10-Q 1 d97541d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark one)

 

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

For the quarterly period ended September 30, 2015

Or

 

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

For the transition period from             to             

Commission file number 1-14037

 

 

Moody’s Corporation

(Exact name of registrant as specified in its charter)

 

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

7 World Trade Center at

250 Greenwich Street, New York, N.Y.

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

Registrant’s telephone number, including area code:

(212) 553-0300

 

 

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

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

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

 

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

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

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

 

Title of Each Class

 

Shares Outstanding at September 30, 2015

Common Stock, par value $0.01 per share   197.7 million


Table of Contents

MOODY’S CORPORATION

INDEX TO FORM 10-Q

 

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

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September  30, 2015 and 2014

     8   
 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014

     9-10   
 

Consolidated Balance Sheets (Unaudited) at September 30, 2015 and December 31, 2014

     11   
 

Consolidated Statements of Cash Flows (Unaudited) for the Nine months ended September  30, 2015 and 2014

     12   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     13-39   

Item 2.

 

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

  
 

The Company

     40   
 

Critical Accounting Estimates

     40-43   
 

Reportable Segments

     43-44   
 

Results of Operations

     44-58   
 

Liquidity and Capital Resources

     59-66   
 

2015 Outlook

     67   
 

Recently Issued Accounting Pronouncements

     68   
 

Contingencies

     68   
 

Regulation

     69   
 

Forward-Looking Statements

     70   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     71   

Item 4.

 

Controls and Procedures

     71-72   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     73   

Item 1A.

 

Risk Factors

     73   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     73   

Item 5.

 

Other Information

     73   

Item 6.

 

Exhibits

     74   

SIGNATURES

     75   

Exhibits Filed Herewith

  

31.1

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

31.2

 

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

  

32.1

 

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

  

32.2

 

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

  

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

  


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.
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, China, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka 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 the CREF asset class within SFG
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
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

 

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TERM

  

DEFINITION

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&A    Depreciation and amortization
D&B Business    Old D&B’s Dun & Bradstreet operating company
DBPP    Defined benefit pension plans
Debt/EBITDA    Ratio of Total Debt to EBITDA
EBITDA    Earnings before interest, taxes, depreciation and amortization
EMEA    Represents countries within Europe, the Middle East and Africa
EPS    Earnings per share
Equilibrium    A leading provider of credit rating and research services in Peru and Panama; acquired by Moody’s in May 2015
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
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
FX    Foreign exchange
GAAP    U.S. Generally Accepted Accounting Principles
GBP    British pounds
ICRA    ICRA Limited; is a leading provider of credit ratings and research in India. The Company previously held 28.51% equity ownership and in June 2014, increased that ownership stake to 50.06% through the acquisition of additional shares
ICRA Acquisition    The June 2014 purchase of an additional 21.55% ownership interest in ICRA resulting in majority ownership and consolidation of ICRAs financial statements; ICRAs results are consolidated into Moody’s financial statements on a three-month lag and accordingly the Company began including the results of operations for ICRA in its consolidated financial statements beginning in the fourth quarter of 2014
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 held 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.

 

4


Table of Contents

TERM

  

DEFINITION

IRS    Internal Revenue Service
IT    Information technology
KIS    Korea Investors Service, Inc; a leading Korean rating agency and consolidated subsidiary of the Company
KIS Pricing    Korea Investors Service Pricing, Inc; a leading Korean provider of fixed income securities pricing and consolidated subsidiary of the Company
Legacy Tax Matter(s)    Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution
Lewtan    Lewtan Technologies; a leading provider of analytical tools and data for the global structured finance market; part of the RD&A LOB within MA; an acquisition completed in October 2014
LIBOR    London Interbank Offered Rate
LOB    Line of business
MA    Moody’s Analytics – a reportable segment of MCO formed in January 2008 which provides a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets; consists of three LOBs – RD&A, ERS and PS
M&A    Mergers and acquisitions
Make Whole Amount    The prepayment penalty amount relating to the Series 2007-1 Notes, 2010 Senior Notes, 2012 Senior Notes, 2013 Senior Notes, 2014 Senior Notes (5-year), 2014 Senior Notes (30-year) and 2015 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 five LOBs – SFG, CFG, FIG, PPIF and MIS Other
MIS Other    Consists of non-ratings revenue from ICRA, KIS Pricing and KIS Research. These businesses are components of MIS; MIS Other is an LOB of MIS
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 is comprised of the D&B Business
NM    Percentage change is not meaningful
NRSRO    Nationally Recognized Statistical Rating Organization
OCI    Other comprehensive income (loss); includes gains and losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments
Old D&B    The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
PPIF    Public, project and infrastructure finance; an LOB of MIS
Profit Participation Plan    Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
PS    Professional Services, an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs

 

5


Table of Contents

TERM

  

DEFINITION

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 that 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
Reform Act    Credit Rating Agency Reform Act of 2006
REIT    Real Estate Investment Trust
Relationship Revenue    Represents MIS 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 MIS Other represents subscription-based revenue. For MA, represents subscription-based and maintenance revenue
Retirement Plans    Moody’s funded and unfunded pension plans, the healthcare plans and 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; notes were paid in 2014
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, represents the initial rating of a new debt issuance as well as other one-time fees. For MIS Other, represents revenue from professional services and outsourcing engagements. For MA, represents software license fees and revenue from risk management advisory projects, training and certification services, and outsourced research and analytical engagements
U.K.    United Kingdom
U.S.    United States
U.S. Shared National Credit Program    Interagency program designed to evaluate large and complex syndicated credits. The program is administered by the three federal banking regulatory agencies which include the Federal Reserve System, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC).
USD    U.S. dollar
UTBs    Unrecognized tax benefits
UTPs    Uncertain tax positions
VSOE    Vendor specific objective evidence; as defined in the ASC, evidence of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
WebEquity    WebEquity Solutions LLC; a leading provider of cloud-based loan origination solutions for financial institutions; part of the ERS LOB within MA; an acquisition completed in July 2014
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

 

6


Table of Contents

TERM

  

DEFINITION

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
2007 Agreement    Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes
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 Facility    Revolving credit facility of $1 billion entered into on April 18, 2012; was replaced with the 2015 Facility
2012 Indenture    Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior Notes    Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
2013 Indenture    Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes
2013 Senior Notes    Principal amount of the $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture
2014 Indenture    Supplemental indenture and related agreements dated July 16, 2014, relating to the 2014 Senior Notes
2014 Senior Notes (5-Year)    Principal amount of $450 million, 2.75% senior unsecured notes due in July 2019
2014 Senior Notes (30-Year)    Principal amount of $300 million, 5.25% senior unsecured notes due in July 2044
2015 Facility    Five-year unsecured revolving credit facility, with capacity to borrow up to $1 billion; replaces the 2012 Facility
2015 Indenture    Supplemental indenture and related agreements dated March 9, 2015, relating to the 2015 Senior Notes
2015 Senior Notes    Principal amount €500 million, 1.75% senior unsecured notes issued March 9, 2015 and due in March 2027
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     Nine Months Ended  
     September 30,     September 30,  
     2015     2014     2015     2014  

Revenue

   $ 834.9      $ 816.1      $ 2,618.6      $ 2,456.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Operating

     236.1        236.7        724.4        674.8   

Selling, general and administrative

     220.8        206.5        669.1        619.0   

Depreciation and amortization

     28.3        23.2        84.8        68.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     485.2        466.4        1,478.3        1,362.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     349.7        349.7        1,140.3        1,094.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating (expense) income, net

        

Interest income (expense), net

     (25.8     (37.7     (87.0     (87.5

Other non-operating income (expense), net

     19.7        16.4        14.0        15.5   

ICRA Gain

     —          —          —          102.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating (expense) income, net

     (6.1     (21.3     (73.0     30.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provisions for income taxes

     343.6        328.4        1,067.3        1,125.2   

Provision for income taxes

     109.8        109.9        338.1        360.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     233.8        218.5        729.2        764.6   

Less: Net income attributable to noncontrolling interests

     2.2        3.3        5.8        12.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 231.6      $ 215.2      $ 723.4      $ 752.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Moody’s common shareholders

        

Basic

   $ 1.16      $ 1.02      $ 3.60      $ 3.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.14      $ 1.00      $ 3.54      $ 3.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

        

Basic

     199.4        210.4        201.1        212.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     202.5        214.2        204.5        216.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share attributable to Moody’s common shareholders

   $ 0.34      $ 0.28      $ 0.68      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

8


Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in millions)

 

     Three Months Ended September 30, 2015     Three Months Ended September 30, 2014  
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net income

       $ 233.8          $ 218.5   
      

 

 

       

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation:

            

Foreign currency translation adjustments

   $ (43.2   $ 1.5        (41.7   $ (79.2   $ (8.2     (87.4

Available for sale securities:

            

Net unrealized gains on available for sale securities

     0.7        —          0.7        —          —          —     

Reclassification of gains included in net income

     (0.6     —          (0.6     —          —          —     

Pension and Other Retirement Benefits:

            

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

     3.4        (1.3     2.1        1.8        (0.7     1.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

   $ (39.7   $ 0.2        (39.5   $ (77.4   $ (8.9     (86.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         194.3            132.2   

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

         2.2            3.3   
      

 

 

       

 

 

 

Comprehensive income attributable to Moody’s

       $ 192.1            $128.9   
      

 

 

       

 

 

 

 

9


Table of Contents
     Nine Months Ended September 30, 2015     Nine Months Ended September 30, 2014  
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net income

       $ 729.2          $ 764.6   
      

 

 

       

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation:

            

Foreign currency translation adjustments

   $ (94.3   $ (5.8     (100.1   $ (76.2   $ (5.6     (81.8

Foreign currency translation adjustments - reclassification of (gains) losses included in net income

     (0.1     —          (0.1     4.4        —          4.4   

Available for sale securities:

            

Net unrealized gains on available for sale securities

     2.8        —          2.8        —          —          —     

Reclassification of gains included in net income

     (0.8     —          (0.8     —          —          —     

Pension and Other Retirement Benefits:

            

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

     10.3        (3.9     6.4        5.5        (3.0     2.5   

Net actuarial gains (losses) and prior service costs

     10.9        (4.2     6.7        (6.9     2.8        (4.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

   $ (71.2   $ (13.9     (85.1   $ (73.2   $ (5.8     (79.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         644.1            685.6   

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

         5.8            12.2   
      

 

 

       

 

 

 

Comprehensive income attributable to Moody’s

       $ 638.3            $673.4   
      

 

 

       

 

 

 

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

 

10


Table of Contents

MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

     September 30,
2015
    December 31,
2014
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,471.1      $ 1,219.5   

Short-term investments

     470.2        458.1   

Accounts receivable, net of allowances of $27.1 in 2015 and $29.4 in 2014

     720.5        792.4   

Deferred tax assets, net

     36.6        43.9   

Other current assets

     163.7        172.5   
  

 

 

   

 

 

 

Total current assets

     2,862.1        2,686.4   

Property and equipment, net of accumulated depreciation of $501.4 in 2015 and $451.5 in 2014

     306.1        302.3   

Goodwill

     990.0        1,021.1   

Intangible assets, net

     308.8        345.5   

Deferred tax assets, net

     132.7        167.8   

Other assets

     173.2        145.9   
  

 

 

   

 

 

 

Total assets

   $ 4,772.9      $ 4,669.0   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 409.2      $ 557.6   

Deferred tax liabilities, net

     15.5        17.5   

Deferred revenue

     625.5        624.6   
  

 

 

   

 

 

 

Total current liabilities

     1,050.2        1,199.7   

Non-current portion of deferred revenue

     128.4        132.2   

Long-term debt

     3,124.5        2,547.3   

Deferred tax liabilities, net

     84.3        95.7   

Unrecognized tax benefits

     208.4        220.3   

Other liabilities

     417.3        430.9   
  

 

 

   

 

 

 

Total liabilities

     5,013.1        4,626.1   

Contingencies (Note 14)

    

Shareholders’ (deficit) 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 September 30, 2015 and December 31, 2014, respectively.

     3.4        3.4   

Capital surplus

     424.8        383.9   

Retained earnings

     6,631.7        6,044.3   

Treasury stock, at cost; 145,161,779 and 138,539,128 shares of common stock at September 30, 2015 and December 31, 2014, respectively

     (7,209.5     (6,384.2

Accumulated other comprehensive loss

     (320.3     (235.2
  

 

 

   

 

 

 

Total Moody’s shareholders’ deficit

     (469.9     (187.8

Noncontrolling interests

     229.7        230.7   
  

 

 

   

 

 

 

Total shareholders’ (deficit) equity

     (240.2     42.9   
  

 

 

   

 

 

 

Total liabilities and shareholders’ (deficit) equity

   $ 4,772.9      $ 4,669.0   
  

 

 

   

 

 

 

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)

 

     Nine months ended
September 30,
 
     2015     2014  

Cash flows from operating activities

    

Net income

   $ 729.2      $ 764.6   

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

    

Depreciation and amortization

     84.8        68.6   

Stock-based compensation expense

     66.5        59.9   

Deferred income taxes

     19.7        43.7   

Excess tax benefits from stock-based compensation plans

     (44.5     (54.5

ICRA Gain

     —          (102.8

Legacy Tax Matters

     (6.4     (6.4

Changes in assets and liabilities:

    

Accounts receivable

     61.0        (11.9

Other current assets

     4.9        (63.3

Other assets

     (6.6     (4.8

Accounts payable and accrued liabilities

     (35.7     (16.3

Deferred revenue

     10.6        25.8   

Unrecognized tax benefits and other non-current tax liabilities

     (9.9     18.5   

Other liabilities

     19.9        (11.3
  

 

 

   

 

 

 

Net cash provided by operating activities

     893.5        709.8   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital additions

     (65.9     (56.8

Purchases of short-term investments

     (480.4     (68.0

Sales and maturities of short-term investments

     448.6        90.7   

Acquisitions, net of cash acquired

     (4.6     (210.5

Settlement of net investment hedges

     20.8        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (81.5     (244.6
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of notes

     552.8        747.7   

Repayments of notes

     —          (300.0

Proceeds from stock-based compensation plans

     72.1        134.6   

Repurchase of shares for payroll tax withholdings related to stock-based compensation

     (59.3     (51.3

Cost of treasury shares repurchased

     (905.6     (780.2

Excess tax benefits from settlement of stock-based compensation plans

     44.5        54.5   

Payment of dividends

     (205.0     (178.2

Payment of dividends to noncontrolling interests

     (4.6     (9.7

Contingent consideration paid

     (1.5     (4.3

Debt issuance costs and related fees

     (5.9     (6.5
  

 

 

   

 

 

 

Net cash used in financing activities

     (512.5     (393.4

Effect of exchange rate changes on cash and cash equivalents

     (47.9     (50.5
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     251.6        21.3   

Cash and cash equivalents, beginning of the period

     1,219.5        1,919.5   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 1,471.1      $ 1,940.8   
  

 

 

   

 

 

 

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. 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 primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations, which consist primarily of the distribution of research and fixed income pricing services in the Asia-Pacific region and outsourced services. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies 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. 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 2014 annual report on Form 10-K filed with the SEC on February 25, 2015. 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.

Certain reclassifications have been made prior to period amounts to conform to the current presentation.

NOTE 2. STOCK-BASED COMPENSATION

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Stock-based compensation cost

   $ 22.1       $ 19.3       $ 66.5       $ 59.9   

Tax benefit

   $ 7.2       $ 6.2       $ 21.8       $ 19.0   

During the first nine months of 2015, the Company granted 0.3 million employee stock options, which had a weighted average grant date fair value of $36.08 per share based on the Black-Scholes option-pricing model. The Company also granted 0.9 million shares of restricted stock in the first nine months of 2015, which had a weighted average grant date fair value of $98.06 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 $94.08 per share.

 

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The following weighted average assumptions were used in determining the fair value for options granted in 2015:

 

Expected dividend yield

     1.39

Expected stock volatility

     39.4

Risk-free interest rate

     1.88

Expected holding period

     6.9 years   

Grant date fair value

   $ 36.08   

Unrecognized compensation expense at September 30, 2015 was $9.8 million and $113.5 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 1.7 years, respectively. Additionally, there was $17.8 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 1.0 years.

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

 

     Nine Months Ended
September 30,
 
Exercise of stock options:    2015      2014  

Proceeds from stock option exercises

   $ 68.0       $ 131.5   

Aggregate intrinsic value

   $ 64.7       $ 107.7   

Tax benefit realized upon exercise

   $ 23.0       $ 38.7   

Number of shares exercised

     1.3         2.8   
     Nine Months Ended
September 30,
 
Vesting of restricted stock:    2015      2014  

Fair value of shares vested

   $ 111.3       $ 92.3   

Tax benefit realized upon vesting

   $ 35.7       $ 31.6   

Number of shares vested

     1.1         1.2   
     Nine Months Ended
September 30,
 
Vesting of performance-based restricted stock:    2015      2014  

Fair value of shares vested

   $ 43.1       $ 38.0   

Tax benefit realized upon vesting

   $ 15.6       $ 14.6   

Number of shares vested

     0.5         0.5   

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 32.0% and 33.5% for the three months ended September 30, 2015 and 2014, respectively and 31.7% and 32.0% for the nine month periods ended September 30, 2015 and 2014, respectively. The decrease in the ETR compared to the third quarter of 2014 was primarily due to changes in New York State and New York City tax laws relating to income apportionment.

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 $0.1 million during the third quarter of 2015 and an overall decrease in its UTPs during the first nine months of 2015 of $11.9 million ($7.6 million net of federal tax benefits).

 

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Table of Contents

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2012 are under examination and its returns for 2013 through 2014 remain open to examination. The Company’s New York State tax returns for 2011 through 2013 are currently under examination and the Company’s New York City tax return for 2013 is currently under examination. The Company’s U.K. tax return for 2012 is currently under examination and its return for 2013 remains 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 that 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.

 

     Nine Months Ended
September 30,
 
     2015      2014  

Income taxes paid

   $     299.9       $     334.6   

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Basic

     199.4         210.4         201.1         212.1   

Dilutive effect of shares issuable under stock-based compensation plans

     3.1         3.8         3.4         4.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     202.5         214.2         204.5         216.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     0.6         0.5         0.8         0.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2015 and 2014. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

The decrease in the diluted shares outstanding primarily reflects treasury share repurchases under the Company’s Board authorized share repurchase program.

 

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NOTE 5. CASH EQUIVALENTS AND INVESTMENTS

The table below provides additional information on the Company’s cash equivalents and investments:

 

     As of September 30, 2015  
     Cost      Gross
Unrealized
Gains
     Fair
Value
     Balance sheet location  
              Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 137.9       $ —         $ 137.9       $ 137.9       $ —         $ —     

Certificates of deposit and money market deposit accounts (1)

   $ 1,088.9       $ —         $ 1,088.9       $ 596.0       $ 470.2       $ 22.7   

Fixed maturity and open ended mutual funds (2)

   $ 33.4       $ 2.8       $ 36.2       $ —         $ —         $ 36.2   
     As of December 31, 2014  
     Cost      Gross
Unrealized
Gains
     Fair
Value
     Balance sheet location  
              Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 149.7       $ —         $ 149.7       $ 149.7       $ —         $ —     

Certificates of deposit and money market deposit accounts (1)

   $ 842.5       $ —         $ 842.5       $ 380.1       $ 458.1       $ 4.3   

Fixed maturity and open ended mutual funds (2)

   $ 47.1       $ 0.9       $ 48.0       $ —         $ —         $ 48.0   

 

(1)

Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one month to twelve months and one month to ten months at September 30, 2015 and December 31, 2014, respectively. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.

(2) 

Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from 14 months to 34 months and two months to 23 months at September 30, 2015 and December 31, 2014, respectively.

The money market mutual funds as well as the fixed maturity and open ended mutual funds in the table above are deemed to be “available for sale” under ASC Topic 320 and the fair value of these instruments is determined using Level 1 inputs as defined in the ASC.

NOTE 6. ACQUISITIONS

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

 

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Table of Contents

Equilibrium

On May 21, 2015, a subsidiary of the Company acquired 100% of Equilibrium, a provider of credit rating and research services in Peru and Panama. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flows is not expected to be material. Equilibrium operates in the MIS reportable segment and goodwill related to this acquisition has been allocated to the MIS reporting unit.

Lewtan Technologies

On October 27, 2014, a subsidiary of the Company acquired 100% of Lewtan Technologies, a leading provider of analytical tools and data for the global structured finance market. The acquisition of Lewtan will bolster MA’s Structured Analytics and Valuations (SAV) business within its RD&A LOB, which provides an extensive data and analytics library for securitized assets. The aggregate purchase price and the near term impact to the Company’s operations and cash flows is not material. Lewtan operates in the RD&A LOB of MA and goodwill related to this acquisition was allocated to the RD&A reporting unit.

WebEquity Solutions, LLC

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 payment of $130.5 million was funded with cash on hand. This acquisition will enhance MA’s risk management product portfolio.

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

 

Current assets

      $ 3.0   

Property and equipment, net

        2.3   

Intangible assets:

     

Client relationships (18 year weighted average life)

   $ 42.8      

Software (15 year weighted average life)

     11.5      

Trade name (4 year weighted average life)

     0.5      
  

 

 

    

Total intangible assets (17 year weighted average life)

        54.8   

Goodwill

        77.6   

Liabilities assumed

        (7.2
     

 

 

 

Net assets acquired

      $ 130.5   
     

 

 

 

The acquired goodwill, which has been assigned to the MA segment, is tax deductible.

As of the date of the acquisition, WebEquity is part of the ERS reporting unit.

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. 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 consolidated ICRA’s financial statements. Moody’s consolidates ICRA’s financial statements on a three-month lag.

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. 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 resulting in a pre-tax gain of $102.8 million ($78.5 million after-tax) in the second quarter of 2014. The fair value of the Company’s equity investment was based on ICRA’s quoted market price on the date of acquisition.

 

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Table of Contents

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   
  

 

 

 

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

      $ 25.4   

Property and equipment, net

        15.1   

Intangible assets:

     

Trade name (36 year weighted average life)

   $ 46.8      

Client relationships (19 year weighted average life)

     33.8      

Other (17 year weighted average life)*

     18.3      
  

 

 

    

Total intangible assets (26 year weighted average life)

        98.9   

Goodwill

        296.7   

Other assets

        56.3   

Liabilities

        (62.7

Fair value of non-controlling interest assumed

        (218.8
     

 

 

 

Net assets acquired

      $ 210.9   
     

 

 

 

 

* Primarily consists of acquired technical know-how and ratings methodologies

Current assets in the table above include acquired cash of approximately $5 million. Additionally, current assets include 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.

ICRA operates as its own reporting unit for purposes of the Company’s annual goodwill impairment assessment.

NOTE 7. 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.

 

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Table of Contents

Derivatives and non-derivative instruments designated as accounting hedges:

Interest Rate Swaps

In the third 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. In the third 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 remaining balance of the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is 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.

In the third 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 a portion of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. In the first quarter of 2015, the Company entered into interest rate swaps with a total notional amount of $200 million to convert the fixed interest rate on the remaining balance of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the 2014 Senior Notes (5-year), 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 2014 Senior Notes (5-year). 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.

The following table summarizes the impact to the statement of operations of the Company’s interest rate swaps designated as fair value hedges:

 

        Amount of income/(expense) recognized in the consolidated  statements
of operations
 
        Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 

Derivatives designated as fair
value accounting hedges

 

Location on Statement of
Operations

  2015     2014     2015     2014  

Interest rate swaps

  Interest income (expense), net   $ 3.9      $ 7.8      $ 11.5      $ 8.3   

Net investment hedges

The Company enters into foreign currency forward contracts that are designated as net investment hedges and additionally has designated €400 million of the 2015 Senior Notes as a net investment hedge. These hedges are intended to mitigate FX exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. These net investment hedges 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 hedge. For hedges that meet the effectiveness requirements, any change in the fair value and any realized gains and losses for the hedge are recorded in AOCI, in the foreign currency translation account. Any change in the fair value of these hedges that is the result of ineffectiveness is recognized immediately in other non-operating (expense) income in the Company’s consolidated statement of operations.

 

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The following table summarizes the notional amounts of the Company’s outstanding net investment hedges:

 

     September 30,      December 31,  
     2015      2014  

Notional amount of net investment hedges:

     

Long-term debt designated as net investment hedge

   400.0       —     

Contracts to sell euros for USD

   —         50.0   

Contracts to sell GBP for euros

   £ 20.4       £ —     

Contracts to sell Japanese yen for USD

   ¥ 19,400       ¥ 19,400   

The outstanding contracts to sell Japanese yen for USD expire in November 2015. The outstanding contracts to sell GBP for euros expire in December 2015. The hedge relating to the portion of the 2015 Senior Notes that was designated as a net investment hedge will end upon the repayment of the notes in 2027 unless terminated earlier at the discretion of the Company.

The following table provides information on the gains/(losses) on the Company’s net investment hedges:

 

Derivatives in Net Investment Hedging Relationships

   Amount of
Gain/(Loss) Recognized
in AOCI on Derivative
(Effective Portion)
 
     Three Months Ended
September 30,
 
     2015      2014  

FX forwards

   $ (0.7    $ 12.1   

Long-term debt

     (0.6      —     
  

 

 

    

 

 

 

Total

   $ (1.3    $ 12.1   
  

 

 

    

 

 

 
      Nine Months Ended
September 30,
 
     2015      2014  

FX forwards

   $ 12.7       $ 8.4   

Long-term debt

     (2.7      —     
  

 

 

    

 

 

 

Total

   $ 10.0       $ 8.4   
  

 

 

    

 

 

 
The cumulative amount of realized and unrecognized net investment hedge gains recorded in AOCI is as follows:    
     Gains/(Losses), net of tax  
     September 30,      December 31,  
     2015      2014  

FX forwards

   $ 33.6       $ 20.9   

Long-term debt

     (2.7      —     
  

 

 

    

 

 

 

Total gains on net investment hedges

   $ 30.9       $ 20.9   
  

 

 

    

 

 

 

Derivatives not designated as accounting hedges:

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 December 2015.

 

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

 

     September 30,      December 31,  
     2015      2014  

Notional amount of currency pair:

     

Contracts to purchase USD with euros

   $ —         $ 38.5   

Contracts to sell USD for euros

   $ 48.3       $ 51.5   

Contracts to purchase USD with GBP

   $ —         $ 0.2   

Contracts to purchase USD with other foreign currencies

   $ —         $ 1.2   

Contracts to purchase euros with other foreign currencies

   36.0       34.0   

Contracts to purchase euros with GBP

   —         25.0   

Contracts to sell euros for GBP

   27.3       38.2   

Cross-currency swaps

In conjunction with the issuance of the 2015 Senior Notes, the Company entered into a cross-currency swap to exchange €100 million for U.S. dollars on the date of the settlement of the notes. The purpose of this cross-currency swap is to mitigate FX risk on the remaining principal balance on the 2015 Senior Notes that was not designated as a net investment hedge as more fully discussed above. The Company has not designated these cross-currency swaps as accounting hedges. Accordingly, changes in fair value on these swaps is 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 €100 million principal of the 2015 Senior Notes that was not designated as a net investment hedge. Under the terms of the swap, the Company will pay the counterparty interest on the $110.5 million received at 3.945% per annum and the counterparty will pay the Company interest on the €100 million paid at 1.75% per annum. These interest payments will be settled in March of each year, beginning in 2016, until either the maturity of the cross-currency swap in 2027 or upon early termination at the discretion of the Company. The principal payments on this cross currency swap will be settled in 2027, concurrent with the repayment of the 2015 Senior Notes at maturity or upon early termination at the discretion of the Company.

The following table summarizes the impact to the consolidated statements of operations relating to the net gain (loss) on the Company’s derivatives which are not designated as hedging instruments:

 

          Three Months Ended
September 30,
 

Derivatives not designated as accounting hedges

  

Location on Statement of Operations

   2015      2014  

Cross-currency swap

   Other non-operating income (expense), net    $ (1.7    $ —     

Foreign exchange forwards

   Other non-operating income (expense), net      0.6         (4.8
     

 

 

    

 

 

 

Total

      $ (1.1    $ (4.8
     

 

 

    

 

 

 
          Nine Months  Ended
September 30,
 

Derivatives not designated as accounting hedges

  

Location on Statement of Operations

   2015      2014  

Cross-currency swap

   Other non-operating income (expense), net    $ (7.0    $ —     

Foreign exchange forwards

   Other non-operating income (expense), net      (1.3      (3.9
     

 

 

    

 

 

 

Total

      $ (8.3    $ (3.9
     

 

 

    

 

 

 

The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instrument as well as the carrying value of its nonderivative debt instruments designated and qualifying as net investment hedges:

 

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Table of Contents
     Derivative and Non-derivative Instruments  
     Balance Sheet
Location
   September 30,
2015
     December 31,
2014
 

Assets:

        

Derivatives designated as accounting hedges:

        

FX forwards on net investment in certain foreign subsidiaries

   Other current assets    $ 17.7       $ 18.8   

Interest rate swaps

   Other assets      25.5         17.4   
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        43.2         36.2   

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

   Other current assets      1.7         5.6   
     

 

 

    

 

 

 

Total assets

      $ 44.9       $ 41.8   
     

 

 

    

 

 

 

Liabilities:

        

Non-derivative instrument designated as accounting hedge:

        

Long-term debt designated as net investment hedge

   Long-term debt    $ 446.5       $ —     

Derivatives not designated as accounting hedges:

        

Cross-currency swap

   Other non-current
liabilities
     5.6         —     

FX forwards on certain assets and liabilities

   Accounts payable
and accrued
liabilities
     1.0         2.1   
     

 

 

    

 

 

 

Total liabilities

      $ 453.1       $ 2.1   
     

 

 

    

 

 

 

 

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NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

     Nine Months Ended September 30, 2015  
     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

   $ 298.7      $ —         $ 298.7      $ 734.6      $ (12.2   $ 722.4      $ 1,033.3      $ (12.2   $ 1,021.1   

Additions/adjustments

     4.9        —           4.9        3.3        —          3.3        8.2        —          8.2   

Foreign currency translation adjustments

     (10.7     —           (10.7     (28.6     —          (28.6     (39.3     —          (39.3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 292.9      $ —         $ 292.9      $ 709.3      $ (12.2   $ 697.1      $ 1,002.2      $ (12.2   $ 990.0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Year ended December 31, 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

     296.7        —           296.7        101.1        —          101.1        397.8        —          397.8   

Foreign currency translation adjustments

     (9.4     —           (9.4     (32.5     —          (32.5     (41.9     —          (41.9
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 298.7      $ —         $ 298.7      $ 734.6      $ (12.2   $ 722.4      $ 1,033.3      $ (12.2   $ 1,021.1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The 2015 additions/adjustments for the MIS segment in the table above relate to the acquisition of Equilibrium. The 2015 additions/adjustments for the MA segment reflect an adjustment to an indemnification asset recognized as part of the Copal acquisition and adjustments to deferred revenue balances and deferred tax assets recognized as part of the Lewtan acquisition.

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 6. The 2014 additions/adjustments for the MA segment in the table above relate to the acquisition of WebEquity in the third quarter of 2014 and Lewtan in the fourth quarter of 2014 as well as adjustments for Amba, which was acquired in the fourth quarter of 2013.

 

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Acquired intangible assets and related amortization consisted of:

 

     September 30,      December 31,  
     2015      2014  

Customer relationships

   $ 299.9       $ 310.4   

Accumulated amortization

     (107.0      (98.1
  

 

 

    

 

 

 

Net customer relationships

     192.9         212.3   
  

 

 

    

 

 

 

Trade secrets

     29.9         30.6   

Accumulated amortization

     (22.5      (20.9
  

 

 

    

 

 

 

Net trade secrets

     7.4         9.7   
  

 

 

    

 

 

 

Software

     75.7         79.8   

Accumulated amortization

     (46.3      (43.0
  

 

 

    

 

 

 

Net software

     29.4         36.8   
  

 

 

    

 

 

 

Trade names

     73.8         76.5   

Accumulated amortization

     (15.6      (13.3
  

 

 

    

 

 

 

Net trade names

     58.2         63.2   
  

 

 

    

 

 

 

Other

     44.0         44.8   

Accumulated amortization

     (23.1      (21.3
  

 

 

    

 

 

 

Net other

     20.9         23.5   
  

 

 

    

 

 

 

Total acquired intangible assets, net

   $ 308.8       $ 345.5   
  

 

 

    

 

 

 

Other intangible assets primarily consist of databases, covenants not to compete, and acquired ratings methodologies and models.

Amortization expense relating to acquired intangible assets is as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Amortization expense

   $ 7.6       $ 6.9       $ 24.1       $ 20.5   

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

 

Year Ending December 31,

      

2015 (after September 30)

   $ 6.8   

2016

     29.2   

2017

     26.9   

2018

     21.1   

2019

     18.1   

Thereafter

     206.7   
  

 

 

 

Total estimated future amortization

   $ 308.8   
  

 

 

 

 

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Table of Contents

NOTE 9. FAIR VALUE

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

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

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

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

The table below presents information about items that are carried at fair value at September 30, 2015 and December 31, 2014:

 

         Fair Value Measurement as of September 30, 2015  
    

Description

   Balance      Level 1      Level 2      Level 3  

Assets:

             
 

Derivatives (a)

   $ 44.9       $ —         $ 44.9       $ —     
 

Money market mutual funds

     137.9         137.9         —           —     
 

Fixed maturity and open ended mutual funds (b)

     36.2         36.2         —           —     
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 219.0       $ 174.1       $ 44.9       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             
 

Derivatives (a)

   $ 6.6       $ —         $ 6.6       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 6.6       $ —         $ 6.6       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 
         Fair Value Measurement as of December 31, 2014  
    

Description

   Balance      Level 1      Level 2      Level 3  

Assets:

             
 

Derivatives (a)

   $ 41.8       $ —         $ 41.8       $ —     
 

Money market mutual funds

     149.7         149.7         —           —     
 

Fixed maturity and open ended mutual funds (b)

     48.0         48.0         —           —     
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 239.5       $ 197.7       $ 41.8       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             
 

Derivatives (a)

   $ 2.1       $ —         $ 2.1       $ —     
 

Contingent consideration arising from acquisitions (c)

     2.1         —           —           2.1   
    

 

 

    

 

 

    

 

 

    

 

 

 
 

Total

   $ 4.2       $ —         $ 2.1       $ 2.1   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Represents FX forwards on certain assets and liabilities and on net investments in certain foreign subsidiaries as well as interest rate swaps as more fully described in Note 7 to the financial statements.

(b)

Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from 14 month to 34 months and two months to 23 months at September 30, 2015 and December 31, 2014, respectively.

(c)

Represents contingent consideration liabilities pursuant to the agreements for the CSI acquisition.

 

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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
Nine Months Ended September 30,
 
     2015      2014  

Balance as of January 1

   $ 2.1       $ 17.5   

Contingent consideration payments

     (1.9      (4.3

Total losses (realized and unrealized):

     

Included in earnings

     —           0.3   

Foreign currency translation adjustments

     (0.2      (0.2
  

 

 

    

 

 

 

Balance as of September 30

   $ —         $ 13.3   
  

 

 

    

 

 

 

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 and are classified as securities available-for-sale. Accordingly, any unrealized gains and losses are recognized through OCI until the instruments mature or are sold.

Money market mutual funds:

The money market mutual funds represent publicly traded funds with a stable $1 net asset value.

Contingent consideration:

During the third quarter of 2015, the Company settled a contingent consideration obligation of 2.5 million Canadian dollars related to the acquisition of CSI that was based on certain non-financial metrics set forth in the acquisition agreement. Prior to the settlement of this obligation, the Company utilized a discounted cash flow methodology to value this obligation. At September 30, 2014, the Company also had contingent consideration obligations related to the acquisition of Copal. These obligations were 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 were adjusted quarterly.

For certain of the contingent consideration obligations relating to the acquisition of Copal, a portion of the contingent cash payments were based on revenue and EBITDA growth for certain of the Copal entities. This growth was 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, to revenue and EBITDA in Copal’s fiscal year ended March 31, 2011. Payments of $12.2 million under this arrangement were made in the fourth quarter of 2014 pursuant to the Company exercising its call option to acquire the remaining shares of Copal Amba. The Company had utilized discounted cash flow methodologies to value these obligations prior to their settlement in 2014. The expected future cash flows for these obligations were 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 was the projected future financial results of the applicable Copal Amba entities.

 

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Table of Contents

For the contingent consideration obligations relating to the acquisition of Amba, the payment was based on the acquired entity achieving a revenue target for its fiscal year ended March 31, 2014 which was met resulting in a $4.3 million payment in the third quarter of 2014.

NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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

 

     September 30,
2015
     December 31,
2014
 

Other current assets:

     

Prepaid taxes

   $ 69.8       $ 65.4   

Prepaid expenses

     56.9         59.9   

Other

     37.0         47.2   
  

 

 

    

 

 

 

Total other current assets

   $ 163.7       $ 172.5   
  

 

 

    

 

 

 
     September 30,
2015
     December 31,
2014
 

Other assets:

     

Investments in joint ventures

   $ 25.8       $ 21.6   

Deposits for real-estate leases

     12.5         11.3   

Indemnification assets related to acquisitions

     19.3         23.5   

Fixed maturity, open ended mutual funds, and fixed deposits

     58.9         48.0   

Other

     56.7         41.5   
  

 

 

    

 

 

 

Total other assets

   $ 173.2       $ 145.9   
  

 

 

    

 

 

 
     September 30,
2015
     December 31,
2014
 

Accounts payable and accrued liabilities:

     

Salaries and benefits

   $ 69.3       $ 86.5   

Incentive compensation

     102.8         155.2   

Profit sharing contribution

     —           9.3   

Customer credits, advanced payments and advanced billings

     19.0         17.0   

Self-insurance reserves for wholly-owned insurance subsidiary

     23.8         21.5   

Dividends

     6.7         75.0   

Professional service fees

     53.7         47.0   

Interest accrued on debt

     20.7         45.0   

Accounts payable

     17.6         19.4   

Income taxes

     12.0         16.1   

Pension and other retirement employee benefits

     5.1         5.1   

Other

     78.5         60.5   
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 409.2       $ 557.6   
  

 

 

    

 

 

 
     September 30,
2015
     December 31,
2014
 

Other liabilities:

     

Pension and other retirement employee benefits

   $ 230.1       $ 244.8   

Deferred rent-non-current portion

     99.5         104.2   

Interest accrued on UTPs

     29.0         20.8   

Legacy and other tax matters

     1.7         8.6   

Other

     57.0         52.5   
  

 

 

    

 

 

 

Total other liabilities

   $ 417.3       $ 430.9   
  

 

 

    

 

 

 

 

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Table of Contents

Changes in the Company’s self-insurance reserves for claims insured by the Company’s wholly-owned insurance subsidiary, which primarily relate to legal defense costs for claims from prior years, are as follows:

 

    

Nine Months Ended
September 30, 2015

    

Year Ended
December 31, 2014

 

Balance January 1,

   $ 21.5       $ 27.6   

Accruals (reversals), net

     13.8         5.8   

Payments

     (11.5      (11.9
  

 

 

    

 

 

 

Balance

   $ 23.8       $ 21.5   
  

 

 

    

 

 

 

Noncontrolling Interests:

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

 

     Nine Months Ended      Year Ended  
     September 30, 2015      December 31, 2014  
     Noncontrolling Interests  

Balance January 1,

   $ 230.7       $ 10.9   

Net earnings

     5.8         7.9   

Dividends

     (6.8      (6.9

ICRA noncontrolling interest*

     —           218.8   
  

 

 

    

 

 

 

Balance

   $ 229.7       $ 230.7   
  

 

 

    

 

 

 

 

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

Other Non-Operating (Expense) Income:

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

FX gain/(loss)

   $ 9.7         7.6         (2.5      1.5   

Legacy Tax benefit

     6.4         6.4         6.4         6.4   

Joint venture income

     3.5         2.6         8.8         7.9   

Other

     0.1         (0.2      1.3         (0.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19.7         16.4         14.0         15.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

28


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 September 30, 2015
    Nine Months
Ended September 30, 2015
    Affected line in the
consolidated statement of
operations

Gains on foreign currency translation adjustments

     

Liquidation of foreign subsidiary

  $ —        $ 0.1      Other non-operating
income (expense), net
 

 

 

   

 

 

   

Total gains on foreign currency translation adjustments

    —          0.1     
 

 

 

   

 

 

   

Gains on available for sale securities:

     

Gains on available for sale securities

    0.6        0.8      Other income
 

 

 

   

 

 

   

Total gains on available for sale securities

    0.6        0.8     
 

 

 

   

 

 

   

Pension and other retirement benefits

     

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

    (2.1     (6.4   Operating expense

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

    (1.3     (3.9   SG&A expense
 

 

 

   

 

 

   

Total before income taxes

    (3.4     (10.3  

Income tax effect of item above

    1.3        3.9      Provision for
income taxes
 

 

 

   

 

 

   

Total pension and other retirement benefits

    (2.1     (6.4  
 

 

 

   

 

 

   

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

  $ (1.5   $ (5.5  
 

 

 

   

 

 

   
    Three Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2014
    Affected line in the
consolidated statement of
operations

Losses on foreign currency translation adjustments

     

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

  $ —        $ (4.4   ICRA gain
 

 

 

   

 

 

   

Total losses on foreign translation adjustments

    —          (4.4  
 

 

 

   

 

 

   

Pension and other retirement benefits

     

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

    (1.1     (3.6   Operating expense

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

    (0.7     (1.9   SG&A expense
 

 

 

   

 

 

   

Total before income taxes

    (1.8     (5.5  

Income tax effect of item above

    0.7        3.0      Provision for
income taxes
 

 

 

   

 

 

   

Total pension and other retirement benefits

    (1.1     (2.5  
 

 

 

   

 

 

   

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

  $ (1.1   $ (6.9  
 

 

 

   

 

 

   

 

29


Table of Contents

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

 

    Three Months Ended  
    September 30, 2015     September 30, 2014  
    Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
    Total     Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Total  

Balance June 30,

    (94.4     (189.2     2.8      $ (280.8     (55.9     8.6        (47.3

Other comprehensive income/(loss) before reclassifications

    —          (41.7     0.7        (41.0     —          (87.4     (87.4

Amounts reclassified from AOCI

    2.1        —          (0.6     1.5        1.1        —          1.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive

income/(loss)

    2.1        (41.7     0.1        (39.5     1.1        (87.4     (86.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30,

  $ (92.3   $ (230.9   $ 2.9      $ (320.3   $ (54.8   $ (78.8   $ (133.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Nine Months Ended  
    September 30, 2015     September 30, 2014  
    Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
    Total     Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Total  

Balance December 31,

  $ (105.4   $ (130.7   $ 0.9      $ (235.2   $ (53.2   $ (1.4   $ (54.6

Other comprehensive income/(loss) before reclassifications

    6.7        (100.1     2.8        (90.6     (4.1     (81.8     (85.9

Amounts reclassified from AOCI

    6.4        (0.1     (0.8     5.5        2.5        4.4        6.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

    13.1        (100.2     2.0        (85.1     (1.6     (77.4     (79.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30,

  $ (92.3   $ (230.9   $ 2.9      $ (320.3   $ (54.8   $ (78.8   $ (133.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS

Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans 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 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.

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

 

     Three Months Ended September 30,  
     Pension Plans      Other Retirement Plans  
     2015      2014      2015      2014  

Components of net periodic expense

           

Service cost

   $ 5.5       $ 4.6       $ 0.5       $ 0.5   

Interest cost

     4.2         4.2         0.2         0.2   

Expected return on plan assets

     (3.6      (3.7      —           —     

Amortization of net actuarial loss from earlier periods

     3.1         1.7         0.1         —     

Amortization of net prior service costs from earlier periods

     0.1         0.2         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic expense

   $ 9.3       $ 7.0       $ 0.8       $ 0.7   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30,  
     Pension Plans      Other Retirement Plans  
     2015      2014      2015      2014  

Components of net periodic expense

           

Service cost

   $ 16.3       $ 13.8       $ 1.6       $ 1.3   

Interest cost

     12.7         12.4         0.7         0.7   

Expected return on plan assets

     (10.8      (10.7      —           —     

Amortization of net actuarial loss from earlier periods

     9.3         5.0         0.3         —     

Amortization of net prior service costs from earlier periods

     0.5         0.5         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic expense

   $ 28.0       $ 21.0       $ 2.6       $ 2.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company made a contribution of $21.6 million to its funded pension plan as well as payments of $1.6 million related to its unfunded U.S. DBPPs and $0.8 million to its U.S. other retirement plans during the nine months ended September 30, 2015. The Company anticipates making payments of $2.5 million related to its unfunded U.S. DBPPs during the remainder of 2015.

 

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NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     September 30,
2015
     December 31,
2014
 

Notes Payable:

     

6.06% Series 2007-1 Notes due 2017

   $ 300.0       $ 300.0   

5.50% 2010 Senior Notes, due 2020, net of unamortized discount of $1.7 million in 2015 and $2.0 million in 2014; also includes a fair value adjustment on an interest rate hedge of $17.1 million in 2015 and $5.8 million in 2014

     515.4         503.8   

4.50% 2012 Senior Notes, due 2022, net of unamortized discount of $2.9 million in 2015 and $3.1 million in 2014

     497.1         496.9   

4.875% 2013 Senior Notes, due 2024, net of unamortized discount of $2.4 million in 2015 and 2.5 million in 2014

     497.6         497.5   

2.75% 2014 Senior Notes (5-Year), due 2019, net of unamortized discount of $0.5 million in 2015 and $0.7 million in 2014; also includes a fair value adjustment on an interest rate hedge of $8.4 million in 2015 and $1.4 million in 2014

     457.9         450.7   

5.25% 2014 Senior Notes (30-Year), due 2044, net of unamortized discount of $1.6 million in 2015 and 2014

     298.4         298.4   

1.75% 2015 Senior Notes, due 2027

     558.1         —     
  

 

 

    

 

 

 

Total long-term debt

   $ 3,124.5       $ 2,547.3   
  

 

 

    

 

 

 

On May 11, 2015, the Company entered into a five-year senior, unsecured revolving credit facility with the capacity to borrow up to $1 billion. This replaces the $1 billion five-year 2012 Facility that was scheduled to expire in April 2017. Interest on borrowings under the facility is payable at rates that are based on the LIBOR plus a premium that can range from 79.5 basis points to 120 basis points per annum depending on the Company’s ratio of total debt to EBITDA. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2015 Facility. The quarterly fees for the 2015 Facility can range from 8 basis points of the facility amount to 17.5 basis points, depending on the Company’s Debt/ EBITDA ratio. The 2015 Facility contains covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates, sale and leaseback transactions or to incur liens, as set forth in the facility agreement. The 2015 Facility also contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events of default constituting a default under the 2015 Facility, all loans outstanding under the 2015 Facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all lending commitments under the 2015 Facility may be terminated. In addition, certain other events of default under the 2015 Facility would automatically result in amounts outstanding becoming immediately due and payable and the termination of all lending commitments.

On March 9, 2015, the Company issued €500 million aggregate principal amount of senior unsecured notes in a public offering. The 2015 Senior Notes bear interest at a fixed rate of 1.75% and mature on March 9, 2027. Interest on the 2015 Senior Notes is due annually on March 9 of each year, commencing March 9, 2016. The Company may prepay the 2015 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2015 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2015 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2015 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2015 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of

 

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any indebtedness (as defined in the 2015 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2015 Indenture, the 2015 Senior Notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding. The Company has designated €400 million of the 2015 Senior Notes as a net investment hedge as more fully discussed in Note 7.

The Company has entered into interest rate swaps on the 2010 Senior Notes and the 2014 Senior Notes (5-Year) which are more fully discussed in Note 7 above.

At September 30, 2015, the Company was in compliance with all covenants contained within all of the debt agreements. The 2015 Facility, the 2015 Senior Notes, the 2014 Senior Notes (5-year), the 2014 Senior Notes (30-year), the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes all contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of September 30, 2015, 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      Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  

Income

   $ 2.8       $ 1.8       $ 7.0       $ 5.1   

Expense on borrowings (1)

     (29.8      (38.8      (88.8      (90.5

UTPs and other tax related liabilities (2)

     0.4         (1.7      (6.3      (3.2

Legacy Tax

     0.7         0.7         0.7         0.7   

Capitalized

     0.1         0.3         0.4         0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (25.8    $ (37.7    $ (87.0    $ (87.5
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The three and nine months ended September 30, 2014 both include approximately $11 million in net costs related to the prepayment of the Series 2005-1 Notes.

(2) 

The three and nine months ended September 30, 2015 include approximately $2 million in interest income on a tax refund. The nine months ended September 30, 2014 amount includes a $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:

 

     Nine Months Ended  
     September 30,  
     2015      2014  

Interest paid

   $ 101.0       $ 108.4   

 

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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 2010 Senior Notes and the 2014 Senior Notes (5-Year) 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 September 30, 2015 and December 31, 2014 are as follows:

 

     September 30, 2015      December 31, 2014  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 

Series 2007-1 Notes

   $ 300.0       $ 324.9       $ 300.0       $ 334.6   

2010 Senior Notes

     515.4         559.0         503.8         564.4   

2012 Senior Notes

     497.1         530.2         496.9         537.1   

2013 Senior Notes

     497.6         531.2         497.5         548.4   

2014 Senior Notes (5-Year)

     457.9         456.7         450.7         454.3   

2014 Senior Notes (30-Year)

     298.4         311.3         298.4         333.9   

2015 Senior Notes

     558.1         531.3         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,124.5       $ 3,244.6       $ 2,547.3       $ 2,772.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. Accordingly, the inputs used to estimate the fair value of the Company’s long-term debt are classified as Level 2 inputs within the fair value hierarchy.

NOTE 14. CONTINGENCIES

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 regulatory standards. Moody’s periodically receives and is continuing to address subpoenas and inquiries from various governmental authorities, including the U.S. Department of Justice and states attorneys general, 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.

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,

 

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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, Commonwealth of Pennsylvania Public School Employees’ Retirement System (“PSERS”) and Commerzbank AG (“Commerzbank”), 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 trial court’s denial of class certification. According to pleadings filed by plaintiffs in earlier proceedings, PSERS and Commerzbank AG seek, respectively, $5.75 million and $69.6 million in compensatory damages in connection with the two claims at issue on the appeal. In October 2014, the Second Circuit affirmed the denial of class certification and the dismissal of PSERS’ claim but reversed a ruling of the trial court that had excluded certain evidence relevant to Commerzbank’s principal argument on appeal. The Second Circuit did not reverse the dismissal of Commerzbank’s claim but instead certified a legal question concerning Commerzbank’s argument to the New York Court of Appeals. The New York Court of Appeals subsequently agreed to hear the certified question, and on June 30, 2015, the Court of Appeals ruled in Moody’s favor. The case has now been returned to the Second Circuit for final disposition of the appeal, and a decision is expected in the near future.

On July 9, 2009, the California Public Employees’ Retirement System (“CalPERS”) filed an action in the Superior Court of California in San Francisco (the “Superior Court”) asserting two common-law causes of action, negligent misrepresentation and negligent interference with prospective economic advantage. The complaint named as defendants the Company, MIS, The McGraw-Hill Companies, Fitch, Inc., and various subsidiaries of Fitch, Inc. (CalPERS subsequently released the Fitch entities from the case). The action relates to the plaintiff’s purchase of securities issued by three structured investment vehicles (“SIVs”) known as Cheyne Finance, Sigma Finance, and Stanfield Victoria Funding. The plaintiff’s complaint seeks unspecified compensatory damages arising from alleged losses in connection with investments that purportedly totaled approximately $1.3 billion; in subsequent court filings, the plaintiff claimed to have suffered “unrealized losses” of approximately $779 million. The central allegation against the defendants is that the credit ratings assigned to the securities issued by the SIVs were inaccurate and that the methodologies used by the rating agencies had no reasonable basis. In August 2009, the defendants removed the action to federal court, but the case was remanded to state court in November 2009 based on a finding that CalPERS is an “arm of the State.” In April 2010, in response to a motion by the defendants, the Superior Court dismissed the claim for negligent interference with prospective economic advantage but declined to dismiss the claim for negligent misrepresentation. In October 2010, the defendants filed a special motion to dismiss the remaining negligent misrepresentation claim under California’s “anti-SLAPP” statute, which limits the maintenance of lawsuits based on speech on matters of public interest. In January 2012, the Superior Court denied the anti-SLAPP motion, ruling that, although the ratings qualify as protected speech activity under California law, the plaintiff had provided sufficient evidence in support of its claims to proceed. The defendants appealed this decision to the California Court of Appeal, which affirmed the Superior Court’s rulings in May 2014, and in September 2014, the Supreme Court of California declined to review the Court of Appeal’s decision. The action has been returned to the Superior Court, and discovery has begun. On March 11, 2015, pursuant to a settlement agreement in which S&P agreed to pay CalPERS $125 million, S&P was dismissed from the action.

In November 2008, Pursuit Partners, LLC and Pursuit Investment Management, LLC filed an amended complaint adding the Company as a defendant to an existing action, which was then pending in the Superior Court of Connecticut in Stamford against UBS AG, UBS Securities LLC, and a UBS employee (collectively, “UBS”). The Company was served in January 2009, and in October 2011, the Company’s rating agency subsidiary, MIS, was substituted for the Company as a defendant. The action arose out of UBS’s sale of five collateralized debt obligations (“CDOs”) to the plaintiffs, who purchased them on the secondary market in 2007 on behalf of two investment funds under their management. With respect to UBS, the plaintiffs alleged, among other things, that UBS made material misrepresentations and omissions in pre-sale communications with the plaintiffs. With respect to MIS, the plaintiffs alleged, among other things, that, prior to the plaintiffs’ purchases, MIS provided UBS with non-public information about potential downgrades of the ratings of the CDOs while maintaining inappropriate investment-grade ratings on the CDOs. As to all defendants, plaintiffs sought compensatory damages for alleged investment losses of approximately $44 million, as well as, among other things,

 

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attorney’s fees, costs, interest, and punitive damages. Plaintiffs’ initial complaint against the Company asserted claims for fraud, violation of the Connecticut Uniform Securities Act (“CUSA”), aiding and abetting fraud and civil theft by UBS, negligent/reckless conduct, unjust enrichment, and civil conspiracy. In March 2012, the court granted MIS’s motion to strike the claim for unjust enrichment but denied MIS’s motion to strike the other claims. In June 2012, after the close of discovery, MIS moved to dismiss all claims against it for lack of standing and also moved for summary judgment. In October 2012, the court granted the motion to dismiss, but in July 2014, the court granted the plaintiffs’ motion for reconsideration and reinstated the action. In October 2014, MIS filed a new motion to dismiss on jurisdictional grounds, which was denied on February 11, 2015. MIS’s motion for summary judgment, originally filed in June 2012, was denied on June 17, 2015. Jury selection for trial began on August 18, 2015, in the Superior Court of Connecticut in Waterbury. On August 21, 2015, prior to the conclusion of jury selection, plaintiffs withdrew all claims against Moody’s, with prejudice, pursuant to a confidential settlement agreement.

For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

NOTE 15. SEGMENT INFORMATION

The Company is organized into three operating segments: (i) MIS, (ii) MA and (iii) Copal Amba. The Copal Amba operating segment has been aggregated with the MA operating segment based on the fact that it has similar economic characteristics to MA. Accordingly, the Company reports in two reportable segments: MIS and MA.

In January 2014, the Company revised its operating segments to create the new Copal Amba operating segment. The new operating segment consists of all operations from Copal and the operations of Amba, which was acquired in December 2013. The Copal Amba operating segment provides offshore research and analytic services to the global financial and corporate sectors. The Company has determined that the Copal Amba and MA operating segments have similar economic characteristics as set forth in ASC 280. As such, Copal Amba has been combined with MA to form the MA reportable segment and Copal Amba’s revenue is reported in the PS LOB.

In the fourth quarter of 2014, pursuant to the acquisition of ICRA, Moody’s realigned certain components of its reportable segments to better align with the current management structure of the Company. The effect of this realignment was to combine non-ratings ICRA operations with certain immaterial research and fixed income pricing operations in the Asia-Pacific region that were previously reported in the RD&A LOB of MA. All of these operations are managed by MIS and their revenue is now reported in the new MIS Other LOB. All operating expenses from these operations are reported in the MIS reportable segment. The impact of this realignment did not have a significant impact on previously reported results for the reportable segments and all prior year comparative periods have been restated to reflect this realignment.

The MIS segment now consists of five LOBs. The corporate finance, structured finance, financial institutions and public, project and infrastructure finance LOBs 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 MIS Other LOB primarily consists of the distribution of research and fixed income pricing services in the Asia-Pacific region as well as ICRA non-ratings revenue.

 

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The MA segment 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 LOBs – RD&A, ERS and PS.

In July 2014, a subsidiary of the Company acquired WebEquity, a leading provider of cloud-based loan origination solutions for financial institutions. WebEquity is part of the MA reportable segment and its revenue is included in the ERS LOB. In October 2014, the Company acquired Lewtan, a leading provider of analytical tools and data for the global structured finance market. Lewtan is part of the MA reportable segment and its revenue is included in the RD&A LOB.

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 that exclusively benefit only one segment are fully charged to that segment. Overhead costs and corporate expenses of the Company that 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. Moody’s does not report the Company’s assets by reportable segment, as this metric is not used by the chief operating decision maker to allocate resources to the segments. Consequently, it is not practical to show assets by reportable segment.

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 September 30,  
     2015      2014  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 571.6       $ 290.1       $ (26.8   $ 834.9       $ 568.8       $ 273.0       $ (25.7   $ 816.1   

Operating, SG&A

     268.1         215.6         (26.8     456.9         263.4         205.5         (25.7     443.2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     303.5         74.5         —          378.0         305.4         67.5         —          372.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     16.9         11.4         —          28.3         11.6         11.6         —          23.2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 286.6       $ 63.1       $ —        $ 349.7       $ 293.8       $ 55.9       $ —        $ 349.7   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Nine Months Ended September 30,  
     2015      2014  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 1,859.1       $ 838.7       $ (79.2   $ 2,618.6       $ 1,766.3       $ 766.2       $ (75.7   $ 2,456.8   

Operating, SG&A

     836.4         636.3         (79.2     1,393.5         783.7         585.8         (75.7     1,293.8   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     1,022.7         202.4         —          1,225.1         982.6         180.4         —          1,163.0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     48.7         36.1         —          84.8         34.4         34.2         —          68.6   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 974.0       $ 166.3       $ —        $ 1,140.3       $ 948.2       $ 146.2       $ —        $ 1,094.4   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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MIS and MA Revenue by Line of Business

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

MIS:

           

Corporate finance (CFG)

   $ 248.3       $ 260.7       $ 866.6       $ 846.0   

Structured finance (SFG)

     112.5         102.1         335.0         308.0   

Financial institutions (FIG)

     89.5         91.8         273.7         269.4   

Public, project and infrastructure finance (PPIF)

     90.6         88.5         291.2         267.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ratings revenue

     540.9         543.1         1,766.5         1,690.6   

MIS Other

     7.2         3.5         23.1         10.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external revenue

     548.1         546.6         1,789.6         1,700.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intersegment royalty

     23.5         22.2         69.5         65.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     571.6         568.8         1,859.1         1,766.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

MA:

           

Research, data and analytics (RD&A)

     157.9         143.3         465.0         422.3   

Enterprise risk solutions (ERS)

     92.2         81.1         252.5         208.1   

Professional services (PS)

     36.7         45.1         111.5         125.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external revenue

     286.8         269.5         829.0         756.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intersegment revenue

     3.3         3.5         9.7         10.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     290.1         273.0         838.7         766.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Eliminations

     (26.8      (25.7      (79.2      (75.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total MCO

   $ 834.9       $ 816.1       $ 2,618.6       $ 2,456.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated Revenue Information by Geographic Area:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

United States

   $ 482.1       $ 449.1       $ 1,527.8       $ 1,335.8   

International:

           

EMEA

     215.4         231.4         660.4         715.3   

Asia-Pacific

     85.5         79.3         270.8         237.8   

Americas

     51.9         56.3         159.6         167.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total International

     352.8         367.0         1,090.8         1,121.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 834.9       $ 816.1       $ 2,618.6       $ 2,456.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. The Company is currently evaluating its adoption options and the impact that adoption of this update will have on its consolidated financial statements. Currently, the Company believes this ASU will have an impact on: i) the capitalization of certain contract implementation costs for its ERS business; ii) the accounting for certain license and maintenance revenue in MA; iii) the accounting for certain ERS revenue arrangements where VSOE is not available and iv) the accounting for contract acquisition costs. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date” which defers the effective date of the ASU for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted up to the original effective date of December 15, 2016.

In April 2015, the FASB issued ASU No. 2015-05 “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. In accordance with the ASU a cloud computing arrangement that contains a software license should be accounted for consistently with the acquisition of other software licenses. If no software license is present in the contract, the entity should account for the

 

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arrangement as a service contract. The Company can elect to apply this ASU either retrospectively or prospectively effective for annual and interim reporting periods beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the impact that adoption of this update will have on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU simplifies the presentation of debt issuance costs in financial statements and requires a company to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization costs will continue to be reported as interest expense. The ASU is effective retrospectively for annual and interim reporting periods beginning after December 15, 2015, and early adoption is permitted. The adoption of this ASU will impact the presentation of debt issuance costs in the Company’s consolidated balance sheets. Additionally, in August 2015, the FASB issued ASU No. 2015-15 “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This ASU codifies that given the lack of authoritative guidance in ASU 2015-03 regarding line-of-credit arrangements, the SEC staff would not object to a Company deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

In May 2015, the FASB issued ASU No. 2015-07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU removes the requirement to include investments in the fair value hierarchy for which fair value is measured using the net asset value per share as a practical expedient. ASU No. 2015-07 is effective retrospectively for fiscal years beginning after December 15, 2015, with early adoption permitted. The adoption of this ASU will only impact the presentation of the Company’s pension assets invested in common/collective trust funds in the fair value hierarchy disclosures.

In September 2015, the FASB issued ASU No. 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments”. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU No. 2015-16 is applied prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.

NOTE 17. SUBSEQUENT EVENT

On October 20, 2015, the Board approved the declaration of a quarterly dividend of $0.34 per share of Moody’s common stock, payable on December 10, 2015 to shareholders of record at the close of business on November 20, 2015.

 

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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 70 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. 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 primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations, which consist primarily of the distribution of research and fixed income pricing services in the Asia-Pacific region, and from ICRA non-ratings services. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

The MA segment 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. 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, 2014, 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, except for updates to estimates utilized in the Company’s annual goodwill impairment assessment, which is performed as of July 31 of each year.

Goodwill and Other Acquired Intangible Assets

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

 

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The Company has six primary reporting units: two within the Company’s ratings business (one for the ICRA business and one that encompasses all of Moody’s other ratings operations) and four reporting units within MA: RD&A, ERS, FSTC and Copal Amba. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit provides products and services that support the credit risk management and regulatory compliance activities of financial institutions, primarily delivered via software that is licensed or sold on a subscription basis. The FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and implementation services. The Copal Amba reporting unit provides outsourced research and analytical services.

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

At July 31, 2015 the Company performed quantitative assessments of the RD&A, ERS, FSTC, Copal Amba and ICRA reporting units and a qualitative assessment for the remaining reporting unit. The quantitative assessments did not result in the carrying value of the reporting unit exceeding its fair value. The qualitative analyses resulted in the Company determining that it was not more likely than not that the fair value of this reporting unit was less than its carrying amount. The most significant factors in the qualitative assessment were an assessment of actual to projected results and a comparison of projected results in the prior quantitative analysis compared to the reporting unit’s current year projection. Additionally, the weighted average cost of capital (WACC) is assessed as well as the impact of various macroeconomic conditions and other factors that could impact future cash flows.

The Company quantitatively tested the RD&A, ERS, FSTC, Copal Amba and ICRA reporting units as of July 31, 2015 due to the factors outlined below:

RD&A – this reporting unit was quantitatively tested to set a new baseline valuation that includes the results of Lewtan, which was acquired in the fourth quarter of 2014.

ERS – this reporting unit was quantitatively tested to set a new baseline valuation to include the results of WebEquity, which was acquired in July 2014 and to reflect significant investments made in the business.

FSTC – this reporting unit was quantitatively tested due to the small amount of excess of fair value of the reporting unit over its net assets in prior years.

Copal Amba – this reporting unit was quantitatively tested due to sales growth trending lower than projected at July 31, 2014 and new management in place since January 2015.

ICRA – this reporting unit was tested quantitatively due to it having a readily available fair value based on its stock price.

 

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

Other assets and liabilities, including applicable corporate assets, are allocated to the extent they are related to the operation of respective reporting units.

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

The following table identifies the amount of goodwill allocated to each reporting unit as of September 30, 2015 as well as the amount by which the net assets of each reporting unit would exceed the fair value under Step 2 of the goodwill impairment test as prescribed in ASC Topic 350, assuming hypothetical reductions in their fair values as of the date of the last quantitative goodwill impairment assessment for all reporting units. For the RD&A, ERS, FSTC, Copal Amba and ICRA reporting units, the fair value was calculated as of July 31, 2015. For the MIS reporting unit, the fair value was calculated as of July 31, 2013, as there have been no qualitative factors that have resulted in the Company deeming it necessary to perform a quantitative assessment subsequent to this date.

 

            Sensitivity Analysis  
            Deficit Caused by a Hypothetical Reduction to Fair  Value  
     Goodwill      10%      20%      30%      40%  

MIS

   $ 48.5       $ —         $ —         $ —         $ —     

RD&A

     178.3         —           —           —           —     

ERS

     275.9         —           —           —           —     

FSTC

     83.6         —           —           —           (17.4

Copal Amba

     159.2         —           —           —           (9.1

ICRA

     244.5         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 990.0       $ —         $ —         $ —         $ (26.5
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

The following is a discussion regarding the Company’s methodology for determining the fair value of its reporting units, excluding ICRA, as of the date of each reporting unit’s last quantitative test (July 31, 2015 for RD&A, ERS, FSTC and Copal Amba; July 31, 2013 for the MIS reporting unit. As ICRA is a publicly traded company in India, the Company was able to observe its fair value based on its market capitalization.

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

 

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The sensitivity analyses on the future cash flows and WACC assumptions described below are as of the date of last quantitative assessment for each reporting unit. The following discusses the key assumptions utilized in the discounted cash flow valuation methodology that requires significant management judgment:

 

   

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

 

   

WACC —The WACC is the rate used to discount each reporting unit’s estimated future cash flows. The WACC is calculated based on the proportionate weighting of the cost of debt and equity. The cost of equity is based on a risk-free interest rate, an equity risk factor which is derived from public companies similar to the reporting unit and which captures the perceived risks and uncertainties associated with the reporting unit’s cash flows. The cost of debt component is calculated as the weighted average cost associated with all of the Company’s outstanding borrowings as of the date of the impairment test and was immaterial to the computation of the WACC. The cost of debt and equity is weighted based on the debt to market capitalization ratio of publicly traded companies with similarities to the reporting unit being tested. The WACC for all reporting units ranged from 9% to 12% as of the date of the last quantitative assessment for each reporting unit. Differences in the WACC used between reporting units is primarily due to distinct risks and uncertainties regarding the cash flows of the different reporting units. A sensitivity analysis of the WACC was performed on all reporting units as of the date of the last quantitative goodwill assessment for each reporting unit. For all reporting units, an increase in the WACC of one percentage point would not result in the carrying value of the reporting unit exceeding its fair value.

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no such events or changes during the first nine months of 2015 that would indicate that the carrying amount of amortizable intangible assets in any of the Company’s reporting units may not be recoverable. This determination was made based on continued growth, consistent with operating and strategic plans for the reporting unit where the intangible asset resides. Additionally, there were no events or circumstances during the first nine months of 2015 that would indicate the need for an adjustment of the remaining useful lives of these amortizable intangible assets.

Reportable Segments

The Company is organized into two reportable segments at September 30, 2015: MIS and MA.

The MIS segment is comprised primarily of all of the Company’s ratings operations. The MIS segment consists of five LOBs – CFG, SFG, FIG, PPIF and MIS Other. The ratings LOBs 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 MIS Other LOB consists of certain non-ratings operations managed by MIS which consists of non-rating revenue from ICRA as well as certain research and fixed income pricing service operations in the Asia-Pacific region.

The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. The MA segment consists of three lines of business – RD&A, ERS and PS.

In June 2014, a subsidiary of the Company acquired a controlling stake in ICRA, a leading provider of credit ratings and research in India. ICRA is part of the MIS reportable segment and its ratings revenue is included in the respective ratings LOBs of MIS while its non-ratings revenue is included in the MIS Other LOB. ICRAs results are reported on a three-month lag. In July 2014, a subsidiary of the Company acquired WebEquity, a leading provider of cloud-based loan origination solutions for financial institutions. WebEquity is part of the MA reporting segment and its revenue is included in the ERS LOB. In October 2014, the Company acquired Lewtan, a leading provider of analytical tools and data for the global structured finance market. Lewtan is part of the MA reportable segment and its revenue is included in the RD&A LOB.

 

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Pursuant to the ICRA acquisition, the Company realigned certain components of its reportable segments in the fourth quarter of 2014. This realignment resulted in the creation of the MIS Other LOB, which now consists of non-ratings revenue from ICRA as well as certain research and fixed income pricing revenue in the Asia-Pacific region which was previously reported in the RD&A LOB of MA. These businesses are all managed by MIS and the expenses from these operations will be included in the MIS reportable segment. All prior period results for both MIS and MA have been restated to reflect this realignment and the impact of the realignment was not significant to MIS’s or MA’s previously reported results.

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 that exclusively benefit one segment are fully charged to that segment. Additionally, overhead costs and corporate expenses of the Company that 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.

RESULTS OF OPERATIONS

Three months ended September 30, 2015 compared with three months ended September 30, 2014

Executive Summary

 

   

Moody’s revenue in the third quarter of 2015 totaled $834.9 million, an increase of $18.8 million, or 2%, compared to 2014. Excluding the unfavorable impact of changes in FX translation rates, primarily due to the strengthening of the U.S. dollar to the euro and British pound, revenue increased 7% over the prior year reflecting growth in both reportable segments.

 

   

External MIS revenue was flat compared to the prior year. Excluding the impact of unfavorable changes in FX translation rates, MIS revenue grew 5% and reflected growth in rated issuance volumes for U.S. investment-grade corporate debt coupled with benefits from changes in the mix of fee type, new fee initiatives and certain pricing increases. Additionally, the increase reflected higher SFG revenue, most notably in U.S. CREF, EMEA RMBS and structured credit in the U.S. and EMEA. Additionally, revenue from the ICRA Acquisition contributed to the growth over 2014. These increases were partially offset by declines in high-yield corporate debt and bank loans in the U.S. and EMEA. Changes in FX translation rates had an approximate $25 million unfavorable impact on MIS revenue compared to the prior year.

 

   

External MA revenue was 6% higher than the prior year. Excluding the impact of unfavorable changes in FX translation rates, MA revenue grew 11% reflecting increases in ERS and RD&A. The revenue growth in ERS was primarily due to increases across most product offerings with particular strength in the regulatory solutions and loan origination verticals. In RD&A, revenue growth was primarily driven by credit research and licensing of ratings data. The 2014 acquisition of Lewtan also contributed to the growth in RD&A. These results were partially offset by an approximate $12 million unfavorable impact due to changes in FX translation rates and declines in professional services revenue.

 

   

Total expenses increased $18.8 million, or 4%, compared to the third quarter of 2014. The growth in operating expenses primarily reflected:

 

   

higher compensation costs of $3.6 million associated with headcount growth and annual compensation increases being partially offset by lower incentive compensation;

 

   

higher non-compensation expenses of $10.1 million primarily reflecting an increase in professional service costs for various IT and other operational enhancement projects as well as higher variable costs associated with business growth;

 

   

higher D&A of $5.1 million reflecting amortization of intangible assets from acquisitions as well as higher depreciation reflecting an increase in capital expenditures to support IT infrastructure and business growth.

The increase in both compensation and non-compensation expense reflects operating costs from the ICRA Acquisition as well as the acquisition of Lewtan.

Changes in FX translation rates had an approximate $20 million favorable impact on total expenses compared to the prior year. Excluding the favorable impact relating to changes in FX translation rates, total expenses increased 8% compared to the prior year.

 

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Operating income of $349.7 million in the third quarter of 2015 was flat compared to 2014 and resulted in an operating margin of 41.9%, compared to 42.9% in the prior year. Adjusted Operating Income of $378.0 million in the third quarter of 2015 increased $5.1 million compared to 2014, resulting in an Adjusted Operating Margin of 45.3% compared to 45.7% in the prior year period. Unfavorable changes in FX translation rates negatively impacted both operating income and adjusted operating income by approximately $17 million. The decrease in margins is primarily due to continued investment in the Company’s operations as well as the acquisition of companies that operate at margins below Moody’s historical margins.

 

   

The ETR in the third quarter of 2015 was 150 BPS lower than the prior year primarily due to lower state income taxes.

 

   

The decrease in non-operating income (expense) compared to the prior year is primarily due to approximately $11 million in net costs (net of a gain on the termination of an interest rate swap) related to the early repayment of the Series 2005-1 Notes in the third quarter of 2014. This decrease was partially offset by interest on the 2015 Senior Notes that were issued in March 2015. Both periods included a $6.4 million Legacy Tax benefit.

 

   

Diluted EPS of $1.14 in the third quarter of 2015 increased $0.14 over 2014. Excluding a $0.03 benefit relating to Legacy Tax Matters in both 2015 and 2014, Non-GAAP Diluted EPS in the third quarter of 2015 was $0.14 higher than 2014 Non-GAAP Diluted EPS of $0.97 primarily due to lower non-operating expenses, a lower ETR and fewer diluted shares outstanding resulting from the Company’s share repurchase program.

Moody’s Corporation

 

    

 

Three months ended September 30,

    % Change
Favorable
(Unfavorable)
 
     2015     2014    

Revenue:

      

United States

   $ 482.1      $ 449.1        7

International:

      

EMEA

     215.4        231.4        (7 %) 

Asia-Pacific

     85.5        79.3        8

Americas

     51.9        56.3        (8 %) 
  

 

 

   

 

 

   

Total International

     352.8        367.0        (4 %) 
  

 

 

   

 

 

   

Total

     834.9