10-Q 1 d149654d10q.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 March 31, 2016

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 March 31, 2016

Common Stock, par value $0.01 per share   194.3 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 Months Ended March  31, 2016 and 2015

     8   
 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March  31, 2016 and 2015

     9   
 

Consolidated Balance Sheets (Unaudited) at March 31, 2016 and December 31, 2015

     10   
 

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March  31, 2016 and 2015

     11   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     12-31   

Item 2.

 

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

  
 

The Company

     32   
 

Critical Accounting Estimates

     32   
 

Reportable Segments

     32-33   
 

Results of Operations

     33-39   
 

Liquidity and Capital Resources

     39-44   
 

Recently Issued Accounting Standards

     45   
 

Contingencies

     45   
 

Regulation

     46   
 

Forward-Looking Statements

     46-47   

Item 4.

 

Controls and Procedures

     47-48   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     49   

Item 1A.

 

Risk Factors

     49   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     49   

Item 5.

 

Other Information

     49   

Item 6.

 

Exhibits

     50   

SIGNATURES

     51   

Exhibits Filed Herewith

  

10.1

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

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
BlackBox    BlackBox Logic; a leading provider of Residential Mortgage-Backed securities loan level data. The Company acquired the customer base and products of BlackBox Logic in December 2015
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
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
Commission    European Commission
Common Stock    The Company’s common stock
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 and reporting unit 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
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

 

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Table of Contents

TERM

  

DEFINITION

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
ECCA    Economics and Consumer Credit Analytics; a business within the RD&A LOB which provides economic and consumer credit trend analytics
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
GGY    Gilliland Gold Young; a leading provider of advanced actuarial software for the global insurance industry. The Company acquired GGY on March 1, 2016
ICRA    ICRA Limited; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to just over 50% through the acquisition of additional shares
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

 

4


Table of Contents

TERM

  

DEFINITION

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
MSS    Moody’s Shared Services
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
Non-GAAP    A financial measure not in accordance with GAAP; these measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period-to-period comparisons of the Company’s performance, facilitate comparisons to competitors’ operating results and to provide greater transparency to investors of supplemental information used by management in its financial and operational decision making
NRSRO    Nationally Recognized Statistical Rating Organization
OCI    Other comprehensive income (loss); includes gains and losses on cash flow and net investment hedges, unrealized gains and losses on available for sale securities, certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments
Old D&B    The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
Other Retirement Plan    The U.S. retirement healthcare and U.S. retirement life insurance plans
PPIF    Public, project and infrastructure finance; an LOB of MIS
Profit Participation Plan    Defined contribution profit participation plan that covers substantially all U.S. employees of the Company
PS    Professional Services, an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs
RD&A    Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and other analytical tools that are produced within MA

 

5


Table of Contents

TERM

  

DEFINITION

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
SAV    Structured Analytics and Valuation; a business within the RD&A LOB which provides data and analytics for securitized assets
SEC    U.S. Securities and Exchange Commission
Securities Act    Securities Act of 1933
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
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
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
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

 

6


Table of Contents

TERM

  

DEFINITION

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 $600 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
March 31,
 
     2016     2015  

Revenue

   $ 816.1        865.6   
  

 

 

   

 

 

 

Expenses

    

Operating

     249.2        244.4   

Selling, general and administrative

     232.9        221.3   

Depreciation and amortization

     29.9        28.6   
  

 

 

   

 

 

 

Total expenses

     512.0        494.3   
  

 

 

   

 

 

 

Operating income

     304.1        371.3   
  

 

 

   

 

 

 

Non-operating (expense) income, net

    

Interest expense, net

     (34.1     (29.3

Other non-operating income, net

     5.6        2.5   
  

 

 

   

 

 

 

Total non-operating expense, net

     (28.5     (26.8

Income before provision for income taxes

     275.6        344.5   

Provision for income taxes

     89.0        113.2   
  

 

 

   

 

 

 

Net income

     186.6        231.3   

Less: Net income attributable to noncontrolling interests

     2.2        1.2   
  

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 184.4        230.1   
  

 

 

   

 

 

 

Earnings per share attributable to Moody’s common shareholders

    

Basic

   $ 0.95      $ 1.14   
  

 

 

   

 

 

 

Diluted

   $ 0.93      $ 1.11   
  

 

 

   

 

 

 

Weighted average number of shares outstanding

    

Basic

     195.0        202.7   
  

 

 

   

 

 

 

Diluted

     197.9        206.5   
  

 

 

   

 

 

 

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 March 31,  
     2016     2015  
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net income

       $ 186.6          $ 231.3   
      

 

 

       

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation:

            

Foreign currency translation adjustments

   $ 48.5      $ (12.5     36.0      $ (77.8   $ (12.7     (90.5

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

     —          —          —          (0.1     —          (0.1

Cash flow hedges:

            

Net unrealized gain on cash flow hedges

     2.0        (0.8     1.2        —          —          —     

Reclassification of gains included in net income

     (2.2     0.8        (1.4     —          —          —     

Available for sale securities:

            

Net unrealized gains on available for sale securities

     0.6        —          0.6        1.1        —          1.1   

Pension and Other Retirement Benefits:

            

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

     2.6        (1.0     1.6        3.8        (1.5     2.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 51.5      $ (13.5     38.0      $ (73.0   $ (14.2     (87.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         224.6            144.1   

Less: comprehensive income attributable to noncontrolling interests

         2.2            1.2   
      

 

 

       

 

 

 

Comprehensive income attributable to Moody’s

       $ 222.4            $142.9   
      

 

 

       

 

 

 

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

 

9


Table of Contents

MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

     March 31,
2016
    December 31,
2015
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,576.1      $ 1,757.4   

Short-term investments

     490.6        474.8   

Accounts receivable, net of allowances of $27.6 in 2016 and $27.5 in 2015

     852.1        802.0   

Deferred tax assets, net

     —          29.3   

Other current assets

     166.5        179.6   
  

 

 

   

 

 

 

Total current assets

     3,085.3        3,243.1   

Property and equipment, net of accumulated depreciation of $541.6 in 2016 and $518.9 in 2015

     310.5        306.4   

Goodwill

     1,050.9        976.3   

Intangible assets, net

     329.2        299.1   

Deferred tax assets, net

     176.2        137.7   

Other assets

     162.8        140.4   
  

 

 

   

 

 

 

Total assets

   $ 5,114.9      $ 5,103.0   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 391.5      $ 566.6   

Deferred tax liabilities, net

     —          16.7   

Deferred revenue

     760.4        635.2   
  

 

 

   

 

 

 

Total current liabilities

     1,151.9        1,218.5   

Non-current portion of deferred revenue

     135.1        132.5   

Long-term debt

     3,428.6        3,380.6   

Deferred tax liabilities, net

     118.6        83.8   

Unrecognized tax benefits

     209.9        203.4   

Other liabilities

     422.3        417.2   
  

 

 

   

 

 

 

Total liabilities

     5,466.4        5,436.0   

Contingencies (Note 14)

     —          —     

Shareholders’ deficit:

    

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

     —          —     

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

     —          —     

Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at March 31, 2016 and December 31, 2015, respectively.

     3.4        3.4   

Capital surplus

     431.7        451.3   

Retained earnings

     6,895.1        6,709.0   

Treasury stock, at cost; 148,575,058 and 146,826,744 shares of common stock at March 31, 2016 and December 31, 2015, respectively

     (7,610.3     (7,389.2

Accumulated other comprehensive loss

     (301.5     (339.5
  

 

 

   

 

 

 

Total Moody’s shareholders’ deficit

     (581.6     (565.0

Noncontrolling interests

     230.1        232.0   
  

 

 

   

 

 

 

Total shareholders’ deficit

     (351.5     (333.0
  

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 5,114.9      $ 5,103.0   
  

 

 

   

 

 

 

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

 

10


Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)

 

     Three Months Ended
March 31,
 
     2016     2015  

Cash flows from operating activities

    

Net income

   $ 186.6      $ 231.3   

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

    

Depreciation and amortization

     29.9        28.6   

Stock-based compensation expense

     25.4        22.7   

Deferred income taxes

     11.3        7.6   

Excess tax benefits from stock-based compensation plans

     (16.3     (37.4

Changes in assets and liabilities:

    

Accounts receivable

     (45.5     (62.7

Other current assets

     13.6        2.9   

Other assets

     1.5        (13.9

Accounts payable and accrued liabilities

     (99.0     (72.8

Deferred revenue

     122.6        127.9   

Unrecognized tax benefits and other non-current tax liabilities

     5.3        7.4   

Other liabilities

     1.9        20.2   
  

 

 

   

 

 

 

Net cash provided by operating activities

     237.3        261.8   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital additions

     (26.3     (19.0

Purchases of investments

     (134.6     (167.9

Sales and maturities of short-term investments

     126.1        116.8   

Acquisitions, net of cash acquired

     (75.9     —     

Settlement of net investment hedges

     2.3        20.8   
  

 

 

   

 

 

 

Net cash used in investing activities

     (108.4     (49.3
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of notes

     —          552.8   

Proceeds from stock-based compensation plans

     24.3        34.8   

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

     (42.7     (58.7

Cost of treasury shares repurchased

     (262.1     (365.8

Excess tax benefits from settlement of stock-based compensation plans

     16.3        37.4   

Payment of dividends

     (72.1     (68.7

Payment of dividends to noncontrolling interests

     (2.9     (3.7

Debt issuance costs and related fees

     —          (4.2
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (339.2     123.9   

Effect of exchange rate changes on cash and cash equivalents

     29.0        (46.0
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (181.3     290.4   

Cash and cash equivalents, beginning of the period

     1,757.4        1,219.5   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 1,576.1      $ 1,509.9   
  

 

 

   

 

 

 

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 2015 annual report on Form 10-K filed with the SEC on February 25, 2016. 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 to prior period amounts to conform to the current presentation.

In the first quarter of 2016, the Company adopted ASU No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” on a prospective basis, and accordingly, prior year comparative periods have not been adjusted. This ASU requires the classification of all deferred income tax assets and liabilities as noncurrent on the balance sheet.

In the first quarter of 2016, the Company adopted ASU No. 2015-03,“Simplifying the Presentation of Debt Issuance Costs” on a retrospective basis. This ASU requires a company to present debt issuance costs in the balance sheet as a reduction of debt rather than as an asset. The impact to the Company’s balance sheet as of December 31, 2015 and March 31, 2016 relating to the adoption of this ASU is set forth in the table below:

 

     As reported
December 31, 2015
     Reclassification     December 31, 2015
As adjusted
     As reported
March 31,  2016
     Reclassification      March 31, 2016
Under previous
accounting guidance
 

Long-term debt

   $ 3,401.0       $ (20.4   $ 3,380.6       $ 3,428.6       $ 19.9       $ 3,448.5   

Other assets

   $ 160.8       $ (20.4   $ 140.4       $ 162.8       $ 19.9       $ 182.7   

 

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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
March 31,
 
     2016      2015  

Stock-based compensation cost

   $ 25.4       $ 22.7   

Tax benefit

   $ 8.4       $ 7.9   

During the first three months of 2016, the Company granted 0.5 million employee stock options, which had a weighted average grant date fair value of $22.93 per share based on the Black-Scholes option-pricing model. The Company also granted 1.2 million shares of restricted stock in the first three months of 2016, which had a weighted average grant date fair value of $80.83 per share. Both the employee stock options and restricted stock generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.2 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $76.45 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2016:

 

Expected dividend yield

     1.83

Expected stock volatility

     32.3

Risk-free interest rate

     1.60

Expected holding period

     6.8 years   

Grant date fair value

   $ 22.93   

Unrecognized compensation expense at March 31, 2016 was $16.0 million and $172.5 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.5 years and 1.9 years, respectively. Additionally, there was $23.8 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 1.2 years.

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

 

     Three Months Ended
March  31,
 
Exercise of stock options:    2016      2015  

Proceeds from stock option exercises

   $ 22.8       $ 33.5   

Aggregate intrinsic value

   $ 11.0       $ 32.1   

Tax benefit realized upon exercise

   $ 3.9       $ 11.9   

Number of shares exercised

     0.4         0.7   
     Three Months Ended
March 31,
 
Vesting of restricted stock:    2016      2015  

Fair value of shares vested

   $ 89.3       $ 108.9   

Tax benefit realized upon vesting

   $ 29.5       $ 35.9   

Number of shares vested

     1.0         1.1   
     Three Months Ended
March 31,
 
Vesting of performance-based restricted stock:    2016      2015  

Fair value of shares vested

   $ 23.6       $ 43.1   

Tax benefit realized upon vesting

   $ 8.4       $ 16.1   

Number of shares vested

     0.2         0.5   

 

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NOTE 3. INCOME TAXES

Moody’s effective tax rate was 32.3% and 32.9% for the three months ended March 31, 2016 and 2015, respectively. The decrease in the ETR compared to the first quarter of 2015 was primarily due to a reduction in UTBs resulting from a change in New York City tax law relating to income apportionment.

The Company classifies interest related to UTBs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an increase in its UTBs of $6.5 million ($6.2 million net of federal tax benefit) during the first quarter of 2016.

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 2011 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 2014 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 returns for 2013 and 2014 remain open to examination.

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

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

 

     Three Months Ended
March  31,
 
     2016      2015  

Income taxes paid

   $     22.0       $     31.4   

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended
March  31,
 
     2016      2015  

Basic

     195.0         202.7   

Dilutive effect of shares issuable under stock-based compensation plans

     2.9         3.8   
  

 

 

    

 

 

 

Diluted

     197.9         206.5   
  

 

 

    

 

 

 

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

     1.5         1.0   
  

 

 

    

 

 

 

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 March 31, 2016 and 2015. 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 March 31, 2016  
     Cost      Gross
Unrealized
Gains
     Fair
Value
     Balance sheet location  
              Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 228.6       $ —         $ 228.6       $ 228.6       $ —         $ —     

Certificates of deposit and money market deposit accounts (1)

   $ 1,097.4       $ —         $ 1,097.4       $ 583.9       $ 490.6       $ 22.9   

Fixed maturity and open ended mutual funds (2)

   $ 28.5       $ 3.7       $ 32.2       $ —         $ —         $ 32.2   

 

     As of December 31, 2015  
     Cost      Gross
Unrealized
Gains
     Fair
Value
     Balance sheet location  
              Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 188.3       $ —         $ 188.3       $ 188.3       $ —         $ —     

Certificates of deposit and money market deposit accounts (1)

   $ 1,307.3       $ —         $ 1,307.3       $ 809.4       $ 474.8       $ 23.1   

Fixed maturity and open ended mutual funds (2)

   $ 28.7       $ 3.2       $ 31.9       $ —         $ —         $ 31.9   

 

(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 13 months at March 31, 2016 and one month to 12 months at December 31, 2015. The remaining contractual maturities for the certificates of deposits classified in other assets are one month to 24 months at March 31, 2016 and one month to 27 months at December 31, 2015. 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 eight months to 28 months and 11 months to 31 months at March 31, 2016 and December 31, 2015 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.

 

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NOTE 6. ACQUISITIONS

The business combination described below is 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, the near term impact to the Company’s operations and cash flows is not material.

Gilliland Gold Young (GGY)

On March 1, 2016, subsidiaries of the Company acquired 100% of GGY, a leading provider of advanced actuarial software for the life insurance industry. The cash payment of $83.4 million made at closing was funded with cash on hand. The acquisition of GGY will allow MA to provide an industry-leading enterprise risk offering for global life insurers and reinsurers.

The table below details the total consideration relating to the acquisition:

 

Cash paid at closing

   $ 83.4   

Additional consideration to be paid to sellers in 2016(1)

     3.5   
  

 

 

 

Total consideration

   $ 86.9   
  

 

 

 

 

(1)

Represents additional consideration due to the sellers for amounts withheld at closing pending the completion of certain administrative matters

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

      $ 11.9   

Property and equipment, net

        2.1   

Indemnification assets

        1.5   

Intangible assets:

     

Trade name (19 year weighted average life)

   $ 3.7      

Client relationships (21 year weighted average life)

     13.8      

Software (7 year weighted average life)

     16.6      
  

 

 

    

Total intangible assets (14 year weighted average life)

        34.1   

Goodwill

        58.8   

Liabilities

        (21.5
     

 

 

 

Net assets acquired

      $ 86.9   
     

 

 

 

Current assets in the table above include acquired cash of $7.5 million. Additionally, current assets include accounts receivable of $2.9 million. Goodwill, which has been assigned to the MA segment, is not deductible for tax.

In connection with the acquisition, the Company assumed liabilities relating to UTPs and certain other tax exposures which are included in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these amounts. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at March 31, 2016.

The Company incurred $0.9 million of costs directly related to the GGY acquisition of which $0.6 million was incurred in 2015 and $0.3 million was incurred in the first quarter of 2016. These costs are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.

GGY is part of the ERS reporting unit for purposes of the Company’s annual goodwill impairment assessment.

 

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Table of Contents

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.

Derivatives and non-derivative instruments designated as accounting hedges:

Interest Rate Swaps

In the second quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. 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:

 

        Three Months Ended
March  31,
 

Derivatives designated as fair value accounting hedges

 

Location on Statement of Operations

  2016     2015  

Interest rate swaps

  Interest income (expense), net   $ 3.0      $ 3.5   

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 below. 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. In March 2016, the Company designated these cross-currency swaps as cash flow hedges. Accordingly, changes in fair value subsequent to the date the swaps were designated as cash flow hedges will initially be recognized in OCI. Gains and losses on the swaps initially recognized in OCI will be reclassified to the statement of operations in the period in which changes in the underlying hedged item affects net income. Ineffectiveness, if any, will be recognized in other non-operating (expense), income, net in the Company’s consolidated statement of operations.

 

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Table of Contents

Net investment hedges

The Company enters into foreign currency forward contracts which are designated as net investment hedges and 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, changes in the fair value 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.

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

 

     March 31,      December 31,  
     2016      2015  

Notional amount of net investment hedges:

     

Long-term debt designated as net investment hedge

   400.0       400.0   

Contracts to sell GBP for euros

   £ 21.5       £ 21.2   

Contracts to sell Japanese yen for USD

   ¥ 19,400       ¥ 19,400   

The outstanding contracts to sell Japanese yen for USD expire in November 2016. The outstanding contracts to sell GBP for euros expire in June 2016. 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 and cash flow hedges

 

Derivatives and non-derivative instruments in
Net Investment Hedging Relationships

   Amount of
Gain/(Loss)  Recognized
in AOCI on Derivative
(Effective Portion),
net of tax
    

Location of Gain/(Loss)

Reclassified from AOCI into

Income (Effective Portion)

   Amount of  Gain/(Loss)
Reclassified from AOCI into
Income (Effective Portion)
 
     Three Months Ended
March 31,
         

Three Months Ended

March 31,

 
     2016     2015           2016      2015  

FX forwards

   $ (4.6   $ 11.3       N/A    $ —         $ —     

Long-term debt

     (13.1     7.6       N/A      —           —     
  

 

 

   

 

 

       

 

 

    

 

 

 

Total net investment hedges

   $ (17.7   $ 18.9       N/A    $ —         $ —     
  

 

 

   

 

 

       

 

 

    

 

 

 

Derivatives in cash flow hedging relationships

                               

Cross currency swap

   $ 1.2      $ —         Other non-operating income, net    $ 1.4       $ —     
  

 

 

   

 

 

       

 

 

    

 

 

 

Total

   $ (16.5   $ 18.9       Total    $ 1.4       $ —     
  

 

 

   

 

 

       

 

 

    

 

 

 

The cumulative amount of realized and unrecognized net investment hedge and cash flow hedge gains (losses) recorded in AOCI is as follows:

 

     Gains (Losses), net of tax  
     March 31,
2016
     December 31,
2015
 

Net investment hedges

     

FX forwards

   $ 29.7       $ 34.3   

Long-term debt

     (8.4      4.7   
  

 

 

    

 

 

 

Total gains (losses) on net investment hedges

   $ 21.3       $ 39.0   
  

 

 

    

 

 

 

Cash flow hedges

     

Treasury rate lock

   $ (1.1    $ (1.1

Cross currency swap

     (0.2      —     
  

 

 

    

 

 

 

Total losses on cash flow hedges

     (1.3      (1.1
  

 

 

    

 

 

 

Total net gains in AOCI

   $ 20.0       $ 37.9   
  

 

 

    

 

 

 

 

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Table of Contents

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 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 June 2016.

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

 

     March 31,      December 31,  
     2016      2015  

Notional amount of currency pair:

     

Contracts to purchase USD with euros

   $ 0.5       $ —     

Contracts to sell USD for euros

   $ 71.2       $ 70.1   

Contracts to purchase euros with other foreign currencies

   34.1       35.5   

Contracts to sell euros for other foreign currencies

   —         1.4   

Contracts to sell euros for GBP

   38.2       23.1   

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
March 31,
 

Derivatives not designated as accounting hedges

  

Location on Statement of Operations

   2016      2015  

Foreign exchange forwards

   Other non-operating income (expense), net    $ 0.5       $ (4.4

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:

 

     Derivative and Non-derivative Instruments  
     Balance Sheet
Location
   March 31,
2016
     December 31,
2015
 

Assets:

        

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

   Other current assets    $ 1.8       $ 0.1   

Derivatives designated as accounting hedges:

        

FX forwards on net investment in certain foreign subsidiaries

   Other current assets    $ 0.3       $ 0.4   

Interest rate swaps

   Other assets      32.3         12.1   
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        32.6         12.5   
     

 

 

    

 

 

 

Total assets

      $ 34.4       $ 12.6   
     

 

 

    

 

 

 

Liabilities:

        

Derivatives designated as accounting hedges:

        

Cross-currency swap

   Other non-current
liabilities
   $ 0.4       $ —     

FX forwards on net investment in certain foreign subsidiaries

   Accounts payable
and accrued
liabilities
     12.1         1.2   

Interest rate swaps

   Other non-current
liabilities
     —           0.3   
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

      $ 12.5       $ 1.5   
     

 

 

    

 

 

 

Non-derivative instrument designated as accounting hedge

        

Long-term debt designated as net investment hedge

   Long-term debt    $ 455.8       $ 434.5   

Derivatives not designated as accounting hedges:

        

Cross-currency swap

   Other non-current
liabilities
     —           9.0   

FX forwards on certain assets and liabilities

   Accounts payable
and accrued
liabilities
     1.0         1.9   
     

 

 

    

 

 

 

Total liabilities

      $ 469.3       $ 446.9   
     

 

 

    

 

 

 

 

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NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

     Three Months Ended March 31, 2016  
     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

   $ 284.4      $ —         $ 284.4      $ 704.1      $ (12.2   $ 691.9      $ 988.5      $ (12.2   $ 976.3   

Additions/adjustments

     —          —           —          58.8        —          58.8        58.8        —          58.8   

Foreign currency translation adjustments

     0.1        —           0.1        15.7        —          15.7        15.8        —          15.8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 284.5      $ —         $ 284.5      $ 778.6      $ (12.2   $ 766.4      $ 1,063.1      $ (12.2   $ 1,050.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Year ended December 31, 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

     3.7        —           3.7        5.0        —          5.0        8.7        —          8.7   

Foreign currency translation adjustments

     (18.0     —           (18.0     (35.5     —          (35.5     (53.5     —          (53.5
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 284.4      $ —         $ 284.4      $ 704.1      $ (12.2   $ 691.9      $ 988.5      $ (12.2   $ 976.3   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The 2016 additions/adjustments for the MA segment in the table above relate to the acquisition of GGY. 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 primarily reflect an adjustment to an indemnification asset recognized as part of the Copal acquisition, goodwill acquired from the acquisition of a business from BlackBox Logic and adjustments to deferred revenue balances and deferred tax assets recognized as part of the Lewtan acquisition.

The accumulated impairment charge in the table above reflects an impairment charge recognized in 2012 relating to the FSTC reporting unit within MA. This impairment charge reflected a contraction in spending for training and certification services for many individuals and global financial institutions in 2012 due to macroeconomic uncertainties at the time. The fair value of the FSTC reporting unit utilized in this impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples.

 

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Acquired intangible assets and related amortization consisted of:

 

     March 31,      December 31,  
     2016      2015  

Customer relationships

   $ 316.2       $ 298.4   

Accumulated amortization

     (114.8      (110.0
  

 

 

    

 

 

 

Net customer relationships

     201.4         188.4   
  

 

 

    

 

 

 

Trade secrets

     30.1         29.7   

Accumulated amortization

     (23.8      (23.1
  

 

 

    

 

 

 

Net trade secrets

     6.3         6.6   
  

 

 

    

 

 

 

Software

     93.6         74.7   

Accumulated amortization

     (51.4      (47.7
  

 

 

    

 

 

 

Net software

     42.2         27.0   
  

 

 

    

 

 

 

Trade names

     76.4         72.4   

Accumulated amortization

     (17.1      (16.2
  

 

 

    

 

 

 

Net trade names

     59.3         56.2   
  

 

 

    

 

 

 

Other

     44.2         44.3   

Accumulated amortization

     (24.2      (23.4
  

 

 

    

 

 

 

Net other

     20.0         20.9   
  

 

 

    

 

 

 

Total acquired intangible assets, net

   $ 329.2       $ 299.1   
  

 

 

    

 

 

 

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
March  31,
 
     2016      2015  

Amortization expense

   $ 7.9       $ 8.5   

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

 

Year Ending December 31,

      

2016 (after March 31)

   $ 25.3   

2017

     32.3   

2018

     26.3   

2019

     23.4   

2020

     22.3   

Thereafter

     199.6   
  

 

 

 

Total estimated future amortization

   $ 329.2   
  

 

 

 

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. There were no impairments to intangible assets during the three months ended March 31, 2016 and 2015.

 

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NOTE 9. FAIR VALUE

The table below presents information about items that are carried at fair value at March 31, 2016 and December 31, 2015:

 

         Fair Value Measurement as of March 31, 2016      
    

Description

   Balance      Level 1      Level 2  

Assets:

          
 

Derivatives (a)

   $ 34.4       $ —         $ 34.4   
 

Money market mutual funds

     228.6         228.6         —     
 

Fixed maturity and open ended mutual funds (b)

     32.2         32.2         —     
    

 

 

    

 

 

    

 

 

 
 

Total

   $ 295.2       $ 260.8       $ 34.4   
    

 

 

    

 

 

    

 

 

 

Liabilities:

          
 

Derivatives (a)

   $ 13.5       $ —         $ 13.5   
    

 

 

    

 

 

    

 

 

 
 

Total

   $ 13.5       $ —         $ 13.5   
    

 

 

    

 

 

    

 

 

 

 

         Fair Value Measurement as of December 31, 2015  
    

Description

   Balance      Level 1      Level 2  

Assets:

          
 

Derivatives (a)

   $ 12.6       $ —         $ 12.6   
 

Money market mutual funds

     188.3         188.3         —     
 

Fixed maturity and open ended mutual funds (b)

     31.9         31.9         —     
    

 

 

    

 

 

    

 

 

 
 

Total

   $ 232.8       $ 220.2       $ 12.6   
    

 

 

    

 

 

    

 

 

 

Liabilities:

          
 

Derivatives (a)

   $ 12.4       $ —         $ 12.4   
    

 

 

    

 

 

    

 

 

 
 

Total

   $ 12.4       $ —         $ 12.4   
    

 

 

    

 

 

    

 

 

 

 

(a)

Represents FX forwards, interest rate swaps and cross-currency 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 following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts, fixed maturity plans, open ended mutual funds and money market mutual funds:

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.

 

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NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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

 

     March 31,
2016
     December 31,
2015
 

Other current assets:

     

Prepaid taxes

   $ 74.1       $ 83.3   

Prepaid expenses

     69.2         66.9   

Other

     23.2         29.4   
  

 

 

    

 

 

 

Total other current assets

   $ 166.5       $ 179.6   
  

 

 

    

 

 

 
     March 31,
2016
     December 31,
2015
 

Other assets:

     

Investments in joint ventures

   $ 30.3       $ 28.7   

Deposits for real-estate leases

     11.8         11.4   

Indemnification assets related to acquisitions

     20.7         19.2   

Mutual funds and fixed deposits

     55.1         55.0   

Other

     44.9         26.1   
  

 

 

    

 

 

 

Total other assets

   $ 162.8       $ 140.4   
  

 

 

    

 

 

 
     March  31,
2016
     December  31,
2015
 

Accounts payable and accrued liabilities:

     

Salaries and benefits

   $ 91.0       $ 83.0   

Incentive compensation

     35.3         137.2   

Customer credits, advanced payments and advanced billings

     26.9         24.6   

Self-insurance reserves

     18.8         19.7   

Dividends

     6.8         78.2   

Professional service fees

     59.3         54.5   

Interest accrued on debt

     18.2         59.4   

Accounts payable

     14.4         22.2   

Income taxes

     41.5         11.5   

Pension and other retirement employee benefits

     5.8         6.2   

Other

     73.5         70.1   
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 391.5       $ 566.6   
  

 

 

    

 

 

 
     March  31,
2016
     December  31,
2015
 

Other liabilities:

     

Pension and other retirement employee benefits

   $ 270.0       $ 261.7   

Deferred rent-non-current portion

     98.9         98.4   

Interest accrued on UTPs

     30.7         27.9   

Legacy and other tax matters

     2.9         1.7   

Other

     19.8         27.5   
  

 

 

    

 

 

 

Total other liabilities

   $ 422.3       $ 417.2   
  

 

 

    

 

 

 

 

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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:

 

    

Three Months Ended

March 31, 2016

    

Year Ended

December 31,
2015

 

Balance January 1,

   $ 19.7       $ 21.5   

Accruals (reversals), net

     0.4         22.2   

Payments

     (1.3      (24.0
  

 

 

    

 

 

 

Balance

   $ 18.8       $ 19.7   
  

 

 

    

 

 

 

Other Non-Operating (Expense) Income:

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

 

     Three Months Ended
March 31,
 
     2016      2015  

FX gain

   $ 4.0       $ —     

Joint venture income

     1.9         1.9   

Other

     (0.3      0.6   
  

 

 

    

 

 

 

Total

   $ 5.6       $ 2.5   
  

 

 

    

 

 

 

NOTE 11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

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

 

    Three Months
Ended March 31, 2016
    Three Months
Ended March 31, 2015
    Affected line in  the
consolidated statement of
operations

Gains (losses) on currency translation adjustments

     

Liquidation of foreign subsidiary

  $ —        $ 0.1      Other non-operating
income, net
 

 

 

   

 

 

   

Total gains on currency translation adjustments

    —          0.1     

Gains on cash flow hedges

     

Cross-currency derivative contracts

    2.2        —        Other non-operating
income, net

Income tax effect of item above

    (0.8     —        Provision for
income taxes
 

 

 

   

 

 

   

Total gains on cash flow hedges

    1.4        —       
 

 

 

   

 

 

   

Pension and other retirement benefits

     

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

    (1.6     (2.3   Operating expense

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

    (1.0     (1.5   SG&A expense
 

 

 

   

 

 

   

Total before income taxes

    (2.6     (3.8  

Income tax effect of item above

    1.0        1.5      Provision for
income taxes
 

 

 

   

 

 

   

Total pension and other retirement benefits

    (1.6     (2.3  
 

 

 

   

 

 

   

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

  $ (0.2   $ (2.2  
 

 

 

   

 

 

   

 

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Table of Contents

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

 

     Three Months Ended  
     March 31, 2016  
     Gains/
(Losses) on
Cash  Flow

Hedges
    Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
     Total  

Balance December 31, 2015

   $ (1.1   $ (85.7   $ (256.0   $ 3.3       $ (339.5

Other comprehensive income before reclassifications

     1.2        —          36.0        0.6         37.8   

Amounts reclassified from AOCI

     (1.4     1.6        —          —           0.2   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income/(loss)

     (0.2     1.6        36.0        0.6         38.0   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance March 31, 2016

   $ (1.3   $ (84.1   $ (220.0   $ 3.9       $ (301.5
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Three Months Ended  
     March 31, 2015  
     Gains/
(Losses) on
Cash Flow
Hedges
    Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available

for Sale
Securities
     Total  

Balance December 31, 2014

   $ —        $ (105.4   $ (130.7   $ 0.9       $ (235.2

Other comprehensive income/(loss) before reclassifications

     —          —          (90.5     1.1         (89.4

Amounts reclassified from AOCI

     —          2.3        (0.1     —           2.2   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income/(loss)

     —          2.3        (90.6     1.1         (87.2
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance March 31, 2015

   $ —        $ (103.1   $ (221.3   $ 2.0       $ (322.4
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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 March 31,  
     Pension Plans      Other Retirement Plans  
     2016      2015      2016      2015  

Components of net periodic expense

           

Service cost

   $ 5.2       $ 5.8       $ 0.5       $ 0.5   

Interest cost

     4.6         4.3         0.3         0.2   

Expected return on plan assets

     (4.3      (3.6      —           —     

Amortization of net actuarial loss from earlier periods

     2.6         3.4         —           0.1   

Amortization of net prior service costs from earlier periods

     —           0.2         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic expense

   $ 8.1       $ 10.1       $ 0.8       $ 0.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company made payments of $1.2 million related to its unfunded U.S. DBPPs and $0.1 million to its U.S. other retirement plans during the three months ended March 31, 2016. The Company anticipates making payments of $22 million related to its funded pension plan and making payments of $3.2 million related to its unfunded U.S. DBPPs and $0.9 million to its U.S. other retirement plans, respectively, during the remainder of 2016.

 

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Table of Contents

NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     March 31, 2016  
     Principal
Amount
     Fair Value of
Interest Rate
Swap (1)
     Unamortized
(Discount)
Premium
    Unamortized
Debt  Issuance
Costs (2)
    Carrying
Value
 

Notes payable:

            

6.06% Series 2007-1 Notes due 2017

   $ 300.0       $ —         $ —        $ (0.1   $ 299.9   

5.50% 2010 Senior Notes, due 2020

     500.0         22.1         (1.6     (1.9     518.6   

4.50% 2012 Senior Notes, due 2022

     500.0         —           (2.7     (2.4     494.9   

4.875% 2013 Senior Notes, due 2024

     500.0         —           (2.2     (3.0     494.8   

2.75% 2014 Senior Notes (5-Year), due 2019

     450.0         10.2         (0.5     (2.2     457.5   

5.25% 2014 Senior Notes (30-Year), due 2044

     600.0         —           3.4        (6.1     597.3   

1.75% 2015 Senior Notes, due 2027

     569.8         —           —          (4.2     565.6   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total long-term debt

   $ 3,419.8       $ 32.3       $ (3.6   $ (19.9   $ 3,428.6   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     December 31, 2015  
     Principal
Amount
     Fair Value of
Interest Rate
Swap (1)
     Unamortized
(Discount)
Premium
    Unamortized
Debt Issuance
Costs (2)
    Carrying
Value
 

Notes payable:

            

6.06% Series 2007-1 Notes due 2017

   $ 300.0       $ —         $ —        $ (0.2   $ 299.8   

5.50% 2010 Senior Notes, due 2020

     500.0         9.4         (1.6     (2.0     505.8   

4.50% 2012 Senior Notes, due 2022

     500.0         —           (2.8     (2.5     494.7   

4.875% 2013 Senior Notes, due 2024

     500.0         —           (2.3     (3.1     494.6   

2.75% 2014 Senior Notes (5-Year), due 2019

     450.0         2.3         (0.5     (2.4     449.4   

5.25% 2014 Senior Notes (30-Year), due 2044

     600.0         —           3.4        (6.2     597.2   

1.75% 2015 Senior Notes, due 2027

     543.1         —           —          (4.0     539.1   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total long-term debt

   $ 3,393.1       $ 11.7       $ (3.8   $ (20.4   $ 3,380.6   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

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.

(2)

Pursuant to ASU No. 2015-03, unamortized debt issuance costs are presented as a reduction to the carrying value of the notes payable. See Note 1 for additional discussion.

At March 31, 2016, 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 March 31, 2016, there were no such cross defaults.

 

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Table of Contents

Interest expense, net

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

 

     Three Months Ended
March  31,
 
     2016      2015  

Income

   $ 2.9       $ 1.9   

Expense on borrowings

     (34.6      (28.3

UTPs and other tax related liabilities

     (2.8      (3.2

Capitalized

     0.4         0.3   
  

 

 

    

 

 

 

Total

   $ (34.1    $ (29.3
  

 

 

    

 

 

 

The following table shows the cash paid for interest:

 

     Three Months Ended
March 31,
 
     2016      2015  

Interest paid

   $ 67.1       $ 48.2   

The fair value and carrying value of the Company’s long-term debt as of March 31, 2016 and December 31, 2015 are as follows:

 

     March 31, 2016      December 31, 2015  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Series 2007-1 Notes

   $ 299.9       $ 318.9       $ 299.8       $ 320.6   

2010 Senior Notes

     518.6         560.6         505.8         551.2   

2012 Senior Notes

     494.9         548.1         494.7         530.0   

2013 Senior Notes

     494.8         553.9         494.6         533.8   

2014 Senior Notes (5-Year)

     457.5         461.5         449.4         454.3   

2014 Senior Notes (30-Year)

     597.3         668.3         597.2         617.7   

2015 Senior Notes

     565.6         575.8         539.1         520.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,428.6       $ 3,687.1       $ 3,380.6       $ 3,527.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of the Company’s long-term debt is estimated based on quoted market prices for similar instruments. 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.

 

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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, 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 was then returned to the Second Circuit for final disposition of the appeal. On February 23, 2016, the Second Circuit affirmed the dismissal of Commerzbank’s claim.

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. The action related 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 sought 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 was 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. On December 23, 2015, following the close of fact discovery, the Company and MIS filed a motion for summary judgment. On March 8, 2016, prior to argument or decision on the motion for summary judgment, the Company and CalPERS entered into an agreement to settle this matter, and the case was subsequently dismissed with prejudice. This resolution did not have a negative financial impact on the Company.

 

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

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.

The MIS segment consists of five LOBs. The CFG, SFG, FIG and PPIF 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 financial instruments pricing services in the Asia-Pacific region as well as ICRA non-ratings revenue.

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.

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. Accordingly, a reportable segment’s share of these costs will increase as its proportion of revenue relative to Moody’s total revenue increases. 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.

 

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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 March 31,  
     2016      2015  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 549.1       $ 293.8       $ (26.8   $ 816.1       $ 624.6       $ 266.6       $ (25.6   $ 865.6   

Operating, SG&A

     278.6         230.3         (26.8     482.1         281.3         210.0         (25.6     465.7   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     270.5         63.5         —          334.0         343.3         56.6         —          399.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     17.5         12.4         —          29.9         16.0         12.6         —          28.6   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 253.0       $ 51.1       $ —        $ 304.1       $ 327.3       $ 44.0       $ —        $ 371.3   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

MIS and MA Revenue by Line of Business

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

 

     Three Months Ended March 31,  
     2016      2015  

MIS:

     

Corporate finance (CFG)

   $ 240.3       $ 298.7   

Structured finance (SFG)

     90.6         101.3   

Financial institutions (FIG)

     94.9         93.8   

Public, project and infrastructure finance (PPIF)

     91.5         100.7   
  

 

 

    

 

 

 

Total ratings revenue

     517.3         594.5   

MIS Other

     7.8         7.8   
  

 

 

    

 

 

 

Total external revenue

     525.1         602.3   
  

 

 

    

 

 

 

Intersegment royalty

     24.0         22.3   
  

 

 

    

 

 

 

Total

     549.1         624.6   
  

 

 

    

 

 

 

MA:

     

Research, data and analytics (RD&A)

     164.9         149.6   

Enterprise risk solutions (ERS)

     89.5         77.1   

Professional services (PS)

     36.6         36.6   
  

 

 

    

 

 

 

Total external revenue

     291.0         263.3   
  

 

 

    

 

 

 

Intersegment revenue

     2.8         3.3   
  

 

 

    

 

 

 

Total

     293.8         266.6   
  

 

 

    

 

 

 

Eliminations

     (26.8      (25.6
  

 

 

    

 

 

 

Total MCO

   $ 816.1       $ 865.6   
  

 

 

    

 

 

 

Consolidated Revenue Information by Geographic Area:

 

     Three Months Ended March 31,  
     2016      2015  

Revenue

     

United States

   $ 480.0       $ 499.8   

International:

     

EMEA

     210.2         227.6   

Asia-Pacific

     82.0         86.1   

Americas

     43.9         52.1   
  

 

 

    

 

 

 

Total International

     336.1         365.8   
  

 

 

    

 

 

 

Total

   $ 816.1       $ 865.6   
  

 

 

    

 

 

 

 

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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. 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 addition, in March and April 2016, the FASB issued additional updates clarifying the implementation guidance for the new revenue recognition standard.

The Company is currently evaluating its adoption options with regard to the aforementioned ASU’s relating to revenue recognition and the impact that adoption of these 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 which will be expensed as incurred under the new standard; ii) the accounting for certain software subscription revenue in MA whereby the license rights within the arrangement would be recognized at the inception of the contract based on estimated stand-alone selling price with the remainder recognized over the subscription period; iii) the accounting for certain ERS revenue arrangements where VSOE is not available should result in the acceleration of revenue recognition and iv) the accounting for contract acquisition costs which will be expensed as incurred under the new standard.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10).” The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of this ASU on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows will depend on classification as either a finance or operating lease. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. This standard must be adopted using a modified retrospective approach whereby leases will be presented in accordance with the new standard as of the earliest period presented. The Company is currently evaluating the impact of this ASU on the Company’s financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting.” This ASU amends the accounting for an investment not previously accounted for under the equity method that subsequently qualifies for the equity method of accounting. It requires a company to add the cost of the additional interest acquired to its current basis and the commencement of the equity method of accounting when the criteria are met. In addition, the unrealized gains or losses in accumulated other comprehensive related to an available for sale equity security should be recognized through earnings if the investment subsequently qualifies for the equity method of accounting. The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of this ASU will only impact the Company if an investment not previously accounted for under the equity method qualifies for accounting under the equity method.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This ASU changes various aspects related to the accounting for share-based payments including: i) accounting for Excess Tax Benefits and shortfalls; ii) the accounting for forfeitures; iii) restrictions on the value of shares retained by an entity to fund the employee’s portion of payroll taxes; and iv) classification of Excess Tax Benefits in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted if all amendments are adopted in the same period. The Company is evaluating the impact of this ASU on its financial statements but currently expects that the most significant effect of this ASU will be the impact on its reported Net Income and Diluted EPS as Excess Tax Benefits and shortfalls will be recorded to the provision for income taxes under this ASU as compared to a charge to capital surplus under current GAAP.

NOTE 17. SUBSEQUENT EVENT

On April 11, 2016, the Board approved the declaration of a quarterly dividend of $0.37 per share of Moody’s common stock, payable on June 10, 2016 to shareholders of record at the close of business on May 20, 2016.

 

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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 46 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 GAAP. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, 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, 2015, 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.

Reportable Segments

The Company is organized into two reportable segments at March 31, 2016: 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.

 

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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.

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 March 31, 2016 compared with three months ended March 31, 2015

Executive Summary

 

   

Moody’s revenue in the three months ended March 31, 2016 totaled $816.1 million, a decrease of $49.5 million, or 6%, compared to 2015 and reflected declines in MIS revenue partially offset by good growth in MA. Excluding the unfavorable impact of changes in FX translation rates, revenue decreased 4% from the prior year. The following discussion of MIS and MA revenue exclude intersegment revenue.

 

   

MIS revenue decreased 13% compared to the prior year reflecting lower revenue from rating high-yield and investment-grade corporate debt in the U.S. and EMEA primarily due to market volatility in the first quarter of 2016. Additionally, the decrease reflected lower securitization activity in the first quarter of 2016, most notably in the U.S. CMBS and CLO asset classes.

 

   

MA revenue was 11% higher than the prior year. Excluding the impact of unfavorable changes in FX translation rates, MA revenue grew 13% reflecting increases in ERS and RD&A across all regions. Revenue grew in all product areas of ERS, with particular strength in the Assets, Liability & Capital, Credit Assessment & Origination and Stress Testing products. The 2016 acquisition of GGY also contributed to the growth in ERS. In RD&A, revenue growth was primarily driven by credit research and licensing of ratings data as well as growth in SAV and ECCA.

 

   

Total operating expenses increased $17.7 million, or 4% reflecting higher compensation costs associated with headcount growth (including costs from the acquisition of GGY) and annual compensation increases partially offset by lower incentive compensation costs;

 

   

Excluding the favorable impact relating to changes in FX translation rates, total expenses increased 6% compared to the prior year.

 

   

Operating income of $304.1 million in the first quarter of 2016 was down $67.2 million compared to 2015 and resulted in an operating margin of 37.3%, compared to 42.9% in the prior year. Adjusted Operating Income of $334.0 million in the first quarter of 2016 decreased $65.9 million compared to 2015, resulting in an Adjusted Operating Margin of 40.9% compared to 46.2% in the prior year.

 

   

The ETR in the first quarter of 2016 was 60 BPS lower than the prior year primarily due to lower state income taxes.

 

   

The increase in non-operating expense, net, compared to the prior year is primarily due to interest on the 2015 Senior Notes issued in March 2015 as well as interest on the $300 million of additional borrowings under the 2014 Senior Notes (30-Year) in November 2015. These increases in expense were partially offset by higher FX gains in 2016.

 

   

Diluted EPS of $0.93 in the first quarter of 2016 decreased $0.18 from 2015 reflecting a decrease in Net Income partially offset by a 4% reduction in diluted weighted average shares outstanding.

 

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Moody’s Corporation

 

    

 

Three months ended March 31,

    % Change
Favorable
(Unfavorable)
 
     2016     2015    

Revenue:

      

United States

   $ 480.0      $ 499.8        (4 %) 

International:

      

EMEA

     210.2        227.6        (8 %) 

Asia-Pacific

     82.0        86.1        (5 %) 

Americas

     43.9        52.1        (16 %) 
  

 

 

   

 

 

   

Total International

     336.1        365.8        (8 %) 
  

 

 

   

 

 

   

Total

     816.1        865.6        (6 %) 
  

 

 

   

 

 

   

Expenses:

      

Operating

     249.2        244.4        (2 %) 

SG&A

     232.9        221.3        (5 %) 

Depreciation and amortization

     29.9        28.6        (5 %) 
  

 

 

   

 

 

   

Total

     512.0        494.3        (4 %) 
  

 

 

   

 

 

   

Operating income

   $ 304.1      $ 371.3        (18 %) 
  

 

 

   

 

 

   

Adjusted Operating Income (1)

   $ 334.0      $ 399.9        (16 %) 
  

 

 

   

 

 

   

Interest expense, net

   $ (34.1   $ (29.3     (16 %) 

Other non-operating income, net

   $ 5.6      $ 2.5        124
  

 

 

   

 

 

   

Total non-operating expense, net

   $ (28.5   $ (26.8     (6 %) 
  

 

 

   

 

 

   

Net income attributable to Moody’s

   $ 184.4      $ 230.1        (20 %) 

Diluted weighted average shares outstanding

     197.9        206.5        4

Diluted EPS attributable to Moody’s common shareholders

   $ 0.93      $ 1.11        (16 %) 

Operating margin

     37.3     42.9  

Adjusted Operating Margin(1)

     40.9     46.2  

 

(1) 

Adjusted Operating Income and Adjusted Operating Margin are non-GAAP financial measures. Refer to the section entitled “Non-GAAP Financial Measures” of this Management Discussion and Analysis for further information regarding these measures.

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

 

     March 31      % Change  
     2016      2015         

United States

     3,441         3,202         7

International

     7,311         6,768         8
  

 

 

    

 

 

    

Total

     10,752         9,970         8
  

 

 

    

 

 

    

Global revenue of $816.1 million in the first quarter of 2016 decreased $49.5 million, or 6%, compared to 2015. Excluding the unfavorable impact of changes in FX translation rates, global revenue decreased 4% from the prior year and reflected lower MIS revenue partially offset by good growth in MA revenue.

The $77.2 million decrease in MIS revenue reflects declines in high-yield and investment-grade corporate debt revenue across all regions reflecting market volatility in the first quarter of 2016. Additionally, the decrease reflected lower securitization activity in the first quarter of 2016, most notably in the U.S. CMBS and CLO asset classes. Unfavorable changes in FX translation rates had a $7 million impact on revenue in the first quarter of 2016.

 

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The $27.7 million growth in MA reflects increases in ERS and RD&A across all regions. Revenue grew in all product areas of ERS, with particular strength in the Assets, Liability & Capital, Credit Assessment & Origination and Stress Testing products. The 2016 acquisition of GGY also contributed to the growth in ERS. In RD&A, revenue growth was primarily driven by credit research and licensing of ratings data as well as growth in SAV and ECCA businesses. These results were partially offset by unfavorable changes in FX translation rates of approximately $6 million. Excluding the impact of changes in FX rates, MA revenue increased 13% compared to 2015.

Transaction revenue accounted for 45% of global MCO revenue in the first quarter of 2016 compared to 51% in the prior year.

U.S. revenue of $480.0 million in the first quarter of 2016 decreased $19.8 million from the prior year, reflecting lower revenue across all MIS LOBs, partially offset by growth in RD&A and ERS revenue within MA.

Non-U.S. revenue of $336.1 million decreased $29.7 million compared to the first quarter of 2015 due to declines in MIS across all regions being partially offset by growth in MA across all regions.

Operating expenses were $249.2 million in the first quarter of 2016, up 2% compared to 2015 and included an increase in compensation costs reflecting higher expenses resulting from the impact of annual compensation increases and increased headcount (including headcount from the acquisition of GGY). These increases were partially offset by lower incentive compensation costs reflecting lower projected achievement against full-year projected results compared to the prior year. The changes above include a favorable impact relating to changes in FX translation rates compared to the prior year.

SG&A expenses of $232.9 million in the first quarter of 2016 increased 5% from the prior year period reflecting higher compensation and non-compensation expenses of approximately $7 million and $5 million, respectively. The growth in compensation costs was primarily due to higher expenses resulting from annual compensation increases, headcount growth in MIS and MA as well as in overhead support areas coupled with higher headcount from the GGY acquisition. These increases were partially offset by lower incentive compensation costs reflecting lower projected achievement against full-year projected results compared to the prior year. The increase in non-compensation expenses primarily reflects higher legal fees as well as higher rent and occupancy costs reflecting various real estate expansion projects. The increases above include a favorable impact relating to changes in FX translation rates compared to the prior year.

Operating income of $304.1 million in the first quarter of 2016 was down $67.2 million compared to 2015 and resulted in an operating margin of 37.3%, compared to 42.9% in the prior year. Adjusted Operating Income of $334.0 million in the first quarter of 2016 decreased $65.9 million compared to 2015, resulting in an Adjusted Operating Margin of 40.9% compared to 46.2% in the prior year period.

Interest expense, net in the first quarter of 2016 was ($34.1) million, a $4.8 million increase in expense compared to 2015. The increase reflects interest on the 2015 Senior Notes which were issued in March 2015 as well as interest on the $300 million of additional borrowings under the 2014 Senior Notes (30-Year) in November 2015.

Other non-operating income, net was $5.6 million in the first quarter of 2016, a $3.1 million increase in income compared to 2015. This increase reflected approximately $4 million in higher FX gains compared to the prior year primarily due to the strengthening of the euro to both the British pound and the U.S. dollar over the previous three months.

The Company’s ETR was 32.3% in the first quarter of 2016, compared with 32.9% in 2015 with the decrease primarily due to lower state income tax.

Net Income in the first quarter of 2016 was $184.4 million, or $0.93 per diluted share. This is a decrease of $45.7 million, or $0.18 per diluted share, compared to 2015. The decrease in diluted EPS reflects lower Net Income partially offset by a 4% reduction in diluted weighted average shares outstanding. This reduction in diluted weighted average shares outstanding reflects share repurchases under the Company’s Board authorized share repurchase program partially offset by shares issued under the employee stock-based compensation programs.

 

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Segment Results

Moody’s Investors Service

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

 

    

 

Three months ended March 31,

    % Change
Favorable
(Unfavorable)
 
     2016     2015    

Revenue:

      

Corporate finance (CFG)

   $ 240.3      $ 298.7        (20 %) 

Structured finance (SFG)

     90.6        101.3        (11 %) 

Financial institutions (FIG)

     94.9        93.8        1

Public, project and infrastructure finance (PPIF)

     91.5        100.7        (9 %) 
  

 

 

   

 

 

   

Total ratings revenue

     517.3        594.5        (13 %) 
  

 

 

   

 

 

   

MIS Other

     7.8        7.8        —     
  

 

 

   

 

 

   

Total external revenue

     525.1        602.3        (13 %) 
  

 

 

   

 

 

   

Intersegment royalty

     24.0        22.3        8
  

 

 

   

 

 

   

Total

     549.1        624.6        (12 %) 
  

 

 

   

 

 

   

Expenses:

      

Operating and SG&A (external)

     275.8        278.0        1

Operating and SG&A (intersegment)

     2.8        3.3        15
  

 

 

   

 

 

   

Adjusted Operating Income

     270.5        343.3        (21 %) 
  

 

 

   

 

 

   

Depreciation and amortization

     17.5        16.0        (9 %) 
  

 

 

   

 

 

   

Operating income

   $ 253.0      $ 327.3        (23 %) 
  

 

 

   

 

 

   

Adjusted Operating Margin

     49.3     55.0  

Operating margin

     46.1     52.4  

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

Global MIS revenue of $525.1 million in the first quarter of 2016 was down 13% compared to 2015 reflecting lower rated issuance volumes for high-yield corporate debt across all regions as well as declines in CMBS and CLO activity in the U.S. Also, there were declines in rated issuance volumes for investment-grade corporate debt across all non-U.S. regions reflecting market volatility in the first quarter of 2016. Transaction revenue for MIS was 56% of total revenue in the first quarter of 2016 compared to 63% in the first quarter of 2015.

In the U.S., revenue was $336.0 million in the first quarter of 2016, a decrease of $35.5 million compared to 2015 and reflected lower rated issuance volumes for high-yield corporate debt due to credit spread and market volatility in the first quarter of 2016. Additionally, there were declines in securitization activity in the CMBS and CLO asset classes within SFG reflecting market volatility as well as uncertainty relating to the implementation of regulatory requirements. Partially offsetting these decreases were higher monitoring fee revenue reflecting a larger number of outstanding rated instruments as well as higher insurance-related issuance volumes due to M&A activity in the sector.

Non-U.S. revenue was $189.1 million in the first quarter of 2016, a decrease of $41.7 million compared to 2015. The decrease reflects lower rated issuance volumes for high-yield and investment-grade corporate debt across all regions reflecting market volatility in the first quarter of 2016 resulting from global economic growth concerns and weak commodity prices. Partially offsetting these declines was higher monitoring fee revenue reflecting a larger number of outstanding rated instruments.

 

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Global CFG revenue of $240.3 million in the first quarter of 2016 was down 20% compared to 2015. The decline reflects lower rated issuance volumes for speculative-grade corporate debt across all regions as credit spreads were volatile for high-yield instruments reflecting overall market volatility in the first quarter of 2016. Also, there were lower rated issuance volumes for investment-grade corporate debt across all non-U.S. regions reflecting the aforementioned market volatility in the first quarter of 2016. Partially offsetting these decreases were the benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Transaction revenue represented 63% and 72% of total CFG revenue in the first quarter of 2016 and 2015, respectively. In the U.S., revenue was $172.4 million, or $19.7 million lower than the prior year. Internationally, revenue of $67.9 million decreased $38.7 million compared to the prior year.

Global SFG revenue of $90.6 million in the first quarter of 2016 decreased $10.7 million, or 11%, compared to 2015. In the U.S., revenue of $60.0 million decreased $10.7 million compared to the first quarter of 2015. This decrease reflected lower securitization activity in the CMBS asset class due to higher credit spreads resulting from overall market volatility in the first quarter of 2016 as well as uncertainties relating to the implementation of regulatory requirements. Additionally, the decline in the U.S. reflects lower CLO formation also due to wider credit spreads resulting from market volatility as well as declining availability of collateral for these instruments. Non-U.S. revenue in the first quarter of 2016 of $30.6 million was flat compared to the prior year as modest growth in EMEA was offset by declines in other regions. Transaction revenue was 55% of total SFG revenue in the first quarter of 2016 compared to 61% in the prior year.

Global FIG revenue of $94.9 million in the first quarter of 2016 increased $1.1 million, or 1%, compared to 2015. Excluding the unfavorable impact of changes in FX translation rates, FIG revenue grew 4% compared to the prior year. In the U.S., revenue was $40.2 million, or 3% lower than the prior year, primarily reflecting reduced banking-related issuance volumes due to market volatility in the first quarter of 2016. This decrease was partially offset by higher M&A rated issuance volumes in the insurance sector as well as benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Internationally, revenue was $54.7 million in the first quarter of 2016, or $2.3 million higher compared to 2015. This increase primarily reflects higher banking revenue in EMEA and insurance revenue in Asia-Pacific as well as benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Partially offsetting the increase in non-U.S. revenue was an approximate $2 million unfavorable impact from changes in FX rates. Transaction revenue was 39% of total FIG revenue in the first quarter of 2016 compared to 40% in the same period in 2015.

Global PPIF revenue was $91.5 million in the first quarter of 2016 and decreased $9.2 million, or 9%, compared to 2015. In the U.S., revenue in the first quarter of 2016 was $61.1 million, a decrease of $4.2 million compared to 2015 due to lower public and project finance revenue reflecting market volatility in the first quarter of 2016 compared to robust issuance in the prior year. Outside the U.S., PPIF revenue decreased $5.0 million compared to 2015, primarily due to lower rated issuance volumes in infrastructure finance in EMEA reflecting market volatility coupled with lower project finance revenue in Asia-Pacific. These decreases were partially offset by benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Transaction revenue was 59% and 64% of total PPIF revenue in first quarter of 2016 and 2015, respectively.

Operating and SG&A expenses in the first quarter of 2016 decreased $2.2 million compared to 2015 primarily reflecting lower non-compensation expense of approximately $3 million primarily due to overall cost control initiatives. Partially offsetting this decrease was higher compensation expense of approximately $1 million primarily reflecting annual salary increases, headcount growth in the ratings LOBs as well as in the support areas such as IT, finance and human resources for which the costs are allocated to each segment based on a revenue-split methodology. This increase in salary expense was partially offset by reduced incentive compensation costs reflecting lower projected achievement against full-year targeted results compared to the prior year.

Adjusted Operating Income and operating income in the first quarter of 2016, which includes intersegment royalty revenue and intersegment expenses, was $270.5 million and $253.0 million, respectively, and were down 21% and 23%, respectively, compared to 2015. Adjusted Operating Margin and operating margin were 49.3% and 46.1%, respectively, or 570 BPS and 630 BPS lower compared to the first quarter of 2015.

 

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Moody’s Analytics

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

 

                 % Change
Favorable
(Unfavorable)
 
     Three months ended March 31,    
     2016     2015    

Revenue:

      

Research, data and analytics (RD&A)

   $ 164.9      $ 149.6        10

Enterprise risk solutions (ERS)

     89.5        77.1        16

Professional services (PS)

     36.6        36.6        —     
  

 

 

   

 

 

   

Total external revenue

     291.0        263.3        11
  

 

 

   

 

 

   

Intersegment revenue

     2.8        3.3        (15 %) 
  

 

 

   

 

 

   

Total MA Revenue

     293.8        266.6        10
  

 

 

   

 

 

   

Expenses:

      

Operating and SG&A (external)

     206.3        187.7        (10 %) 

Operating and SG&A (intersegment)

     24.0        22.3        (8 %) 
  

 

 

   

 

 

   

Adjusted Operating Income

     63.5        56.6        12
  

 

 

   

 

 

   

Depreciation and amortization

     12.4        12.6        2
  

 

 

   

 

 

   

Operating income

   $ 51.1      $ 44.0        16
  

 

 

   

 

 

   

Adjusted Operating Margin

     21.6     21.2  

Operating margin

     17.4     16.5  

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

Global MA revenue increased $27.7 million, or 11%, compared to the first quarter of 2015 reflecting growth in RD&A as well as ERS, which included revenue from the acquisition of GGY. Excluding unfavorable changes in FX translation rates, MA revenue grew 13% compared to the prior year. Recurring revenue comprised 76% and 77% of total MA revenue in the first quarter of 2016 and 2015, respectively.

In the U.S., revenue of $144.0 million in the first quarter of 2016 increased $15.7 million, and reflected growth in ERS and RD&A.

Non-U.S. revenue of $147.0 million in the first quarter of 2016 was $12.0 million higher than in 2015 reflecting growth in RD&A and ERS, partially offset by an approximate $6 million unfavorable impact due to changes in FX rates.

Global RD&A revenue of $164.9 million, which comprised 57% of total external MA revenue in both the first quarter of 2016 and 2015, increased $15.3 million, or 10%, over the prior year period. Excluding an approximate $4 million unfavorable impact due to changes in FX translation rates, RD&A revenue grew 13% compared to the prior year reflecting increases across all regions. The growth reflected strong sales of credit research and licensing of ratings data, record customer retention and higher revenue within SAV and ECCA. In the U.S., revenue of $96.2 million increased 14% over the prior year. Non-U.S. revenue of $68.7 million increased 5% and included the unfavorable impact from changes in FX translation rates.

Global ERS revenue in the first quarter of 2016 of $89.5 million increased $12.4 million, or 16%, over 2015. Excluding unfavorable changes in FX translation rates, ERS revenue grew 18%. Revenue growth was primarily due to increases across all product offerings with particular strength in the Assets, Liabilities & Capital, Credit Assessment and Origination and Stress Testing products as well as revenue from the acquisition of GGY in March of 2016. Revenue in ERS is subject to quarterly volatility resulting from the variable nature of project timing and the concentration of software implementation and license revenue in a relatively small number of engagements. In the U.S., revenue of $35.2 million increased 14% compared to the prior year. Non-U.S. revenue of $54.3 million increased 17% and included the aforementioned unfavorable impact from changes in FX translation rates.

 

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Global PS revenue of $36.6 million in the first quarter of 2016 was flat compared to 2015. Excluding unfavorable changes in FX translation rates, revenue was 2% higher than the prior year reflecting good growth in the outsourced research and analytical services business. In the U.S., revenue of $12.6 million decreased 6%. Non-U.S. revenue of $24.0 million decreased 3% compared to the prior year and included an approximate $1 million unfavorable impact due to changes in FX translation rates.

Operating and SG&A expenses in the first quarter of 2016 increased $18.6 million compared to 2015. The expense growth reflects an approximate $16 million increase in compensation costs primarily due to higher headcount to support business growth as well as higher headcount in support areas, for which the costs are allocated based on the Company’s revenue-split methodology. Also contributing to the increase in compensation costs was headcount from the acquisition of GGY, annual merit increases and higher incentive compensation reflecting greater achievement against full-year targeted results compared to the prior year. Additionally, there was an approximate $3 million increase in non-compensation expenses primarily due to higher rent and occupancy and variable costs correlated with business growth.

Adjusted Operating Income was $63.5 million in the first quarter of 2016 and increased $6.9 million compared to 2015. Operating income of $51.1 million in the first quarter of 2016 increased $7.1 million compared to 2015. Adjusted Operating Margin for the first quarter of 2016 was 21.6% compared to 21.2% in 2015. Operating margin was 17.4% in the first quarter of 2016 compared to 16.5% in the prior year. Adjusted operating income and operating income both include intersegment revenue and expense.

Liquidity and Capital Resources

Cash Flow

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

 

     Three Months Ended
March 31,
     $ Change  
     2016      2015         

Net cash provided by operating activities

   $ 237.3       $ 261.8       $ (24.5

Net cash used in investing activities.

   $ (108.4    $ (49.3    $ (59.1

Net cash (used in) provided by financing activities

   $ (339.2    $ 123.9       $ (463.1

Free Cash Flow*

   $ 211.0       $ 242.8       $ (31.8

 

* Free Cash Flow is a non-GAAP financial measure. Refer to the section “Non-GAAP Financial Measures” of this MD&A for further information on this financial measure.

Net cash provided by operating activities

Net cash flows from operating activities decreased $24.5 million compared to the prior year. The decrease was primarily due to lower net income of $44.7 million. This was partially offset by an approximate $29 million increase primarily relating to higher incentive compensation payouts in 2015 compared to 2016 which reflected lower achievement against full-year targeted results in 2015 compared to achievement in 2014. The remaining decrease in cash flow from operations is due to various other changes in working capital.

 

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Table of Contents

Net cash used in investing activities

The $59.1 million increase in cash used in investing activities is primarily due to:

 

   

cash paid, net of cash acquired, of $75.9 million to acquire GGY;

 

   

$18.5 million less cash received upon maturity of FX forward contracts designated as net investment hedges;

Partially offset by:

 

   

lower net purchases of investments of $42.6 million.

Net cash used in financing activities

The $463.1 million increase in cash used in financing activities was attributed to:

 

   

net proceeds of $552.8 million in 2015 reflecting the issuance of the 2015 Senior Notes;

Partially offset by:

 

   

treasury shares repurchased of $262.1 million in the first three months of 2016 compared to $365.8 million in the first three months of 2015;

Cash and short-term investments held in non-U.S. jurisdictions

The Company’s aggregate cash and cash equivalents and short-term investments of $2.1 billion at March 31, 2016 consisted of approximately $1.5 billion located outside of the U.S. Approximately 32% of the Company’s aggregate cash and cash equivalents and short-term investments is denominated in euros and British pounds. Approximately 95% of the cash and cash equivalents and short-term investments in the Company’s non-U.S. operations are held by entities whose undistributed earnings are indefinitely reinvested in the Company’s foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution or change in assertion regarding reinvestment by the foreign subsidiaries relating to these earnings could result in additional tax liability to the Company. It is not practicable to determine the amount of the potential additional tax liability due to complexities in the tax laws and in the hypothetical calculations that would have to be made. The Company manages both its U.S. and international cash flow to maintain sufficient liquidity in all regions to effectively meet its operating needs.

Indebtedness

At March 31, 2016, Moody’s had $3.4 billion of outstanding debt and $1.0 billion of additional capacity available under the 2015 Facility. At March 31, 2016, the Company was in compliance with all covenants contained within all of the debt agreements. The 2015 Facility, the 2007 Agreement, the 2010 Indenture, the 2012 Indenture, the 2013 Indenture, the 2014 Indenture and the 2015 Indenture contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of March 31, 2016, there were no such cross defaults.

 

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Table of Contents

The repayment schedule for the Company’s borrowings is as follows:

 

Year Ended
December 31,

   Series 2007-1
Notes
     2010 Senior
Notes
     2012 Senior
Notes
     2013 Senior
Notes
     2014 Senior
Notes (5-Year)
     2014 Senior
Notes (30-Year)
     2015 Senior
Notes (1)
     Total  

2016 (after March 31,)

   $ —         $ —         $ —         $ —         $ —         $ —         $ —         $ —     

2017

     300.0         —           —           —           —           —           —           300.0   

2018

     —           —           —           —           —           —           —           —     

2019

     —           —           —           —           450.0         —           —           450.0   

2020

     —           500.0         —           —           —           —           —           500.0   

Thereafter

     —           —           500.0         500.0         —           600.0         569.8         2,169.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 300.0       $ 500.0       $ 500.0       $ 500.0       $ 450.0       $ 600.0       $ 569.8       $ 3,419.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Based on end of quarter FX rates

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

Other Material Future Cash Requirements

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

The Company remains committed to using its strong cash flow to create value for shareholders by investing in growing areas of the business, reinvesting in ratings quality initiatives, making selective acquisitions, repurchasing stock and paying a dividend, all in a manner consistent with maintaining sufficient liquidity after giving effect to any additional indebtedness that may be incurred. In April 2016, the Board of Directors of the Company declared a quarterly dividend of $0.37 per share of Moody’s common stock, payable on June 10, 2016 to shareholders of record at the close of business on May 20, 2016. The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board. In December 2014, the Board authorized $1.0 billion of share repurchase authority that has a remaining repurchase authority of approximately $204 million at March 31, 2016. In December 2015, the Board authorized an additional $1.0 billion of share repurchase authority which will be utilized following the completion of the program authorized in December 2014. Full-year 2016 total share repurchases are expected to be approximately $1 billion, subject to available cash, market conditions and other ongoing capital allocation decisions.

On February 6, 2008, the Company entered into an operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The Canary Wharf Lease has an initial term of 17.5-years with a total of 15 years of renewal options. The total base rent of the Canary Wharf Lease over its initial 17.5-year term is approximately £134 million, and the Company began making base rent payments in 2011. In addition to the base rent payments, the Company will be obligated to pay certain customary amounts for its share of operating expenses and tax obligations. The total remaining lease payments as of March 31, 2016 are approximately £92 million, of which approximately £9 million will be paid in the next twelve months. Payments under this lease agreement are included in the contractual obligations table below.

 

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On October 20, 2006, the Company entered into an operating lease agreement with 7 World Trade Center, LLC for 589,945 square-feet of an office building located at 7WTC at 250 Greenwich Street, New York, New York, which is serving as Moody’s headquarters. The 7WTC Lease has an initial term of 21 years with a total of 20 years of renewal options. The total base rent of 7WTC Lease over its initial 21-year term is approximately $536 million including rent credits from the World Trade Center Rent Reduction Program promulgated by the Empire State Development Corporation. On March 28, 2007, the 7WTC lease agreement was amended for the Company to lease an additional 78,568 square-feet at 7WTC. The additional base rent is approximately $106 million over a 20-year term. The total remaining lease payments as of March 31, 2016, including the aforementioned rent credits, are approximately $411 million, of which approximately $33 million will be paid during the next twelve months. Payments under this lease agreement are included in the contractual obligations table below.

The Company anticipates making an approximate $22 million contribution to its U.S. defined benefit funded pension plan during the remainder of 2016.

Off-Balance Sheet Arrangements

At March 31, 2016, Moody’s did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose or variable interest entities where Moody’s is the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, Moody’s is not exposed to any financing, liquidity market or credit risk that could arise if it had engaged in such relationships.

Contractual Obligations

The following table presents payments due under the Company’s contractual obligations as of March 31, 2016:

 

            Payments Due by Period  

(in millions)

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

Indebtedness(1)

   $ 4,943.2       $ 137.2       $ 547.0       $ 1,163.0       $ 3,096.0   

Operating lease obligations

     811.5         95.8         173.1         141.5         401.1   

Capital lease obligations

     1.2         0.6         0.6         —           —     

Purchase obligations

     167.6         69.1         64.0         34.5         —     

Pension obligations(2)

     161.7         28.9         44.5         17.3         71.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(3)

   $ 6,085.2       $ 331.6       $ 829.2       $ 1,356.3       $ 3,568.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Reflects principal payments, related interest and applicable fees due on the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes, the 2013 Senior Notes, the 2014 Senior Notes (5-year), the 2014 Senior Notes (30-year), the 2015 Senior Notes and the 2015 Facility as described in Note 13 to the condensed consolidated financial statements.

(2) 

Reflects projected benefit contributions to the Company’s funded U.S. DBPP and payments relating to the Company’s U.S. unfunded DBPPs and Retirement and Other Plans described in Note 12 to the condensed consolidated financial statements

(3) 

The table above does not include the Company’s net long-term tax liabilities of $211.6 million relating to UTP and Legacy Tax Matters, since the expected cash outflow of such amounts by period cannot be reasonably estimated.

Dividends

On April 11, 2016, the Board approved the declaration of a quarterly dividend of $0.37 per share of Moody’s common stock, payable on June 10, 2016 to shareholders of record at the close of business on May 20, 2016.

Non-GAAP Financial Measures:

In addition to its reported results, Moody’s has included in this MD&A certain adjusted results that the SEC defines as “non-GAAP financial measures.” Management believes that such non-GAAP financial measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period to period comparisons of the Company’s

 

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

Constant Currency Measures:

The Company presents revenue and operating income growth on a constant currency basis because management deems this metric to be a useful measure of assessing the operations of the Company in times of foreign exchange rate volatility. Constant currency measures exclude the impact of changes in foreign exchange rates on operating results. The Company calculates the dollar impact of foreign exchange as the difference between the translation of its current period non-USD functional currency results using prior comparative period weighted average foreign exchange translation rates and current year as reported results. Growth rates on a constant currency basis are determined based on the difference between current period revenue and operating income translated using prior period comparative weighted average exchange rates and prior period as reported results divided by prior as reported results. Below is a reconciliation of the Company’s as reported revenue and operating income changes to the changes on a constant currency basis:

 

      Three Months Ended March 31, 2016  
     RD&A     ERS     PS     Total MA  
     Revenue     Revenue     Revenue     Revenue  
     $      %     $      %     $      %     $      %  

Reported change

   $  15.3         10   $  12.4         16   $  —           —        $  27.7         11

FX impact

     3.7         3     1.4         2     0.9         2     6.0         2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Constant currency change

   $ 19.0         13   $ 13.8         18   $ 0.9         2   $ 33.7         13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     FIG  
     Revenue  
     $      %  

Reported change

   $  1.1         1

FX impact

     2.3         3
  

 

 

    

 

 

 

Constant currency change

   $ 3.4         4
  

 

 

    

 

 

 

 

     MCO     MCO  
     Revenue     Expense  
     $      %     $      %  

Reported change

   $  (49.5      (6 %)    $  17.7         4

FX impact

     12.6         2     11.5         2
  

 

 

    

 

 

   

 

 

    

 

 

 

Constant currency change

   $ (36.9      (4 %)    $ 29.2         6
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Adjusted Operating Income and Adjusted Operating Margin:

The Company presents adjusted operating income because management deems this metric to be a useful measure of assessing the operating performance of Moody’s, measuring the Company’s ability to service debt, fund capital expenditures, and expand its business. Adjusted operating income excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. Management believes that the exclusion of this item, detailed in the reconciliation below, allows for a more meaningful comparison of the Company’s results from period to period and across companies. The Company defines adjusted operating margin as adjusted operating income divided by revenue:

 

     Three Months Ended
March  31,
 
     2016     2015  

Operating income

   $ 304.1      $ 371.3   

Adjustments:

    

Depreciation and amortization

     29.9        28.6   
  

 

 

   

 

 

 

Adjusted Operating Income

   $ 334.0      $ 399.9   
  

 

 

   

 

 

 

Operating Margin

     37.3