10-Q 1 d383610d10q.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)

 

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

For the quarterly period ended March 31, 2017

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  ☒    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  ☒    No  ☐

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

 

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

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

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

 

Title of Each Class

 

Shares Outstanding at March 31, 2017

Common Stock, par value $0.01 per share   191.3 million


Table of Contents

MOODY’S CORPORATION

INDEX TO FORM 10-Q

 

         Page(s)  
  Glossary of Terms and Abbreviations      3-8  
PART I. FINANCIAL INFORMATION  
Item 1.   Financial Statements   
 

Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2017 and 2016

     9  
 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March  31, 2017 and 2016

     10  
  Consolidated Balance Sheets (Unaudited) at March 31, 2017 and December 31, 2016      11  
  Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2017 and 2016      12  
  Notes to Condensed Consolidated Financial Statements (Unaudited)      13-39  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   
  The Company      40  
  Critical Accounting Estimates      40-42  
  Reportable Segments      43  
  Results of Operations      44-50  
  Liquidity and Capital Resources      50-55  
  Recently Issued Accounting Standards      56  
  Contingencies      56  
  Regulation      56-57  
  Forward-Looking Statements      57  
Item 4.   Controls and Procedures      58  
PART II. OTHER INFORMATION  
Item 1.   Legal Proceedings      59  
Item 1A.   Risk Factors      59  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      59  
Item 5.   Other Information      59  
Item 6.   Exhibits      60  
SIGNATURES  
Exhibits Filed Herewith  
12   Statement of Computation of Ratios of Earnings to Fixed Charges   
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 Diluted EPS    EPS excluding the impact of the CCXI Gain
Adjusted Operating Income    Operating income excluding depreciation and amortization
Adjusted Operating Margin    Adjusted Operating Income divided by revenue
Americas    Represents countries within North and South America, excluding the U.S.
AOCI    Accumulated other comprehensive income (loss); a separate component of shareholders’ (deficit) equity
ASC    The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants
Asia-Pacific    Represents countries in Asia including but not limited to: Australia, China, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka and Thailand
ASU    The FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
Board    The board of directors of the Company
BPS    Basis points
CCXI    China Cheng Xin International Credit Rating Co. Ltd.; China’s first and largest domestic credit rating agency approved by the People’s Bank of China; the Company acquired a 49% interest in 2006; currently Moody’s owns 30% of CCXI.
CCXI Gain    In the first quarter of 2017 CCXI, as part of a strategic business realignment, issued additional capital to its majority shareholder in exchange for a ratings business wholly-owned by the majority shareholder and which has the right to rate a different class of debt instrument in the Chinese market. The capital issuance by CCXI in exchange for this ratings business diluted Moody’s ownership interest in CCXI to 30% of a larger business and resulted in a $59.7 million non-cash, non-taxable gain.
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

 

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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 research and analytical services to institutional investors
Copal Amba    Operating segment (rebranded as MAKS in 2016) created in January 2014 that consists of all operations from Copal and Amba. Part of the PS LOB within the MA reportable segment. Also a reporting unit.
Council    Council of the European Union
CP    Commercial Paper
CP Notes    Unsecured commercial paper issued under the CP Program
CP Program    A program entered into on August 3, 2016 allowing the Company to privately place CP up to a maximum of $1 billion for which the maturity may not exceed 397 from the date of issue
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
D&A    Depreciation and amortization
D&B Business    Old D&B’s Dun & Bradstreet operating company
DBPP    Defined benefit pension plans
Debt/EBITDA    Ratio of Total Debt to EBITDA
EBITDA    Earnings before interest, taxes, depreciation and amortization
EMEA    Represents countries within Europe, the Middle East and Africa
EPS    Earnings per share
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

 

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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; part of the PS LOB and a reporting unit within the MA reportable segment; consists of on-line and classroom-based training services and CSI Global Education, Inc.
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; part of the ERS LOB and reporting unit within the MA reportable segment
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
ICTEAS    ICRA Techno Analytics; formerly a wholly-owned subsidiary of ICRA; divested by ICRA in the fourth quarter of 2016
IRS    Internal Revenue Service
IT    Information technology
KIS    Korea Investors Service, Inc; a leading Korean rating agency and consolidated subsidiary of the Company
KIS Pricing    Korea Investors Service Pricing, Inc; a leading Korean provider of fixed income securities pricing and consolidated subsidiary of the Company
Legacy Tax Matter(s)    Exposures to certain potential tax liabilities assumed in connection with the Company’s spin-off from Dun & Bradstreet in 2000
LIBOR    London Interbank Offered Rate
LOB    Line of business
M&A    Mergers and acquisitions

 

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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
Make Whole Amount    The prepayment penalty amount relating to the Series 2007-1 Notes, 2010 Senior Notes, 2012 Senior Notes, 2013 Senior Notes, 2014 Senior Notes (5-year), 2014 Senior Notes (30-year), 2015 Senior Notes and 2017 Senior Notes which is a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MAKS    Moody’s Analytics Knowledge Services; operating segment and reporting unit formerly known as Copal Amba; provides offshore research and analytic services to the global financial and corporate sectors; part of the PS LOB and a reporting unit within the MA reportable segment
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 consisting of MAKS and FSTC that provides 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    For MIS represents 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 license and maintenance revenue
Retirement Plans    Moody’s funded and unfunded pension plans, the healthcare plans and life insurance plans
SCDM    SCDM Financial, a leading provider of analytical tools for participants in securitization markets. Moody’s acquired SCDM’s structured finance data and analytics business in February 2017
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; prepaid in March 2017
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 as well as data services, research and analytical engagements. For MA, represents software license fees and revenue from risk management advisory projects, training and certification services, and research and analytical engagements
U.K.    United Kingdom
U.S.    United States
USD    U.S. dollar
UTBs    Unrecognized tax benefits
UTPs    Uncertain tax positions
VSOE    Vendor specific objective evidence; as defined in the ASC, evidence of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
2000 Distribution    The distribution by Old D&B to its shareholders of all the outstanding shares of New D&B common stock on September 30, 2000

 

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2007 Agreement    Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes
2010 Indenture    Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes    Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 Facility    Revolving credit facility of $1 billion entered into on April 18,2012; was replaced with the 2015 Facility
2012 Indenture    Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior Notes    Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
2013 Indenture    Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes
2013 Senior Notes    Principal amount of the $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture
2014 Indenture    Supplemental indenture and related agreements dated July 16, 2014, relating to the 2014 Senior Notes
2017 Indenture    Supplemental indenture and related agreements dated March 2, 2017, relating to the 2017 Floating Rate Senior Notes and 2017 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
2017 Floating Rate Senior Notes    Principal amount of $300 million, floating rate senior unsecured notes due in September 2018
2017 Senior Notes    Principal amount of $500 million, 2.75% senior unsecured notes due in December 2021

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in millions, except per share data)

 

      Three Months Ended
March 31,
 
     2017     2016  

Revenue

   $ 975.2     $ 816.1  
  

 

 

   

 

 

 

Expenses

    

Operating

     277.4       249.2  

Selling, general and administrative

     221.9       232.9  

Depreciation and amortization

     32.5       29.9  
  

 

 

   

 

 

 

Total expenses

     531.8       512.0  
  

 

 

   

 

 

 

Operating income

     443.4       304.1  
  

 

 

   

 

 

 

Non-operating (expense) income, net

    

Interest expense, net

     (42.4     (34.1

Other non-operating (expense) income, net

     (9.4     5.6  

CCXI Gain

     59.7       —    
  

 

 

   

 

 

 

Total non-operating income (expense), net

     7.9       (28.5
  

 

 

   

 

 

 

Income before provision for income taxes

     451.3       275.6  

Provision for income taxes

     105.4       89.0  
  

 

 

   

 

 

 

Net income

     345.9       186.6  

Less: Net income attributable to noncontrolling interests

     0.3       2.2  
  

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 345.6     $ 184.4  
  

 

 

   

 

 

 

Earnings per share

    

Basic

   $ 1.81     $ 0.95  
  

 

 

   

 

 

 

Diluted

   $ 1.78     $ 0.93  
  

 

 

   

 

 

 

Weighted average shares outstanding

    

Basic

     191.1       195.0  
  

 

 

   

 

 

 

Diluted

     194.3       197.9  
  

 

 

   

 

 

 

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

 

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Table of Contents

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in millions)

 

     Three Months Ended
March 31,
 
     2017     2016  
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net Income

       $ 345.9         $ 186.6  

Other Comprehensive Income (Loss):

            

Foreign Currency Adjustments:

            

Foreign currency translation adjustments, net

   $ 14.4     $ (2.3     12.1     $ 48.5     $ (12.5     36.0  

Cash Flow Hedges:

            

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

     (0.3     0.1       (0.2     2.0       (0.8     1.2  

Reclassification of gains included in net income

     (1.4     0.5       (0.9     (2.2     0.8       (1.4

Available for sale securities:

            

Net unrealized gains on available for sale securities

     0.5       —         0.5       0.6       —         0.6  

Pension and Other Retirement Benefits:

            

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

     2.4       (0.9     1.5       2.6       (1.0     1.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income

   $ 15.6     $ (2.6     13.0     $ 51.5     $ (13.5     38.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

         358.9           224.6  

Less: comprehensive income attributable to noncontrolling interests

         5.7           2.2  
      

 

 

       

 

 

 

Comprehensive Income Attributable to Moody’s

       $ 353.2         $ 222.4  
      

 

 

       

 

 

 

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

 

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MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

     March 31,     December 31,  
     2017     2016  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 2,129.6     $ 2,051.5  

Short-term investments

     132.8       173.4  

Accounts receivable, net of allowances of $25.1 in 2017 and $25.7 in 2016

     953.5       887.4  

Other current assets

     269.6       140.8  
  

 

 

   

 

 

 

Total current assets

     3,485.5       3,253.1  

Property and equipment, net of accumulated depreciation of $620.5 in 2017 and $595.5 in 2016

     329.1       325.9  

Goodwill

     1,029.6       1,023.6  

Intangible assets, net

     289.8       296.4  

Deferred tax assets, net

     135.1       316.1  

Other assets

     166.8       112.2  
  

 

 

   

 

 

 

Total assets

   $ 5,435.9     $ 5,327.3  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 392.6     $ 1,444.3  

Commercial paper

     213.8       —    

Current portion of long-term debt

     —         300.0  

Deferred revenue

     817.4       683.9  
  

 

 

   

 

 

 

Total current liabilities

     1,423.8       2,428.2  

Non-current portion of deferred revenue

     132.5       134.1  

Long-term debt

     3,861.9       3,063.0  

Deferred tax liabilities, net

     105.0       104.3  

Unrecognized tax benefits

     202.7       199.8  

Other liabilities

     434.2       425.2  
  

 

 

   

 

 

 

Total liabilities

     6,160.1       6,354.6  

Contingencies (Note 14)

     —         —    

Shareholders’ deficit:

    

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

     —         —    

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

     —         —    

Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at March 31, 2017 and December 31, 2016, respectively.

     3.4       3.4  

Capital surplus

     447.0       477.2  

Retained earnings

     7,031.0       6,688.9  

Treasury stock, at cost; 151,594,546 and 152,208,231 shares of common stock at March 31, 2017 and December 31, 2016, respectively

     (8,051.2     (8,029.6

Accumulated other comprehensive loss

     (357.3     (364.9
  

 

 

   

 

 

 

Total Moody’s shareholders’ deficit

     (927.1     (1,225.0

Noncontrolling interests

     202.9       197.7  
  

 

 

   

 

 

 

Total shareholders’ deficit

     (724.2     (1,027.3
  

 

 

   

 

 

 

Total liabilities, noncontrolling interests and shareholders’ deficit

   $ 5,435.9     $ 5,327.3  
  

 

 

   

 

 

 

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

 

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)

 

     Three Months Ended  
     March 31,  
     2017     2016  

Cash flows from operating activities

    

Net income

   $ 345.9     $ 186.6  

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

    

Depreciation and amortization

     32.5       29.9  

Stock-based compensation

     28.4       25.4  

CCXI Gain

     (59.7     —    

Deferred income taxes

     185.0       11.3  

Changes in assets and liabilities:

    

Accounts receivable

     (61.9     (45.5

Other current assets

     (128.3     13.6  

Other assets

     (3.2     1.5  

Accounts payable and accrued liabilities

     (988.6     (99.0

Deferred revenue

     125.9       122.6  

Unrecognized tax benefits and other non-current tax liabilities

     0.9       5.3  

Other liabilities

     10.7       1.9  
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (512.4     253.6  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital additions

     (18.7     (26.3

Purchases of investments

     (34.5     (134.6

Sales and maturities of short-term investments

     76.8       126.1  

Cash paid for acquisitions, net of cash acquired

     (5.0     (75.9

Receipts from settlements of net investment hedges

     —         2.3  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     18.6       (108.4
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of notes

     798.5       —    

Repayment of notes

     (300.0     —    

Issuance of commercial paper

     653.7       —    

Repayments of commercial paper

     (440.4     —    

Proceeds from stock-based compensation plans

     22.1       24.3  

Repurchase of shares related to stock-based compensation

     (47.5     (42.7

Cost of treasury shares repurchased

     (55.0     (262.1

Dividends

     (72.6     (72.1

Dividends to noncontrolling interests

     (0.2     (2.9

Debt issuance costs and related fees

     (4.9     —    
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     553.7       (355.5

Effect of exchange rate changes on cash and cash equivalents

     18.2       29.0  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     78.1       (181.3

Cash and cash equivalents, beginning of the period

     2,051.5       1,757.4  
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 2,129.6     $ 1,576.1  
  

 

 

   

 

 

 

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) 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 financial instrument pricing services in the Asia-Pacific region as well as revenue from ICRA’s non-ratings operations. 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 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 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 2016 annual report on Form 10-K filed with the SEC on February 24, 2017. 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.

Adoption of New Accounting Standard

In the first quarter of 2017, the Company adopted ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting”. As required by ASU 2016-09, Excess Tax Benefits or shortfalls recognized on stock-based compensation expense are reflected in the consolidated statement of operations as a component of the provision for income taxes on a prospective basis. Prior to the adoption of this ASU, Excess Tax Benefits and shortfalls were recorded to capital surplus within shareholders’ deficit. The impact of this adoption was a $19.0 million benefit to the provision for income taxes for the three months ended March 31, 2017.

Additionally, in accordance with this ASU, Excess Tax Benefits or shortfalls recognized on stock-based compensation are classified as operating cash flows in the consolidated statement of cash flows, and the Company has applied this provision on a retrospective basis. Under previous accounting guidance, the Excess Tax Benefits or shortfalls were shown as a reduction to operating activity and an increase to financing activity. Furthermore, the Company has elected to continue to estimate the number of stock-based awards expected to vest, rather than accounting for award forfeitures as they occur, to determine the amount of stock-based compensation cost recognized in each period. The impact to the Company’s statement of cash flows for the three months ended March 31, 2016 relating to the adoption of this provision of the ASU is set forth in the table below:

 

(amounts in millions)    As reported
Three Months  Ended
March 31, 2016
     Adoption
Adjustment
     Three Months Ended
March 31, 2016
As adjusted
 

Net cash provided by operating activities

   $  237.3      $  16.3      $  253.6  

Net cash used in financing activities

   $  (339.2    $  (16.3    $  (355.5

 

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NOTE 2. STOCK-BASED COMPENSATION

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

 

     Three Months Ended  
     March 31,  
     2017      2016  

Stock-based compensation expense

   $ 28.4      $ 25.4  

Tax benefit

   $ 9.1      $ 8.4  

During the first three months of 2017, the Company granted 0.2 million employee stock options, which had a weighted average grant date fair value of $29.88 per share based on the Black-Scholes option-pricing model. The Company also granted 1.0 million shares of restricted stock in the first three months of 2017, which had a weighted average grant date fair value of $113.32 per share. Both the employee stock options and restricted stock generally vest ratably over a four-year period. Additionally, the Company granted 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 $108.88 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2017:

 

Expected dividend yield

     1.34

Expected stock volatility

     26.8

Risk-free interest rate

     2.19

Expected holding period

     6.5 years  

Grant date fair value

   $ 29.88  

Unrecognized stock-based compensation expense at March 31, 2017 was $12.1 million and $200.7 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.5 years and 1.8 years, respectively. Additionally, there was $27.7 million of unrecognized stock-based compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 1.2 years.

 

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

 

     Three Months Ended  
     March 31,  
Exercise of stock options:    2017      2016  

Proceeds from stock option exercises

   $ 20.6      $ 22.8  

Aggregate intrinsic value

   $ 21.6      $ 11.0  

Tax benefit realized upon exercise

   $ 7.9      $ 3.9  

Number of shares exercised

     0.4        0.4  
     Three Months Ended  
     March 31,  
Vesting of restricted stock:    2017      2016  

Fair value of shares vested

   $ 106.8      $ 89.3  

Tax benefit realized upon vesting

   $ 33.7      $ 29.5  

Number of shares vested

     0.9        1.0  
     Three Months Ended  
     March 31,  
Vesting of performance-based restricted stock:    2017      2016  

Fair value of shares vested

   $ 19.5      $ 23.6  

Tax benefit realized upon vesting

   $ 6.9      $ 8.4  

Number of shares vested

     0.2        0.2  

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 23.4% and 32.3% for the three months ended March 31, 2017 and 2016, respectively. The decrease in the ETR was primarily due to the impact of a benefit related to the adoption of ASU 2016-09, as further discussed in Note 1 above, and the non-taxable CCXI Gain as discussed in Note 10 below.

The Company classifies interest related to UTBs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an increase in its UTBs of $2.9 million ($3.7 million net of federal tax) during the first quarter of 2017.

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, 2014 and 2015 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 is currently under examination. The Company’s U.K. tax return for 2012 is currently under examination and its returns for 2013, 2014 and 2015 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.

On March 30, 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share Based Payment Accounting” as more fully discussed in Note 1 to the condensed consolidated financial statements. The Company has adopted the new guidance as of the first quarter of 2017 and expects the adoption to result in a benefit to the provision for income taxes of approximately $30 million for the full year of 2017, or $0.15 per diluted share.

 

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In the first quarter of 2017, the Company adopted ASU No. 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” Under previous guidance, the tax effects of intra-entity asset transfers (intercompany sales) were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. Upon adoption, a cumulative-effect adjustment is recorded in retained earnings as of the beginning of the period of adoption. The net impact upon adoption is a reduction to retained earnings of $4.6 million. The Company does not expect any material impact on its future operations as a result of the adoption of this guidance.

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

 

     Three Months Ended  
     March 31,  
     2017      2016  

Income taxes paid

   $ 23.4      $ 22.0  

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended  
     March 31,  
     2017      2016  

Basic

     191.1        195.0  

Dilutive effect of shares issuable under stock-based compensation plans

     3.2        2.9  
  

 

 

    

 

 

 

Diluted

     194.3        197.9  
  

 

 

    

 

 

 

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

     1.0        1.5  
  

 

 

    

 

 

 

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of March 31, 2017 and 2016. The assumed proceeds in 2017 do not include Excess Tax Benefits pursuant to the prospective adoption of ASU 2016-09 in the first quarter of 2017. The assumed proceeds in 2016 include Excess Tax Benefits.

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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Table of Contents

NOTE 5. CASH EQUIVALENTS AND INVESTMENTS

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

 

     As of March 31, 2017  
            Gross
Unrealized
Gains
            Balance sheet location  
     Cost         Fair
Value
     Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 240.8      $ —        $ 240.8      $ 240.8      $ —        $ —    

Certificates of deposit and money market deposit accounts (1)

   $ 1,111.5      $ —        $ 1,111.5      $ 977.9      $ 132.8      $ 0.8  

Fixed maturity and open ended mutual funds (2)

   $ 26.5      $ 6.0      $ 32.5      $ —        $ —        $ 32.5  
     As of December 31, 2016  
            Gross             Balance sheet location  
     Cost      Unrealized
Gains
     Fair
Value
     Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 189.0      $ —        $ 189.0      $ 189.0      $ —        $ —    

Certificates of deposit and money market deposit accounts (1)

   $ 1,190.5      $ —        $ 1,190.5      $ 1,017.0      $ 173.4      $ 0.1  

Fixed maturity and open ended mutual funds (2)

   $ 27.0      $ 5.6      $ 32.6      $ —        $ —        $ 32.6  

 

(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 March 31, 2017 and at December 31, 2016. The remaining contractual maturities for the certificates of deposits classified in other assets are 23 months at March 31, 2017 and 13 months to 15 months at December 31, 2016. 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 three months to 16 months and six months to 19 months at March 31, 2017 and December 31, 2016 respectively.

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

 

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NOTE 6. ACQUISITIONS

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

SCDM Financial

On February 13, 2017, a subsidiary of the Company acquired the structured finance data and analytics business of SCDM Financial. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flow is not expected to be material. This business unit operates in the MA reportable segment and goodwill related to this acquisition has been allocated to the RD&A reporting unit.

Korea Investor Service (KIS)

In July 2016, a subsidiary of the Company acquired the non-controlling interest of KIS and additional shares of KIS Pricing. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flow is not expected to be material. KIS and KIS Pricing are a part of the MIS segment.

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 payments noted in the table below were 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 paid to sellers in the third quarter of 2016(1)

     3.1  
  

 

 

 

Total consideration

   $ 86.5  
  

 

 

 

 

(1) 

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

 

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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

      $ 11.7  

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

        (22.2
     

 

 

 

Net assets acquired

      $ 86.5  
     

 

 

 

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

In connection with the acquisition, the Company assumed liabilities relating to UTPs and certain other tax exposures which are included in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these amounts. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at March 31, 2017 and December 31, 2016.

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

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

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

The Company has entered into interest rate swaps to convert the fixed interest rate on certain of its long-term debt 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 long-term debt, 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 debt. The changes in the fair value of the swaps and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest (expense) income, net in the Company’s consolidated statement of operations.

 

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Table of Contents

The following table summarizes the Company’s interest rate swaps designated as fair value hedges:

 

Hedged Item

   Nature of Swap    Notional Amount      Floating Interest
Rate
 
      As of
March 31,
2017
     As of
December 31,
2016
    

2010 Senior Notes due 2020

   Pay Floating/Receive Fixed    $ 500.0      $ 500.0        3-month LIBOR  

2014 Senior Notes due 2019

   Pay Floating/Receive Fixed    $ 450.0      $ 450.0        3-month LIBOR  

2012 Senior Notes due 2022

   Pay Floating/Receive Fixed    $ 80.0      $ 80.0        3-month LIBOR  

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  
         March 31,  

Derivatives Designated as Fair Value
Accounting Hedges

  

Location on Consolidated Statement of Operations

  2017     2016  

Interest rate swaps

   Interest expense, net   $ 2.4     $ 3.0  

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 that are designated as net investment hedges and additionally has designated €400 million of the 2015 Senior Notes as a net investment hedge. These hedges are intended to mitigate FX exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. These net investment hedges are designated as accounting hedges under the applicable sections of Topic 815 of the ASC.

Hedge effectiveness is assessed based on the overall changes in the fair value of the hedge. For hedges that meet the effectiveness requirements, any change in the fair value is recorded in OCI 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, net in the Company’s consolidated statement of operations.

 

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

 

     March 31,      December 31,  
     2017      2016  
      Sell      Buy      Sell      Buy  

Notional amount of net investment hedges:

           

Contracts to sell GBP for euros

   £ 22.1      26.4      £ 22.1      26.4  

The outstanding contracts to sell GBP for euros mature in June 2017. The hedge relating to the portion of the 2015 Senior Notes that was designated as a net investment hedge will end upon the repayment of the notes in 2027 unless terminated earlier at the discretion of the Company.

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

 

Derivatives and Non-Derivative Instruments in

Net Investment Hedging Relationships

   Amount of
Gain/(Loss)  Recognized
in AOCI on Derivative
(Effective Portion),
net of Tax
     Amount of  Gain/(Loss)
Reclassified from AOCI into
Income (Effective Portion),
net of Tax
 
     Three Months Ended      Three Months Ended  
     March 31,      March 31,  
     2017      2016      2017      2016  

FX forwards

   $ —        $ (4.6    $ —        $ —    

Long-term debt

     (3.6      (13.1      —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net investment hedges

   $ (3.6    $ (17.7    $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives in Cash Flow Hedging Relationships

                           

Cross currency swap

   $ (0.2    $ 1.2      $ 1.0    $ 1.4

Treasury rate lock

     —          —          (0.1      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash flow hedges

   $ (0.2    $ 1.2      $ 0.9      $ 1.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (3.8    $ (16.5    $ 0.9      $ 1.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Reflects a $1.5 million ($0.5 million tax effect) and $2.2 million ($0.8 million tax effect) gain for 2017 and 2016, respectively, recorded in other non-operating (expense) income, net.

 

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

 

     Cumulative Gains/(Losses), net of tax  
     March 31,      December 31,  
     2017      2016  

Net investment hedges

     

FX forwards

   $ 22.3      $ 22.3  

Long-term debt

     8.9        12.5  
  

 

 

    

 

 

 

Total net investment hedges

   $ 31.2      $ 34.8  
  

 

 

    

 

 

 

Cash flow hedges

     

Treasury rate lock

   $ (1.0    $ (1.1

Cross currency swap

     1.7        2.8  
  

 

 

    

 

 

 

Total cash flow hedges

     0.7        1.7  
  

 

 

    

 

 

 

Total net gains in AOCI

   $ 31.9      $ 36.5  
  

 

 

    

 

 

 

Derivatives not designated as accounting hedges:

Foreign exchange forwards

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through September 2017.

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

 

     March 31,      December 31,  
     2017      2016  
     Sell      Buy      Sell      Buy  

Notional amount of currency pair:

           

Contracts to purchase USD with euros

   35.5      $ 37.8      —        $ —    

Contracts to sell USD for euros

   $ 31.9      30.0      $ —        —    

Contracts to sell USD for GBP

   $ 278.1      £ 222.5      $ —        £ —    

Contracts to sell USD for CAD

   $ 16.7      C$ 22.3      $ —        C$ —    

Contracts to purchase euros with Singapore dollars

   S$ —        —        S$ 55.5      36.0  

Contracts to sell euros for GBP

   30.0      £ 25.7      31.0      £ 25.9  

Note: € = Euro, £ = British pound, S$ = Singapore dollar, C$ = Canadian dollar, $ = U.S. dollar

 

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

 

         Three Months Ended  
         March 31,  

Derivatives Not Designated as Accounting Hedges

   Location on Statement of Operations   2017      2016  

Foreign exchange forwards

   Other non-operating
(expense) income, net
  $ (2.3    $ 0.5  
    

 

 

    

 

 

 

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 non-derivative debt instruments designated and qualifying as net investment hedges:

 

     Derivative and Non-Derivative Instruments  
     Balance  Sheet
Location
     March 31,
2017
     December 31,
2016
 

Assets:

        

Derivatives designated as accounting hedges:

        

FX forwards on net investment in certain foreign subsidiaries

     Other current assets      $ 0.6      $ 0.6  

Interest rate swaps

     Other assets        4.5        7.0  
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        5.1        7.6  
     

 

 

    

 

 

 

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

     Other current assets        1.1        —    
     

 

 

    

 

 

 

Total assets

      $ 6.2      $ 7.6  
     

 

 

    

 

 

 

Liabilities:

        

Derivatives designated as accounting hedges:

        

Cross-currency swap

    
Other non-current
liabilities
 
 
   $ 4.1      $ 3.8  

Interest rate swaps

    
Other non-current
liabilities
 
 
     1.3        0.8  
     

 

 

    

 

 

 

Total derivatives designated as accounting hedges

        5.4        0.8  
     

 

 

    

 

 

 

Non-derivative instrument designated as accounting hedge

        

Long-term debt designated as net investment hedge

     Long-term debt        427.8        421.9  

Derivatives not designated as accounting hedges:

        

FX forwards on certain assets and liabilities

    
Accounts payable and
accrued liabilities
 
 
     0.7        0.8  
     

 

 

    

 

 

 

Total liabilities

      $ 433.9      $ 423.5  
     

 

 

    

 

 

 

 

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NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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

 

     Three Months Ended March 31, 2017  
     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

   $ 277.0     $ —        $ 277.0     $ 758.8     $ (12.2   $ 746.6     $ 1,035.8     $ (12.2   $ 1,023.6  

Additions/adjustments

     —         —          —         3.6       —         3.6       3.6       —         3.6  

Foreign currency translation adjustments

     (2.8     —          (2.8     5.2       —         5.2       2.4       —         2.4  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 274.2     $ —        $ 274.2     $ 767.6     $ (12.2   $ 755.4     $ 1,041.8     $ (12.2   $ 1,029.6  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Year ended December 31, 2016  
     MIS     MA     Consolidated  
     Gross
goodwill
    Accumulated
impairment
charge
     Net
goodwill
    Gross
goodwill
    Accumulated
impairment
charge
    Net
goodwill
    Gross
goodwill
    Accumulated
impairment
charge
    Net
goodwill
 

Balance at beginning of year

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

Additions/adjustments

     —         —          —         61.0       —         61.0       61.0       —         61.0  

Goodwill derecognized upon sale of subsidiary

     (3.2     —          (3.2     —         —         —         (3.2     —         (3.2

Foreign currency translation adjustments

     (4.2     —          (4.2     (6.3     —         (6.3     (10.5     —         (10.5
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 277.0     $ —        $ 277.0     $ 758.8     $ (12.2   $ 746.6     $ 1,035.8     $ (12.2   $ 1,023.6  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The 2017 additions/adjustments for the MA segment in the table above relate to the acquisition of the structured finance data and analytics business of SCDM. The 2016 additions/adjustments for the MA segment in the table above relate to the acquisition of GGY. The 2016 goodwill derecognized for the MIS segment in the table above relates to the divestiture of ICTEAS in the fourth quarter of 2016.

 

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Acquired intangible assets and related amortization consisted of:

 

     March 31,      December 31,  
     2017      2016  

Customer relationships

   $ 313.2      $ 310.1  

Accumulated amortization

     (128.7      (124.4
  

 

 

    

 

 

 

Net customer relationships

     184.5        185.7  
  

 

 

    

 

 

 

Trade secrets

     29.9        29.9  

Accumulated amortization

     (26.2      (25.6
  

 

 

    

 

 

 

Net trade secrets

     3.7        4.3  
  

 

 

    

 

 

 
Software    88.8      87.7  

Accumulated amortization

     (58.3      (54.9
  

 

 

    

 

 

 

Net software

     30.5        32.8  
  

 

 

    

 

 

 

Trade names

     74.7        75.3  

Accumulated amortization

     (21.0      (19.9
  

 

 

    

 

 

 

Net trade names

     53.7        55.4  
  

 

 

    

 

 

 

Other

     43.4        43.5  

Accumulated amortization

     (26.0      (25.3
  

 

 

    

 

 

 

Net other

     17.4        18.2  
  

 

 

    

 

 

 

Total acquired intangible assets, net

   $ 289.8      $ 296.4  
  

 

 

    

 

 

 

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

Amortization expense relating to acquired intangible assets is as follows:

 

     Three Months Ended  
     March 31,  
     2017      2016  

Amortization expense

   $ 8.5      $ 7.9  

 

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

 

Year Ending December 31,

      

2017 (after March 31)

   $ 23.8  

2018

     26.6  

2019

     23.7  

2020

     20.9  

2021

     20.5  

Thereafter

     174.3  
  

 

 

 

Total estimated future amortization

   $ 289.8  
  

 

 

 

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. There were no impairments to intangible assets during the three months ended March 31, 2017 and 2016.

NOTE 9. FAIR VALUE

The table below presents information about items that are carried at fair value at March 31, 2017 and December 31, 2016:

 

          Fair Value Measurement as of March 31, 2017  
     

Description

  

 

Balance

     Level 1      Level 2  

Assets:

           
  

Derivatives (a)

   $ 6.2      $ —        $ 6.2  
  

Money market mutual funds

     240.8        240.8        —    
  

Fixed maturity and open ended mutual funds

     32.5        32.5        —    
     

 

 

    

 

 

    

 

 

 
  

Total

   $ 279.5      $ 273.3      $ 6.2  
     

 

 

    

 

 

    

 

 

 

Liabilities:

           
  

Derivatives (a)

   $ 6.1      $ —        $ 6.1  
     

 

 

    

 

 

    

 

 

 
  

Total

   $ 6.1      $ —        $ 6.1  
     

 

 

    

 

 

    

 

 

 
          Fair Value Measurement as of December 31, 2016  
     

Description

  

 

Balance

     Level 1      Level 2  

Assets:

           
  

Derivatives (a)

   $ 7.6      $ —        $ 7.6  
  

Money market mutual funds

     189.0        189.0        —    
  

Fixed maturity and open ended mutual funds

     32.6        32.6        —    
     

 

 

    

 

 

    

 

 

 
  

Total

   $ 229.2      $ 221.6      $ 7.6  
     

 

 

    

 

 

    

 

 

 

Liabilities:

           
  

Derivatives (a)

   $ 5.4      $ —        $ 5.4  
     

 

 

    

 

 

    

 

 

 
  

Total

   $ 5.4      $ —        $ 5.4  
     

 

 

    

 

 

    

 

 

 

 

(a)

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

 

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

NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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

 

     March 31,      December 31,  
     2017      2016  

Other current assets:

     

Prepaid taxes

   $ 175.9      $ 47.0  

Prepaid expenses

     73.3        65.7  

Other

     20.4        28.1  
  

 

 

    

 

 

 

Total other current assets

   $ 269.6      $ 140.8  
  

 

 

    

 

 

 
     March 31,      December 31,  
     2017      2016  

Other assets:

     

Investments in joint ventures

   $ 86.9      $ 26.3  

Deposits for real-estate leases

     11.2        10.8  

Indemnification assets related to acquisitions

     16.8        16.5  

Mutual funds and fixed deposits

     33.3        32.7  

Other

     18.6        25.9  
  

 

 

    

 

 

 

Total other assets

   $ 166.8      $ 112.2  
  

 

 

    

 

 

 
     March 31,      December 31,  
     2017      2016  

Accounts payable and accrued liabilities:

     

Salaries and benefits

   $ 96.7      $ 89.3  

Incentive compensation

     48.9        151.1  

Accrued settlement charge

     —          863.8  

Customer credits, advanced payments and advanced billings

     31.1        28.4  

Self-insurance reserves

     10.1        11.1  

Dividends

     4.5        78.5  

Professional service fees

     47.0        40.4  

Interest accrued on debt

     18.5        59.2  

Accounts payable

     24.1        28.4  

Income taxes

     40.3        16.8  

Restructuring

     3.0        6.3  

Pension and other retirement employee benefits

     7.1        6.1  

Other

     61.3        64.9  
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 392.6      $ 1,444.3  
  

 

 

    

 

 

 
     March 31,      December 31,  
     2017      2016  

Other liabilities:

     

Pension and other retirement employee benefits

   $ 272.5      $ 264.1  

Deferred rent-non-current portion

     97.3        98.3  

Interest accrued on UTPs

     36.2        34.1  

Legacy and other tax matters

     1.2        1.2  

Other

     27.0        27.5  
  

 

 

    

 

 

 

Total other liabilities

   $ 434.2      $ 425.2  
  

 

 

    

 

 

 

 

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

 

     Three Months Ended      Year Ended  
     March 31, 2017      December 31, 2016  

Balance January 1,

   $ 11.1      $ 19.7  

Accruals (reversals), net

     1.8        12.1  

Payments

     (2.8      (20.7
  

 

 

    

 

 

 

Balance

   $ 10.1      $ 11.1  
  

 

 

    

 

 

 

Other Non-Operating (Expense) Income:

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

 

     Three Months Ended  
     March 31,  
     2017      2016  

FX (loss) gain

   $ (9.6    $ 4.0  

Joint venture income

     1.0        1.9  

Other

     (0.8      (0.3
  

 

 

    

 

 

 

Total

   $ (9.4    $ 5.6  
  

 

 

    

 

 

 

CCXI Gain:

CCXI is a Chinese credit rating agency in which Moody’s acquired a 49% stake in 2006. Moody’s accounts for this investment under the equity method of accounting. On March 21, 2017, CCXI, as part of a strategic business realignment, issued additional capital to its majority shareholder in exchange for a ratings business wholly-owned by the majority shareholder and which has the right to rate a different class of debt instrument in the Chinese market. The capital issuance by CCXI in exchange for this ratings business diluted Moody’s ownership interest in CCXI to 30% of a larger business and resulted in a $59.7 million non-cash, non-taxable gain. The issuance of additional capital by CCXI is treated as if Moody’s sold a 19% interest in CCXI at fair value. The fair value of the 19% interest in CCXI that Moody’s hypothetically sold was estimated using both a discounted cash flow methodology and comparable public company multiples. A DCF analysis requires significant estimates, including projections of future operating results and cash flows based on the budgets and forecasts of CCXI, expected long-term growth rates, terminal values, WACC and the effects of external factors and market conditions. Moody’s will continue to account for its 30% interest in CCXI under the equity method of accounting.

 

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Table of Contents

NOTE 11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

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

 

            Affected line in the  
     Three Months Ended      consolidated statement of  
     March 31, 2017      March 31, 2016      operations  

Gains on cash flow hedges

        

Cross-currency swap

     1.5        2.2       
Other non-operating
(expense) income, net
 
 

Treasury rate lock

     (0.1      —         
Interest expense,
net
 
 
  

 

 

    

 

 

    

Total before income taxes

     1.4        2.2     

Income tax effect of items above

     (0.5      (0.8     
Provision for
income taxes
 
 
  

 

 

    

 

 

    

Total gains on cash flow hedges

     0.9        1.4     
  

 

 

    

 

 

    

Pension and other retirement benefits

        

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

     (1.5      (1.6      Operating expense  

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

     (0.9      (1.0      SG&A expense  
  

 

 

    

 

 

    

Total before income taxes

     (2.4      (2.6   

Income tax effect of item above

     0.9        1.0       
Provision for
income taxes
 
 
  

 

 

    

 

 

    

Total pension and other retirement benefits

     (1.5      (1.6   
  

 

 

    

 

 

    

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

   $ (0.6    $ (0.2   
  

 

 

    

 

 

    

 

 

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

 

     Three Months Ended  
     March 31, 2017  
     Pension
and Other
Retirement
Benefits
    Gains /
(Losses) on
Cash Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
     Total  

Balance December 31, 2016

   $ (79.5   $ 1.7     $ (290.2   $ 3.1      $ (364.9

Other comprehensive income before reclassifications

     —         (0.2     6.9       0.3        7.0  

Amounts reclassified from AOCI

     1.5       (0.9       —          0.6  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income/(loss)

     1.5       (1.1     6.9       0.3        7.6  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance March 31, 2017

   $ (78.0   $ 0.6     $ (283.3   $ 3.4      $ (357.3
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Three Months Ended  
     March 31, 2016  
     Pension
and Other
Retirement
Benefits
    Gains /
(Losses) on
Cash Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Gains on
Available
for Sale
Securities
     Total  

Balance December 31, 2015

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

Other comprehensive income/(loss) before reclassifications

     —         1.2       36.0       0.6        37.8  

Amounts reclassified from AOCI

     1.6       (1.4     —         —          0.2  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income/(loss)

     1.6       (0.2     36.0       0.6        38.0  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance March 31, 2016

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS

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

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

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

 

     Three Months Ended March 31,  
     Pension Plans      Other Retirement Plans  
     2017      2016      2017      2016  

Components of net periodic expense

           

Service cost

   $ 4.9      $ 5.2      $ 0.6      $ 0.5  

Interest cost

     4.7        4.6        0.3        0.3  

Expected return on plan assets

     (4.1      (4.3      —          —    

Amortization of net actuarial loss from earlier periods

     2.4        2.6        —          —    

Amortization of net prior service costs from earlier periods

     —          —          (0.1      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic expense

   $ 7.9      $ 8.1      $ 0.8      $ 0.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company made payments of $1.3 million related to its unfunded U.S. DBPPs and $0.2 million to its U.S. other retirement plans during the three months ended March 31, 2017. The Company anticipates making contributions of $10.4 million to its funded pension plan, and payments of $3.8 million and $0.8 million to its unfunded U.S. DBPPs and U.S. other retirement plans, respectively, during the remainder of 2017.

 

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NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:

 

     March 31, 2017  
     Principal
Amount
     Fair Value of
Interest Rate
Swap (1)
    Unamortized
(Discount)
Premium
    Unamortized
Debt Issuance
Costs
    Carrying
Value
 

Notes Payable:

              —    

5.50% 2010 Senior Notes, due 2020

   $ 500.0      $ 3.7     $ (1.3   $ (1.5   $ 500.9  

4.50% 2012 Senior Notes, due 2022

     500.0        (0.3     (2.3     (2.0     495.4  

4.875% 2013 Senior Notes, due 2024

     500.0        —         (2.0     (2.6     495.4  

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

     450.0        (0.2     (0.3     (1.6     447.9  

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

     600.0        —         3.3       (5.9     597.4  

1.75% 2015 Senior Notes, due 2027

     534.8        —         —         (3.5     531.3  

2.75% 2017 Senior Notes, due 2021

     500.0        —         (1.5     (3.8     494.7  

2017 Floating Rate Senior Notes, due 2018

     300.0          —         (1.1     298.9  

Commercial Paper

     214.0        —         (0.2     —         213.8  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total debt

   $ 4,098.8      $ 3.2     $ (4.3   $ (22.0   $ 4,075.7  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Current portion

              (213.8
           

 

 

 

Total long-term debt

            $ 3,861.9  
           

 

 

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

Notes Payable:

           

6.06% Series 2007-1 Notes due 2017

   $ 300.0      $ —       $ —       $     $ 300.0  

5.50% 2010 Senior Notes, due 2020

     500.0        5.5       (1.3     (1.6     502.6  

4.50% 2012 Senior Notes, due 2022

     500.0        (0.2     (2.4     (2.1     495.3  

4.875% 2013 Senior Notes, due 2024

     500.0        —         (2.1     (2.7     495.2  

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

     450.0        0.9       (0.4     (1.7     448.8  

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

     600.0        —         3.3       (5.9     597.4  

1.75% 2015 Senior Notes, due 2027

     527.4        —         —         (3.7     523.7  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term debt

   $ 3,377.4      $ 6.2     $ (2.9   $ (17.7   $ 3,363.0  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Current portion

              (300.0
           

 

 

 

Total long-term debt

            $ 3,063.0  
           

 

 

 

 

(1) 

The Company has entered into interest rate swaps on the 2010 Senior Notes, the 2012 Senior Notes and the 2014 Senior Notes (5-Year) which are more fully discussed in Note 7 above.

 

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Commercial Paper

On August 3, 2016, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Borrowings under the CP Program are backstopped by the 2015 Facility. Amounts under the CP Program may be re-borrowed. The maturity of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par, or alternatively, sold at par and bear interest at rates that will vary based upon market conditions. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods. At March 31, 2017, the Company has CP borrowings outstanding of $214.0 million with a weighted average maturity and interest rate of 20 days and 1.29%, respectively.

Notes Payable

On March 2, 2017, the Company issued $300 million aggregate principal amount of senior unsecured floating rate notes in a public offering. The 2017 Floating Rate Senior Notes bear interest at a floating rate which is calculated as three-month LIBOR as determined on the interest determination date plus 0.35%. The interest determination date for an interest period will be the second London business day preceding the first day of such interest period. The 2017 Floating Rate Senior Notes will mature on September 4, 2018. Interest on the 2017 Floating Rate Senior Notes will accrue from March 2, 2017, and will be paid quarterly in arrears on June 4, 2017, September 4, 2017, December 4, 2017, March 4, 2018, June 4, 2018 and on the maturity date, to the record holders at the close of business on the business date preceding the interest payment date. The 2017 Floating Rate Senior Notes are not redeemable prior to their maturity.

On March 2, 2017, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2017 Senior Notes bear interest at a fixed rate of 2.75% and mature on December 15, 2021. Interest on the 2017 Senior Notes is due semiannually on June 15 and December 15 of each year, commencing June 15, 2017. The Company may prepay the 2017 Senior Notes, in whole or in part, at any time at a price equity to 100% of the principal amount being prepaid, plus accrued interest and a Make-Whole Amount.

For both the 2017 Floating Rate Senior Notes and 2017 Senior Notes, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2017 Indenture, at a price equal to 101% of the principal amount, thereof, plus accrued and unpaid interest to the date of purchase. The 2017 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2017 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2017 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2017 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2017 Indenture, the 2017 Floating Rate Senior notes and 2017 Senior Notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

In the first quarter of 2017, the Company repaid the Series 2007-1 Notes along with a Make-Whole Amount of approximately $7 million.

At March 31, 2017, the Company was in compliance with all covenants contained within all of the debt agreements. All the debt agreements contain cross default provisions which state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of March 31, 2017, there were no such cross defaults.

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

 

Year Ended December 31,

   2010
Senior
Notes
     2012
Senior
Notes
     2013
Senior
Notes
     2014
Senior
Notes
(5-
Year)
     2014
Senior
Notes
(30-Year)
     2015
Senior
Notes (1)
     2017
Floating
Rate
Senior Notes
     2017
Senior
Notes
     Commercial
Paper
     Total  

2017 (after March 31,)

   $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 214.0      $ 214.0  

2018

     —          —          —          —          —          —          300.0        —          —          300.0  

2019

     —          —          —          450.0        —          —          —          —          —          450.0  

2020

     500.0        —          —          —          —          —          —          —          —          500.0  

2021

     —          —          —          —          —          —          —          500.0        —          500.0  

Thereafter

     —          500.0        500.0        —          600.0        534.8        —          —          —          2,134.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 500.0      $ 500.0      $ 500.0      $ 450.0      $ 600.0      $ 534.8      $ 300.0      $ 500.0      $ 214.0      $ 4,098.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Based on end of quarter FX rates

 

 

 

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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
March  31,
 
     2017      2016  

Income

   $ 4.1      $ 2.9  

Expense on borrowings

     (44.7      (34.6

UTPs and other tax related liabilities

     (2.1      (2.8

Capitalized

     0.3        0.4  
  

 

 

    

 

 

 

Total

   $ (42.4    $ (34.1
  

 

 

    

 

 

 

The following table shows the cash paid for interest:

 

     Three Months Ended
March  31,
 
     2017      2016  

Interest paid*

   $ 74.7      $ 67.1  

 

* Amount in 2017 includes an approximate $7 million Make-Whole Amount relating to the early repayment of the Series 2007-1 Notes

The fair value and carrying value of the Company’s long-term debt as of March 31, 2017 and December 31, 2016 are as follows:

 

     March 31, 2017      December 31, 2016  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair  Value
 

Series 2007-1 Notes

   $ —        $ —        $ 300.0      $ 308.9  

2010 Senior Notes

     500.9        547.9        502.6        548.3  

2012 Senior Notes

     495.4        537.2        495.3        535.3  

2013 Senior Notes

     495.4        546.2        495.2        539.9  

2014 Senior Notes (5-Year)

     447.9        455.7        448.8        456.2  

2014 Senior Notes (30-Year)

     597.4        666.2        597.4        661.5  

2015 Senior Notes

     531.3        547.7        523.7        534.8  

2017 Senior Notes

     494.7        499.7        —          —    

2017 Floating Rate Senior Notes

     298.9        300.5        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,861.9      $ 4,101.1      $ 3,363.0      $ 3,584.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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NOTE 14. CONTINGENCIES

Given the nature of their activities, Moody’s and its subsidiaries are subject to governmental, regulatory and legislative investigations and inquiries, and claims and litigation that are based on ratings assigned by MIS or that are otherwise incidental to the Company’s business. They periodically receive and respond to subpoenas and other inquiries which may relate to Moody’s activities or to activities of others that may result in litigation, proceedings or investigations by private litigants or governmental, regulatory or legislative authorities. Moody’s also is subject to tax proceedings and ongoing tax audits as addressed in Note 3 to the financial statements.

Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, the Company records liabilities in the consolidated financial statements when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated 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 instances when a loss is reasonably possible but uncertainties exist related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if material. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. Moody’s also discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

In view of the inherent difficulty of assessing the potential outcome of legal proceedings, governmental, regulatory and legislative investigations and inquiries, claims and litigation and similar matters and contingencies, particularly when the claimants seek large or indeterminate damages or assert novel legal theories or the matters involve a large number of parties, the Company often cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also may be unable to 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 and to accrue for and disclose such matters as and when required. However, because such matters are inherently unpredictable and unfavorable developments or resolutions can occur, the ultimate outcome of such matters, including the amount of any loss, may differ from those estimates.

NOTE 15 SEGMENT INFORMATION

The Company is organized into two operating segments: MIS and MA and 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.

 

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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.

Financial Information by Segment

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

 

     Three Months Ended March 31,  
     2017      2016  
     MIS      MA      Eliminations     Consolidated      MIS      MA      Eliminations     Consolidated  

Revenue

   $ 694.2      $ 310.7      $ (29.7   $ 975.2      $ 549.1      $ 293.8      $ (26.8   $ 816.1  

Operating, SG&A

     288.3        240.7        (29.7     499.3        278.6        230.3        (26.8     482.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted Operating Income

     405.9        70.0        —         475.9        270.5        63.5        —         334.0  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less:

                     

Depreciation and amortization

     18.9        13.6        —         32.5        17.5        12.4        —         29.9  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 387.0      $ 56.4      $ —       $ 443.4      $ 253.0      $ 51.1      $ —       $ 304.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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MIS and MA Revenue by Line of Business

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

 

     Three Months Ended March 31,  
     2017      2016  

MIS:

     

Corporate finance (CFG)

   $ 352.8      $ 240.3  

Structured finance (SFG)

     100.2        90.6  

Financial institutions (FIG)

     112.3        94.9  

Public, project and infrastructure finance (PPIF)

     98.1        91.5  
  

 

 

    

 

 

 

Total ratings revenue

     663.4        517.3  

MIS Other

     4.8        7.8  
  

 

 

    

 

 

 

Total external revenue

     668.2        525.1  
  

 

 

    

 

 

 

Intersegment royalty

     26.0        24.0  
  

 

 

    

 

 

 

Total

     694.2        549.1  
  

 

 

    

 

 

 

MA:

     

Research, data and analytics (RD&A)

     175.4        164.9  

Enterprise risk solutions (ERS)

     95.9        89.5  

Professional services (PS)

     35.7        36.6  
  

 

 

    

 

 

 

Total external revenue

     307.0        291.0  
  

 

 

    

 

 

 

Intersegment revenue

     3.7        2.8  
  

 

 

    

 

 

 

Total

     310.7        293.8  
  

 

 

    

 

 

 

Eliminations

     (29.7      (26.8
  

 

 

    

 

 

 

Total MCO

   $ 975.2      $ 816.1  
  

 

 

    

 

 

 

Consolidated Revenue Information by Geographic Area:

     Three Months Ended March 31,  
     2017      2016  

Revenue

     

United States

   $ 577.8      $ 480.0  

International:

     

EMEA

     236.3        210.2  

Asia-Pacific

     99.4        82.0  

Americas

     61.7        43.9  
  

 

 

    

 

 

 

Total International

     397.4        336.1   
  

 

 

    

 

 

 

Total

   $ 975.2      $ 816.1  
  

 

 

    

 

 

 

 

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NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. 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, during 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 using the modified retrospective transition method. Under this adoption method, the Company will record a cumulative adjustment to retained earnings at January 1, 2018 and apply the provisions of the ASU prospectively. Currently, the Company believes this ASU will have an impact on, which is not limited to: i) 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 (compared to ASC 605 whereby all software subscription revenue is currently recognized over the subscription period); ii) the accounting for certain ERS revenue arrangements where VSOE is not currently available under ASC 605 would result in the acceleration of revenue recognition (compared to ASC 605 whereby revenue is currently deferred due to lack of VSOE); iii) the capitalization of software implementation project costs to fulfill a contract for its ERS business which will be expensed as incurred under the new standard; and iv.) the amortization period for capitalized costs to obtain a contract in the MA segment.

At March 31, 2017, the Company is progressing in assessing and documenting key changes to judgmental areas of its accounting policies relating to the adoption of the new revenue accounting standard. However, the quantitative impact of adopting this ASU is not currently known or reasonably estimable as the impact will be heavily dependent upon the status of contracts in-process primarily within the Company’s ERS LOB as of the date of adoption (the Company does not have any material software implementation arrangements with terms longer than two years). Furthermore, the Company is in the process of upgrading its IT infrastructure in order to support the accounting under the new standard as well as assessing the impact that the new standard will have on its processes and internal controls.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities”. 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. The Company believes that the most pertinent impact to its financial statements upon the adoption of this ASU will relate to the discontinuance of the available-for-sale classification for investments in equity securities (unrealized gains and losses were recorded through OCI). Accordingly, subsequent to adoption of this ASU, changes in the fair value of equity securities held by the Company will be recorded through earnings.

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. The Company believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and lease liability for its real estate leases.

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

 

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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. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on accounts receivable.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company will apply this clarification guidance in its statements of cash flows upon adoption.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and should be applied prospectively. Upon adoption, the Company will apply the guidance in this ASU when evaluating whether acquired assets and activities constitute a business.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This ASU impacts the presentation of net periodic pension costs in the statement of operations. Entities will be required to report the service cost component in the same line item or items as other compensation costs (either Operating or SG&A in Moody’s statement of operations). The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside of operating income. The ASU permits only the service cost component of net periodic pension cost to be eligible for capitalization, when applicable. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Upon adoption, the Company will bifurcate its net periodic pension costs reported in its statements of operations in accordance with this ASU.

NOTE 17. SUBSEQUENT EVENT

On April 25, 2017, the Board approved the declaration of a quarterly dividend of $0.38 per share of Moody’s common stock, payable on June 12, 2017 to shareholders of record at the close of business on May 22, 2017.

 

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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 57 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, capital markets and economic related research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) 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 financial instruments pricing services in the Asia-Pacific region as well as revenue from ICRA’s non-ratings business. 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 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 research and analytical services and financial training and certification programs.

Critical Accounting Estimates

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, restructuring, goodwill and acquired intangible assets, pension and other retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Company’s annual report on Form 10-K for the year ended December 31, 2016, 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 other than the update below relating to a goodwill impairment assessment performed on the Company’s MAKS reporting unit in the first quarter of 2017.

Goodwill and Other Acquired Intangible Assets

The following is an update to the Company’s critical accounting estimate disclosures relating to goodwill and other acquired intangible assets which were presented in Moody’s Form 10-K for the year ended December 31, 2016. This update should be read in conjunction with the disclosures made in the aforementioned Form 10-K, and relates to the Company’s MAKS reporting unit, formerly known as Copal Amba, which is a provider of research and analytical services.

 

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In January 2017, there was a management change in the MAKS business. A quantitative goodwill impairment assessment for the MAKS reporting unit was performed during the first quarter of 2017 upon the completion of revised financial projections by the new management of this reporting unit. This assessment resulted in no impairment of goodwill for the MAKS reporting unit at March 31, 2017; however, the amount by which the fair value of the reporting unit exceeded its carrying value declined compared to amounts derived during the last quantitative impairment assessment as of July 31, 2016.

Determining the fair value of a reporting unit or an indefinite-lived acquired intangible asset involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and appropriate comparable market metrics. However, as these estimates and assumptions are unpredictable and inherently uncertain, actual future results may differ from these estimates.

In addition, the Company also makes certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units. Other assets and liabilities, including applicable corporate assets, are allocated to the extent they are related to the operation of respective reporting units.

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

The following table identifies the amount of goodwill allocated to each reporting unit as of March 31, 2017 and the amount by which the net assets of each reporting unit would exceed the fair value under Step 2 of the goodwill impairment test as prescribed in ASC Topic 350, assuming hypothetical reductions in their fair values as of the date of the last quantitative goodwill impairment assessment for all reporting units (March 31, 2017 for MAKS; July 31, 2016 for the remaining reporting units).

 

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

MIS

   $ 52.2      $ —        $ —        $ —       $ —    

RD&A

     179.7        —          —          —         —    

ERS

     326.1        —          —          —         —    

FSTC

     85.7        —          —          (14.4     (34.6

MAKS

     160.6        —          —          (23.1     (53.5

ICRA

     225.3        —          —          —         —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 1,029.6      $ —        $ —        $ (37.5   $ (88.1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

The following is a discussion regarding the Company’s methodology for determining the fair value of its reporting units, excluding ICRA, as of the date of each reporting unit’s last quantitative assessment (March 31, 2017 for MAKS and July 31, 2016 for the remaining reporting units). As ICRA is a publicly traded company in India, the Company was able to observe its fair value based on its market capitalization.

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

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

 

   

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

 

   

WACC —The WACC is the rate used to discount each reporting unit’s estimated future cash flows. The WACC is calculated based on the proportionate weighting of the cost of debt and equity. The cost of equity is based on a risk-free interest rate and an equity risk factor which is derived from public companies similar to the reporting unit and which captures the perceived risks and uncertainties associated with the reporting unit’s cash flows. The cost of debt component is calculated as the weighted average cost associated with all of the Company’s outstanding borrowings as of the date of the impairment test and was immaterial to the computation of the WACC. The cost of debt and equity is weighted based on the debt to market capitalization ratio of publicly traded companies with similarities to the reporting unit being tested. The WACC for all reporting units ranged from 8.5% to 11.5% as of the date of the reporting unit’s last quantitative assessment. Differences in the WACC used between reporting units is primarily due to distinct risks and uncertainties regarding the cash flows of the different reporting units. A sensitivity analysis of the WACC was performed on all reporting units as of the date of the reporting unit’s last quantitative goodwill impairment assessment. For all reporting units, an increase in the WACC of one percentage point would not result in the carrying value of the reporting unit exceeding its fair value.

 

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Reportable Segments

The Company is organized into two reportable segments at March 31, 2017: 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.

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.

 

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RESULTS OF OPERATIONS

Three months ended March 31, 2017 compared with three months ended March 31, 2016

Executive Summary

 

   

Moody’s revenue in the first quarter of 2017 totaled $975.2 million, an increase of $159.1 million, or 19%, compared to 2016 reflecting strong growth in MIS as well as good growth in MA.

 

   

MIS revenue increased 27% compared to a weak prior year period, where issuance volumes were suppressed due to market volatility at the time. Rated issuance volumes in the first quarter of 2017 were strong primarily reflecting robust activity in the bank loan and high-yield corporate debt sectors in CFG as issuers took advantage of favorable market conditions to refinance obligations. The increase also reflects growth in the banking sector within FIG and growth across most asset classes in SFG.

 

   

MA revenue was 5% higher than the prior year reflecting increases in ERS and RD&A, most notably in the U.S. The growth in ERS is primarily due to revenue from GGY, which was acquired in March 2016, coupled with growth in the Risk and Finance Analytics product vertical. In RD&A, revenue growth was primarily driven by credit research subscriptions and licensing of ratings data, most notably in the U.S. and EMEA.

 

   

Total operating expenses increased $19.8 million, or 4% compared to 2016. The increase is primarily due to growth in compensation costs of $22.9 million mainly due to higher incentive compensation costs reflecting higher projected achievement against full-year projected results compared to the prior year.

 

   

Operating income of $443.4 million in the first quarter of 2017 increased $139.3 million compared to 2016 and resulted in an operating margin of 45.5% compared to 37.3% in the prior year. Adjusted Operating Income of $475.9 million in the first quarter of 2017 increased $141.9 million compared to 2016, resulting in an Adjusted Operating Margin of 48.8% compared to 40.9% in the prior year.

 

   

The increase in non-operating income (expense) net, compared to the prior year is primarily due to:

 

   

a $59.7 million non-cash, non-taxable gain relating to a strategic business realignment at CCXI, a Chinese credit rating agency, in which Moody’s has had an equity interest since 2006 (refer to Note 10 to the condensed consolidated financial statements for further discussion on this CCXI Gain);

Partially offset by:

 

   

higher interest expense of $8.3 million reflecting an approximate $7 million prepayment penalty on the early repayment of the Series 2007-1 Notes as well as interest on additional debt and CP issued by the Company during the first quarter of 2017; and

 

   

FX losses of approximately $10 million in the first quarter of 2017 compared to FX gains of $4 million in the prior year.

 

   

The ETR of 23.4% in the first quarter of 2017 was 890 BPS lower than the prior year, primarily due to the non-taxable CCXI Gain as well as an approximate $19 million benefit reflecting the adoption on a prospective basis of a new accounting standard relating to Excess Tax Benefits on stock-based compensation (refer to Note 1 to the condensed consolidated financial statements for further discussion of the impacts of this new accounting standard).

 

   

Diluted EPS of $1.78 in the first quarter of 2017, which includes a $0.31 benefit related to the CCXI Gain and a $0.10 benefit relating to the new accounting standard for Excess Tax Benefits, increased $0.85 compared to 2016, reflecting higher Net Income and a 2% reduction in diluted weighted average shares outstanding. Excluding the $0.31 CCXI Gain in the first quarter of 2017, Adjusted Diluted EPS of $1.47 increased $0.54 compared to 2016.

 

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Moody’s Corporation

 

     Three months ended March 31,     % Change
Favorable
(Unfavorable)
 
     2017     2016    

Revenue:

      

United States

   $ 577.8     $ 480.0       20
  

 

 

   

 

 

   

International:

      

EMEA

     236.3       210.2       12

Asia-Pacific

     99.4       82.0       21

Americas

     61.7       43.9       41
  

 

 

   

 

 

   

Total International

     397.4       336.1       18
  

 

 

   

 

 

   

Total

     975.2       816.1       19
  

 

 

   

 

 

   

Expenses:

      

Operating

     277.4       249.2       (11 %) 

SG&A

     221.9       232.9       5

Depreciation and amortization

     32.5       29.9       (9 %) 
  

 

 

   

 

 

   

Total

     531.8       512.0       (4 %) 
  

 

 

   

 

 

   

Operating income

   $ 443.4     $ 304.1       46
  

 

 

   

 

 

   

Adjusted Operating Income (1)

   $ 475.9     $ 334.0       42
  

 

 

   

 

 

   

Interest (expense) income, net

   $ (42.4   $ (34.1     (24 %) 

Other non-operating (expense) income, net

   $ (9.4   $ 5.6       (268 %) 

CCXI Gain

   $ 59.7     $ —         NM  
  

 

 

   

 

 

   

Non-operating income (expense), net

   $ 7.9     $ (28.5     128
  

 

 

   

 

 

   

Net income attributable to Moody’s

   $ 345.6     $ 184.4       87

Diluted weighted average shares outstanding

     194.3       197.9       2

Diluted EPS attributable to Moody’s common shareholders

   $ 1.78     $ 0.93       91

Adjusted Diluted EPS attributable to Moody’s common shareholders(1)

   $ 1.47     $ 0.93       58

Operating margin

     45.5     37.3  

Adjusted Operating Margin(1)

     48.8     40.9  

 

(1) 

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

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

 

     March 31      % Change  
     2017      2016         

United States

     3,411        3,441        (1 %) 

International

     7,247        7,311        (1 %) 
  

 

 

    

 

 

    

Total

     10,658        10,752        (1 %) 
  

 

 

    

 

 

    

 

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Global revenue of $975.2 million in the first quarter of 2017 increased $159.1 million, or 19%, compared to 2016 and reflected strong growth in MIS and good growth in MA.

The $143.1 million increase in MIS revenue primarily reflects strong bank loan and high-yield corporate debt rated issuance volumes in CFG as issuers took advantage of favorable market conditions to refinance obligations in the first quarter of 2017 compared to weak issuance in the prior year reflecting market volatility. The increase also reflects growth in the banking sector within FIG and growth across most asset classes in SFG. Additionally, the increase over prior year reflects benefits from changes in the mix of fee type, new fee initiatives and pricing increases.

The $16.0 million growth in MA reflects increases in ERS and RD&A, most notably in the U.S. The growth in ERS is primarily due to revenue from GGY, which was acquired in March 2016 coupled with growth in the Risk and Finance Analytics product vertical. In RD&A, revenue growth was primarily driven by credit research subscriptions and licensing of ratings data.

Transaction revenue accounted for 51% of global MCO revenue in the first quarter of 2017 compared to 45% in the prior year.

U.S. revenue of $577.8 million in the first quarter of 2017 increased $97.8 million from the prior year, reflecting growth in both reportable segments.

Non-U.S. revenue of $397.4 million in the first quarter of 2017 increased $61.3 million compared to the prior year reflecting growth across all regions in both MIS and MA.

Operating expenses were $277.4 million in the first quarter of 2017, up $28.2 million compared to 2016 primarily due to an increase in compensation costs reflecting higher incentive compensation due to greater projected achievement relative to full-year targeted results compared to the prior year. This increase also reflects higher salaries and employee benefit expenses resulting from the impact of annual compensation increases and increased headcount, most notably in MA which includes headcount from the acquisition of GGY.

SG&A expenses of $221.9 million in the first quarter of 2017 decreased $11.0 million from the prior year period primarily reflecting both lower compensation and non-compensation costs due to the impact of cost management initiatives implemented in 2016 that have continued into 2017. These decreases were partially offset by higher incentive compensation reflecting greater projected achievement relative to full-year targeted results compared to the prior year.

Operating income of $443.4 million increased $139.3 million from the first quarter of 2016. Adjusted Operating Income was $475.9 million in the first quarter of 2017, an increase of $141.9 million compared to 2016. Operating margin of 45.5% increased 820 BPS compared to the first quarter of 2016. Adjusted Operating Margin of 48.8% increased 790 BPS compared to the prior year.

Interest (expense) income, net in the first quarter of 2017 was ($42.4) million, an $8.3 million increase in expense compared to 2016, primarily due to an approximate $7 million prepayment penalty on the early repayment of the Series 2007-1 Notes. Additionally, the increase reflects interest on the 2017 Senior Notes and 2017 Floating Rate Senior Notes which were issued in the first quarter of 2017 as well as interest on borrowings under the Company’s CP program for which Moody’s commenced issuance in February 2017.

Other non-operating (expense) income, net was ($9.4) million in the first quarter of 2017, a $15.0 million increase in expense compared to 2016 reflecting approximately $10 million in FX losses compared to approximately $4 million in FX gains in the prior year. The losses in 2017 primarily relate to the strengthening of the British pound and Japanese yen compared to the U.S. dollar which negatively impacted U.S. dollar denominated assets held in these international jurisdictions.

The CCXI Gain represents a $59.7 million non-cash, non-taxable gain relating to a strategic business realignment at CCXI, a Chinese credit rating agency, in which Moody’s has had an equity interest since 2006 (refer to Note 10 to the condensed consolidated financial statements for further discussion on this CCXI Gain).

The ETR of 23.4% in the first quarter of 2017 was 890 BPS lower than the prior year. This decrease was primarily due to the non-taxable CCXI Gain as well as an approximate $19 million benefit reflecting the adoption on a prospective basis of a new accounting standard relating to Excess Tax Benefits on stock-based compensation. In accordance with the new accounting standard, these Excess Tax Benefits are now recorded to the provision for income taxes, whereas in the prior year were recorded to capital surplus (refer to Note 1 to the condensed consolidated financial statements for further discussion on this new accounting standard).

 

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Net Income in the first quarter of 2017, which included $59.7 million related to the CCXI Gain and a benefit of approximately $19 million relating to the new accounting standard for Excess Tax Benefits, was $345.6 million, or $161.2 million higher than prior year. Diluted EPS of $1.78 in the first quarter of 2017, which included a $0.31 benefit for the CCXI Gain and a $0.10 benefit relating to the aforementioned new accounting standard, increased $0.85 compared to the prior year reflecting higher net income coupled with a 2% reduction in diluted weighted average shares outstanding. The reduction in diluted weighted average shares outstanding reflects share repurchases under the Company’s Board authorized share repurchase program partially offset by shares issued under employee stock-based compensation programs. Excluding the CCXI Gain in the first quarter of 2017, Adjusted Diluted EPS of $1.47 in 2017 increased $0.54 compared to 2016.

Segment Results

Moody’s Investors Service

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

 

    

 

Three months ended March 31,

    % Change
Favorable
(Unfavorable)
 
     2017     2016    

Revenue:

      

Corporate finance (CFG)

   $ 352.8     $ 240.3       47

Structured finance (SFG)

     100.2       90.6       11

Financial institutions (FIG)

     112.3       94.9       18

Public, project and infrastructure finance (PPIF)

     98.1       91.5       7
  

 

 

   

 

 

   

Total ratings revenue

     663.4       517.3       28
  

 

 

   

 

 

   

MIS Other

     4.8       7.8       (38 %) 
  

 

 

   

 

 

   

Total external revenue

     668.2       525.1       27
  

 

 

   

 

 

   

Intersegment royalty

     26.0       24.0       8
  

 

 

   

 

 

   

Total

     694.2       549.1       26
  

 

 

   

 

 

   

Expenses:

      

Operating and SG&A (external)

     284.6       275.8       (3 %) 

Operating and SG&A (intersegment)

     3.7       2.8       (32 %) 
  

 

 

   

 

 

   

Adjusted Operating Income

     405.9       270.5       50
  

 

 

   

 

 

   

Depreciation and amortization

     18.9       17.5       (8 %) 
  

 

 

   

 

 

   

Operating income

   $ 387.0     $ 253.0       53
  

 

 

   

 

 

   

Adjusted Operating Margin

     58.5     49.3  

Operating margin

     55.7     46.1  

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

MIS revenue of $668.2 million in the first quarter of 2017 increased 27% compared to 2016 reflecting robust rated issuance volumes for bank loans and high-yield corporate debt within CFG coupled with strong growth in banking-related revenue in FIG and growth across most asset classes in SFG. The strong issuance volume activity in the first quarter of 2017 is in contrast to weak issuance conditions in the prior year when market volatility resulted in suppressed issuance volumes. Also contributing to the growth was the favorable impact of changes in the mix of fee type, new fee initiatives and pricing increases.

Transaction revenue for MIS was 65% in the first quarter of 2017 compared to 56% in the first quarter of 2016.

In the U.S., revenue was $422.5 million in the first quarter of 2017, an increase of $86.5 million, or 26% compared to 2016 primarily reflecting strong growth in rated issuance volumes for bank loans and high-yield corporate debt as well as strong growth in banking sector and infrastructure finance issuance. Additionally, the increase reflects growth in SFG resulting from higher structured credit, REIT and ABS rated deal counts and benefits from changes in the mix of fee type, new fee initiatives and pricing increases across all LOBs. These increases were partially offset by declines in public finance rated issuance volumes.

 

 

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Non-U.S. revenue was $245.7 million in the first quarter of 2017, an increase of $56.6 million, or 30%, compared to 2016 primarily reflecting growth in high-yield corporate debt and bank loan revenue across all regions coupled with higher banking-related rated issuance volumes in the Asia-Pacific region. Also contributing to the growth were higher investment-grade rated issuance volumes in EMEA and benefits from changes in the mix of fee type, new fee initiatives and pricing increases.

CFG revenue of $352.8 million in the first quarter of 2017 increased $112.5 million, or 47%, compared to 2016 primarily due to robust rated issuance volumes in bank loans and high-yield corporate debt as issuers took advantage of favorable market conditions to refinance obligations compared to a challenging prior year period where global market volatility at the time suppressed leveraged finance issuance volumes. The strength in leveraged finance rated issuance volumes in the first quarter of 2017, which were most notable in the U.S. and EMEA, reflect current favorable market conditions, low capital market volatility and increased investor demand for floating rate instruments as interest rates were rising. The increase over the prior year also reflects higher investment-grade corporate debt rated issuance volumes in EMEA reflecting elevated liquidity within the region resulting from the ECB sponsored CSPP. Additionally, the growth reflects benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Transaction revenue represented 74% and 63% of total CFG revenue in the first quarter of 2017 and 2016, respectively. In the U.S., revenue was $243.8 million, or 41% higher compared to the prior year. Internationally, revenue of $109.0 million increased 61% compared to the prior year.

SFG revenue of $100.2 million in the first quarter of 2017 increased $9.6 million, or 11%, compared to 2016. In the U.S., revenue of $65.0 million increased $5.0 million over 2016 primarily due to growth in CLO, REIT and ABS issuance compared to a challenging prior year period when global market volatility suppressed issuance. These increases were partially offset by lower securitization activity in CMBS reflecting the impact of certain newly implemented risk retention regulatory requirements for this asset class. Non-U.S. revenue in the first quarter of 2017 of $35.2 million increased $4.6 million compared to the prior year primarily reflecting higher covered bond revenue in EMEA due to issuance ahead of potential volatility stemming from the upcoming European election calendar. Transaction revenue was 57% of total SFG revenue in the first quarter of 2017 compared to 55% in the prior year.

FIG revenue of $112.3 million in the first quarter of 2017 increased $17.4 million, or 18%, compared to 2016. In the U.S., revenue was $50.6 million, up 26% compared to the first quarter of 2016 reflecting higher issuance in the banking sector and benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Internationally, revenue was $61.7 million in the first quarter of 2017, up 13% compared to 2016 primarily due to growth in the Asia-Pacific region reflecting higher cross-border issuance from Chinese banks and asset managers. Transaction revenue was 48% of total FIG revenue in the first quarter of 2017 compared to 39% in the same period in 2016.

PPIF revenue was $98.1 million in the first quarter of 2017 and increased $6.6 million, or 7%, compared to 2016. In the U.S., revenue of $63.0 million in the first quarter of 2017 increased $1.9 million compared to 2016 primarily due to benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Additionally, the increase reflects growth in infrastructure finance revenue compared to a challenging prior year period where market volatility at the time resulted in lower issuance volumes. These increases were partially offset by declines in public finance revenue as higher benchmark interest rates in the first quarter of 2017 suppressed municipal issuance volumes. Outside the U.S., PPIF revenue increased $4.7 million compared to 2016 reflecting higher public and infrastructure finance revenue in the EMEA and Asia-Pacific regions. Transaction revenue was 60% in the first quarter of 2017 compared to 59% of total PPIF revenue in first quarter of 2016.

Operating and SG&A expenses in the first quarter of 2017 increased $8.8 million compared to 2016. Compensation expenses increased approximately $14 million primarily due to higher incentive compensation reflecting higher projected achievement against full-year targeted results compared to the prior year partially offset by continued cost control initiatives. Non-compensation expenses declined approximately $5 million reflecting continued cost control initiatives.

Adjusted Operating Income and operating income in the first quarter of 2017, which includes intersegment royalty revenue and intersegment expenses, were $405.9 million and $387.0 million, respectively, and increased $135.4 million and $134.0 million, respectively, compared to 2016. Adjusted Operating Margin and operating margin were 58.5% and 55.7%, respectively, compared to 49.3% and 46.1%, in the prior year, respectively.

 

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Moody’s Analytics

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

 

    

 

Three months ended March 31,

    % Change
Favorable
(Unfavorable)
 
     2017     2016    

Revenue:

      

Research, data and analytics (RD&A)

   $ 175.4     $ 164.9       6

Enterprise risk solutions (ERS)

     95.9       89.5       7

Professional services (PS)

     35.7       36.6       (2 %) 
  

 

 

   

 

 

   

Total external revenue

     307.0       291.0       5
  

 

 

   

 

 

   

Intersegment revenue

     3.7       2.8       32
  

 

 

   

 

 

   

Total MA Revenue

     310.7       293.8       6
  

 

 

   

 

 

   

Expenses:

      

Operating and SG&A (external)

     214.7       206.3