10-Q 1 d226790d10q.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 June 30, 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 June 30, 2016

Common Stock, par value $0.01 per share   192.3 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 and Six Months Ended June  30, 2016 and 2015

     8   
 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June  30, 2016 and 2015

     9   
 

Consolidated Balance Sheets (Unaudited) at June 30, 2016 and December 31, 2015

     10   
 

Consolidated Statements of Cash Flows (Unaudited) for the Six months ended June 30, 2016 and 2015

     11   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     12-35   

Item 2.

 

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

  
 

The Company

     36   
 

Critical Accounting Estimates

     36   
 

Reportable Segments

     36-37   
 

Results of Operations

     37-48   
 

Liquidity and Capital Resources

     49-53   
 

Recently Issued Accounting Pronouncements

     54   
 

Contingencies

     54   
 

Regulation

     54-55   
 

Forward-Looking Statements

     55-56   

Item 4.

 

Controls and Procedures

     56   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     57   

Item 1A.

 

Risk Factors

     57   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     57   

Item 5.

 

Other Information

     57   

Item 6.

 

Exhibits

     58   

SIGNATURES

     59   

Exhibits Filed Herewith

  

31.1

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

31.2

 

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

  

32.1

 

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

  

32.2

 

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

  

101.DEF

 

XBRL Definitions Linkbase Document

  

101.INS

 

XBRL Instance Document

  

101.SCH

 

XBRL Taxonomy Extension Schema Document

  

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

  

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

  

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

  


Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

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

 

TERM

  

DEFINITION

Adjusted Operating Income    Operating income excluding depreciation and amortization
Adjusted Operating Margin    Operating margin excluding depreciation and amortization
Amba    Amba Investment Services; a provider of outsourced investment research and quantitative analytics for global financial institutions; a majority owned subsidiary of the Company acquired 100% of Amba in December 2013
Americas    Represents countries within North and South America, excluding the U.S.
AOCI    Accumulated other comprehensive income (loss); a separate component of shareholders’ equity
ASC    The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants
Asia-Pacific    Represents countries in Asia including but not limited to: Australia, China, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka and Thailand
ASU    The FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
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
Brexit    Abbreviation of “British exit”, which refers to the June 23, 2016 referendum by British voters to exit the European Union
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

 

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CSI    CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification services primarily in Canada
D&A    Depreciation and amortization
DBPP    Defined benefit pension plans
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
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
IT    Information technology
KIS    Korea Investors Service, Inc; a leading Korean rating agency and consolidated subsidiary of the Company

 

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KIS Pricing    Korea Investors Service Pricing, Inc; a leading Korean provider of fixed income securities pricing and consolidated subsidiary of the Company
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
MCO    Moody’s Corporation and its subsidiaries; the Company; Moody’s
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MIS    Moody’s Investors Service – a reportable segment of MCO; consists of five LOBs – SFG, CFG, FIG, PPIF and MIS Other
MIS Other    Consists of non-ratings revenue from ICRA, KIS Pricing and KIS Research. These businesses are components of MIS; MIS Other is an LOB of MIS
Moody’s    Moody’s Corporation and its subsidiaries; MCO; the Company
Net Income    Net income attributable to Moody’s Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder
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
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

 

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RD&A    Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and other analytical tools that are produced within MA
Reform Act    Credit Rating Agency Reform Act of 2006
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, as amended
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
2007 Agreement    Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes
2010 Indenture    Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes    Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 Facility    Revolving credit facility of $1 billion entered into on April 18, 2012; was replaced with the 2015 Facility
2012 Indenture    Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes

 

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Table of Contents
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     Six Months Ended  
     June 30,     June 30,  
     2016     2015     2016     2015  

Revenue

   $ 928.9      $ 918.1      $ 1,745.0      $ 1,783.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Operating

     258.9        243.9        508.1        488.3   

Selling, general and administrative

     228.6        227.0        461.5        448.3   

Depreciation and amortization

     31.2        27.9        61.1        56.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     518.7        498.8        1,030.7        993.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     410.2        419.3        714.3        790.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating (expense) income, net

        

Interest income (expense), net

     (34.3     (31.9     (68.4     (61.2

Other non-operating income (expense), net

     3.0        (8.2     8.6        (5.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating (expense) income, net

     (31.3     (40.1     (59.8     (66.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provisions for income taxes

     378.9        379.2        654.5        723.7   

Provision for income taxes

     120.8        115.1        209.8        228.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     258.1        264.1        444.7        495.4   

Less: Net income attributable to noncontrolling interests

     2.6        2.4        4.8        3.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 255.5        261.7        439.9        491.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Moody’s common shareholders

        

Basic

   $ 1.32        1.30        2.27        2.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.30        1.28        2.24        2.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

        

Basic

     193.4        201.3        194.2        202.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     195.8        204.4        196.8        205.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share attributable to Moody’s common shareholders

   $ 0.37      $ 0.34      $ 0.37      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in millions)

 

     Three Months Ended
June 30, 2016
    Three Months Ended
June 30, 2015
 
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net income

       $ 258.1          $ 264.1   
      

 

 

       

 

 

 

Other comprehensive (loss) income:

            

Foreign currency translation:

            

Foreign currency translation adjustments, net

   $ (45.9   $ 26.5        (19.4   $ 26.7      $ 5.4        32.1   

Cash flow hedges:

            

Net unrealized loss on cash flow hedges

     (4.6     1.7        (2.9     —          —          —     

Reclassification of losses included in net income

     2.6        (0.9     1.7        —          —          —     

Available for sale securities:

            

Net unrealized gains on available for sale securities

     0.6        —          0.6        1.0        —          1.0   

Reclassification of gains included in net income

     —          —          —          (0.2     —          (0.2

Pension and Other Retirement Benefits:

            

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

     2.3        (0.9     1.4        3.1        (1.1     2.0   

Net actuarial gains and prior service costs

     5.3        (2.0     3.3        10.9        (4.2     6.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

   $ (39.7   $ 24.4        (15.3   $ 41.5      $ 0.1        41.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         242.8            305.7   

Less: comprehensive income attributable to noncontrolling interests

         2.6            2.4   
      

 

 

       

 

 

 

Comprehensive income attributable to Moody’s

       $ 240.2          $ 303.3   
      

 

 

       

 

 

 
     Six Months Ended
June 30, 2016
    Six Months Ended
June 30, 2015
 
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net income

       $ 444.7          $ 495.4   
      

 

 

       

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation:

            

Foreign currency translation adjustments, net

   $ 2.6      $ 14.0        16.6      $ (51.1   $ (7.3     (58.4

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

     —          —          —          (0.1     —          (0.1

Cash flow hedges:

            

Net unrealized loss on cash flow hedges

     (2.6     0.9        (1.7     —          —          —     

Reclassification of losses included in net income

     0.4        (0.1     0.3        —          —          —     

Available for sale securities:

            

Net unrealized gains on available for sale securities

     1.2        —          1.2        2.1        —          2.1   

Reclassification of gains included in net income

     —          —          —          (0.2     —          (0.2

Pension and Other Retirement Benefits:

            

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

     4.9        (1.9     3.0        6.9        (2.6     4.3   

Net actuarial gains and prior service costs

     5.3        (2.0     3.3        10.9        (4.2     6.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 11.8      $ 10.9        22.7      $ (31.5   $ (14.1     (45.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         467.4            449.8   

Less: comprehensive income attributable to noncontrolling interests

         4.8            3.6   
      

 

 

       

 

 

 

Comprehensive income attributable to Moody’s

       $ 462.6          $ 446.2   
      

 

 

       

 

 

 

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

 

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Table of Contents

MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

     June 30,     December 31,  
     2016     2015  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,674.3      $ 1,757.4   

Short-term investments

     352.5        474.8   

Accounts receivable, net of allowances of $27.2 in 2016 and $27.5 in 2015

     843.7        802.0   

Deferred tax assets, net

     —          29.3   

Other current assets

     159.6        179.6   
  

 

 

   

 

 

 

Total current assets

     3,030.1        3,243.1   

Property and equipment, net of accumulated depreciation of $560.6 in 2016 and $518.9 in 2015

     323.0        306.4   

Goodwill

     1,047.2        976.3   

Intangible assets, net

     319.2        299.1   

Deferred tax assets, net

     167.2        137.7   

Other assets

     158.2        140.4   
  

 

 

   

 

 

 

Total assets

   $ 5,044.9      $ 5,103.0   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 453.8      $ 566.6   

Deferred tax liabilities, net

     —          16.7   

Deferred revenue

     692.6        635.2   
  

 

 

   

 

 

 

Total current liabilities

     1,146.4        1,218.5   

Non-current portion of deferred revenue

     134.1        132.5   

Long-term debt

     3,420.4        3,380.6   

Deferred tax liabilities, net

     111.4        83.8   

Unrecognized tax benefits

     198.1        203.4   

Other liabilities

     404.0        417.2   
  

 

 

   

 

 

 

Total liabilities

     5,414.4        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 June 30, 2016 and December 31, 2015, respectively.

     3.4        3.4   

Capital surplus

     457.3        451.3   

Retained earnings

     7,077.8        6,709.0   

Treasury stock, at cost; 150,647,727 and 146,826,744 shares of common stock at June 30, 2016 and December 31, 2015, respectively

     (7,821.7     (7,389.2

Accumulated other comprehensive loss

     (316.8     (339.5
  

 

 

   

 

 

 

Total Moody’s shareholders’ deficit

     (600.0     (565.0

Noncontrolling interests

     230.5        232.0   
  

 

 

   

 

 

 

Total shareholders’ deficit

     (369.5     (333.0
  

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 5,044.9      $ 5,103.0   
  

 

 

   

 

 

 

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

 

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)

 

     Six months ended
June 30,
 
     2016     2015  

Cash flows from operating activities

    

Net income

   $ 444.7      $ 495.4   

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

    

Depreciation and amortization

     61.1        56.5   

Stock-based compensation expense

     48.9        44.4   

Deferred income taxes

     13.7        10.6   

Excess tax benefits from stock-based compensation plans

     (17.6     (41.1

Changes in assets and liabilities:

    

Accounts receivable

     (45.2     (11.8

Other current assets

     19.2        (3.3

Other assets

     13.7        (3.5

Accounts payable and accrued liabilities

     (69.8     (35.0

Deferred revenue

     66.7        63.0   

Unrecognized tax benefits and other non-current tax liabilities

     (4.3     (12.1

Other liabilities

     (2.3     31.3   
  

 

 

   

 

 

 

Net cash provided by operating activities

     528.8        594.4   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital additions

     (54.3     (40.7

Purchases of investments

     (174.5     (289.2

Sales and maturities of investments

     294.9        221.9   

Acquisitions, net of cash acquired

     (75.9     (4.6

Settlement of net investment hedges

     2.5        20.8   
  

 

 

   

 

 

 

Net cash used in investing activities

     (7.3     (91.8
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of notes

     —          552.8   

Proceeds from stock-based compensation plans

     36.9        55.0   

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

     (43.2     (59.1

Cost of treasury shares repurchased

     (485.9     (600.7

Excess tax benefits from settlement of stock-based compensation plans

     17.6        41.1   

Payment of dividends

     (143.6     (137.2

Payment of dividends to noncontrolling interests

     (4.6     (3.7

Debt issuance costs and related fees

     —          (5.8
  

 

 

   

 

 

 

Net cash used in financing activities

     (622.8     (157.6

Effect of exchange rate changes on cash and cash equivalents

     18.2        (25.9
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (83.1     319.1   

Cash and cash equivalents, beginning of the period

     1,757.4        1,219.5   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 1,674.3      $ 1,538.6   
  

 

 

   

 

 

 

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 June 30, 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
June 30, 2016
     Reclassification      June 30, 2016
Under previous
accounting guidance
 

Long-term debt

   $ 3,401.0       $ (20.4   $ 3,380.6       $ 3,420.4       $ 19.1       $ 3,439.5   

Other assets

   $ 160.8       $ (20.4   $ 140.4       $ 158.2       $ 19.1       $ 177.3   

 

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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      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Stock-based compensation cost

   $ 23.5       $ 21.7       $ 48.9       $ 44.4   

Tax benefit

   $ 7.5       $ 6.7       $ 15.9       $ 14.6   

During the first six months of 2016, the Company granted 0.5 million employee stock options, which had a weighted average grant date fair value of $22.95 per share based on the Black-Scholes option-pricing model. The Company also granted 1.2 million shares of restricted stock in the first six months of 2016, which had a weighted average grant date fair value of $80.88 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 $76.50 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

   $ 22.95   

Unrecognized compensation expense at June 30, 2016 was $13.0 million and $150.7 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.4 years and 1.8 years, respectively. Additionally, there was $16.7 million of unrecognized compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 1.1 years.

 

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

 

     Six Months Ended  
     June 30,  
Exercise of stock options:    2016      2015  

Proceeds from stock option exercises

   $ 33.4       $ 51.9   

Aggregate intrinsic value

   $ 21.0       $ 49.9   

Tax benefit realized upon exercise

   $ 7.4       $ 17.9   

Number of shares exercised

     0.6         1.0   
     Six Months Ended  
     June 30,  
Vesting of restricted stock:    2016      2015  

Fair value of shares vested

   $   90.6       $   110.8   

Tax benefit realized upon vesting

   $ 29.6       $ 35.6   

Number of shares vested

     1.0         1.1   
     Six Months Ended  
     June 30,  
Vesting of performance-based restricted stock:    2016      2015  

Fair value of shares vested

   $ 23.6       $ 43.1   

Tax benefit realized upon vesting

   $ 8.4       $ 15.6   

Number of shares vested

     0.2         0.5   

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 31.9% and 30.4% for the three months ended June 30, 2016 and 2015, respectively, and 32.1% and 31.5% for the six month periods ended June 30, 2016 and 2015, respectively. The increase in the ETR compared to the second quarter of 2015 and the six month period ended June 30, 2015 was primarily due to a benefit in the prior year resulting from a favorable state tax ruling.

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 a decrease in its UTBs of $11.7 million ($7.6 million net of federal tax benefit) during the second quarter of 2016 and an overall decrease in its UTBs during the first six months of 2016 of $5.3 million ($1.4 million net of federal tax benefits).

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2011 and 2012 are under examination and its returns for 2013 and 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 2014 remains open to 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:

 

     Six Months Ended  
     June 30,  
     2016      2015  

Income taxes paid

   $   151.8       $   191.1   

 

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NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Basic

     193.4         201.3         194.2         202.0   

Dilutive effect of shares issuable under stock-based compensation plans

     2.4         3.1         2.6         3.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     195.8         204.4         196.8         205.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     1.2         0.8         1.5         0.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 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 June 30, 2016  
            Gross             Balance sheet location  
     Cost      Unrealized
Gains
     Fair
Value
     Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 55.5       $ —         $ 55.5       $ 55.5       $ —         $ —     

Certificates of deposit and money market deposit accounts (1)

   $ 913.2       $ —         $ 913.2       $ 533.7       $ 352.5       $ 27.0   

Fixed maturity and open ended mutual funds (2)

   $ 28.5       $ 4.4       $ 32.9       $ —         $ —         $ 32.9   
     As of December 31, 2015  
            Gross             Balance sheet location  
     Cost      Unrealized
Gains
     Fair
Value
     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 12 months at both June 30, 2016 and December 31, 2015. The remaining contractual maturities for the certificates of deposits classified in other assets are one month to 21 months at June 30, 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 five months to 25 months and 11 months to 31 months at June 30, 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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Table of Contents

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

        2.0   

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

        59.4   

Liabilities

        (22.0
     

 

 

 

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 June 30, 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:

 

          Amount of income recognized in the
consolidated statements of operations
 
          Three Months Ended      Six Months Ended  
          June 30,      June 30,  

Derivatives designated as fair value accounting hedges

  

Location on Statement of Operations

   2016      2015      2016      2015  

Interest rate swaps

   Interest income(expense), net    $ 3.1       $ 4.1       $ 6.1       $ 7.6   

 

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Table of Contents

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.

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:

 

     June 30,      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

   £ 22.1       £ 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 December 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.

 

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Table of Contents

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)
   

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          Three Months Ended  
     June 30,          June 30,  
     2016     2015          2016     2015  

FX forwards

   $ (8.6   $ 2.1      N/A    $ —        $ —     

Long-term debt

     7.1        (9.7   N/A      —          —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total net investment hedges

   $ (1.5   $ (7.6   N/A    $ —        $ —     
  

 

 

   

 

 

      

 

 

   

 

 

 
     Three Months Ended          Three Months Ended  

Derivatives in cash flow hedging relationships

   June 30,          June 30,  
     2016     2015          2016     2015  

Cross currency swap

   $ (2.9   $ —        Other non-operating income, net    $ (1.7   $ —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total cash flow hedges

     (2.9     —             (1.7     —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ (4.4   $ (7.6   Total    $ (1.7   $ —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Derivatives and non-derivative instruments in

Net Investment Hedging Relationships

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

Location of Gain/(Loss)

Reclassified from AOCI into

Income (Effective Portion)

   Amount of Gain/(Loss)
Reclassified from AOCI into

Income (Effective Portion)
 
     Six Months Ended          Six Months Ended  
     June 30,          June 30,  
     2016     2015          2016     2015  
  

 

 

   

 

 

      

 

 

   

 

 

 

FX forwards

   $ (13.2   $ 13.4      N/A    $ —        $ —     

Long-term debt

     (6.0     (2.1   N/A      —          —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total net investment hedges

   $ (19.2   $ 11.3      N/A    $ —        $ —     
  

 

 

   

 

 

      

 

 

   

 

 

 
     Six Months Ended          Six Months Ended  

Derivatives in cash flow hedging relationships

   June 30,          June 30,  
     2016     2015          2016     2015  

Cross currency swap

   $ (1.7   $ —        Other non-operating income, net    $ (0.3   $ —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total cash flow hedges

     (1.7     —             (0.3     —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ (20.9   $ 11.3      Total    $ (0.3   $ —     
  

 

 

   

 

 

      

 

 

   

 

 

 

 

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Table of Contents

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  
     June 30,      December 31,  
     2016      2015  

Net investment hedges

     

FX forwards

   $ 21.1       $ 34.3   

Long-term debt

     (1.3      4.7   
  

 

 

    

 

 

 

Total gains on net investment hedges

   $ 19.8       $ 39.0   
  

 

 

    

 

 

 

Cash flow hedges

     

Treasury rate lock

   $ (1.1    $ (1.1

Cross currency swap

     (1.4      —     
  

 

 

    

 

 

 

Total losses on cash flow hedges

     (2.5      (1.1
  

 

 

    

 

 

 

Total net gains in AOCI

   $ 17.3       $ 37.9   
  

 

 

    

 

 

 

Derivatives not designated as accounting hedges:

Foreign exchange forwards

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through December 2016.

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

 

     June 30,      December 31,  
     2016      2015  

Notional amount of currency pair:

     

Contracts to sell USD for euros

   $ 72.6       $ 70.1   

Contracts to purchase euros with other foreign currencies

   34.4       35.5   

Contracts to sell euros for other foreign currencies

   —         1.4   

Contracts to sell euros for GBP

   36.2       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      Six Months Ended  
         June 30,      June 30,  

Derivatives not designated as accounting hedges

 

Location on Statement of Operations

   2016      2015      2016      2015  

Foreign exchange forwards

 

Other non-operating income (expense), net

   $ (5.7    $ 2.5       $ (5.2    $ (1.9

 

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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
     June 30,
2016
     December 31,
2015
 

Assets:

        

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

     Other current assets         —           0.1   

Derivatives designated as accounting hedges:

        

FX forwards on net investment in certain foreign subsidiaries

     Other current assets       $ 1.6       $ 0.4   

Interest rate swaps

     Other assets         37.4         12.1   
     

 

 

    

 

 

 

Total assets

      $ 39.0       $ 12.6   
     

 

 

    

 

 

 

Liabilities:

        

Derivatives designated as accounting hedges:

        

Cross-currency swap

     Other liabilities       $ 5.0         —     

FX forwards on net investment in certain foreign subsidiaries

    
 
 
Accounts payable
and accrued
liabilities
  
  
  
     28.3         1.2   

Interest rate swaps

     Other liabilities         —           0.3   

Non-derivative instrument designated as accounting hedge:

        

Long-term debt designated as net investment hedge

     Long-term debt       $ 444.4       $ 434.5   

Derivatives not designated as accounting hedges:

        

Cross-currency swap

     Other liabilities         —           7.0   

FX forwards on certain assets and liabilities

    
 
 
Accounts payable
and accrued
liabilities
  
  
  
     3.7         1.9   
     

 

 

    

 

 

 

Total liabilities

      $ 481.4       $ 444.9   
     

 

 

    

 

 

 

 

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NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

     Six Months Ended June 30, 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

     —          —           —          61.1        —          61.1        61.1        —          61.1   

Foreign currency translation adjustments

     (0.1     —           (0.1     9.9        —          9.9        9.8        —          9.8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 284.3      $ —         $ 284.3      $ 775.1      $ (12.2   $ 762.9      $ 1,059.4      $ (12.2   $ 1,047.2   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     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 primarily 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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Table of Contents

Acquired intangible assets and related amortization consisted of:

 

     June 30,      December 31,  
     2016      2015  

Customer relationships

   $ 315.0       $ 298.4   

Accumulated amortization

     (118.2      (110.0
  

 

 

    

 

 

 

Net customer relationships

     196.8         188.4   
  

 

 

    

 

 

 

Trade secrets

     30.0         29.7   

Accumulated amortization

     (24.4      (23.1
  

 

 

    

 

 

 

Net trade secrets

     5.6         6.6   
  

 

 

    

 

 

 

Software

     91.8         74.7   

Accumulated amortization

     (52.9      (47.7
  

 

 

    

 

 

 

Net software

     38.9         27.0   
  

 

 

    

 

 

 

Trade names

     76.3         72.4   

Accumulated amortization

     (17.8      (16.2
  

 

 

    

 

 

 

Net trade names

     58.5         56.2   
  

 

 

    

 

 

 

Other(1)

     43.9         44.3   

Accumulated amortization

     (24.5      (23.4
  

 

 

    

 

 

 

Net other

     19.4         20.9   
  

 

 

    

 

 

 

Total acquired intangible assets, net

   $ 319.2       $ 299.1   
  

 

 

    

 

 

 

 

  (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      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Amortization expense

   $ 8.7       $ 8.0       $ 16.6       $ 16.5   

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

 

Year Ending December 31,

      

2016 (after June 30)

   $ 17.0   

2017

     32.1   

2018

     26.2   

2019

     23.4   

2020

     22.0   

Thereafter

     198.5   
  

 

 

 

Total estimated future amortization

   $ 319.2   
  

 

 

 

 

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NOTE 9. FAIR VALUE

The table below presents information about items that are carried at fair value at June 30, 2016 and December 31, 2015:

 

         Fair Value Measurement as of June 30, 2016  
    

Description

  

 

Balance

     Level 1      Level 2  

Assets:

          
 

Derivatives (a)

   $ 39.0       $ —         $ 39.0   
 

Money market mutual funds

     55.5         55.5         —     
 

Fixed maturity and open ended mutual funds (b)

     32.9         32.9         —     
    

 

 

    

 

 

    

 

 

 
 

Total

   $ 127.4       $ 88.4       $ 39.0   
    

 

 

    

 

 

    

 

 

 

Liabilities:

          
 

Derivatives (a)

   $ 37.0       $ —         $ 37.0   
    

 

 

    

 

 

    

 

 

 
 

Total

   $ 37.0       $ —         $ 37.0   
    

 

 

    

 

 

    

 

 

 
         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)

   $ 10.4       $ —         $ 10.4   
    

 

 

    

 

 

    

 

 

 
 

Total

   $ 10.4       $ —         $ 10.4   
    

 

 

    

 

 

    

 

 

 

 

(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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Table of Contents

NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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

 

     June 30,      December 31,  
     2016      2015  

Other current assets:

     

Prepaid taxes

   $ 67.7       $ 83.3   

Prepaid expenses

     58.4         66.9   

Other

     33.5         29.4   
  

 

 

    

 

 

 

Total other current assets

   $ 159.6       $ 179.6   
  

 

 

    

 

 

 
     June 30,      December 31,  
     2016      2015  

Other assets:

     

Investments in joint ventures

   $ 16.2       $ 28.7   

Deposits for real-estate leases

     11.5         11.4   

Indemnification assets related to acquisitions

     20.5         19.2   

Mutual funds and fixed deposits

     59.9         55.0   

Other

     50.1         26.1   
  

 

 

    

 

 

 

Total other assets

   $ 158.2       $ 140.4   
  

 

 

    

 

 

 
     June 30,      December 31,  
     2016      2015  

Accounts payable and accrued liabilities:

     

Salaries and benefits

   $ 73.7       $ 83.0   

Incentive compensation

     62.8         137.2   

Customer credits, advanced payments and advanced billings

     25.4         24.6   

Self-insurance reserves

     25.1         19.7   

Dividends

     6.7         78.2   

Professional service fees

     51.8         54.5   

Interest accrued on debt

     56.1         59.4   

Accounts payable

     35.6         22.2   

Income taxes

     21.7         11.5   

Pension and other retirement employee benefits

     6.2         6.2   

Other

     88.7         70.1   
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 453.8       $ 566.6   
  

 

 

    

 

 

 
     June 30,      December 31,  
     2016      2015  

Other liabilities:

     

Pension and other retirement employee benefits

   $ 248.0       $ 261.7   

Deferred rent-non-current portion

     98.0         98.4   

Interest accrued on UTPs

     30.9         27.9   

Legacy and other tax matters

     3.0         1.7   

Other

     24.1         27.5   
  

 

 

    

 

 

 

Total other liabilities

   $ 404.0       $ 417.2   
  

 

 

    

 

 

 

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:

 

     Six Months Ended      Year Ended  
     June 30, 2016      December 31, 2015  

Balance January 1,

   $ 19.7       $ 21.5   

Accruals

     8.8         22.2   

Payments

     (3.4      (24.0
  

 

 

    

 

 

 

Balance

   $ 25.1       $ 19.7   
  

 

 

    

 

 

 

 

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Table of Contents

Other Non-Operating Income (Expense):

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

FX gain/(loss)

   $ 0.8         (12.2      4.8         (12.2

Joint venture income

     3.0         3.4         4.9         5.3   

Other

     (0.8      0.6         (1.1      1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3.0         (8.2      8.6         (5.7
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

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

 

     Three Months
Ended June 30, 2016
     Six Months
Ended June 30, 2016
    Affected line in the
consolidated statement of
operations
 

Losses on cash flow hedges

       

Cross-currency swap

     (2.6      (0.4    

 

Other non-operating

income (expense), net

  

  

Income tax effect of item above

     0.9         0.1       
 
Provision for
income taxes
  
  
  

 

 

    

 

 

   

Total losses on cash flow hedges

     (1.7      (0.3  
  

 

 

    

 

 

   

Pension and other retirement benefits

       

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

     (1.5      (3.1     Operating expense   

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

     (0.8      (1.8     SG&A expense   
  

 

 

    

 

 

   

Total before income taxes

     (2.3      (4.9  
  

 

 

    

 

 

   

Income tax effect of item above

     0.9         1.9       
 
Provision for
income taxes
  
  
  

 

 

    

 

 

   

Total pension and other retirement benefits

     (1.4      (3.0  
  

 

 

    

 

 

   

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

   $ (3.1    $ (3.3  
  

 

 

    

 

 

   
     Three Months
Ended June 30, 2015
     Six Months Ended
June 30, 2015
    Affected line in the
consolidated statement of
operations
 

Losses on foreign currency translation adjustments

       

Liquidation of foreign subsidiary

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

 

 

    

 

 

   

Total losses on foreign translation adjustments

     —           0.1     
  

 

 

    

 

 

   

Gains on available for sale securities:

       

Gains on available for sale securities

     0.2         0.2       
 
 
Other non-operating
income (expense),
net
  
  
  
  

 

 

    

 

 

   

Total gains on available for sale securities

     0.2         0.2     
  

 

 

    

 

 

   

Pension and other retirement benefits

       

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

     (2.0      (4.3     Operating expense   

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

     (1.1      (2.6     SG&A expense   
  

 

 

    

 

 

   

Total before income taxes

     (3.1      (6.9  
  

 

 

    

 

 

   

Income tax effect of item above

     1.1         2.6       
 
Provision for
income taxes
  
  
  

 

 

    

 

 

   

Total pension and other retirement benefits

     (2.0      (4.3  
  

 

 

    

 

 

   

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

   $ (1.8    $ (4.0  
  

 

 

    

 

 

   

 

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Table of Contents

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

 

    Three Months Ended  
    June 30, 2016     June 30, 2015  
    Gains/
(Losses) on
Cash Flow
Hedges
    Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
    Total     Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
    Total  

Balance March 31,

  $ (1.3     (84.1     (220.0     3.9      $ (301.5     (103.1     (221.3     2.0      $ (322.4

Other comprehensive income/(loss) before reclassifications

    (2.9     3.3        (19.4     0.6        (18.4     6.7        32.1        1.0        39.8   

Amounts reclassified from AOCI

    1.7        1.4        —          —          3.1        2.0        —          (0.2     1.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

    (1.2     4.7        (19.4     0.6        (15.3     8.7        32.1        0.8        41.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30,

  $ (2.5   $ (79.4   $ (239.4   $ 4.5      $ (316.8   $ (94.4   $ (189.2   $ 2.8      $ (280.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Six Months Ended  
    June 30, 2016     June 30, 2015  
    Gains/
(Losses) on
Cash Flow
Hedges
    Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
    Total     Pension
and Other
Retirement
Benefits
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
    Total  

Balance December 31,

  $ (1.1     (85.7     (256.0     3.3      $ (339.5     (105.4     (130.7     0.9      $ (235.2

Other comprehensive income/(loss) before reclassifications

    (1.7     3.3        16.6        1.2        19.4        6.7        (58.4     2.1        (49.6

Amounts reclassified from AOCI

    0.3        3.0        —          —          3.3        4.3        (0.1     (0.2     4.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

    (1.4     6.3        16.6        1.2        22.7        11.0        (58.5     1.9        (45.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30,

  $ (2.5     (79.4     (239.4     4.5      $ (316.8     (94.4     (189.2     2.8      $ (280.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS

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

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

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

 

     Three Months Ended June 30,  
     Pension Plans      Other Retirement Plans  
     2016      2015      2016      2015  

Components of net periodic expense

           

Service cost

   $ 4.9       $ 5.0       $ 0.6       $ 0.6   

Interest cost

     4.5         4.2         0.2         0.3   

Expected return on plan assets

     (4.2      (3.6      —           —     

Amortization of net actuarial loss from earlier periods

     2.3         2.8         —           0.1   

Amortization of net prior service costs from earlier periods

     —           0.2         (0.1      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic expense

   $ 7.5       $ 8.6       $ 0.7       $ 1.0   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended June 30,  
     Pension Plans      Other Retirement Plans  
     2016      2015      2016      2015  

Components of net periodic expense

           

Service cost

   $ 10.1       $ 10.8       $ 1.1       $ 1.1   

Interest cost

     9.1         8.5         0.5         0.5   

Expected return on plan assets

     (8.5      (7.2      —           —     

Amortization of net actuarial loss from earlier periods

     4.9         6.2         —           0.2   

Amortization of net prior service costs from earlier periods

     —           0.4         (0.1      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic expense

   $ 15.6       $ 18.7       $ 1.5       $ 1.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company made a contribution of $22.4 million to its funded pension plan well as payments of $1.9 million related to its unfunded U.S. DBPPs and $0.3 million to its U.S. other retirement plans during the six months ended June 30, 2016. The Company anticipates making payments of $3.2 million related to its unfunded U.S. DBPPs and $0.5 million to its U.S. other retirement plans, respectively, during the remainder of 2016.

 

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NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     June 30, 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         25.5         (1.5     (1.8     522.2   

4.50% 2012 Senior Notes, due 2022

     500.0         —           (2.6     (2.3     495.1   

4.875% 2013 Senior Notes, due 2024

     500.0         —           (2.2     (2.9     494.9   

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

     450.0         12.0         (0.5     (2.1     459.4   

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

     600.0         —           3.3        (6.0     597.3   

1.75% 2015 Senior Notes, due 2027

     555.5         —           —          (3.9     551.6   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total long-term debt

   $ 3,405.5       $ 37.5       $ (3.5   $ (19.1   $ 3,420.4   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     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 June 30, 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 June 30, 2016, there were no such cross defaults.

 

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Interest expense, net

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

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2016      2015      2016      2015  

Income

   $ 2.8       $ 2.3       $ 5.7       $ 4.2   

Expense on borrowings

     (35.4      (30.7      (70.0      (59.0

Expense on UTPs and other tax related liabilities

     (1.7      (3.5      (4.5      (6.7

Capitalized

     —           —           0.4         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (34.3    $ (31.9    $ (68.4    $ (61.2
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the cash paid for interest:

 

     Six Months Ended
June  30,
 
     2016      2015  

Interest paid

   $ 73.9       $ 53.3   

The fair value and carrying value of the Company’s long-term debt as of June 30, 2016 and December 31, 2015 are as follows:

 

     June 30, 2016      December 31, 2015  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Series 2007-1 Notes

   $ 299.9       $ 316.6       $ 299.8       $ 320.6   

2010 Senior Notes

     522.2         566.9         505.8         551.2   

2012 Senior Notes

     495.1         558.7         494.7         530.0   

2013 Senior Notes

     494.9         569.9         494.6         533.8   

2014 Senior Notes (5-Year)

     459.4         463.8         449.4         454.3   

2014 Senior Notes (30-Year)

     597.3         734.0         597.2         617.7   

2015 Senior Notes

     551.6         577.6         539.1         520.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,420.4       $ 3,787.5       $ 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.

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 such matters, 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 June 30,  
     2016      2015  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 650.2       $ 306.1       $ (27.4   $ 928.9       $ 662.9       $ 282.0       $ (26.8   $ 918.1   

Operating, SG&A

     281.3         233.6         (27.4     487.5         287.0         210.7         (26.8     470.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     368.9         72.5         —          441.4         375.9         71.3         —          447.2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     18.2         13.0         —          31.2         15.8         12.1         —          27.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 350.7       $ 59.5       $ —        $ 410.2       $ 360.1       $ 59.2       $ —        $ 419.3   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Six Months Ended June 30,  
     2016      2015  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 1,199.3       $ 599.9       $ (54.2   $ 1,745.0       $ 1,287.5       $ 548.6       $ (52.4   $ 1,783.7   

Operating, SG&A

     559.9         463.9         (54.2     969.6         568.3         420.7         (52.4     936.6   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     639.4         136.0         —          775.4         719.2         127.9         —          847.1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     35.7         25.4         —          61.1         31.8         24.7         —          56.5   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 603.7       $ 110.6       $ —        $ 714.3       $ 687.4       $ 103.2       $ —        $ 790.6   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

MIS and MA Revenue by Line of Business

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  

MIS:

           

Corporate finance (CFG)

   $ 304.8       $ 319.6       $ 545.1       $ 618.3   

Structured finance (SFG)

     111.5         121.2         202.1         222.5   

Financial institutions (FIG)

     89.7         90.4         184.6         184.2   

Public, project and infrastructure finance (PPIF)

     112.3         99.9         203.8         200.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ratings revenue

     618.3         631.1         1,135.6         1,225.6   

MIS Other

     7.3         8.1         15.1         15.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external revenue

     625.6         639.2         1,150.7         1,241.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intersegment royalty

     24.6         23.7         48.6         46.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     650.2         662.9         1,199.3         1,287.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

MA:

           

Research, data and analytics (RD&A)

     168.3         157.5         333.2         307.1   

Enterprise risk solutions (ERS)

     97.5         83.2         187.0         160.3   

Professional services (PS)

     37.5         38.2         74.1         74.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external revenue

     303.3         278.9         594.3         542.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intersegment revenue

     2.8         3.1         5.6         6.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     306.1         282.0         599.9         548.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Eliminations

     (27.4      (26.8      (54.2      (52.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Total MCO

   $ 928.9       $ 918.1       $ 1,745.0       $ 1,783.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Consolidated Revenue Information by Geographic Area:

     Three Months Ended June 30,      Six Months Ended June 30,  
     2016      2015      2016      2015  

United States

   $ 545.9       $ 545.9       $ 1,025.9       $ 1,045.7   

International:

           

EMEA

     229.3         217.4         439.5         445.0   

Asia-Pacific

     97.5         99.2         179.5         185.3   

Americas

     56.2         55.6         100.1         107.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total International

     383.0         372.2         719.1         738.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 928.9       $ 918.1       $ 1,745.0       $ 1,783.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 the first and second quarter of 2016, the FASB issued additional updates clarifying the implementation guidance for the new revenue recognition standard.

The Company intends to adopt the new revenue guidance as of January 1, 2018 and is currently evaluating the application of a transition method and the impact that adoption of these updates 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.

 

 

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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.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU require the use of an “expected credit loss” impairment model for most financial assets reported at amortized cost which will require entities to estimate expected credit losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of this ASU on its financial statements.

NOTE 17. SUBSEQUENT EVENT

On July 11, 2016, the Board approved the declaration of a quarterly dividend of $0.37 per share of Moody’s common stock, payable on September 12, 2016 to shareholders of record at the close of business on August 22, 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 55 for a discussion of uncertainties, risks and other factors associated with these statements.

The Company

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

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations, which consist primarily of the distribution of research and fixed income pricing services in the Asia-Pacific region, and from ICRA non-ratings services. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

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

Critical Accounting Estimates

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, 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 June 30, 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.

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.

 

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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 June 30, 2016 compared with three months ended June 30, 2015

Executive Summary

 

   

Moody’s revenue in the three months ended June 30, 2016 totaled $928.9 million, an increase of $10.8 million, or 1%, compared to 2015 and reflected good growth in MA partially offset by modest declines in MIS.

 

   

MIS revenue decreased 2% compared to the prior year primarily reflecting challenges in the U.S. securitization markets, most notably in the CLO asset class. Also contributing to the decline were lower rated issuance volumes for high-yield corporate debt in the U.S. and investment-grade corporate debt in the Asia-Pacific region. These declines were partially offset by benefits from changes in the mix of fee type, new fee initiatives and pricing increases coupled with higher infrastructure finance revenue across all regions.

 

   

MA revenue was 9% higher than the prior year reflecting increases in ERS and RD&A across all regions. Revenue grew in all product areas of ERS and included revenue from the first quarter 2016 acquisition of GGY. In RD&A, revenue growth was primarily driven by credit research subscriptions and licensing of ratings data.

 

   

Total operating expenses increased $19.9 million, or 4%, compared to the second quarter of 2015 primarily reflecting:

 

   

higher compensation costs of $21.1 million associated with headcount growth (including costs from the acquisition of GGY) and annual compensation increases partially offset by a decline in incentive compensation costs;

partially offset by:

 

   

lower non-compensation expenses of $4.5 million primarily reflecting cost reduction initiatives in response to the current challenging business conditions in MIS.

 

   

Operating income of $410.2 million in the second quarter of 2016 was down $9.1 million compared to 2015. Operating margin was 44.2% compared to 45.7% in the prior year. Adjusted Operating Income of $441.4 million in the second quarter of 2016 decreased $5.8 million compared to 2015. Adjusted Operating Margin was 47.5% compared to 48.7% in the prior year period.

 

   

The ETR in the second quarter of 2016 was 150 BPS higher primarily due to benefits in the prior year resulting from a favorable state tax ruling.

 

   

The decrease in non-operating expense, net, compared to the prior year is primarily due to FX gains in Q2 2016 of approximately $1 million compared to FX losses in 2015 of approximately $12 million. This was partially offset by higher interest expense on borrowings primarily due to $300 million of additional borrowings under the 2014 Senior Notes (30-Year) in November 2015.

 

   

Diluted EPS of $1.30 in the second quarter of 2016 increased $0.02 from 2015 reflecting a 4% reduction in diluted weighted average shares outstanding partially offset by a 2% decrease in Net Income.

 

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Moody’s Corporation

 

    

 

Three Months Ended June 30,

    % Change
Favorable
(Unfavorable)
 
     2016     2015    

Revenue:

      

United States

   $ 545.9      $ 545.9        —     

International:

      

EMEA

     229.3        217.4        5

Asia-Pacific

     97.5        99.2        (2 %) 

Americas

     56.2        55.6        1
  

 

 

   

 

 

   

Total International

     383.0        372.2        3
  

 

 

   

 

 

   

Total

     928.9        918.1        1