10-Q 1 d762103d10q.htm 10-Q 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark one)

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

For the quarterly period ended June 30, 2014

Or

 

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

For the transition period from              to             

Commission file number 1-14037

 

 

Moody’s Corporation

(Exact name of registrant as specified in its charter)

 

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

7 World Trade Center at

250 Greenwich Street, New York, N.Y.

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

Registrant’s telephone number, including area code:

(212) 553-0300

 

 

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

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

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

 

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

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

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

 

Title of Each Class

 

Shares Outstanding at June 30, 2014

Common Stock, par value $0.01 per share   211.2 million


Table of Contents

MOODY’S CORPORATION

INDEX TO FORM 10-Q

 

   Glossary of Terms and Abbreviations     3-7   
PART I. FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

    8   
  

Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013

    8   
  

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013

    9   
  

Consolidated Balance Sheets (Unaudited) at June 30, 2014 and December 31, 2013

    10   
  

Consolidated Statements of Cash Flows (Unaudited) for the Six months ended June 30, 2014 and 2013

    11   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

    12-39   

Item 2.

  

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

    40   
  

The Company

    40   
  

Critical Accounting Estimates

    40   
  

Reportable Segments

    41   
  

Results of Operations

    42-53   
  

Liquidity and Capital Resources

    53-60   
  

2014 Outlook

    61   
  

Recently Issued Accounting Pronouncements

    62   
  

Contingencies

    62   
  

Regulation

    62-63   
  

Forward-Looking Statements

    64-65   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

    65   

Item 4.

  

Controls and Procedures

    65   
PART II. OTHER INFORMATION   

Item 1.

  

Legal Proceedings

    66   

Item 1A.

  

Risk Factors

    66   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

    66   

Item 5.

  

Other Information

    66   

Item 6.

  

Exhibits

    67   

SIGNATURES

    68   

Exhibits Filed Herewith

 

10.1

  

Seventh Amendment to the Profit Participation Plan of Moody’s Corporation

 

10.2

  

Second Amendment to Career Transition Plan

 

10.3

  

First Amendment to Moody’s Cafeteria Plan

 

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

 

 

2


Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM

  

DEFINITION

Adjusted Operating Income    Operating income excluding depreciation and amortization
Adjusted Operating Margin    Operating margin excluding depreciation and amortization
Amba    Amba Investment Services; a provider of outsourced investment research and quantitative analytics for global financial institutions; a majority owned 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 – a reportable segment of MCO formed in January 2008, which includes the non-rating commercial activities of MCO
AOCI    Accumulated other comprehensive income (loss); a separate component of shareholders’ equity
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 including but not limited to: Australia and its proximate islands, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand
ASU    The FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
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
CDO    Collateralized debt obligation
CFG    Corporate finance group; an LOB of MIS
CLO    Collateralized loan obligation
CMBS    Commercial mortgage-backed securities; part of CREF
Commission    European Commission
Company    Moody’s Corporation and its subsidiaries; MCO; Moody’s
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
Copal Amba    Operating segment created in January 2014 that consists of all operations from Copal as well as the operations of Amba. The Copal Amba operating segment provides outsourced research and analytical services to the global financial and corporate sectors
Council    Council of the European Union
CRAs    Credit rating agencies

 

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Table of Contents

TERM

  

DEFINITION

CRA1    Regulation (EC) No 1060/2009 of the European Parliament and of the Council, establishing an oversight regime for the CRA industry in the EU
CRA2    Regulation (EU) No 513/2011 of the European Parliament and of the Council, which transferred direct supervisory responsibility for the registered CRA industry in the EU to ESMA
CRA3    Regulation (EU) No 462/2013 of the European Parliament and of the Council, which updated the regulatory regimes imposing additional procedural requirements on CRAs
CREF    Commercial real estate finance which includes REITs, commercial real estate CDOs and mortgage-backed securities; part of SFG
CSI    CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification services primarily in Canada
D&B Business    Old D&B’s Dun & Bradstreet operating company
DBPP    Defined benefit pension plans
DCF    Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate
Debt/EBITDA    Ratio of Total Debt to EBITDA
EBITDA    Earnings before interest, taxes, depreciation and amortization
EMEA    Represents countries within Europe, the Middle East and Africa
EPS    Earnings per share
ERS    The enterprise risk solutions LOB within MA which offers risk management software products as well as software implementation services and related risk management advisory engagements
ESMA    European Securities and Markets Authority
ETR    Effective tax rate
EU    European Union
EU Parliament    European Parliament
EUR    Euros
European Ratings Platform    Central credit ratings website administered by ESMA
Excess Tax Benefits    The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time the option or restricted share is expensed under GAAP
Exchange Act    The Securities Exchange Act of 1934, as amended
FASB    Financial Accounting Standards Board
FIG    Financial institutions group; an LOB of MIS
Financial Reform Act    Dodd-Frank Wall Street Reform and Consumer Protection Act
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

 

4


Table of Contents

TERM

  

DEFINITION

FX    Foreign exchange
GAAP    U.S. Generally Accepted Accounting Principles
GBP    British pounds
ICRA    ICRA Limited.; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to 50.06% through the acquisition of additional shares
ICRA Gain    Gain relating to the step-acquisition of ICRA; U.S. GAAP requires the remeasurement to fair value of the previously held non-controlling shares upon obtaining a controlling interest in a step-acquisition. This remeasurement of the Company’s equity investment in ICRA to fair value resulted in a pre-tax gain of $102.8 million ($78.5 million after tax) in the second quarter of 2014.
IRS    Internal Revenue Service
IT    Information technology
Legacy Tax Matter(s)    Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution
LIBOR    London Interbank Offered Rate
LOB    Line of business
MA    Moody’s Analytics – a reportable segment of MCO formed in January 2008, which includes the non-rating commercial activities of MCO
M&A    Mergers and acquisitions
Make Whole Amount    The prepayment penalty amount relating to the Series 2005-1 Notes, Series 2007-1 Notes, 2010 Senior Notes, 2012 Senior Notes and 2013 Senior Notes which is a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MCO    Moody’s Corporation and its subsidiaries; the Company; Moody’s
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MIS    Moody’s Investors Service – a reportable segment of MCO; consists of four LOBs – SFG, CFG, FIG and PPIF
Moody’s    Moody’s Corporation and its subsidiaries; MCO; the Company
Net Income    Net income attributable to Moody’s Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder
New D&B    The New D&B Corporation – which comprises the D&B Business
NM    Percentage change is not meaningful
NRSRO    Nationally Recognized Statistical Rating Organization
Old D&B    The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
PPIF    Public, project and infrastructure finance; an LOB of MIS

 

5


Table of Contents

TERM

  

DEFINITION

Profit Participation Plan    Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
PS    Professional Services, an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs
RD&A    Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and other analytical tools that are produced within MA
Redeemable Noncontrolling 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 in the control of the minority shareholders
REIT    Real Estate Investment Trust
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
Retirement Plans    Moody’s funded and unfunded pension plans, the retirement healthcare plans and retirement life insurance plans
SEC    U.S. Securities and Exchange Commission
Securities Act    Securities Act of 1933
Series 2005-1 Notes    Principal amount of $300 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement
Series 2007-1 Notes    Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement
SFG    Structured finance group; an LOB of MIS
SG&A    Selling, general and administrative expenses
Total Debt    All indebtedness of the Company as reflected on the consolidated balance sheets
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

 

6


Table of Contents

TERM

  

DEFINITION

2000 Distribution    The distribution by Old D&B to its shareholders of all the outstanding shares of New D&B common stock on September 30, 2000
2000 Distribution Agreement    Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS rulings on certain tax matters and certain other potential tax liabilities
2005 Agreement    Note purchase agreement dated September 30, 2005, relating to the Series 2005-1 Notes
2007 Agreement    Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes
2008 Term Loan    Five-year $150 million senior unsecured term loan entered into by the Company on May 7, 2008
2010 Indenture    Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes    Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 Indenture    Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior Notes    Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
2012 Facility    Revolving credit facility of $1 billion entered into on April 18, 2012, expiring in 2017
2013 Indenture    Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes
2013 Senior Notes    Principal amount of $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture
2014 Senior Notes (5-Year)    Principal amount of $450 million, 2.750% senior unsecured notes due in July 2019
2014 Senior Notes (30-Year)    Principal amount of $300 million, 5.250% senior unsecured notes due in July 2044
7WTC    The Company’s corporate headquarters located at 7 World Trade Center in New York, NY
7WTC Lease    Operating lease agreement entered into on October 20, 2006

 

7


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in millions, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Revenue

   $ 873.5      $ 756.0      $ 1,640.7      $ 1,487.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Operating

     222.1        197.1        438.1        397.9   

Selling, general and administrative

     217.4        185.0        412.5        412.0   

Depreciation and amortization

     22.3        23.1        45.4        46.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     461.8        405.2        896.0        856.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     411.7        350.8        744.7        631.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating (expense) income, net

        

Interest income (expense), net

     (26.0     (21.7     (49.8     (43.7

Other non-operating income (expense), net

     (3.3     7.7        (0.9     16.5   

ICRA Gain

     102.8        —          102.8        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating (expense) income, net

     73.5        (14.0     52.1        (27.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provisions for income taxes

     485.2        336.8        796.8        604.0   

Provision for income taxes

     160.8        108.4        250.7        184.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     324.4        228.4        546.1        419.5   

Less: Net income attributable to noncontrolling interests

     5.2        2.9        8.9        5.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 319.2      $ 225.5      $ 537.2      $ 413.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Moody’s common shareholders

        

Basic

   $ 1.51      $ 1.01      $ 2.52      $ 1.86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.48      $ 1.00      $ 2.47      $ 1.83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

        

Basic

     212.0        222.3        213.0        222.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     215.7        226.2        217.1        226.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share attributable to Moody’s common shareholders

   $ 0.28      $ 0.20      $ 0.28      $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in millions)

 

     Three Months Ended
June 30, 2014
    Three Months Ended
June 30, 2013
 
     Pre-tax
amounts
    Tax
amounts
    After-tax amounts     Pre-tax
amounts
    Tax
amounts
    After-tax amounts  

Net income

       $ 324.4          $ 228.4   
      

 

 

       

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation:

            

Foreign currency translation adjustments

   $ 14.1      $ —          14.1      $ (13.0   $ —          (13.0

Foreign currency translation adjustments—reclassification of losses to net income pursuant to ICRA step-acquisition

     4.4        —          4.4        —          —          —     

Cash flow and net investment hedges:

            

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

     (2.7     1.1        (1.6     (0.4     0.1        (0.3

Reclassification of losses included in net income

     —          —          —          0.1        —          0.1   

Pension and Other Retirement Benefits:

            

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

     2.0        (0.8     1.2        2.8        (1.2     1.6   

Net actuarial losses and prior service costs

     (6.9     2.8        (4.1     0.9        (0.4     0.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

   $ 10.9      $ 3.1        14.0      $ (9.6   $ (1.5     (11.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         338.4            217.3   

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

         5.2            2.9   
      

 

 

       

 

 

 

Comprehensive income attributable to Moody’s

       $ 333.2          $ 214.4   
      

 

 

       

 

 

 
     Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
 
     Pre-tax
amounts
    Tax
amounts
    After-tax amounts     Pre-tax
amounts
    Tax
amounts
    After-tax amounts  

Net income

       $ 546.1          $ 419.5   
      

 

 

       

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation:

            

Foreign currency translation adjustments

   $ 9.3      $ —          9.3      $ (72.8   $ —          (72.8

Foreign currency translation adjustments—reclassification of losses to net income pursuant to ICRA step-acquisition

     4.4        —          4.4        —          —          —     

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     1.0        (0.5     0.5   

Reclassification of losses included in net income

     —          —          —          0.7        (0.2     0.5   

Pension and Other Retirement Benefits:

            

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

     3.7        (2.3     1.4        5.9        (2.4     3.5   

Net actuarial losses and prior service costs

     (6.9     2.8        (4.1     0.9        (0.4     0.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 4.2      $ 3.1        7.3      $ (64.3   $ (3.5     (67.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         553.4            351.7   

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

         8.9            5.6   
      

 

 

       

 

 

 

Comprehensive income attributable to Moody’s

       $ 544.5          $ 346.1   
      

 

 

       

 

 

 

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

 

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Table of Contents

MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

     June 30,
2014
    December 31,
2013
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 1,777.3      $ 1,919.5   

Short-term investments

     182.0        186.8   

Accounts receivable, net of allowances of $30.6 in 2014 and $28.9 in 2013

     758.3        694.2   

Deferred tax assets, net

     49.7        53.9   

Other current assets

     177.0        114.4   
  

 

 

   

 

 

 

Total current assets

     2,944.3        2,968.8   

Property and equipment, net of accumulated depreciation of $414.9 in 2014 and $375.7 in 2013

     298.3        278.7   

Goodwill

     955.2        665.2   

Intangible assets, net

     310.5        221.6   

Deferred tax assets, net

     130.9        148.7   

Other assets

     147.4        112.1   
  

 

 

   

 

 

 

Total assets

   $ 4,786.6      $ 4,395.1   
  

 

 

   

 

 

 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 430.8      $ 538.9   

Deferred tax liabilities, net

     1.6        4.0   

Deferred revenue

     661.0        598.4   
  

 

 

   

 

 

 

Total current liabilities

     1,093.4        1,141.3   

Non-current portion of deferred revenue

     120.8        109.2   

Long-term debt

     2,104.5        2,101.8   

Deferred tax liabilities, net

     112.2        59.1   

Unrecognized tax benefits

     204.5        195.6   

Other liabilities

     354.7        360.2   
  

 

 

   

 

 

 

Total liabilities

     3,990.1        3,967.2   

Contingencies (Note 14)

    

Redeemable noncontrolling interest

     122.6        80.0   
  

 

 

   

 

 

 

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 June 30, 2014 and December 31, 2013, respectively.

     3.4        3.4   

Capital surplus

     385.0        405.8   

Retained earnings

     5,780.7        5,302.1   

Treasury stock, at cost; 131,693,425 and 128,941,621 shares of common stock at June 30, 2014 and December 31, 2013, respectively

     (5,676.4     (5,319.7

Accumulated other comprehensive loss

     (47.3     (54.6
  

 

 

   

 

 

 

Total Moody’s shareholders’ equity

     445.4        337.0   

Noncontrolling interests

     228.5        10.9   
  

 

 

   

 

 

 

Total shareholders’ equity

     673.9        347.9   
  

 

 

   

 

 

 

Total liabilities, redeemable noncontrolling interest and shareholders’ equity

   $ 4,786.6      $ 4,395.1   
  

 

 

   

 

 

 

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

 

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)

 

     Six Months Ended  
     June 30,  
     2014     2013  

Cash flows from operating activities

    

Net income

   $ 546.1      $ 419.5   

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

    

Depreciation and amortization

     45.4        46.7   

Stock-based compensation expense

     40.6        33.3   

Deferred income taxes

     46.2        10.8   

Excess tax benefits from stock-based compensation plans

     (45.2     (27.0

ICRA Gain

     (102.8     —     

Changes in assets and liabilities:

    

Accounts receivable

     (45.8     2.4   

Other current assets

     (56.1     (56.6

Other assets

     3.3        (0.8

Accounts payable and accrued liabilities

     (26.6     (168.4

Deferred revenue

     62.2        59.6   

Unrecognized tax benefits and other non-current tax liabilities

     5.8        34.5   

Other liabilities

     (15.1     15.1   
  

 

 

   

 

 

 

Net cash provided by operating activities

     458.0        369.1   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital additions

     (38.8     (18.1

Purchases of short-term investments

     (39.8     (17.5

Sales and maturities of short-term investments

     45.7        16.6   

Cash paid for acquisitions, net of cash acquired

     (80.5     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (113.4     (19.0
  

 

 

   

 

 

 

Cash flows from financing activities

    

Repayments of notes

     —          (63.8

Net proceeds from stock-based compensation plans

     40.2        60.8   

Cost of treasury shares repurchased

     (459.7     (350.4

Excess tax benefits from settlement of stock-based compensation plans

     45.2        27.0   

Payment of dividends

     (119.2     (89.1

Payment of dividends to noncontrolling interests

     (7.7     (8.2

Contingent consideration paid

     —          (2.5
  

 

 

   

 

 

 

Net cash used in financing activities

     (501.2     (426.2

Effect of exchange rate changes on cash and cash equivalents

     14.4        (46.3
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (142.2     (122.4

Cash and cash equivalents, beginning of the period

     1,919.5        1,755.4   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 1,777.3      $ 1,633.0   
  

 

 

   

 

 

 

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

 

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MOODY’S CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

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

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

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2013 annual report on Form 10-K filed with the SEC on February 27, 2014. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

NOTE 2. STOCK-BASED COMPENSATION

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Stock-based compensation cost

   $ 20.3       $ 16.1       $ 40.6       $ 33.3   

Tax benefit

   $ 6.5       $ 5.8       $ 12.8       $ 12.0   

During the first six months of 2014, the Company granted 0.3 million employee stock options, which had a weighted average grant date fair value of $31.49 per share based on the Black-Scholes option-pricing model. The Company also granted 0.9 million shares of restricted stock in the first six months of 2014, which had a weighted

 

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average grant date fair value of $79.55 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.2 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $76.24 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2014:

 

Expected dividend yield

     1.41

Expected stock volatility

     41.2

Risk-free interest rate

     2.30

Expected holding period

     7.2 years   

Grant date fair value

   $ 31.49   

Unrecognized compensation expense at June 30, 2014 was $12.3 million and $111.2 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.3 years and 1.8 years, respectively. Additionally, there was $20.9 million of unrecognized compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 1.1 years.

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

 

     Six Months Ended
June 30,
 
Exercise of stock options:    2014      2013  

Proceeds from stock option exercises

   $ 89.0       $ 89.2   

Aggregate intrinsic value

   $ 69.2       $ 66.7   

Tax benefit realized upon exercise

   $ 25.3       $ 24.4   

Number of shares exercised

     2.0         2.7   
     Six Months Ended
June 30,
 
Vesting of restricted stock:    2014      2013  

Fair value of shares vested

   $ 91.9       $ 53.8   

Tax benefit realized upon vesting

   $ 32.0       $ 19.1   

Number of shares vested

     1.2         1.1   
     Six Months Ended
June 30,
 
Vesting of performance-based restricted stock:    2014      2013  

Fair value of shares vested

   $ 38.0       $ 25.5   

Tax benefit realized upon vesting

   $ 14.8       $ 9.7   

Number of shares vested

     0.5         0.5   

 

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NOTE 3. INCOME TAXES

Moody’s effective tax rate was 33.1% and 32.2% for the three months ended June 30, 2014 and 2013, respectively and 31.5% and 30.5% for the six month periods ended June 30, 2014 and 2013, respectively. The increase in the ETR compared to the second quarter of 2013 was primarily due to higher taxes on foreign income. The six months ended June 30, 2013 ETR included a tax benefit related to U.S. tax legislation enacted in early 2013 which retroactively extended certain tax benefits to the 2012 tax year, as well as tax benefits on a litigation settlement in the first quarter of 2013. The ETR for the six month period ended June 30, 2014 includes a benefit related to the reversal of UTPs resulting from the favorable resolution of certain international tax matters.

The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an increase in its UTPs of $13.7 million ($12.1 million net of federal tax benefit) during the second quarter of 2014 and an overall increase in its UTPs during the first six months of 2014 of $8.9 million ($4.3 million net of federal tax benefits).

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various states, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2010 are under examination and its returns for 2011 and 2012 remain open to examination. The Company’s New York State tax returns for 2011 and 2012 remain open to examination. Income tax filings in the U.K. for 2012 remain open to examination.

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

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

 

     Six Months Ended
June 30,
 
     2014      2013  

Income Taxes Paid*

   $     216.7       $     231.6   

 

* Payments in 2013 include $50 million of 2012 estimated federal taxes paid in the first quarter of 2013 pursuant to IRS relief due to Hurricane Sandy.

 

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NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Basic

     212.0         222.3         213.0         222.8   

Dilutive effect of shares issuable under stock-based compensation plans

     3.7         3.9         4.1         3.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     215.7         226.2         217.1         226.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above

     0.7         4.4         0.7         4.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2014 and 2013. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

NOTE 5. SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one month to 12 months and one month to nine months as of June 30, 2014 and December 31, 2013, respectively. Interest and dividends are recorded into income when earned.

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

Interest Rate Swaps

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

 

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In the second quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the 2010 Senior Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2010 Senior Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.

Foreign Exchange Forwards

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through February 2015.

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

 

     June 30,
2014
     December 31,
2013
 

Notional amount of currency pair:

     

Contracts to purchase USD with euros

   $ 71.1       $ 14.2   

Contracts to sell USD for euros

   $ 54.7       $ 53.2   

Contracts to purchase USD with GBP

   $ 0.7       $ —     

Contracts to purchase USD with other foreign currencies

   $ 1.9       $ —     

Contracts to sell USD for other foreign currencies

   $ 20.1       $ —     

Contracts to purchase euros with other foreign currencies

   53.8       13.1   

Contracts to purchase euros with GBP

   24.1       22.1   

Contracts to sell euros for GBP

   67.3       —     

Net Investment Hedges

The Company enters into foreign currency forward contracts to hedge the exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against adverse changes in foreign exchange rates. These forward contracts are designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Hedge effectiveness is assessed based on the overall changes in the fair value of the forward contracts on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in the fair value for the hedge is recorded in the currency translation adjustment component of AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statement of operations. These outstanding contracts expire in September 2014 for contracts to sell euros for USD and in November 2014 for contracts to sell Japanese yen for USD.

 

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

 

     June 30,
2014
     December 31,
2013
 

Notional amount of currency pair:

     

Contracts to sell euros for USD

   50.0       50.0   

Contracts to sell Japanese yen for USD

   ¥ 19,700       ¥ 19,700   

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

 

    

Fair Value of Derivative Instruments

 

Derivatives Instruments

  

Balance Sheet
Location

   June 30, 2014      December 31,
2013
 

Assets:

        

Derivatives designated as accounting hedges:

        

Interest rate swaps

  

Other assets

   $ 12.6       $ 10.3   

FX forwards on net investment in certain foreign subsidiaries

  

Other current assets

     2.5         9.3   
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        15.1         19.6   

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

  

Other current assets

     3.4         0.9   
     

 

 

    

 

 

 

Total assets

      $ 18.5       $ 20.5   
     

 

 

    

 

 

 

Liabilities:

        

Derivatives designated as accounting hedges:

        

FX forwards on net investment in certain foreign subsidiaries

  

Accounts payable and accrued liabilities

   $ 0.5       $ 1.0   

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

  

Accounts payable and accrued liabilities

     0.2         0.7   
     

 

 

    

 

 

 

Total liabilities

      $ 0.7       $ 1.7   
     

 

 

    

 

 

 

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

 

          Amount of gain (loss)
recognized in the consolidated
statements of operations
 
          Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Derivatives designated as fair value accounting hedges

  

Location on Statement of Operations

   2014      2013      2014      2013  

Interest rate swaps

  

Interest income(expense), net

   $ 2.0       $ 1.0       $ 0.5       $ 2.1   
     

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as accounting hedges

                                

Foreign exchange forwards

  

Other non-operating income (expense), net

   $ 1.3       $ 1.0       $ 0.9       $ (0.1
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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All gains and losses on interest rate swaps designated as cash flow hedges were initially recognized through AOCI. Realized gains and losses reported in AOCI were reclassified into interest income (expense), net as the underlying transaction was recognized. There were no cash flow hedges outstanding at both June 30, 2014 and 2013. Accordingly, there were no gains or losses recorded in AOCI in the three and six months ended June 30, 2014. The amount of losses reclassified from AOCI into net income in the three and six months ended June 30, 2013 was immaterial.

All gains and losses on derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI. The losses recognized in OCI in the three and six months ended June 30, 2014 and 2013 were immaterial. Additionally, the cumulative amount of unrecognized hedge losses recorded in AOCI at June 30, 2014 and December 31, 2013 were not material.

NOTE 7. ACQUISITIONS

The acquisitions described below are accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at their acquisition date fair value. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. For the acquisitions described below, the Company has not presented proforma combined results because the impact on previously reported statements of operations would not have been material. These acquisitions are discussed below in more detail.

ICRA Limited

On June 26, 2014, a subsidiary of the Company acquired 2,154,722 additional shares of ICRA Limited, a publicly traded company in India, pursuant to a conditional open tender offer which was initiated in February 2014. ICRA is a leading provider of credit ratings and research in India and will extend MIS’s reach in the growing domestic debt market in India as well as other emerging markets in the region. The acquisition of the additional shares increased Moody’s ownership stake in ICRA from 28.5% to 50.06%, resulting in a controlling interest in ICRA. Accordingly, the Company will consolidate ICRA’s financial statements and as of June 30, 2014, ICRA’s balance sheet was consolidated. Subsequent to June 30, 2014, Moody’s will consolidate ICRA’s financial statements on a three month lag. Thus in 2014, Moody’s will consolidate only one quarter of ICRA’s operating results.

Prior to the acquisition of the additional shares, Moody’s accounted for its investment in ICRA on an equity basis whereby the Company recorded its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net and any dividends received would reduce the carrying amount of the investment. The acquisition of the additional shares has resulted in the Company consolidating ICRA into its financial statements. As a result of this consolidation and in accordance with ASC 805, the carrying value of the Company’s equity investment in ICRA was remeasured to fair value as of the acquisition date which resulted in a pre-tax gain of $102.8 million ($78.5 million after-tax) in the three and six months ended June 30, 2014. The fair value of the Company’s equity investment was based on ICRA’s quoted market price.

The Company incurred approximately $2 million of costs directly related to the acquisition of ICRA during the six months ended June 30, 2014, which are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.

 

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The table below details the total consideration relating to the ICRA step-acquisition:

 

Cash paid

   $ 86.0   

Fair value of equity interest in ICRA prior to obtaining a controlling interest

     124.9   
  

 

 

 

Total consideration

   $ 210.9   
  

 

 

 

The cash paid in the table above was funded by using Moody’s non-U.S. cash on hand.

Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:

 

Current assets

      $ 24.8   

Property and equipment, net

        7.3   

Intangible assets:

     

Trade name

   $ 50.1      

Client relationships

     33.8      

Other

     17.5      
  

 

 

    

Total intangible assets

        101.4   

Goodwill

        294.6   

Other assets

        56.3   

Liabilities

        (54.7

Fair value of non-controlling interest assumed

        (218.8
     

 

 

 

Net assets acquired

      $ 210.9   
     

 

 

 

Due to the proximity of the acquisition date to the issuance date of these interim financial statements, the purchase price allocation above as well as the estimated useful lives of the acquired intangible assets are not finalized.

Current assets include acquired cash of approximately $5 million. Additionally, current assets includes gross accounts receivable of approximately $14 million, of which an immaterial amount is not expected to be collectible. Goodwill, which has been assigned to the MIS segment, is not deductible for tax.

The fair value of the non-controlling interest was determined based on the quoted market price per share of ICRA, on the date that the Company acquired the controlling stake.

Subsequent to the second quarter of 2014, ICRA will operate as its own reporting unit.

 

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Amba Investment Services

On December 10, 2013, Copal Partners Limited, a majority-owned subsidiary of the Company, acquired 100% of Amba Investment Services, a provider of outsourced investment research and quantitative analytics for global financial institutions. Amba currently operates within the PS LOB of MA and will bolster the research and analytical capabilities offered by MA through Copal, a majority owned subsidiary which was acquired in December 2011.

The table below details the total consideration transferred to the sellers of Amba:

 

Cash paid

   $ 67.2   

Contingent consideration liability assumed

     4.3   

Additional purchase price to be paid in 2014 based on final working capital acquired

     0.1   
  

 

 

 

Total fair value of consideration transferred

   $ 71.6   
  

 

 

 

The cash payment to the sellers was funded by using Moody’s non-U.S. cash.

The purchase agreement contains a provision for a contingent cash payment to the sellers valued at $4.3 million at the acquisition date. This contingent cash payment was dependent on Amba achieving certain revenue targets for the period from the acquisition date through March 31, 2014. This contingent consideration payment will be made to the sellers in 2014.

Shown below is the purchase price allocation, which summarizes the fair value of the assets acquired and the liabilities assumed, at the date of acquisition:

 

Current assets

      $ 23.7   

Property and equipment, net

        0.4   

Intangible assets:

     

Trade name (7 year weighted average life)

   $ 3.3      

Client relationships (12 year weighted average life)

     26.7      

Other (3 year weighted average life)

     1.6      
  

 

 

    

Total intangible assets (11 year weighted average life)

        31.6   

Goodwill

        29.2   

Indemnification asset

        10.4   

Other assets

        2.0   

Liabilities assumed

        (25.7
     

 

 

 

Net assets acquired

      $ 71.6   
     

 

 

 

Current assets include acquired cash of approximately $16 million. Additionally, current assets includes gross accounts receivable of approximately $6 million, of which an immaterial amount is not expected to be collectible. The acquired goodwill, which has been assigned to the MA segment, will not be deductible for tax.

In connection with the acquisition, the Company assumed liabilities relating to certain UTPs. These UTPs are included in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these UTPs. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at March 31, 2014 and December 31, 2013.

As of the date of the acquisition, Amba was integrated with Copal to form the Copal Amba reporting unit.

 

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NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

     Six Months Ended June 30, 2014  
     MIS      MA     Consolidated  
     Gross
goodwill
     Accumulated
impairment
charge
     Net
goodwill
     Gross
goodwill
    Accumulated
impairment
charge
    Net
goodwill
    Gross
goodwill
     Accumulated
impairment
charge
    Net
goodwill
 

Balance at beginning of year

   $ 11.4       $ —         $ 11.4       $ 666.0      $ (12.2   $ 653.8      $ 677.4       $ (12.2   $ 665.2   

Additions/adjustments

     294.6         —           294.6         (5.3     —          (5.3     289.3         —          289.3   

Foreign currency translation adjustments

     0.2         —           0.2         0.5        —          0.5        0.7         —          0.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 306.2       $ —         $ 306.2       $ 661.2      $ (12.2   $ 649.0      $ 967.4       $ (12.2   $ 955.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Year ended December 31, 2013  
     MIS     MA     Consolidated  
     Gross
goodwill
    Accumulated
impairment
charge
     Net
goodwill
    Gross
goodwill
    Accumulated
impairment
charge
    Net
goodwill
    Gross
goodwill
    Accumulated
impairment
charge
    Net
goodwill
 

Balance at beginning of year

   $ 11.5      $ —         $ 11.5      $ 637.8      $ (12.2   $ 625.6      $ 649.3      $ (12.2   $ 637.1   

Additions

     —          —           —          34.5        —          34.5        34.5        —          34.5   

Foreign currency translation adjustments

     (0.1     —           (0.1     (6.3     —          (6.3     (6.4     —          (6.4
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 11.4      $ —         $ 11.4      $ 666.0      $ (12.2   $ 653.8      $ 677.4      $ (12.2   $ 665.2   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The 2014 additions/adjustments for the MIS segment in the table above relate to the ICRA acquisition in the second quarter of 2014 as further discussed in Note 7. The 2014 and 2013 additions/adjustments for the MA segment in the table above relate to the acquisition of Amba in the fourth quarter of 2013. There were no impairments to goodwill in the six months ended June 30, 2014 and year ended December 31, 2013.

 

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Acquired intangible assets and related amortization consisted of:

 

     June 30,
2014
    December 31,
2013
 

Customer relationships

   $ 272.0      $ 237.4   

Accumulated amortization

     (93.5     (86.6
  

 

 

   

 

 

 

Net customer relationships

     178.5        150.8   
  

 

 

   

 

 

 

Trade secrets

     31.0        31.1   

Accumulated amortization

     (19.7     (18.5
  

 

 

   

 

 

 

Net trade secrets

     11.3        12.6   
  

 

 

   

 

 

 

Software

     72.5        71.0   

Accumulated amortization

     (42.7     (38.8
  

 

 

   

 

 

 

Net software

     29.8        32.2   
  

 

 

   

 

 

 

Trade names

     81.3        31.3   

Accumulated amortization

     (12.5     (11.7
  

 

 

   

 

 

 

Net trade names

     68.8        19.6   
  

 

 

   

 

 

 

Other

     42.9        26.1   

Accumulated amortization

     (20.8     (19.7
  

 

 

   

 

 

 

Net other

     22.1        6.4   
  

 

 

   

 

 

 

Total acquired intangible assets, net

   $ 310.5      $ 221.6   
  

 

 

   

 

 

 

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

Amortization expense relating to acquired intangible assets is as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2014              2013              2014              2013      

Amortization expense

   $ 6.3       $ 6.9       $ 13.6       $ 14.0   

 

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

 

Year Ending December 31,

      

2014 (after June 30,)

   $ 12.3   

2015

     24.2   

2016

     23.5   

2017

     19.9   

2018

     15.1   

Thereafter

     114.1   

Due to the proximity of the acquisition date to the filing of this Form 10Q, the above table does not include future amortization for intangible assets from the ICRA acquisition as more fully discussed in Note 7 as the Company is still in the process of determining the estimated useful lives of these assets.

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. There were no impairments to intangible assets during the three and six months ended June 30, 2014 and 2013.

 

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Table of Contents

NOTE 9. FAIR VALUE

The table below presents information about items which are carried at fair value on a recurring basis at June 30, 2014 and December 31, 2013:

 

         Fair Value Measurement as of June 30, 2014  
   

Description

   Balance      Level 1      Level 2      Level 3  

Assets:

             
 

Derivatives (a)

   $ 18.5       $ —         $ 18.5       $ —     
 

Fixed maturity and open ended mutual funds (b)

     44.6         44.6         —           —     
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 63.1       $ 44.6       $ 18.5       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             
 

Derivatives (a)

   $ 0.7       $ —         $ 0.7       $ —     
 

Contingent consideration arising from acquisitions (c)

     17.2         —           —           17.2   
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 17.9       $ —         $ 0.7       $ 17.2   
    

 

 

    

 

 

    

 

 

    

 

 

 
         Fair Value Measurement as of December 31, 2013  
   

Description

   Balance      Level 1      Level 2      Level 3  

Assets:

             
 

Derivatives (a)

   $ 20.5       $ —         $ 20.5       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 20.5       $ —         $ 20.5       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             
 

Derivatives (a)

   $ 1.7       $ —         $ 1.7       $ —     
 

Contingent consideration arising from acquisitions (c)

     17.5         —           —           17.5   
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 19.2       $ —         $ 1.7       $ 17.5   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non-U.S. dollar net investments in certain foreign subsidiaries as more fully described in Note 6 to the financial statements.

(b)

Represents investments in fixed maturity mutual funds and open ended mutual funds. These investments were acquired pursuant to the ICRA step-acquisition, more fully discussed in Note 7 to the financial statements. The remaining contractual maturities for the fixed maturity instruments range from one month to 11 months.

(c)

Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions.

 

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Table of Contents

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

 

     Contingent Consideration
Six  Months Ended June 30,
 
         2014             2013      

Balance as of January 1

   $ 17.5      $ 9.0   

Contingent consideration payments

     —          (2.5

Total losses (gains) (realized and unrealized):

    

Included in earnings

     (0.2     4.1   

Foreign currency translation adjustments

     (0.1     (0.1
  

 

 

   

 

 

 

Balance as of June 30

   $ 17.2      $ 10.5   
  

 

 

   

 

 

 

The gains and losses included in earnings in the table above are recorded within SG&A expenses in the Company’s consolidated statements of operations. The gains in the six months ended June 30, 2014 relate to contingent consideration obligations outstanding at June 30, 2014.

Of the $17.2 million of contingent consideration obligations as of June 30, 2014, $14.9 million is classified in accounts payable and accrued liabilities and $2.3 million is classified in other liabilities within the Company’s consolidated balance sheet.

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

Derivatives:

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

Fixed maturity and open ended mutual funds:

The fixed maturity mutual funds and open ended mutual funds primarily represent exchange traded funds in India which were acquired as part of the ICRA step-acquisition and are classified as securities available-for-sale. Accordingly, any unrealized gains and losses in future quarters will be recognized through other comprehensive income until the instruments mature. The cost basis of these investments is $42.3 million at June 30, 2014.

Contingent consideration:

At June 30, 2014, the Company has contingent consideration obligations related to the acquisitions of CSI, Copal and Amba which are carried at estimated fair value, and are based on certain financial and non-financial metrics set forth in the acquisition agreements. These obligations are measured using Level 3 inputs as defined in the ASC. The Company recorded the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management’s best estimates of the achievement of the metrics and the value of the obligations are adjusted quarterly.

 

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Table of Contents

The contingent consideration obligation for CSI is based on the achievement of a certain contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At June 30, 2014, the Company expects that this milestone will be reached by the aforementioned date.

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

For the contingent consideration obligations relating to the acquisition of Amba, the payment is based on the acquired entity achieving a revenue target for its fiscal year ended March 31, 2014. The Company has utilized a discounted cash flow methodology to value this obligation. At March 31, 2014, Amba has met this revenue target and a $4.3 million contingent consideration payment will be made in 2014.

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

 

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Table of Contents

NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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

 

     June 30,
2014
     December 31,
2013
 

Other current assets:

     

Prepaid taxes

   $ 100.3       $ 40.0   

Prepaid expenses

     48.3         48.1   

Other

     28.4         26.3   
  

 

 

    

 

 

 

Total other current assets

   $ 177.0       $ 114.4   
  

 

 

    

 

 

 
     June 30,
2014
     December 31,
2013
 

Other assets:

     

Investments in joint ventures

   $ 17.3       $ 37.5   

Deposits for real-estate leases

     11.5         10.3   

Indemnification assets related to acquisitions

     26.1         27.0   

Fixed maturity and open ended mutual funds

     44.6         —     

Other

     47.9         37.3   
  

 

 

    

 

 

 

Total other assets

   $ 147.4       $ 112.1   
  

 

 

    

 

 

 
     June 30,
2014
     December 31,
2013
 

Accounts payable and accrued liabilities:

     

Salaries and benefits

   $ 69.5       $ 77.1   

Incentive compensation

     73.2         135.9   

Customer credits, advanced payments and advanced billings

     23.2         21.7   

Self-insurance reserves

     26.6         27.6   

Dividends

     4.4         65.5   

Professional service fees

     49.3         32.9   

Interest accrued on debt

     36.1         36.3   

Accounts payable

     20.4         16.4   

Income taxes

     33.2         47.5   

Pension and other retirement employee benefits

     7.1         7.0   

Other

     87.8         71.0   
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 430.8       $ 538.9   
  

 

 

    

 

 

 
     June 30,
2014
     December 31,
2013
 

Other liabilities:

     

Pension and other retirement employee benefits

   $ 161.7       $ 164.0   

Deferred rent-non-current portion

     108.5         106.3   

Interest accrued on UTPs

     16.2         18.0   

Legacy and other tax matters

     15.6         15.4   

Other

     52.7         56.5   
  

 

 

    

 

 

 

Total other liabilities

   $ 354.7       $ 360.2   
  

 

 

    

 

 

 

 

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Table of Contents

Redeemable Noncontrolling Interest:

In connection with the acquisition of Copal, the Company and the non-controlling shareholders entered into a put/call option agreement whereby the Company has the option to purchase from the non-controlling shareholders and the non-controlling shareholders have the option to sell to the Company the remaining 33% ownership interest of Copal Partners Limited based on a strike price to be calculated on pre-determined formulas using a combination of revenue and EBITDA multiples when exercised. The value of the estimated put/call option strike price on the date of acquisition was based on a Monte Carlo simulation model. This model contemplated multiple scenarios which simulated certain of Copal’s revenue, EBITDA margins and equity values to estimate the present value of the expected strike price of the option. In connection with the acquisition of Amba in December 2013, which was combined with Copal to form the Copal Amba reporting unit, the aforementioned revenue and EBITDA multiples set forth in the put/call option were modified to include the results of Amba. The option is subject to a minimum exercise price of $46 million. There is no limit as to the maximum amount of the strike price on the put/call option.

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

 

     Six Months Ended
June 30, 2014
    Year Ended
December 31,  2013
 
(in millions)    Redeemable Noncontrolling Interest  

Balance January 1,

   $ 80.0      $ 72.3   

Net earnings

     5.4        5.8   

Dividends

     (3.7     (6.0

Adjustment to redemption value *

     40.9        7.9   
  

 

 

   

 

 

 

Balance

   $ 122.6      $ 80.0   
  

 

 

   

 

 

 

 

* The adjustment to the redemption value in the six months ended June 30, 2014 reflects the aforementioned revisions to the revenue and EBITDA multiples pursuant to the amendment of the put/call agreement which occurred contemporaneously with the acquisition of Amba coupled with growth in the Copal Amba reporting unit.

Noncontrolling Interests:

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

 

     Six Months
Ended June 30,
2014
    Year Ended
December  31,
2013
 
(in millions)    Noncontrolling Interests  

Balance January 1,

   $ 10.9      $ 11.4   

Net earnings

     3.5        5.7   

Dividends

     (4.7     (6.2

ICRA noncontrolling interest*

     218.8        —     
  

 

 

   

 

 

 

Balance

   $ 228.5      $ 10.9   
  

 

 

   

 

 

 

 

* Represents the fair value of the ICRA noncontrolling interest as of the day majority control was acquired.

 

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Table of Contents

Other Non-Operating (Expense) Income:

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2014             2013             2014             2013      

FX gain/(loss)

   $ (7.1   $ 5.3      $ (6.1   $ 12.7   

Joint venture income

     3.5        3.2        5.3        4.9   

Other

     0.3        (0.8     (0.1     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (3.3   $ 7.7      $ (0.9   $ 16.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(in millions)    Six Months Ended
June  30,
2014
    Year Ended
December 31,
2013
 

Balance January 1,

   $ 27.6      $ 55.8   

Accruals (reversals), net

     13.7        (0.9

Payments

     (14.7     (27.3
  

 

 

   

 

 

 

Balance*

   $ 26.6      $ 27.6   
  

 

 

   

 

 

 

 

* These reserves primarily relate to legal defense costs for claims from prior years.

 

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Table of Contents

NOTE 11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table provides details about the reclassifications out of AOCI:

 

     Three Months
Ended

June 30, 2014
    Six Months
Ended

June  30, 2014
   

Affected line in the

consolidated statement of

operations

Gains/(losses) on foreign currency translation adjustments

      

Loss on foreign currency translation adjustment pursuant to ICRA step-acquisition

   $ (4.4   $ (4.4   ICRA gain
  

 

 

   

 

 

   

Total gains/(losses) on foreign currency translation adjustments

     (4.4     (4.4  
  

 

 

   

 

 

   

Pension and other retirement benefits

      

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

     (1.2     (2.5   Operating expense

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

     (0.8     (1.2   SG&A expense
  

 

 

   

 

 

   

Total before income taxes

     (2.0     (3.7  

Income tax effect of item above

     0.8        2.3      Provision for income taxes
  

 

 

   

 

 

   

Total pension and other retirement benefits

     (1.2     (1.4  
  

 

 

   

 

 

   

Total losses included in Net Income attributable to reclassifications out of AOCI

   $ (5.6   $ (5.8  
  

 

 

   

 

 

   

 

     Three Months
Ended
June 30, 2013
    Six Months
Ended
June 30, 2013
   

Affected line in the
consolidated statement of
operations

Gains/(losses) on cash flow hedges

      

Interest rate swap derivative contracts

   $ (0.1   $ (0.7   Interest income (expense), net
  

 

 

   

 

 

   

Income tax effect of item above

     —          0.2      Provision for income taxes
  

 

 

   

 

 

   

Total losses on cash flow hedges

     (0.1     (0.5  
  

 

 

   

 

 

   

Pension and other retirement benefits

      

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

     (1.8     (3.9   Operating expense

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

     (1.0     (2.0   SG&A expense
  

 

 

   

 

 

   

Total before income taxes

     (2.8     (5.9  

Income tax effect of item above

     1.2        2.4      Provision for income taxes
  

 

 

   

 

 

   

Total pension and other retirement benefits

     (1.6     (3.5  
  

 

 

   

 

 

   

Total losses included in Net Income attributable to reclassifications out of AOCI

   $ (1.7   $ (4.0  
  

 

 

   

 

 

   

 

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Table of Contents

The following table shows changes in AOCI by component (net of tax):

 

    Three Months Ended  
    June 30, 2014     June 30, 2013  
    Gains/(Losses)
on Net
Investment
Hedges
    Pension and
Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Total     Gains/(Losses)
on Net
Investment
Hedges
    Pension and
Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Total  

Balance March 31,

  $ (0.6   $ (53.0   $ (7.7   $ (61.3   $ (1.7   $ (88.2   $ (48.9   $ (138.8

Other comprehensive income/(loss) before reclassifications

    (1.6     (4.1     14.1        8.4        (0.3     0.5        (13.0     (12.8

Amounts reclassified from AOCI

    —          1.2        4.4        5.6        0.1        1.6        —          1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

    (1.6     (2.9     18.5        14.0        (0.2     2.1        (13.0     (11.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30,

  $ (2.2   $ (55.9   $ 10.8      $ (47.3   $ (1.9   $ (86.1   $ (61.9   $ (149.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Six Months Ended  
    June 30, 2014     June 30, 2013  
    Gains/(Losses)
on Net
Investment
Hedges
    Pension and
Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Total     Gains/(Losses)
on Net
Investment
Hedges
    Pension and
Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Total  

Balance December 31,

  $ 1.5      $ (53.2   $ (2.9   $ (54.6   $ (2.9   $ (90.1   $ 10.9      $ (82.1

Other comprehensive income/(loss) before reclassifications

    (3.7     (4.1     9.3        1.5        0.5        0.5        (72.8     (71.8

Amounts reclassified from AOCI

    —          1.4        4.4        5.8        0.5        3.5        —          4.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income/(loss)

    (3.7     (2.7     13.7        7.3        1.0        4.0        (72.8     (67.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30,

  $ (2.2   $ (55.9   $ 10.8      $ (47.3   $ (1.9   $ (86.1   $ (61.9   $ (149.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS

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

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

 

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

 

     Three Months Ended June 30,  
     Pension Plans     Other Retirement Plans  
     2014     2013     2014      2013  

Components of net periodic expense

         

Service cost

   $ 4.6      $ 4.7      $ 0.4       $ 0.4   

Interest cost

     4.2        3.3        0.3         0.2   

Expected return on plan assets

     (3.5     (3.1     —           —     

Amortization of net actuarial loss from earlier periods

     1.8        2.6        —           0.1   

Amortization of net prior service costs from earlier periods

     0.1        0.1        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic expense

   $ 7.2      $ 7.6      $ 0.7       $ 0.7   
  

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended June 30,  
     Pension Plans     Other Retirement Plans  
     2014     2013     2014      2013  

Components of net periodic expense

         

Service cost

   $ 9.2      $ 9.9      $ 0.8       $ 0.8   

Interest cost

     8.2        6.7        0.5         0.4   

Expected return on plan assets

     (7.0     (6.4     —           —     

Amortization of net actuarial loss from earlier periods

     3.3        5.4        —           0.2   

Amortization of net prior service costs from earlier periods

     0.3        0.3        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic expense

   $ 14.0      $ 15.9      $ 1.3       $ 1.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company contributed $20.7 million to its U.S. funded pension plan and made payments of $1.2 million related to its unfunded U.S. DBPPs and $0.2 million to its U.S. other retirement plans, respectively during the six months ended June 30, 2014. The Company presently anticipates making additional payments of $3.1 million related to its unfunded U.S. DBPPs and $0.4 million to its U.S. other retirement plans during the remainder of 2014.

NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     June 30,
2014
     December 31,
2013
 

2012 Facility

   $ —         $ —     

Notes Payable:

     

4.98% Series 2005-1 Notes, due 2015; includes the fair value of interest rate swap of $8.7 million at 2014 and $10.3 million at 2013

     308.7         310.3   

6.06% Series 2007-1 Notes due 2017

     300.0         300.0   

5.50% 2010 Senior Notes, due 2020, net of unamortized discount of $2.1 million in 2014 and $2.2 million in 2013; also includes the fair value of interest rate swap of $3.9 million in 2014

     501.8         497.8   

4.50% 2012 Senior Notes, due 2022, net of unamortized discount of $3.4 million in 2014 and $3.5 million in 2013

     496.6         496.5   

4.875% 2013 Senior Notes, due 2024, net of unamortized discount of $2.6 million in 2014 and $2.8 million in 2013

     497.4         497.2   
  

 

 

    

 

 

 

Total long-term debt

   $ 2,104.5       $ 2,101.8   
  

 

 

    

 

 

 

 

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The Company has the capacity to borrow up to $1 billion under its unsecured revolving credit facility which expires in April 2017. Any future borrowings under this facility would accrue interest at LIBOR plus a premium that can range from 77.5 bps to 120 bps per annum based on the Company’s debt/EBITDA ratio.

The Company has entered into interest rate swaps on the Series 2005-1 Notes and the 2010 Senior Notes which are more fully discussed in Note 6 above.

At June 30, 2014, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2012 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2014, there were no such cross defaults.

Interest expense, net

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Income

   $ 1.7      $ 1.2      $ 3.3      $ 2.4   

Expense on borrowings

     (25.6     (20.5     (51.7     (41.5

UTPs and other tax related liabilities*

     (2.1     (2.4     (1.5     (4.6

Capitalized

     —          —          0.1        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (26.0   $ (21.7   $ (49.8   $ (43.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* The six months ended June 30, 2014 amount includes $2.0 million reversal of an interest accrual relating to the favorable resolution of an international tax matter.

The following table shows the cash paid for interest:

 

     Six Months Ended
June  30,
 
     2014      2013  

Interest paid

   $ 60.5       $ 41.4   

 

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The Company’s long-term debt is recorded at its carrying amount, which represents the issuance amount plus or minus any issuance premium or discount, except for the Series 2005-1 Notes and the 2010 Senior Notes which are recorded at the carrying amount 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 June 30, 2014 and December 31, 2013 are as follows:

 

     June 30, 2014      December 31, 2013  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 

Series 2005-1 Notes(1)

   $ 308.7       $ 314.5       $ 310.3       $ 319.2   

Series 2007-1 Notes

     300.0         338.9         300.0         334.7   

2010 Senior Notes(2)

     501.8         565.7         497.8         536.6   

2012 Senior Notes

     496.6         524.5         496.5         497.0   

2013 Senior Notes

     497.4         537.5         497.2         501.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,104.5       $ 2,281.1       $ 2,101.8       $ 2,188.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The carrying amount for the Series 2005-1 Notes includes an $8.7 million and $10.3 million fair value adjustment on an interest rate hedge at June 30, 2014 and December 31, 2013, respectively.

(2) 

The carrying amount for the 2010 Senior Notes includes the unamortized discount of $2.1 million and $2.2 million in 2014 and 2013, respectively, and a $3.9 million fair value adjustment on an interest rate hedge at June 30, 2014.

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

NOTE 14. 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.

 

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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

 

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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 inquires not related to income taxes, where it is both probable that a liability is expected to be incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. 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.

Legacy Tax Matters

Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of June 30, 2014, Moody’s has recorded liabilities for Legacy Tax Matters totaling $17.8 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody’s future reported results, financial position and cash flows.

NOTE 15. SEGMENT INFORMATION

Beginning in January 2014, pursuant to certain management realignment, the Company revised its operating segments. Accordingly, the Company is now organized into four operating segments: (i) MIS, (ii) MA, (iii) Copal Amba and (iv) an immaterial operating segment that provides fixed income pricing services and research in the Asia-Pacific region. The Copal Amba and the immaterial operating segment have been aggregated with the MA operating segment to form the MA reportable segment based on the determination that all of the operating segments demonstrate similar economic characteristics. Accordingly, the Company continues to be organized into two reportable segments: (i) MIS and (ii) 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 reportable segment. Revenue from the Copal Amba operating segment continues to be reported within the PS LOB while revenue from the immaterial operating segment that provides fixed income pricing services and research in the Asia-Pacific region continues to be reported within RD&A.

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.

 

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The MA segment, which includes all of the Company’s non-rating commercial activities, develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three lines of business – RD&A, ERS and PS.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products and is generally based on comparable market transactions. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services. Additionally, overhead costs and corporate expenses of the Company which exclusively benefit only one segment, are fully charged to that segment. Overhead costs and corporate expenses of the Company which benefit both segments are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. “Eliminations” in the table below represent intersegment revenue/expense.

Financial Information by Segment

The table below shows revenue, Adjusted Operating Income and operating income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment.

 

     Three Months Ended June 30,  
     2014      2013  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $     643.6       $ 255.1       $ (25.2   $ 873.5       $ 556.3       $ 221.4       $ (21.7   $ 756.0   

Operating, SG&A

     268.9         195.8         (25.2     439.5         236.2         167.6         (21.7     382.1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     374.7         59.3         —          434.0         320.1         53.8         —          373.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     11.4         10.9         —          22.3         11.5         11.6         —          23.1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 363.3       $ 48.4       $ —        $ 411.7       $ 308.6       $ 42.2       $ —        $ 350.8   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Six Months Ended June 30,  
     2014      2013  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $     1,190.9       $ 499.8       $ (50.0   $ 1,640.7       $ 1,096.4       $ 434.8       $ (43.4   $ 1,487.8   

Operating, SG&A

     514.6         386.0         (50.0     850.6         520.5         332.8         (43.4     809.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     676.3         113.8         —          790.1         575.9         102.0         —          677.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     22.8         22.6         —          45.4         22.8         23.9         —          46.7   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 653.5       $ 91.2       $ —        $ 744.7       $ 553.1       $ 78.1       $ —        $ 631.2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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MIS and MA Revenue by Line of Business

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
         2014             2013             2014             2013      

MIS:

        

Corporate finance (CFG)

   $ 320.9      $ 262.9      $ 585.3      $ 521.2   

Structured finance (SFG)

     110.6        97.2        205.9        190.2   

Financial institutions (FIG)

     92.2        84.5        177.6        171.0   

Public, project and infrastructure finance (PPIF)

     98.0        92.7        178.7        176.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total external revenue

     621.7        537.3        1,147.5        1,058.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intersegment royalty

     21.9        19.0        43.4        37.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     643.6        556.3        1,190.9        1,096.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

MA:

        

Research, data and analytics (RD&A)

     144.7        130.3        285.6        259.9   

Enterprise risk solutions (ERS)

     67.2        60.2        127.0        113.2   

Professional services (PS)

     39.9        28.2        80.6        56.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total external revenue

     251.8        218.7        493.2        429.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intersegment revenue

     3.3        2.7        6.6        5.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     255.1        221.4        499.8        434.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Eliminations

     (25.2     (21.7     (50.0     (43.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total MCO

   $ 873.5      $ 756.0      $ 1,640.7      $ 1,487.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Revenue Information by Geographic Area:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2014              2013              2014              2013      

United States

   $ 461.1       $ 408.4       $ 886.7       $ 818.3   

International:

           

EMEA

     263.3         222.5         483.9         429.6   

Asia-Pacific

     88.6         75.5         158.5         143.7   

Americas

     60.5         49.6         111.6         96.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total International

     412.4         347.6         754.0         669.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 873.5       $ 756.0       $ 1,640.7       $ 1,487.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual and interim reporting periods beginning after December 15, 2016 and early adoption is not permitted. Companies may either use a full retrospective or modified retrospective approach to adopt this ASU. The Company is currently evaluating both adoption options and the impact that adoption of this update will have on its consolidated financial statements.

 

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In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The objective of this ASU is to change the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. In accordance with this ASU, only those disposals of components of an entity that represent a strategic shift which has or will have a material effect on an entity’s operations and financial results will be reported as discontinued operations. The amendments in this ASU are required to be applied prospectively for any disposals (of classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. Early adoption is permitted, for disposals (or classifications as held for sale) that have not been previously reported in an entity’s financial statements. The adoption of this ASU will not have any impact on the Company’s consolidated financial statements other than changing the classification criteria and related disclosures for any potential future disposals (or classifications as held for sale).

NOTE 17. SUBSEQUENT EVENTS

On July 16, 2014, the Company issued $450 million aggregate principal amount of unsecured notes in a public offering. The notes bear interest at 2.750% and mature on July 15, 2019. Also on July 16, 2014, the Company issued $300 million aggregate principal amount of unsecured notes in a public offering. The $300 million notes bear interest at 5.250% and mature on July 15, 2044. The Company intends to use the proceeds of these notes to retire the Series 2005-1 Notes, for which the Company has issued a notice to the bondholders calling the notes, as well as for general corporate purposes. The Company entered into interest rate swaps in July 2014 with a total notional amount of $250 million to convert the fixed interest rate on a portion of the $450 million unsecured notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of a portion of the $450 million unsecured notes.

On July 14, 2014, the Board approved the declaration of a quarterly dividend of $0.28 per share of Moody’s common stock, payable on September 10, 2014 to shareholders of record at the close of business on August 20, 2014.

On July 17, 2014, a subsidiary of the Company acquired 100% of WebEquity Solutions, LLC, a leading provider of cloud-based loan origination solutions for financial institutions. The Company does not anticipate that this acquisition will have a material impact on its consolidated financial statements subsequent to the acquisition date. Due to the proximity of the acquisition date to the filing of this Form 10Q, the Company has not yet completed its assessment of WebEquity’s balance sheet as of the date of acquisition nor has an initial purchase price allocation been completed. These and all other required disclosures related to this acquisition will appear in the Company’s Form 10Q for the three and nine months ended September 30, 2014.

 

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

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 64 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 accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, restructuring, goodwill and acquired intangible assets, pension and other retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Company’s annual report on Form 10-K for the year ended December 31, 2013, includes descriptions of some of the judgments that Moody’s makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there have been no material changes to the Company’s critical accounting estimates.

 

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Reportable Segments

The Company is organized into two reportable segments at June 30, 2014: 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—CFG, SFG, FIG and PPIF—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 December 2013, a subsidiary of the Company acquired Amba, a provider of investment research and quantitative analytics for global financial institutions. Amba is part of the MA reportable segment and its revenue is included in the PS LOB.

The following is a discussion of the results of operations of the Company and its reportable segments. Total MIS revenue and total MA expenses include 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. Total MA revenue and total MIS expenses include 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.

 

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RESULTS OF OPERATIONS

Three months ended June 30, 2014 compared with three months ended June 30, 2013

Executive Summary

Moody’s revenue in the second quarter of 2014 totaled $873.5 million, an increase of $117.5 million compared to 2013 and reflected strong growth in both MIS and MA. Total expenses increased $56.6 million compared to the second quarter of 2013 reflecting higher compensation and non-compensation costs of approximately $42 million and $15 million, respectively. Operating income of $411.7 million in the second quarter of 2014 increased $60.9 million compared to 2013 and resulted in an operating margin of 47.1%, compared to 46.4% in the prior year. Adjusted Operating Income of $434.0 million in the second quarter of 2014 increased $60.1 million compared to 2013, resulting in an Adjusted Operating Margin of 49.7% compared to 49.5% in the prior year period. Diluted EPS of $1.48 in the second quarter of 2014 increased $0.48 over 2013, and included $0.36 for the ICRA Gain. Excluding this gain in the second quarter of 2014, Diluted EPS in the second quarter of 2014 was $0.12 higher than the second quarter 2013 Diluted EPS of $1.00.

 

     Three months ended June 30,     % Change
Favorable
(Unfavorable)
 
     2014     2013    

Revenue:

      

United States

   $ 461.1      $ 408.4        13
  

 

 

   

 

 

   

International:

      

EMEA

     263.3        222.5        18

Asia-Pacific

     88.6        75.5        17

Americas

     60.5        49.6        22
  

 

 

   

 

 

   

Total International

     412.4        347.6        19
  

 

 

   

 

 

   

Total

     873.5        756.0        16
  

 

 

   

 

 

   

Expenses:

      

Operating

     222.1        197.1        (13 %) 

SG&A

     217.4        185.0        (18 %) 

Depreciation and amortization

     22.3        23.1        3
  

 

 

   

 

 

   

Total

     461.8        405.2        (14 %) 
  

 

 

   

 

 

   

Operating income

   $ 411.7      $ 350.8        17
  

 

 

   

 

 

   

Adjusted Operating Income(1)

   $ 434.0      $ 373.9        16
  

 

 

   

 

 

   

Interest income (expense), net

   $ (26.0   $ (21.7     (20 %) 

Other non-operating income (expense), net

   $ (3.3   $ 7.7        (143 %) 

ICRA Gain

   $ 102.8      $ —          NM   

Net income attributable to Moody’s

   $ 319.2      $ 225.5        42

Diluted EPS attributable to Moody’s common shareholders

   $ 1.48      $ 1.00        48

Non-GAAP EPS attributable to Moody’s common shareholders

   $ 1.12      $ 1.00        12

Operating margin

     47.1     46.4  

Adjusted Operating Margin(1)

     49.7     49.5  

 

(1) Adjusted Operating Income, Adjusted Operating Margin and Non-GAAP 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:

 

     June 30,      %
Change
 
     2014     2013         

United States

     2,888        2,686         8

International

     6,904     4,284         61
  

 

 

   

 

 

    

Total

     9,792        6,970         40
  

 

 

   

 

 

    

 

* Total as of June 30, 2014 includes approximately 2,200 staff from the acquisitions of ICRA and Amba which occurred on June 26, 2014 and December 10, 2013, respectively, and for which a majority are located in low cost jurisdictions.

Global revenue of $873.5 million in the second quarter of 2014 increased $117.5 million compared to 2013 reflecting strong growth in both reportable segments. The increase in ratings revenue reflects strong growth in high-yield corporate debt and bank loan revenue as well as changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. The growth also reflects higher rated issuance volumes in CLOs and infrastructure finance. The growth in MA reflects higher revenue across all LOBs. The growth in RD&A resulted from solid demand for credit research and content licensing while the growth in ERS was driven by higher software subscription and related service revenue as well as higher software maintenance fees. The growth in PS included revenue from the fourth quarter 2013 acquisition of Amba as well as growth from the FSTC business. Transaction revenue accounted for 53% of global MCO revenue in the second quarter of 2014 compared to 51% in the second quarter of 2013.

U.S. revenue of $461.1 million in the second quarter of 2014 increased $52.7 million over the prior year, reflecting strong growth in CFG and SFG revenue within MIS coupled with growth in all LOBs within MA.

Non-U.S. revenue increased $64.8 million compared to the second quarter of 2013, reflecting strong growth in MIS revenue across all regions coupled with strong growth in MA revenue in the EMEA and Americas regions.

Operating expenses were $222.1 million in the second quarter of 2014 and increased $25.0 million from 2013 primarily due to growth in compensation costs reflecting higher salaries and related employee benefits primarily resulting from increases in headcount as well as the impact of annual compensation increases. Also contributing to the increase in compensation expenses were costs related to the acquisition of Amba in the fourth quarter of 2013.

SG&A expenses of $217.4 million in the second quarter of 2014 increased $32.4 million from the prior year period due to approximately $17 million in higher compensation costs primarily reflecting higher salaries and related employee benefits resulting from annual compensation increases, headcount growth in MIS and MA as well as in overhead support areas coupled with higher headcount from the Amba acquisition. Additionally, there were higher rent and occupancy costs of approximately $4 million reflecting additional floors leased at the Company’s 7WTC headquarters coupled with various other real estate expansion projects worldwide. Also, there were incremental legal expenses as well as expenses from the Amba business acquired in the fourth quarter of 2013.

Operating income of $411.7 million increased $60.9 million from the second quarter of 2013. Adjusted Operating Income was $434.0 million in the second quarter of 2014 and increased $60.1 million compared to 2013. Operating margin increased 70bps compared to the second quarter of 2013. Adjusted Operating Margin in the second quarter of 2014 of 49.7% increased 20bps compared to the prior year.

Interest income (expense), net in the second quarter of 2014 was ($26.0) million, a $4.3 million increase in expense compared to 2013. This increase is due to approximately $5 million of higher interest primarily reflecting the issuance of the 2013 Senior Notes in August 2013.

 

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Other non-operating income (expense), net was ($3.3) million in the second quarter of 2014, an $11.0 million increase in expense compared to 2013. The increase in expense is primarily due to approximately $12 million in FX losses in the second quarter of 2014 compared to FX gains of approximately $6 million in the prior year. The FX losses in the second quarter of 2014 were primarily due to the decline of the euro relative to the British pound.

The $102.8 million ICRA Gain related to a fair value remeasurement of the Company’s previously held equity investment in ICRA which occurred in connection with Moody’s acquiring a controlling stake in ICRA on June 26, 2014.

The Company’s ETR was 33.1% in the second quarter of 2014, up slightly from 32.2% in 2013 with the increase primarily due to higher taxes on foreign income.

Net Income in the second quarter of 2014, which included the ICRA Gain of $78.5 million, was $319.2 million, or $1.48 per diluted share. This is an increase of $93.7 million, or $0.48 per diluted share, compared to 2013. Excluding the aforementioned ICRA Gain, Non-GAAP Diluted EPS of $1.12 in the second quarter of 2014 was $0.12 higher than Diluted EPS of $1.00 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:

 

     Three months ended June 30,     % Change
Favorable
(Unfavorable)
 
     2014     2013    

Revenue:

      

Corporate finance (CFG)

   $ 320.9      $ 262.9        22

Structured finance (SFG)

     110.6        97.2        14

Financial institutions (FIG)

     92.2        84.5        9

Public, project and infrastructure finance (PPIF)

     98.0        92.7        6
  

 

 

   

 

 

   

Total external revenue

     621.7        537.3        16
  

 

 

   

 

 

   

Intersegment royalty

     21.9        19.0        15
  

 

 

   

 

 

   

Total MIS Revenue

     643.6        556.3        16
  

 

 

   

 

 

   

Expenses:

      

Operating and SG&A (external)

     265.6        233.5        (14 %) 

Operating and SG&A (intersegment)

     3.3        2.7        (22 %) 
  

 

 

   

 

 

   

Adjusted Operating Income

     374.7        320.1        17
  

 

 

   

 

 

   

Depreciation and amortization

     11.4        11.5        1
  

 

 

   

 

 

   

Operating income

   $ 363.3      $ 308.6        18
  

 

 

   

 

 

   

Adjusted Operating Margin

     58.2     57.5  

Operating margin

     56.4     55.5  

 

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

Global MIS revenue of $621.7 million in the second quarter of 2014 increased $84.4 million compared to 2013 reflecting growth across all LOBs. The growth reflects higher rated issuance volumes for high-yield corporate debt and bank loans as well as higher CLO, infrastructure finance and banking-related rated issuance volumes. Also contributing to the growth were benefits from the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. These increases were partially offset by declines in rated issuance volumes for U.S. public finance. Transaction revenue for MIS was 65% and 64% in the second quarter of 2014 and 2013, respectively.

In the U.S., revenue was $352.5 million in the second quarter of 2014, an increase of $39.3 million compared to 2013 and reflected growth in rated issuance volumes for high-yield corporate debt and bank loans as well as growth in volumes for CLOs and infrastructure finance. Also contributing to the increase were changes in the mix of fee type, new fee initiatives and certain pricing increases coupled with higher monitoring fees in CFG. These increases were partially offset by lower refunding volumes in the public finance sector.

Non-U.S. revenue was $269.2 million in the second quarter of 2014, an increase of $45.1 million compared to 2013 reflecting growth in rated issuance volumes for high-yield corporate debt and bank loans coupled with increases in banking revenue across all regions and CLO revenue in EMEA. Also contributing to the growth were changes in the mix of fee type, new fee initiatives and certain pricing increases as well as higher monitoring fees in CFG.

Global CFG revenue of $320.9 million in the second quarter of 2014 increased $58.0 million from 2013 primarily due to higher rated issuance volumes in the U.S. and EMEA for high-yield corporate debt and bank loans reflecting continued refinancing activity resulting from favorable market conditions as well as issuance to fund M&A activity. The growth over the prior year also reflects changes in the mix of fee type, new fee initiatives and certain pricing increases. Monitoring fee revenue also increased across all regions due to growth in the number of outstanding rated entities. Transaction revenue represented 74% of total CFG revenue in both the second quarter of 2014 and 2013. In the U.S., revenue in the second quarter of 2014 was $183.2 million, or $31.0 million higher than the prior year. Internationally, revenue of $137.7 million in the second quarter of 2014 increased $27.0 million compared to the prior year.

Global SFG revenue of $110.6 million in the second quarter of 2014 increased $13.4 million compared to 2013 primarily reflecting higher rated issuance volumes for CLOs in the U.S. and EMEA. This growth in rated issuance volumes for CLOs over the prior year reflects attractive spreads in this asset class as well as continued investor demand for these instruments. The growth over 2013 also reflects changes in the mix of fee type, new fee initiatives and certain pricing increases. Partially offsetting these increases were declines in asset-backed commercial paper revenue in the U.S. and EMEA. Transaction revenue was 63% of total SFG revenue in the second quarter of 2014 compared to 61% in the prior year. In the U.S., revenue of $72.8 million increased $10.7 million compared to the second quarter of 2013. Non-U.S. revenue in the second quarter of 2014 of $37.8 million increased $2.7 million compared to the prior year.

Global FIG revenue of $92.2 million in the second quarter of 2014 was $7.7 million higher compared to 2013 due to changes in the mix of fee type, new fee initiatives and pricing increases coupled with higher banking revenue primarily reflecting robust cross-border issuance from the financial sector in the Asia-Pacific region. These increases were partially offset by a decline in U.S. banking revenue which reflects an unfavorable shift in issuance mix. Transaction revenue was 35% of total FIG revenue in the second quarter of 2014 compared to 36% in the same period in 2013. In the U.S. revenue was $34.7 million, or 4% lower than the prior year. Internationally, revenue was $57.5 million in the second quarter of 2014, or $9.0 million higher compared to 2013.

Global PPIF revenue was $98.0 million in the second quarter of 2014 and increased $5.3 million compared to 2013. The growth is primarily due to changes in the mix of fee type, new fee initiatives and pricing increases coupled with higher rated issuance volumes in infrastructure finance in the U.S. and Asia-Pacific reflecting favorable market

 

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conditions. These increases were partially offset by lower U.S. public finance revenue due to a decrease in refunding volumes which resulted from higher benchmark interest rates. Transaction revenue was 63% of total PPIF revenue in both the second quarter of 2014 and 2013. In the U.S., revenue in the second quarter of 2014 was $61.8 million, a decrease of $1.1 million compared to 2013. Outside the U.S., PPIF revenue increased $6.4 million compared to 2013.

Operating and SG&A expenses in the second quarter of 2014 increased $32.1 million compared to 2013 primarily reflecting higher compensation costs of approximately $25 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. Also, there were higher costs in the second quarter of 2014 to support the Company’s IT systems and infrastructure and incremental legal expenses. Furthermore, there were higher rent and occupancy costs for additional leased floors at 7WTC coupled with various other global real estate expansion projects.

Adjusted Operating Income in the second quarter of 2014, which includes intersegment royalty revenue and intersegment expenses, was $374.7 million and increased $54.6 million compared to 2013. Operating income in the second quarter of 2014 was $363.3 million and increased $54.7 million compared to the prior year. Adjusted Operating Margin and operating margin were 58.2% and 56.4%, respectively, or 70bps and 90bps higher compared to the second quarter of 2013. The increase in both margins compared to the prior year reflects strong revenue growth outpacing growth in total operating expenses.

Moody’s Analytics

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

 

     Three months ended June 30,     % Change
Favorable
(Unfavorable)
 
     2014     2013    

Revenue:

      

Research, data and analytics (RD&A)

   $ 144.7        130.3        11

Enterprise risk solutions (ERS)

     67.2        60.2        12

Professional services (PS)

     39.9        28.2        41
  

 

 

   

 

 

   

Total external revenue

     251.8        218.7        15
  

 

 

   

 

 

   

Intersegment revenue

     3.3        2.7        22
  

 

 

   

 

 

   

Total MA Revenue

     255.1        221.4        15
  

 

 

   

 

 

   

Expenses:

      

Operating and SG&A (external)

     173.9        148.6        (17 %) 

Operating and SG&A (intersegment)

     21.9        19.0        (15 %) 
  

 

 

   

 

 

   

Adjusted Operating Income

     59.3        53.8        10
  

 

 

   

 

 

   

Depreciation and amortization

     10.9        11.6        6
  

 

 

   

 

 

   

Operating income

   $ 48.4      $ 42.2        15
  

 

 

   

 

 

   

Adjusted Operating Margin

     23.2     24.3  

Operating margin

     19.0     19.1  

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

Global MA revenue increased $33.1 million compared to the second quarter of 2013, with growth across all LOBs. Recurring revenue comprised 77% and 79% of total MA revenue in the second quarter of 2014 and 2013, respectively.

 

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In the U.S., revenue of $108.6 million in the second quarter of 2014 increased $13.4 million, and reflected growth across all LOBs. International revenue of $143.2 million in the second quarter of 2014 was $19.7 million higher than in 2013 also with growth across all LOBs.

Global RD&A revenue, which comprised 57% and 60% of total external MA revenue in the second quarter of 2014 and 2013, respectively, increased $14.4 million over the prior year period. The growth, which was most notable in the U.S. and EMEA, was primarily due to strength in credit research and content licensing, general market price increases and the favorable impact of changes in FX translation rates.

Global ERS revenue in the second quarter of 2014 increased $7.0 million over 2013, primarily due to growth in software subscriptions and related services as well as higher software maintenance fees resulting from growing demand for ERS products and services in the banking and insurance industries. Revenue in ERS is subject to quarterly volatility resulting from the variable nature of project timing and the concentration of software implementation and license revenue in a relatively small number of engagements.

Revenue from PS increased $11.7 million compared to the second quarter of 2013 with a substantial portion of the growth relating to the acquisition of Amba in the fourth quarter of 2013 coupled with higher revenue from the FSTC business.

Operating and SG&A expenses in the second quarter of 2014 increased $25.3 million compared to 2013. The expense growth reflects an approximate $18 million increase in compensation costs primarily due to higher headcount to support business growth and from the acquisition of Amba as well as higher headcount in support areas for which the costs are allocated to each segment based on a revenue-split methodology. Additionally, annual merit increases contributed to the growth in compensation costs. The increase also reflects an approximate $8 million increase in non-compensation expenses reflecting higher consulting costs due to product delivery in ERS coupled with higher variable costs to support business growth. Furthermore, there was an increase in rent and occupancy costs reflecting additional floors at 7WTC as well as various other real estate expansion projects worldwide.

Adjusted Operating Income was $59.3 million in the second quarter of 2014 and increased $5.5 million compared to the same period in 2013. Operating income of $48.4 million in the second quarter of 2014 increased $6.2 million compared to the same period in 2013. Adjusted Operating Margin for the second quarter of 2014 was 23.2%, compared to 24.3% in 2013. Operating margin was 19.0%, or flat compared to the prior year. Adjusted operating income and operating income both include intersegment revenue and expense.

Six months ended June 30, 2014 compared with six months ended June 30, 2013

Executive Summary

Moody’s revenue in the first half of 2014 totaled $1,640.7 million, an increase of $152.9 million compared to 2013 and reflected growth in both MIS and MA. Total expenses increased $39.4 million compared to the first half of 2013 reflecting higher compensation costs of approximately $76 million primarily relating to headcount growth and annual compensation increases. The expense growth also reflects a $7 million increase in costs to support ongoing IT initiatives as well as an $8 million increase in rent and occupancy costs. These increases in expenses were partially offset by a charge for the settlement of the Abu Dhabi and Rhinebridge litigation matters in the prior year more fully discussed in Note 14 to the condensed consolidated financial statements. Operating income of $744.7 million in the first half of 2014 increased $113.5 million compared to 2013 and resulted in an operating margin of 45.4%, compared to 42.4% in the prior year. Adjusted Operating Income of $790.1 million in the first half of 2014 increased $112.2 million compared to 2013, resulting in an Adjusted Operating Margin of 48.2% compared to 45.6% in the prior year period. Both the operating margin and Adjusted Operating Margin in 2013 included the aforementioned litigation settlement charge. Diluted EPS of $2.47 in the first half of 2014, which included $0.36 for the ICRA Gain, increased $0.64 over 2013, which included a $0.14 charge related to the aforementioned litigation settlement. Excluding both the ICRA Gain in 2014 and the litigation

 

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settlement charge in 2013, Non-GAAP Diluted EPS in the first half of 2014 of $2.11 was $0.14 higher than first half 2013 Non-GAAP Diluted EPS of $1.97.

 

     Six months ended June 30     % Change
Favorable
(Unfavorable)
 
     2014     2013    

Revenue:

      

United States

   $ 886.7      $ 818.3        8
  

 

 

   

 

 

   

International:

      

EMEA

     483.9        429.6        13

Asia-Pacific

     158.5        143.7        10

Americas