10-Q 1 d603526d10q.htm 10-Q 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 September 30, 2018

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, every Interactive Data File required to be submitted 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 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. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      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 September 30, 2018

Common Stock, par value $0.01 per share    191.6 million


Table of Contents

MOODY’S CORPORATION

INDEX TO FORM 10-Q

 

          Page (s)  
   Glossary of Terms and Abbreviations      3-9  
PART I. FINANCIAL INFORMATION  

Item 1.

  

Financial Statements

  
  

Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September  30, 2018 and 2017

     10  
  

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017

     11  
   Consolidated Balance Sheets (Unaudited) at September 30, 2018 and December 31, 2017      12  
   Consolidated Statements of Cash Flows (Unaudited) for the Nine months ended September 30, 2018 and 2017      13  
   Notes to Condensed Consolidated Financial Statements (Unaudited)      14-53  

Item 2.

  

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

  
  

The Company

     54  
   Critical Accounting Estimates      54-57  
   Reportable Segments      57  
   Results of Operations      58-70  
   Liquidity and Capital Resources      70-76  
   Recently Issued Accounting Standards      76  
   Contingencies      76  
   Regulation      76-77  
   Forward-Looking Statements      77-78  

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     78-79  

Item 4.

  

Controls and Procedures

     79  
PART II. OTHER INFORMATION  

Item 1.

  

Legal Proceedings

     80  

Item 1A.

  

Risk Factors

     80  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     80  

Item 5.

  

Other Information

     80-81  

Item 6.

  

Exhibits

     82  
SIGNATURES      83  
Exhibits Filed Herewith   
10.1    Employment Offer Letter between Moody’s Corporation and Mark Kaye, dated July 18, 2018   
12    Statement of Computations of Ratio 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

Acquisition-Related Amortization    Amortization of definite-lived intangible assets acquired by the Company from all business combination transactions
Acquisition-Related Expenses    Consists of expenses incurred to complete and integrate the acquisition of Bureau van Dijk for which the integration will be a multi-year effort
Adjusted Diluted EPS    Diluted EPS excluding the impact of certain items as detailed in the section entitled “Non-GAAP Financial Measures”
Adjusted Net Income    Net Income excluding the impact of certain items as detailed in the section entitled “Non-GAAP Financial Measures”
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’ equity (deficit)
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
ASC 605    The U.S. GAAP authoritative guidance for revenue accounting prior to the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (ASC Topic 606).
Asia-Pacific    Represents Australia and countries in Asia including but not limited to: 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

 

Bureau van Dijk

  

Basis points

 

Bureau van Dijk Electronic Publishing, B.V., a global provider of business intelligence and company information; acquired by the Company on August 10, 2017 via the acquisition of Yellow Maple I B.V., an indirect parent of Bureau van Dijk.

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.

 

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Table of Contents

TERM

  

DEFINITION

CFG    Corporate finance group; an LOB of MIS
CLO    Collateralized loan obligation
CMBS    Commercial mortgage-backed securities; part of the CREF asset class within SFG
Commission    European Commission
Common Stock    The Company’s common stock
Company    Moody’s Corporation and its subsidiaries; MCO; Moody’s
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 days from the date of issue and which is backstopped by the 2015 facility.
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
DBPPs    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 solutions as well as related risk management advisory engagements services
ESA    Economics and Structured Analytics; part of the RD&A line of business within MA
ESMA    European Securities and Markets Authority
ETR    Effective tax rate
EU    European Union
EUR    Euros

 

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Table of Contents

TERM

  

DEFINITION

EURIBOR    The Euro Interbank Offered Rate
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; now referred to as MALS
FX    Foreign exchange
GAAP    U.S. Generally Accepted Accounting Principles
GBP    British pounds
ICRA    ICRA Limited; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to just over 50% through the acquisition of additional shares
IASB    International Accounting Standards Board
IFRS    International Financial Reporting Standards
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
KIS Research    Korea Investors Service Research; a Korean provider of financial research and consolidated subsidiary of the Company
Korea    Republic of South Korea
LIBOR    London Interbank Offered Rate
LOB    Line of business

 

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Table of Contents

TERM

  

DEFINITION

M&A    Mergers and acquisitions
MA    Moody’s Analytics – a reportable segment of MCO 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, 2017 Senior Notes and 2018 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; 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
MALS    Moody’s Analytics Learning Solutions; a reporting unit within the MA segment that includes on-line and classroom-based training services as well as credentialing and certification services; formerly known as FSTC
MCO    Moody’s Corporation and its subsidiaries; the Company; Moody’s
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MIS    Moody’s Investors Service – a reportable segment of MCO; consists of five LOBs – SFG, CFG, FIG, PPIF and MIS Other
MIS Other    Consists of non-ratings revenue from ICRA, KIS Pricing and KIS Research. These businesses are components of MIS; MIS Other is an LOB of MIS
Moody’s    Moody’s Corporation and its subsidiaries; MCO; the Company
Net Income    Net income attributable to Moody’s Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder
New Revenue Accounting Standard    Updates to the ASC pursuant to ASU No. 2014-09, “Revenue from Contracts with Customers (ASC Topic 606)”. This new accounting guidance significantly changes the accounting framework under U.S. GAAP relating to revenue recognition and to the accounting for the deferral of incremental costs of obtaining or fulfilling a contract with a customer
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, which is a credit rating agency registered with the SEC.
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 (in periods prior to January 1, 2018), certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments

 

6


Table of Contents

TERM

  

DEFINITION

Omega Performance    A leading provider of online credit training; acquired by the Company in August 2018.
Operating segment    Term defined in the ASC relating to segment reporting; the ASC defines an operating segment as a component of a business entity that has each of the three following characteristics: i) the component engages in business activities from which it may recognize revenue and incur expenses; ii) the operating results of the component are regularly reviewed by the entity’s chief operating decision maker; and iii) discrete financial information about the component is available.
Other Retirement Plan    The U.S. retirement healthcare and U.S. retirement life insurance plans
PCS    Post-Contract Customer Support
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 MALS that provides offshore analytical and research services as well as learning solutions and certification programs
Purchase Price Hedge    Foreign currency collars and forward contracts entered into by the Company to economically hedge the Bureau van Dijk euro denominated purchase price
Purchase Price Hedge Gain    Gain on foreign currency collars and forward contracts to economically hedge the Bureau van Dijk euro denominated purchase price
RD&A    an LOB within MA that offers subscription based research, data and analytical products, including credit ratings produced by MIS, credit research, quantitative credit scores and other analytical tools, economic research and forecasts, business intelligence and company information products, and commercial real estate data and analytical tools
Reform Act    Credit Rating Agency Reform Act of 2006
REIT    Real Estate Investment Trust
Relationship Revenue    For MIS, represents recurring monitoring fees 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 revenue and software maintenance revenue
Retirement Plans    Moody’s funded and unfunded pension plans, the healthcare plans and life insurance plans
SaaS    Software-as-a-Service
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
Settlement Charge    Charge of $863.8 million recorded in the fourth quarter of 2016 related to an agreement entered into on January 13, 2017 with the U.S. Department of Justice and the attorneys general of 21 U.S. states and the District of Columbia to resolve pending and potential civil claims related to credit ratings that MIS assigned to certain structured finance instruments in the financial crisis era
SFG    Structured finance group; an LOB of MIS

 

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Table of Contents

TERM

  

DEFINITION

SG&A    Selling, general and administrative expenses
SSP    Standalone selling price
T&M    Time-and-Material
Tax Act    The “Tax Cuts and Jobs Act” enacted into U.S. law on December 22, 2017 which significantly amends the tax code in the U.S.
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 perpetual software license fees and revenue from software implementation services, 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
UTPs    Uncertain tax positions
VSOE    Vendor specific objective evidence; as defined in the ASC, evidence of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
2007 Agreement    Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes
2010 Indenture    Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior Notes    Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 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

 

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Table of Contents

TERM

  

DEFINITION

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; backstops CP issued under the CP Program
2015 Indenture    Supplemental indenture and related agreements dated March 9, 2015, relating to the 2015 Senior Notes
2015 Senior Notes    Principal amount of €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 Indenture    Collectively the Supplemental indenture and related agreements dated March 2, 2017, relating to the 2017 Floating Rate Senior Notes and 2017 Notes Due 2023 and 2028, and the supplemental indenture and related agreements dated June 12, 2017, relating to the 2017 Notes Due 2023 and 2028
2017 Senior Notes Due 2023    Principal amount of $500 million, 2.625% senior unsecured notes due January 15, 2023
2017 Senior Notes Due 2028    Principal amount of $500 million, 3.250% senior unsecured notes due January 15, 2028
2017 Senior Notes Due 2021    Principal amount of $500 million, 2.75% senior unsecured notes due in December 2021
2017 Term Loan    $500 million, three-year term loan facility entered into on June 6, 2017 for which the Company drew down $500 million on August 8, 2017 to fund the acquisition of Bureau van Dijk
2018 Senior Notes    Principal amount of $300 million, 3.250% senior unsecured notes due June 7, 2021

 

9


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
September 30,
    Nine Months Ended
September 30,
 
      2018     2017     2018     2017  

Revenue

   $ 1,080.8     $ 1,062.9     $ 3,382.6     $ 3,038.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Operating

     306.3       315.6       941.4       875.7  

Selling, general and administrative

     260.3       245.7       801.9       682.5  

Depreciation and amortization

     46.1       43.0       143.6       108.4  

Acquisition-Related Expenses

     1.3       10.1       4.1       16.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     614.0       614.4       1,891.0       1,683.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     466.8       448.5       1,491.6       1,355.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating (expense) income, net

        

Interest expense, net

     (56.4     (53.1     (160.5     (150.2

Other non-operating income, net

     2.4       0.5       18.3       3.2  

Purchase Price Hedge Gain

     —         69.9       —         111.1  

CCXI Gain

     —         —         —         59.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating (expense) income, net

     (54.0     17.3       (142.2     23.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provisions for income taxes

     412.8       465.8       1,349.4       1,379.1  

Provision for income taxes

     100.8       146.1       282.7       399.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     312.0       319.7       1,066.7       979.2  

Less: Net income attributable to noncontrolling interests

     1.8       2.4       7.4       4.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 310.2     $ 317.3     $ 1,059.3     $ 975.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Moody’s common shareholders

        

Basic

   $ 1.62     $ 1.66     $ 5.53     $ 5.10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.59     $ 1.63     $ 5.45     $ 5.02  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

        

Basic

     191.8       191.1       191.7       191.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     194.5       194.1       194.4       194.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share attributable to Moody’s common shareholders

   $ 0.44     $ 0.38     $ 1.32     $ 0.76  
  

 

 

   

 

 

   

 

 

   

 

 

 

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
September 30, 2018
    Three Months Ended
September 30, 2017
 
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net Income

       $ 312.0         $ 319.7  
      

 

 

       

 

 

 

Other Comprehensive Income (loss):

            

Foreign Currency Adjustments:

            

Foreign currency translation adjustments, net

   $ (46.5   $ (1.8     (48.3   $ 45.4     $ 6.4       51.8  

Cash Flow Hedges:

            

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

     —         —         —         5.2       (2.0     3.2  

Reclassification of gains included in net income

     (0.1     —         (0.1     (4.2     1.6       (2.6

Available for Sale Securities:

            

Net unrealized gains on available for sale securities

     —         —         —         0.5       —         0.5  

Reclassification of gains included in net income

     —         —         —         (2.2     —         (2.2

Pension and Other Retirement Benefits:

            

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

     1.1       (0.3     0.8       2.1       (0.8     1.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive (loss) income

   $ (45.5   $ (2.1     (47.6   $ 46.8     $ 5.2       52.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         264.4           371.7  

Less: comprehensive (loss) income attributable to noncontrolling interests

         (8.4         3.1  
      

 

 

       

 

 

 

Comprehensive Income Attributable to Moody’s

       $ 272.8         $ 368.6  
      

 

 

       

 

 

 
     Nine Months Ended
September 30, 2018
    Nine Months Ended
September 30, 2017
 
     Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
    Pre-tax
amounts
    Tax
amounts
    After-tax
amounts
 

Net Income

       $ 1,066.7         $ 979.2  
      

 

 

       

 

 

 

Other Comprehensive Income (loss):

            

Foreign Currency Adjustments:

            

Foreign currency translation adjustments, net

   $ (175.2   $ (7.4     (182.6   $ 94.9     $ 19.5       114.4  

Cash Flow Hedges:

            

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

     1.9       (0.4     1.5       10.0       (3.8     6.2  

Reclassification of gains included in net income

     (0.3     —         (0.3     (11.7     4.9       (6.8

Available for Sale Securities:

            

Net unrealized gains on available for sale securities

     —         —         —         1.6       —         1.6  

Reclassification of gains included in net income

     —         —         —         (2.2     —         (2.2

Pension and Other Retirement Benefits:

            

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

     3.5       (1.0     2.5       6.4       (2.5     3.9  

Net actuarial gains and prior service costs

     1.6       (0.4     1.2       7.9       (3.0     4.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

   $ (168.5   $ (9.2     (177.7   $ 106.9     $ 15.1       122.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

         889.0           1,101.2  

Less: comprehensive (loss) income attributable to noncontrolling interests

         (2.7         19.6  
      

 

 

       

 

 

 

Comprehensive Income Attributable to Moody’s

       $ 891.7         $ 1,081.6  
      

 

 

       

 

 

 

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)

 

     September 30,
2018
    December 31,
2017
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 1,034.8     $ 1,071.5  

Short-term investments

     110.7       111.8  

Accounts receivable, net of allowances of $36.9 in 2018 and $36.6 in 2017

     1,131.8       1,147.2  

Other current assets

     238.9       250.1  
  

 

 

   

 

 

 

Total current assets

     2,516.2       2,580.6  

Property and equipment, net of accumulated depreciation of $767.9 in 2018 and $706.0 in 2017

     311.1       325.1  

Goodwill

     3,661.3       3,753.2  

Intangible assets, net

     1,517.6       1,631.6  

Deferred tax assets, net

     189.3       143.8  

Other assets

     243.6       159.9  
  

 

 

   

 

 

 

Total assets

   $ 8,439.1     $ 8,594.2  
  

 

 

   

 

 

 

LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 581.6     $ 750.3  

Commercial paper

     24.9       129.9  

Current portion of long-term debt

     445.6       299.5  

Deferred revenue

     771.5       883.6  
  

 

 

   

 

 

 

Total current liabilities

     1,823.6       2,063.3  

Non-current portion of deferred revenue

     123.9       140.0  

Long-term debt

     4,484.0       5,111.1  

Deferred tax liabilities, net

     354.8       341.6  

Uncertain tax positions

     471.8       389.1  

Other liabilities

     574.9       664.0  
  

 

 

   

 

 

 

Total liabilities

     7,833.0       8,709.1  
  

 

 

   

 

 

 

Contingencies (Note 16)

     —         —    

Shareholders’ equity (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 September 30, 2018 and December 31, 2017, respectively.

     3.4       3.4  

Capital surplus

     569.7       528.6  

Retained earnings

     8,429.1       7,465.4  

Treasury stock, at cost; 151,293,579 and 151,932,157 shares of common stock at September 30, 2018 and December 31, 2017, respectively

     (8,260.1     (8,152.9

Accumulated other comprehensive loss

     (342.0     (172.2
  

 

 

   

 

 

 

Total Moody’s shareholders’ equity (deficit)

     400.1       (327.7

Noncontrolling interests

     206.0       212.8  
  

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     606.1       (114.9
  

 

 

   

 

 

 

Total liabilities, noncontrolling interests and shareholders’ equity (deficit)

   $ 8,439.1     $ 8,594.2  
  

 

 

   

 

 

 

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

 

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MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)

 

      Nine Months  Ended
September 30
 
      2018     2017  

Cash flows from operating activities

    

Net income

   $ 1,066.7     $ 979.2  

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

    

Depreciation and amortization

     143.6       108.4  

Stock-based compensation

     100.0       88.9  

CCXI Gain

     —         (59.7

Purchase Price Hedge Gain

     —         (111.1

Deferred income taxes

     (75.3     161.4  

Changes in assets and liabilities:

    

Accounts receivable

     22.5       (9.8

Other current assets

     36.6       (16.2

Other assets

     (7.4     11.4  

Accounts payable and accrued liabilities

     (176.5     (827.2

Deferred revenue

     (35.3     (19.3

Unrecognized tax benefits and other non-current tax liabilities

     42.8       18.4  

Other liabilities

     (33.1     25.4  
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,084.6       349.8  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital additions

     (62.9     (69.4

Purchases of investments

     (142.5     (124.0

Sales and maturities of investments

     120.9       183.8  

Cash received upon disposal of a subsidiary, net of cash transferred to purchaser

     5.7       —    

Cash paid for acquisitions, net of cash acquired

     (35.0     (3,511.0

Receipts from Purchase Price Hedge

     —         111.1  

Receipts from settlements of net investment hedges

     —         2.1  
  

 

 

   

 

 

 

Net cash used in investing activities

     (113.8     (3,407.4
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of notes

     299.6       2,291.9  

Repayment of notes

     (750.0     (300.0

Issuance of commercial paper

     434.4       1,437.5  

Repayment of commercial paper

     (539.2     (1,123.2

Proceeds from stock-based compensation plans

     42.9       49.3  

Repurchase of shares related to stock-based compensation

     (62.0     (48.3

Treasury shares

     (147.2     (163.6

Dividends

     (252.9     (217.8

Dividends to noncontrolling interests

     (4.0     (3.2

Payment for noncontrolling interest

     —         (6.2

Debt issuance costs, extinguishment costs and related fees

     (1.8     (26.8
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (980.2     1,889.6  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (27.3     79.3  
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (36.7     (1,088.7

Cash and cash equivalents, beginning of period

     1,071.5       2,051.5  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,034.8     $ 962.8  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the 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 that support financial risk management activities; (iv) quantitatively derived credit scores; (v) learning solutions and certification services; (vi) offshore financial research and analytical services; and (vii) company information and business intelligence products. Moody’s reports in 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 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 offers subscription based research, data and analytical products, including credit ratings produced by MIS, credit research, quantitative credit scores and other analytical tools, economic research and forecasts, business intelligence and company information products, and commercial real estate data and analytical tools. Within its ERS business, MA provides software solutions as well as related risk management services. The PS business provides offshore analytical and research services along with learning solutions 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 2017 annual report on Form 10-K filed with the SEC on February 27, 2018. 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 Standards

On January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (ASC Topic 606)” using the modified retrospective approach which Moody’s has elected to apply only to those contracts which were not completed as of January 1, 2018. Additionally, the Company has not retrospectively restated contract positions for contract modifications made prior to the adoption. ASU No. 2014-09 also includes updates related to the accounting for the deferral of incremental costs of obtaining or fulfilling a contract with a customer (“ASC Subtopic 340-40”). Hereunder, discussion of the provisions of ASC Topic 606 and ASC Subtopic 340-40 are both individually and collectively referred to as the “New Revenue Accounting Standard.” Results for reporting periods beginning on January 1, 2018 are presented under the guidance set forth in the New Revenue Accounting Standard, while prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.

The most significant impacts to the Company’s financial statements from adopting the New Revenue Accounting Standard are primarily related to: i) the accounting for certain installed software subscription revenue in MA whereby the license rights within the arrangement are recognized at the inception of the contract based on SSP with the remainder recognized over the subscription period (compared to ASC Topic 605 whereby all installed software subscription revenue was previously recognized over the subscription period); ii) the accounting for certain ERS and ESA revenue arrangements where VSOE was not available under ASC Topic 605 now results in the acceleration of revenue recognition (compared to ASC Topic 605 whereby revenue was deferred due to lack of VSOE until all elements without VSOE had been delivered); iii) sales commissions incurred in the MA segment will be capitalized and amortized over an extended period which is generally based upon the average economic life of products/services sold and incorporates anticipated subscription renewals (compared to previous accounting guidance whereby capitalized sales commissions were amortized over the committed subscription period only); iv) the immediate expensing of software implementation project costs to fulfill a contract for its ERS and ESA businesses which under previous accounting guidance were capitalized and expensed when related project revenue was recognized; v) the capitalization of work-in-process costs for in-progress MIS ratings at the end of each reporting period which under ASC Topic 605 were expensed as incurred; vi) the timing of when revenue for certain MIS ratings products is recognized; and vii) the estimation of variable consideration at contract inception whereas under ASC Topic 605 companies were not required to consider the amount of consideration for which it expected to be entitled.

 

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The Company does not anticipate that applying the provisions of the New Revenue Accounting Standard will have a material impact to its 2018 consolidated Net Income. However, there could be quarterly fluctuations in the financial results of both MIS and MA, or there could be increases or decreases in revenues and expenses which would largely offset and not be material to total consolidated Net Income for the full year.

The table below provides detail relating to the adjustment to the Company’s retained earnings balance upon adoption of the New Revenue Accounting Standard:

 

Transition adjustment

  

Benefit to / (reduction of)
January 1, 2018 Retained
Earnings

  

Corresponding Balance Sheet Line Item

Recognition of MA deferred revenue / increase in MA unbilled receivables (1)

   $108 million    Deferred revenue, Non-current portion of deferred revenue, Accounts receivable, Other assets

Increase to capitalized MA sales commissions (2)

   $78 million    Other current assets, Other assets, Accounts payable and accrued liabilities

Capitalization of work-in-process for in-progress ratings

   $9 million    Other current assets

Net impact of all other adjustments

   $4 million    Various

Net increase in tax liability on the above

   ($43 million)    Deferred tax liabilities, net
  

 

  

Total post-tax adjustment

   $156 million   
  

 

  

 

(1) 

Represents deferred revenue as of December 31, 2017 as well as amounts then unbilled that would have been recognized as revenue in 2017 or earlier if the New Revenue Accounting Standard was then in effect. These amounts will not be recognized as revenue in future statements of operations. Conversely, revenue will be recorded to the Company’s statement of operations in 2018 under the New Revenue Accounting Standard, which otherwise would have been recognized in periods subsequent to 2018 if accounted for under ASC Topic 605.

(2)

Represents sales commissions that would have been capitalized as of December 31, 2017 if the New Revenue Accounting Standard was then in effect, but had previously been expensed by the Company under the previous accounting guidance. These sales commissions, as well as sales commissions incurred in 2018 related to new sales and renewals, will be amortized to expense in the statements of operations beginning in 2018 over an extended period generally based upon the average economic life of the products sold or over the period in which implementation and advisory services will be provided.

 

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The table below presents the cumulative effect of the changes made to the Company’s consolidated balance sheet at January 1, 2018 for the adoption of the New Revenue Accounting Standard:

 

     As
Reported
December 31,  2017
    Adjustment Due to
New Revenue
Accounting

Standard
    Balance at
January 1, 2018
 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 1,071.5     $ —       $ 1,071.5  

Short-term investments

     111.8       —         111.8  

Accounts receivable, net of allowances

     1,147.2       16.8       1,164.0  

Other current assets

     250.1       32.9       283.0  
  

 

 

   

 

 

   

 

 

 

Total current assets

     2,580.6       49.7       2,630.3  

Property and equipment, net

     325.1       —         325.1  

Goodwill

     3,753.2       —         3,753.2  

Intangible assets, net

     1,631.6       —         1,631.6  

Deferred tax assets, net

     143.8       —         143.8  

Other assets

     159.9       71.3       231.2  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,594.2     $ 121.0     $ 8,715.2  
  

 

 

   

 

 

   

 

 

 

LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ (DEFICIT)/EQUITY

 

Current liabilities:

      

Accounts payable and accrued liabilities

   $ 750.3     $ (0.8   $ 749.5  

Commercial paper

     129.9       —         129.9  

Current portion of long-term debt

     299.5       —         299.5  

Deferred revenue

     883.6       (69.3     814.3  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     2,063.3       (70.1     1,993.2  

Non-current portion of deferred revenue

     140.0       (8.0     132.0  

Long-term debt

     5,111.1       —         5,111.1  

Deferred tax liabilities, net

     341.6       42.7       384.3  

Unrecognized tax benefits

     389.1       —         389.1  

Other liabilities

     664.0       0.3       664.3  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     8,709.1       (35.1     8,674.0  
  

 

 

   

 

 

   

 

 

 

Shareholders’ (deficit) equity:

      

Common stock

     3.4       —         3.4  

Capital surplus

     528.6       —         528.6  

Retained earnings

     7,465.4       156.1       7,621.5  

Treasury stock

     (8,152.9     —         (8,152.9

Accumulated other comprehensive loss

     (172.2     —         (172.2
  

 

 

   

 

 

   

 

 

 

Total Moody’s shareholders’ (deficit) equity

     (327.7     156.1       (171.6

Noncontrolling interests

     212.8       —         212.8  
  

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit) equity

     (114.9     156.1       41.2  
  

 

 

   

 

 

   

 

 

 

Total liabilities, noncontrolling interests and shareholders’ (deficit) equity

   $ 8,594.2     $ 121.0     $ 8,715.2  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The below table presents the impacts on the Company’s statement of operations for the current reporting period from applying the provisions of the New Revenue Accounting Standard compared to the accounting standard in effect before the change:

 

      For the Three Months Ended September 30, 2018  
      As
Reported
    Under previous
accounting guidance
    Effect  of
Change
Higher/(Lower)
 

Revenue

   $ 1,080.8     $ 1,072.4     $ 8.4  
  

 

 

   

 

 

   

 

 

 

Expenses

      

Operating

     306.3       306.6       (0.3

Selling, general and administrative

     260.3       263.4       (3.1

Depreciation and amortization

     46.1       46.1       —    

Acquisition-related expenses

     1.3       1.3       —    
  

 

 

   

 

 

   

 

 

 

Total expenses

     614.0       617.4       (3.4
  

 

 

   

 

 

   

 

 

 

Operating income

     466.8       455.0       11.8  
  

 

 

   

 

 

   

 

 

 

Non-operating (expense) income, net

      

Interest expense, net

     (56.4     (56.4     —    

Other non-operating income, net

     2.4       2.4       —    
  

 

 

   

 

 

   

 

 

 

Total non-operating (expense) income, net

     (54.0     (54.0     —    
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     412.8       401.0       11.8  

Provision for income taxes

     100.8       98.4       2.4  
  

 

 

   

 

 

   

 

 

 

Net income

     312.0       302.6       9.4  

Less: Net income attributable to noncontrolling interests

     1.8       1.8       —    
  

 

 

   

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 310.2     $ 300.8     $ 9.4  
  

 

 

   

 

 

   

 

 

 

Earnings per share

      

Basic

   $ 1.62     $ 1.57     $ 0.05  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.59     $ 1.55     $ 0.04  
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

      

Basic

     191.8       191.8    
  

 

 

   

 

 

   

Diluted

     194.5       194.5    
  

 

 

   

 

 

   
      For the Nine Months Ended September 30, 2018  
      As
Reported
    Under previous
accounting guidance
    Effect of
Change
Higher/(Lower)
 

Revenue

   $ 3,382.6     $ 3,368.7     $ 13.9  
  

 

 

   

 

 

   

 

 

 

Expenses

      

Operating

     941.4       942.8       (1.4

Selling, general and administrative

     801.9       807.4       (5.5

Depreciation and amortization

     143.6       143.6       —    

Acquisition-related expenses

     4.1       4.1       —    
  

 

 

   

 

 

   

 

 

 

Total expenses

     1,891.0       1,897.9       (6.9
  

 

 

   

 

 

   

 

 

 

Operating income

     1,491.6       1,470.8       20.8  
  

 

 

   

 

 

   

 

 

 

Non-operating (expense) income, net

      

Interest expense, net

     (160.5     (160.5     —    

Other non-operating income, net

     18.3       18.3       —    
  

 

 

   

 

 

   

 

 

 

Total non-operating (expense) income, net

     (142.2     (142.2     —    
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     1,349.4       1,328.6       20.8  

Provision for income taxes

     282.7       277.6       5.1  
  

 

 

   

 

 

   

 

 

 

Net income

     1,066.7       1,051.0       15.7  

Less: Net income attributable to noncontrolling interests

     7.4       7.4       —    
  

 

 

   

 

 

   

 

 

 

Net income attributable to Moody’s

   $ 1,059.3     $ 1,043.6     $ 15.7  
  

 

 

   

 

 

   

 

 

 

Earnings per share

      

Basic

   $ 5.53     $ 5.44     $ 0.09  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 5.45     $ 5.37     $ 0.08  
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

      

Basic

     191.7       191.7    
  

 

 

   

 

 

   

Diluted

     194.4       194.4    
  

 

 

   

 

 

   

 

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Table of Contents

The below table presents the impacts on the Company’s consolidated balance sheet at the end of the current reporting period from applying the provisions of the New Revenue Accounting Standard compared to the accounting standard in effect before the change:

 

      As
Reported
September 30, 2018
    Under previous
accounting guidance
September 30, 2018
    Effect  of
Change
Higher/(Lower)
 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 1,034.8     $ 1,034.8     $ —    

Short-term investments

     110.7       110.7       —    

Accounts receivable, net of allowances

     1,131.8       1,093.4       38.4  

Other current assets

     238.9       222.5       16.4  
  

 

 

   

 

 

   

 

 

 

Total current assets:

     2,516.2       2,461.4       54.8  

Property and equipment, net

     311.1       311.1       —    

Goodwill

     3,661.3       3,661.3       —    

Intangible assets, net

     1,517.6       1,517.6       —    

Deferred tax assets, net

     189.3       189.3       —    

Other assets

     243.6       172.6       71.0  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,439.1     $ 8,313.3     $ 125.8  
  

 

 

   

 

 

   

 

 

 

LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY

 

 

Accounts payable and accrued liabilities

   $ 581.6     $ 581.4     $ 0.2  

Commercial paper

     24.9       24.9       —    

Current portion of long-term debt

     445.6       445.6       —    

Deferred revenue

     771.5       836.5       (65.0
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,823.6       1,888.4       (64.8

Non-current portion of deferred revenue

     123.9       130.1       (6.2

Long-term debt

     4,484.0       4,484.0       —    

Deferred tax liabilities, net

     354.8       330.8       24.0  

Unrecognized tax benefits

     471.8       471.8       —    

Other liabilities

     574.9       574.8       0.1  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     7,833.0       7,879.9       (46.9
  

 

 

   

 

 

   

 

 

 

Shareholders’ equity:

      

Common stock

     3.4       3.4       —    

Capital surplus

     569.7       569.7       —    

Retained earnings

     8,429.1       8,256.4       172.7  

Treasury stock

     (8,260.1     (8,260.1     —    

Accumulated other comprehensive loss

     (342.0     (342.0     —    
  

 

 

   

 

 

   

 

 

 

Total Moody’s shareholders’ equity

     400.1       227.4       172.7  

Noncontrolling interests

     206.0       206.0       —    
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     606.1       433.4       172.7  
  

 

 

   

 

 

   

 

 

 

Total liabilities, noncontrolling interests and shareholders’ equity

   $ 8,439.1     $ 8,313.3     $ 125.8  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The below table presents the impacts on various line items within the operating cash flow within the Company’s statement of cash flows for the current reporting period from applying the provisions of the New Revenue Accounting Standard compared to the accounting standard in effect before the change.

 

      For the Nine Months Ended September 30, 2018  
      As
Reported
     Under previous
accounting guidance
     Effect of
Change
 

Cash flows from operating activities

        

Net income

   $ 1,066.7      $ 1,051.0      $ 15.7  

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

        

Depreciation and amortization

     143.6        143.6        —    

Stock-based compensation

     100.0        100.0        —    

Deferred income taxes

     (75.3      (59.3      (16.0

Changes in assets and liabilities:

        

Accounts receivable

     22.5        44.1        (21.6

Other current assets

     36.6        20.1        16.5  

Other assets

     (7.4      (7.8      0.4  

Accounts payable and accrued liabilities

     (176.5      (178.4      1.9  

Deferred revenue

     (35.3      (41.4      6.1  

Unrecognized tax benefits and other non-current tax liabilities

     42.8        42.8        —    

Other liabilities

     (33.1      (30.1      (3.0
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

   $ 1,084.6      $ 1,084.6      $ —    
  

 

 

    

 

 

    

 

 

 

The New Revenue Accounting Standard did not have any impact on individual line items within investing or financing cash flows in the Company’s consolidated statement of cash flows. In 2018, the adoption of the New Revenue Accounting Standard will likely result in higher cash taxes as the cumulative catch-up adjustment to retained earnings is taxable and there is expected to be acceleration of revenue recognition under the New Revenue Accounting Standard.

On January 1, 2018, the Company adopted ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. As required by this ASU, the components of net periodic pension costs were disaggregated in the statement of operations on a retrospective basis. The Company has continued to reflect the service cost component in either Operating or SG&A expenses in Moody’s statement of operations. The other components of net benefit cost are presented within non-operating (expense) income, net, within the statement of operations. The adoption of this ASU has no impact on Net Income in the Company’s statements of operations. The impact to the Company’s statements of operations for the three and nine months ended September 30, 2018 and 2017 related to the adoption of this ASU are set forth in the table below

 

     For the Three Months Ended September 30,
2018
    For the Three Months Ended September 30,
2017
 
     As
Reported
    Under
previous
accounting

guidance
    Effect  of
Change
Higher/(Lower)
    As
Adjusted
    Under
previous
accounting

guidance
    Effect  of
Change
Higher/(Lower)
 

Operating expenses

   $ 306.3     $ 307.5     $ (1.2   $ 315.6     $ 317.2     $ (1.6

Selling, general and administrative expenses

     260.3       261.4       (1.1     245.7       247.2       (1.5

Operating income

     466.8       464.5       2.3       448.5       445.4       3.1  

Interest expense, net

     (56.4     (51.5     (4.9     (53.1     (48.1     (5.0

Other non-operating income (expense), net

     2.4       (0.2     2.6       0.5       (1.4     1.9  
     For the Nine Months Ended September 30,
2018
    For the Nine Months Ended September 30,
2017
 
     As
Reported
    Under
previous
accounting
guidance
    Effect of
Change

Higher/(Lower)
    As
Adjusted
    Under
previous
accounting
guidance
    Effect of
Change

Higher/(Lower)
 

Operating expenses

   $ 941.4     $ 944.9     $ (3.5   $ 875.7     $ 880.4     $ (4.7

Selling, general and administrative expenses

     801.9       805.1       (3.2     682.5       686.8       (4.3

Operating income

     1,491.6       1,484.9       6.7       1,355.3       1,346.3       9.0  

Interest expense, net

     (160.5     (146.0     (14.5     (150.2     (135.5     (14.7

Other non-operating income (expense), net

     18.3       10.5       7.8       3.2       (2.5     5.7  

 

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Table of Contents

On January 1, 2018, the Company adopted ASU No. 2016-01 “Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. Upon adoption, the Company recorded a $2.3 million cumulative adjustment to reclassify net unrealized gains on investments in equity securities previously classified as available-for-sale under the previous guidance from AOCI to retained earnings. Beginning in the first quarter of 2018, the Company will measure equity investments with readily determinable fair values (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. The adoption of this ASU did not have a material impact on the Company’s financial statements for the three and nine months ended September 30, 2018.

In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This ASU adds SEC paragraphs to the codification pursuant to the SEC Staff Accounting Bulletin No. 118, which addresses the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to finalize the calculations for the 2017 income tax effects of the Tax Act. This ASU provides entities with a one year measurement period from the December 22, 2017 enactment date, in order to complete the accounting for the effects of the Tax Act. The Company has recorded a provisional estimate for the transition tax relating to the Tax Act which is more fully described in Note 5. This provisional estimate may be impacted by a number of additional considerations, including but not limited to the issuance of regulations and the Company’s ongoing analysis of the new law.

On January 1, 2018, the Company adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)” on a retrospective basis. This ASU reduces diversity in practice in how certain transactions are reflected in the statement of cash flows. Pursuant to the adoption of this ASU, the Company reclassified $7.1 million in cash paid in the first nine months of 2017 relating to a Make-Whole provision upon the repayment of the Series 2007-1 Notes from cash flows used in operations to cash flows provided by financing activities.

During the second quarter of 2018, the Company early adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. This ASU fosters enhanced transparency relating to risk management activities and simplifies the application of hedge accounting in certain circumstances. The adoption of this ASU did not have an impact on the Company’s financial statements at the date of adoption. Refer to Note 9 for further discussion on the prospective impact of this ASU on the Company’s financial statements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company adopted the New Revenue Accounting Standard on January 1, 2018 using the modified retrospective transition method. Below are the Company’s revised accounting policies reflecting the provisions of the New Revenue Accounting Standard; ASU 2016-01 (as codified under ASC Topic 321) relating to the accounting for financial instruments; and the amendments to ASC Topic 815 as a result of the Company’s second quarter adoption of ASU 2017-12 relating to derivative instruments and hedging activities. The Company’s adoption of these ASUs is further discussed in Note 1. All other significant accounting policies described in the Form 10-K for the year ended December 31, 2017 remain unchanged. Also refer to Note 3 of the condensed consolidated financial statements for certain quantitative disclosures relating to the Company’s revenue from contracts with customers.

Revenue Recognition and Costs to Obtain or Fulfill a Contract with a Customer

Revenue recognition:

Revenue is recognized when control of promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

When contracts with customers contain multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to each distinct performance obligation on a relative SSP basis. The Company determines the SSP by using the price charged for a deliverable when sold separately or uses management’s best estimate of SSP for goods or services not sold separately based on the maximum number of observable data points, including: internal factors relevant to its pricing practices such as costs and margin objectives; standalone sales prices of similar products; percentage of the fee charged for a primary product or service relative to a related product or service; and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trends.

Sales, usage-based, value added and other taxes are excluded from revenues.

 

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Table of Contents

MIS Revenue

In the MIS segment, revenue arrangements are generally comprised of two distinct performance obligations, an initial rating and the related monitoring service. Revenue attributed to initial ratings of issued securities is generally recognized when the rating is delivered to the issuer. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of certain structured finance products, primarily CMBS, issuers can elect to pay all of the annual monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities.

MIS arrangements generally have standard contractual terms for which the stated payments are due at conclusion of the ratings process for initial ratings and either upfront or in arrears for monitoring services; and are signed by customers either on a per issue basis or at the beginning of the relationship with the customer. However, customer fee arrangements may be adjusted for which the Company accounts for as variable consideration at inception using the expected value method based on analysis of similar contracts in the same line of business, which is constrained based on the Company’s assessment of the realization of the adjustment amount.

The Company allocates the transaction price within arrangements that include both the initial rating and the related monitoring service based upon the relative SSP of each service. The Company generally uses management’s best estimate based on observable pricing points in determining SSP for its initial ratings as the Company rarely provides initial ratings separately without providing related monitoring services. The SSP for monitoring fees in these arrangements are generally based upon directly observable selling prices where the monitoring service is sold separately.

MA Revenue

In the MA segment, products and services offered by the Company include hosted research and data subscriptions, installed software subscriptions, perpetual installed software licenses and related maintenance, or PCS, and professional services. Subscription and PCS contracts are generally invoiced in advance of the contractual coverage period, which is principally one year, but can range from 3-5 years; while perpetual software licenses are generally invoiced upon delivery and professional services are invoiced as those services are provided. Payment terms and conditions vary by contract type, but primarily include a requirement of payment within 30 to 60 days.

Revenue from research, data and other hosted subscriptions is recognized ratably over the related subscription period. A large portion of these services are invoiced in the months of November, December and January.

Revenue from the sale of a software license, when considered distinct from the related software implementation services, is generally recognized at the time the product master or first copy is delivered or transferred to the customer. However, in instances where the software license (perpetual or subscription) and related implementation services are considered to be one combined performance obligation, revenue is recognized on a percentage-of-completion basis (input method) as implementation services are performed over time, which is consistent with the pattern of recognition for the software implementation services if considered to be a separate distinct performance obligation. The Company exercises judgment in determining the level of integration and interdependency between the promise to grant the software license and the promise to deliver the related implementation services. This determination influences whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the implementation services and recognized over time. PCS is generally recognized ratably over the contractual period commencing when the software license is fully delivered. Revenue from installed software subscriptions, which includes PCS, is bifurcated into a software license performance obligation and a PCS performance obligation, which follow the patterns of recognition described above.

For implementation services and other service projects within the ERS and ESA LOBs for which fees are fixed, the Company determined progress towards completion is most accurately measured on a percentage-of-completion basis (input method) as this approach utilizes the most directly observable data points and is therefore used to recognize the related revenue. For implementation services where price varies based on time expended, a time-based measure of progress towards completion of the performance obligation is utilized.

Revenue from professional services rendered within the PS LOB is generally recognized as the services are performed over time.

 

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Table of Contents

Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where an arrangement contains multiple performance obligations, the Company accounts for the individual performance obligations separately if they are considered distinct. Revenue is generally allocated to all performance obligations based upon the relative SSP at contract inception. Judgment is often required to determine the SSP for each distinct performance obligation. Revenue is recognized for each performance obligation based upon the conditions for revenue recognition noted above.

In the MA segment, customers usually pay a fixed fee for the products and services based on signed contracts. However, accounting for variable consideration is applied mainly for: i) estimates for cancellation rights and price concessions and ii) T&M based services.

The Company estimates the variable consideration associated with cancellation rights and price concessions based on the expected amount to be provided to customers and reduces the amount of revenue to be recognized. T&M based contracts represent about half of MA’s service projects within the ERS and ESA LOBs. The Company provides agreed upon services at a contracted daily or hourly rate. The commitment represents a series of goods and services that are substantially the same and have the same pattern of transfer to the customer. As such, if T&M services are sold with other MA products, the Company allocates the variable consideration entirely to the T&M performance obligation if the services are sold at standard pricing or at a similar discount level compared to other performance obligations in the same revenue contract. If these criteria are not met, the Company estimates variable consideration for each performance obligation upfront.

Each form of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.

Costs to Obtain or Fulfill a Contract with a Customer:

Costs incurred to obtain customer contracts, such as sales commissions, are deferred and recorded within other current assets and other assets when such costs are determined to be incremental to obtaining a contract, would not have been incurred otherwise and the Company expects to recover those costs. These costs are amortized to expense consistent with the recognition pattern of the related revenue over time. Depending on the line of business to which the contract relates, this may be based upon the average economic life of the products sold or average period for which services are provided, inclusive of anticipated contract renewals. Determining the estimated economic life of the products sold requires judgment with respect to anticipated future technological changes. The Company had a balance of $93.3 million in such deferred costs as of September 30, 2018 and recognized $8.0 million and $24.7 million of related amortization during the three and nine-month periods ended September 30, 2018, respectively, which is included within SG&A expenses in the consolidated statement of operations. Costs incurred to obtain customer contracts are only in the MA segment.

Costs incurred to fulfill customer contracts, are deferred and recorded within other current assets and other assets when such costs relate directly to a contract, generate or enhance resources of the Company that will be used in satisfying performance obligations in the future and the Company expects to recover those costs.

The Company capitalizes work-in-process costs for in-progress MIS ratings, which is recognized consistent with the rendering of the related services to the customers, as ratings are issued. The Company had a balance of $10.6 million in such deferred costs as of September 30, 2018 and recognized $10.3 million and $29.8 million of amortization of the costs during the three and nine-month periods ended September 30, 2018, respectively, which is included within operating expenses in the consolidated statement of operations.

In addition, within the MA segment, the Company capitalizes royalty costs related to third-party information data providers associated with hosted company information and business intelligence products. These costs are amortized to expense consistent with the recognition pattern of the related revenue over time. The Company had a balance of $24.8 million in such deferred costs as of September 30, 2018 and recognized $12.9 million and $41.2 million of related amortization during the three and nine-month periods ended September 30, 2018, respectively, which is included within operating expenses in the consolidated statement of operations.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in certain short-term investments consisting primarily of certificates of deposit that are carried at cost, which approximates fair value due to their short-term maturities.

 

22


Table of Contents

The Company also has certain investments in closed-ended and open-ended mutual funds in India which are accounted for as equity securities with readily determinable fair values under ASC Topic 321. Beginning in the first quarter of 2018, the Company will measure these investments at fair value with both realized gains and losses and unrealized holding gains and losses for these investments included in net income.

Prior to January 1, 2018, the investments in closed-ended and open-ended mutual funds in India were designated as ‘available for sale’ under Topic 320 of the ASC. Accordingly, unrealized gains and losses on these investments were recorded to other comprehensive income and were reclassified out of accumulated other comprehensive income to the statement of operations when the investment matured or was sold using a specific identification method.

Also, the Company uses derivative instruments to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets.

Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.

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

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

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

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

Derivative Instruments and Hedging Activities

Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded in the same income statement line item in earnings in which the corresponding adjustment to the carrying value of the hedged item is presented. The entire change in the fair value of derivatives that qualify as cash flow hedges is recorded to OCI and such amounts are reclassified from AOCI to the same income statement line in earnings in the same period or periods during which the hedged transaction affects income. Effective with the Company early adoption of ASC 2017-12, the Company changed the method by which it assesses effectiveness for net investment hedges from the forward-method to the spot-method. The Company considers the spot-method an improved method of assessing hedge effectiveness, as spot rate changes relating to the hedging instrument’s notional amount perfectly offset the currency translation adjustment on the hedged net investment in the Company’s foreign subsidiaries. The entire change in the fair value of derivatives that qualify as net investment hedges is initially recorded to OCI. Those changes in fair value attributable to components included in the assessment of hedge effectiveness in a net investment hedge are recorded in the currency translation adjustment component of OCI and remain in AOCI until the period in which the hedged item affects earnings. Those changes in fair value attributable to components excluded from the assessment of hedge effectiveness in a net investment hedge are recorded to OCI and amortized to earnings using a systematic and rational method over the duration of the hedge. Any changes in the fair value of derivatives that the Company does not designate as hedging instruments under Topic 815 of the ASC are recorded in the consolidated statements of operations in the period in which they occur. Refer to Note 9 for further information regarding the Company’s derivative financial instruments and hedging activities.

 

23


Table of Contents

NOTE 3. REVENUES

Revenue by Category

The following table presents the Company’s revenues disaggregated by LOB:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2018      2017 (1)      2018      2017 (1)  

MIS:

           

Corporate finance (CFG)

           

Investment-grade

   $ 51.0      $ 78.5      $ 199.4      $ 235.2  

High-yield

     38.3        62.9        154.8        189.8  

Bank loans

     75.9        82.4        301.9        274.1  

Other accounts (2)

     130.9        126.4        395.3        359.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CFG

     296.1        350.2        1,051.4        1,058.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Structured finance (SFG)

           

Asset-backed securities

     24.6        22.8        80.7        69.6  

Residential mortgage backed securities

     23.7        21.9        74.8        64.7  

Commercial real estate finance

     25.9        37.5        90.7        96.7  

Structured credit

     50.7        45.6        148.6        115.2  

Other accounts

     0.5        0.5        1.9        1.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total SFG

     125.4        128.3        396.7        347.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial institutions (FIG)

           

Banking

     72.9        70.1        227.2        219.6  

Insurance

     37.7        23.9        98.9        72.4  

Managed investments

     5.5        4.6        18.4        15.6  

Other accounts

     3.4        3.5        9.9        9.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total FIG

     119.5        102.1        354.4        316.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Public, project and infrastructure finance (PPIF)

           

Public finance / sovereign

     45.3        49.4        143.9        155.6  

Project and infrastructure

     53.7        59.8        156.4        156.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PPIF

     99.0        109.2        300.3        312.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total ratings revenue

     640.0        689.8        2,102.8        2,035.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

MIS Other

     4.8        4.4        14.2        13.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external revenue

     644.8        694.2        2,117.0        2,049.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Intersegment royalty

     31.6        29.0        92.0        82.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total MIS

     676.4        723.2        2,209.0        2,131.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

MA:

           

Research, data and analytics (RD&A)

     282.6        218.4        831.7        574.7  

Enterprise risk solutions (ERS)

     113.0        112.6        318.6        305.8  

Professional services (PS)

     40.4        37.7        115.3        109.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external revenue

     436.0        368.7        1,265.6        989.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Intersegment revenue

     2.6        4.1        10.0        11.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total MA

     438.6        372.8        1,275.6        1,001.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Eliminations

     (34.2      (33.1      (102.0      (93.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total MCO

   $ 1,080.8      $ 1,062.9      $ 3,382.6      $ 3,038.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  

Prior period amounts have not been adjusted under the modified retrospective method of adoption for the New Revenue Accounting Standard.

(2) 

Other includes: recurring monitoring fees of a rated debt obligation and/or entities that issue such obligations as well as fees from programs such as commercial paper, medium term notes, and ICRA corporate finance revenue.

 

24


Table of Contents

The following table presents the Company’s revenues disaggregated by LOB and geographic area:

 

     Three Months Ended September 30, 2018      Three Months Ended September 30, 2017 (1)  
     United States      International      Total      United States      International      Total  

MIS:

                 

Corporate finance (CFG)

   $ 184.0      $ 112.1      $ 296.1      $ 234.0      $ 116.2      $ 350.2  

Structured finance (SFG)

     81.3        44.1        125.4        89.3        39.0        128.3  

Financial institutions (FIG)

     59.8        59.7        119.5        40.5        61.6        102.1  

Public, project and infrastructure finance (PPIF)

     59.4        39.6        99.0        63.8        45.4        109.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ratings revenue

     384.5        255.5        640.0        427.6        262.2        689.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

MIS Other

     0.2        4.6        4.8        0.1        4.3        4.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total MIS

     384.7        260.1        644.8        427.7        266.5        694.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

MA:

                 

Research, data and analytics (RD&A)

     116.7        165.9        282.6        107.5        110.9        218.4  

Enterprise risk solutions (ERS)

     43.0        70.0        113.0        39.5        73.1        112.6  

Professional services (PS)

     15.2        25.2        40.4        13.7        24.0        37.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total MA

     174.9        261.1        436.0        160.7        208.0        368.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total MCO

   $ 559.6      $ 521.2      $ 1,080.8      $ 588.4      $ 474.5      $ 1,062.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2018      Nine Months Ended September 30, 2017 (1)  
     United States      International      Total      United States      International      Total  

MIS:

                 

Corporate finance (CFG)

   $ 673.0      $ 378.4      $ 1,051.4      $ 698.6      $ 360.2      $ 1,058.8  

Structured finance (SFG)

     259.2        137.5        396.7        235.9        111.8        347.7  

Financial institutions (FIG)

     162.7        191.7        354.4        135.0        181.8        316.8  

Public, project and infrastructure finance (PPIF)

     173.9        126.4        300.3        192.8        119.2        312.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ratings revenue

     1,268.8        834.0        2,102.8        1,262.3        773.0        2,035.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

MIS Other

     0.5        13.7        14.2        0.3        13.5        13.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total MIS

     1,269.3        847.7        2,117.0        1,262.6        786.5        2,049.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

MA:

                 

Research, data and analytics (RD&A)

     347.5        484.2        831.7        310.6        264.1        574.7  

Enterprise risk solutions (ERS)

     124.1        194.5        318.6        120.1        185.7        305.8  

Professional services (PS)

     41.8        73.5        115.3        40.7        68.3        109.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total MA

     513.4        752.2        1,265.6        471.4        518.1        989.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total MCO

   $ 1,782.7      $ 1,599.9      $ 3,382.6      $ 1,734.0      $ 1,304.6      $ 3,038.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  

Prior period amounts have not been adjusted under the modified retrospective method of adoption for the New Revenue Accounting Standard.

The tables below summarize the split between transaction and relationship revenue. In the MIS segment, excluding MIS Other, transaction revenue represents the initial rating of a new debt issuance as well as other one-time fees while relationship revenue represents the recurring monitoring fees 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. In MIS Other, transaction revenue represents revenue from professional services and outsourcing engagements and relationship revenue represents subscription-based revenues. In the MA segment, relationship revenue represents subscription-based revenues and software maintenance revenue. Transaction revenue in MA represents perpetual software license fees and revenue from software implementation services, risk management advisory projects, training and certification services, and outsourced research and analytical engagements.

 

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Table of Contents
     Three Months Ended September 30,  
     2018     2017 (2)  
     Transaction     Relationship     Total     Transaction     Relationship     Total  

Corporate Finance

   $ 192.0     $ 104.1     $ 296.1     $ 254.3     $ 95.9     $ 350.2  
     65     35     100     73     27     100

Structured Finance

   $ 81.0     $ 44.4     $ 125.4     $ 84.1     $ 44.2     $ 128.3  
     65     35     100     66     34     100

Financial Institutions

   $ 56.2     $ 63.3     $ 119.5     $ 40.6     $ 61.5     $ 102.1  
     47     53     100     40     60     100

Public, Project and Infrastructure Finance

   $ 60.8     $ 38.2     $ 99.0     $ 71.1     $ 38.1     $ 109.2  
     61     39     100     65     35     100

MIS Other

   $ 0.5     $ 4.3     $ 4.8     $ 0.4     $ 4.0     $ 4.4  
     10     90     100     9     91     100

Total MIS

   $ 390.5     $ 254.3     $ 644.8     $ 450.5     $ 243.7     $ 694.2  
     61     39     100     65     35     100

Moody’s Analytics

   $ 71.0 (1)     $ 365.0     $ 436.0     $ 77.6 (1)     $ 291.1     $ 368.7  
     16     84     100     21     79     100

Total Moody’s Corporation

   $ 461.5     $ 619.3     $ 1,080.8     $ 528.1     $ 534.8     $ 1,062.9  
     43     57     100     50     50     100
     Nine Months Ended September 30,  
     2018     2017 (2)  
     Transaction     Relationship     Total     Transaction     Relationship     Total  

Corporate Finance

   $ 741.2     $ 310.2     $ 1,051.4     $ 777.4     $ 281.4     $ 1,058.8  
     70     30     100     73     27     100

Structured Finance

   $ 259.4     $ 137.3     $ 396.7     $ 216.8     $ 130.9     $ 347.7  
     65     35     100     62     38     100

Financial Institutions

   $ 162.4     $ 192.0     $ 354.4     $ 137.9     $ 178.9     $ 316.8  
     46     54     100     44     56     100

Public, Project and Infrastructure Finance

   $ 184.9     $ 115.4     $ 300.3     $ 197.5     $ 114.5     $ 312.0  
     62     38     100     63     37     100

MIS Other

   $ 1.5     $ 12.7     $ 14.2     $ 1.0     $ 12.8     $ 13.8  
     11     89     100     7     93     100

Total MIS

   $ 1,349.4     $ 767.6     $ 2,117.0     $ 1,330.6     $ 718.5     $ 2,049.1  
     64     36     100     65     35     100

Moody’s Analytics

   $ 198.3 (1)     $ 1,067.3     $ 1,265.6     $ 205.0     $ 784.5     $ 989.5  
     16     84     100     21     79     100

Total Moody’s Corporation

   $ 1,547.7     $ 1,834.9     $ 3,382.6     $ 1,535.6     $ 1,503.0     $ 3,038.6  
     46     54     100     51     49     100

 

(1)

Revenue from software implementation services and risk management advisory projects, while classified by management as transactional revenue, is recognized over time under the New Revenue Accounting Standard (please also refer to the table below).

(2) 

Prior period amounts have not been adjusted under the modified retrospective method of adoption for the New Revenue Accounting Standard.

The following table presents the timing of revenue recognition:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2018      2018  
     MIS      MA      Total      MIS      MA      Total  

Revenue recognized at a point in time

   $ 390.5      $ 19.5      $ 410.0      $ 1,349.4      $ 49.0      $ 1,398.4  

Revenue recognized over time

     254.3        416.5        670.8        767.6        1,216.6        1,984.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 644.8      $ 436.0      $ 1,080.8      $ 2,117.0      $ 1,265.6      $ 3,382.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Unbilled receivables, Deferred revenue and Remaining performance obligations

Unbilled receivables

At September 30, 2018, accounts receivable included approximately $349.4 million of unbilled receivables related to the MIS segment. Certain MIS arrangements contain contractual terms whereby the customers are billed in arrears for annual monitoring services, requiring revenue to be accrued as an unbilled receivable as such services are provided. Additionally, there are other instances in which the timing of when the Company has the unconditional right to consideration and recognizes revenue prior to invoicing the customer, for which an unbilled receivable is recorded.

In addition, for certain MA arrangements, the timing of when the Company has the unconditional right to consideration and recognizes revenue occurs prior to invoicing the customer. Consequently, at September 30, 2018, accounts receivable included approximately $57.0 million of unbilled receivables related to the MA segment.

Historically, the Company has not had material differences between the estimated revenue and the actual billings.

Deferred revenue

The Company recognizes deferred revenue when a contract requires a customer to pay consideration to the Company in advance of when revenue related to that contract is recognized. This deferred revenue is relieved when the Company satisfies the related performance obligation and revenue is recognized.

Significant changes in the deferred revenue balances during the three and nine months ended September 30, 2018 are as follows:

 

     Three Months Ended September 30, 2018  
     MIS     MA     Total  

Balance at June 30, 2018

   $ 377.5     $ 609.0     $ 986.5  
  

 

 

   

 

 

   

 

 

 

Changes in deferred revenue

      

Revenue recognized that was included in the deferred revenue balance at the beginning of the period

     (127.4     (241.8     (369.2

Increases due to amounts billable excluding amounts recognized as revenue during the period

     101.6       176.6       278.2  

Effect of exchange rate changes

     1.1       (1.2     (0.1
  

 

 

   

 

 

   

 

 

 

Total changes in deferred revenue

     (24.7     (66.4     (91.1
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

   $ 352.8     $ 542.6     $ 895.4  
  

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2018  
     MIS     MA     Total  

Balance at January 1, 2018 (after New Revenue Accounting Standard transition adjustment)

   $ 334.7     $ 611.6     $ 946.3  
  

 

 

   

 

 

   

 

 

 

Changes in deferred revenue

      

Revenue recognized that was included in the deferred revenue balance at the beginning of the period

     (196.2     (417.1     (613.3

Increases due to amounts billable excluding amounts recognized as revenue during the period

     217.6       359.9       577.5  

Effect of exchange rate changes

     (3.3     (11.8     (15.1
  

 

 

   

 

 

   

 

 

 

Total changes in deferred revenue

     18.1       (69.0     (50.9
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

   $ 352.8     $ 542.6     $ 895.4  
  

 

 

   

 

 

   

 

 

 

Deferred revenue - current

   $ 233.9     $ 537.6     $ 771.5  

Deferred revenue - noncurrent

   $ 118.9     $ 5.0     $ 123.9  

For the MIS segment, the changes in the deferred revenue balance during the three and nine months ended September 30, 2018 were primarily related to the significant portion of contract renewals that occur during the first quarter of 2018 and are generally recognized over a one year period.

 

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For the MA segment, the decrease in deferred revenue for the three months ended September 30, 2018 was primarily due to the recognition of annual subscription and maintenance billings from December 2017 and January 2018. For the nine months ended September 30, 2018, the decrease in the deferred revenue balance attributable to recognition of revenues related to the aforementioned December 2017 billings, was largely offset by the impact of the high concentration of January 2018 billings.

Remaining performance obligations

The following tables include the expected recognition period for the remaining performance obligations for each reportable segment as of September 30, 2018:

 

MIS  
Total     Less than 1 year     1 - 5 years     6 - 10 Years     11 - 15 years      16-20 years      Over 20 Years  
$ 151.3     $ 22.4     $ 68.0     $ 43.2     $ 7.5      $ 4.2      $ 6.0  

The balances in the MIS table above largely reflect deferred revenue related to monitoring fees for certain structured finance products, primarily CMBS, where the issuers can elect to pay the monitoring fees for the life of the security in advance. With respect to the remaining performance obligations for the MIS segment, the Company has applied a practical expedient set forth in ASC Topic 606 permitting the omission from the table above for unsatisfied performance obligations relating to contracts with an original expected length of one year or less.

 

MA  
        Total              Less than 1 Year      1 - 2 Years      Over 2 Years  
$ 1,265.2      $ 930.1      $ 236.1      $ 99.0  

The balances in the MA table above include both amounts recorded as deferred revenue on the balance sheet as of September 30, 2018 as well as amounts not yet invoiced to customers as of September 30, 2018 largely reflecting future revenue related to signed multi-year arrangements for hosted and installed subscription based products.

NOTE 4. STOCK-BASED COMPENSATION

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

 

     Three Months Ended
September 30,
     Nine months ended
September 30,
 
     2018      2017      2018      2017  

Stock-based compensation cost

   $ 30.5      $ 31.8      $ 100.0      $ 88.9  

Tax benefit

   $ 11.5      $ 10.3      $ 26.0      $ 28.8  

During the first nine months of 2018, the Company granted 0.2 million employee stock options, which had a weighted average grant date fair value of $45.87 per share based on the Black-Scholes option-pricing model. The Company also granted 0.7 million shares of restricted stock in the first nine months of 2018, which had a weighted average grant date fair value of $167.48 per share. Both the employee stock options and restricted stock generally vest ratably over a four-year period. Additionally, the Company granted 0.1 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 $162.42 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2018:

 

Expected dividend yield

     1.05

Expected stock volatility

     25.6

Risk-free interest rate

     2.81

Expected holding period

     6.2 years  

Grant date fair value

   $ 45.87  

 

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Table of Contents

Unrecognized stock-based compensation expense at September 30, 2018 was $7.5 million and $164.6 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 2.0 years and 2.5 years, respectively. Additionally, there was $35.2 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 1.8 years.

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

 

     Nine months ended  
     September 30,  
Exercise of stock options:    2018      2017  

Proceeds from stock option exercises

   $ 36.2      $ 44.0  

Aggregate intrinsic value

   $ 94.9      $ 75.7  

Tax benefit realized upon exercise

   $ 23.2      $ 26.9  

Number of shares exercised

     0.8        1.0  
     Nine months ended
September 30,
 
Vesting of restricted stock:    2018      2017  

Fair value of shares vested

   $ 150.0      $ 109.1  

Tax benefit realized upon vesting

   $ 34.7      $ 34.6  

Number of shares vested

     0.9        1.0  
     Nine months ended
September 30,
 
Vesting of performance-based restricted stock:    2018      2017  

Fair value of shares vested

   $ 23.0      $ 19.5  

Tax benefit realized upon vesting

   $ 5.6      $ 6.9  

Number of shares vested

     0.1        0.2  

NOTE 5. INCOME TAXES

Moody’s effective tax rate was 24.4% and 31.4% for the three month periods ended September 30, 2018 and 2017, respectively and 21.0% and 29.0% for the nine month periods ended September 30, 2018 and 2017, respectively. The decline in the tax rate primarily reflects the impact of an enacted lower corporate tax rate in the U.S. pursuant to the Tax Act. Additionally, the ETR in 2018 includes a $37.5 million benefit relating to Excess Tax Benefits on stock-based compensation as well as a net uncertain tax position benefit pursuant to statute of limitation lapses. The ETR in 2017 reflected the non-taxable CCXI gain as well as $35.6 million in Excess Tax Benefits on stock-based compensation partially offset by tax on the Purchase Price Hedge Gain which was taxed in a higher tax jurisdiction.

On December 22, 2017, the Tax Act was signed into law which resulted in significant changes to U.S. corporate tax laws. The Tax Act includes a mandatory one-time deemed repatriation tax (“transition tax”) on previously untaxed accumulated earnings of foreign subsidiaries and beginning in 2018 reduces the statutory federal corporate income tax rate from 35% to 21%. Due to the complexities of the Tax Act, the SEC issued guidance requiring that companies provide a reasonable estimate of the impact of the Tax Act to the extent such reasonable estimate has been determined. Accordingly, as of December 31, 2017 the Company recorded a provisional estimate for the transition tax of $247.3 million. In September, 2018, the Company filed its 2017 federal income tax return and revised its estimate of the transition tax to $237.0 million, a reduction of $10.3 million from the estimate at December 31, 2017. The reduction is primarily due to Proposed Regulations issued by the Internal Revenue Service and the finalization of earnings and profits calculations. A portion of the transition tax will be payable over eight years, starting in 2018, and will not accrue interest. The above revised provisional estimate may be impacted by a number of additional considerations, including but not limited to the issuance of final regulations and our ongoing analysis of the new law.

As a result of the Tax Act, all previously net undistributed foreign earnings have now been subject to U.S. tax. The Company continues to evaluate which entities it will indefinitely reinvest earnings outside the U.S. The Company has provided deferred taxes for those entities whose earnings are not considered permanently reinvested outside of the U.S.

 

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Table of Contents

The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an increase in its UTPs of $73.5 million ($73.4 million net of federal tax) during the third quarter of 2018 and a net increase in its UTPs during the first nine months of 2018 of $82.7 million ($80.9 million net of federal tax). The movement in UTPs was primarily related to the additional reserves established for non-U.S. tax matters and an adjustment to the transition tax under U.S. tax reform. The Company has recorded a deferred tax asset in the amount of $54.4 million for potential transition tax benefits if certain non-U.S. UTPs are not sustained.

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 2013, 2015 through 2017 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 through 2016 remain open to examination.

For ongoing audits, it is possible the balance of UTPs 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 UTPs. 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 UTPs 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 UTPs.

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

 

     Nine months ended  
     September 30,  
     2018      2017  

Income taxes paid

   $ 337.0      $ 194.7  

NOTE 6. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

 

     Three Months Ended      Nine months ended  
     September 30,      September 30,  
     2018      2017      2018      2017  

Basic

     191.8        191.1        191.7        191.1  

Dilutive effect of shares issuable under stock-based compensation plans

     2.7        3.0        2.7        3.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     194.5        194.1        194.4        194.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     0.3        0.5        0.4        0.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of September 30, 2018 and 2017.

 

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Table of Contents

NOTE 7. CASH EQUIVALENTS AND INVESTMENTS

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

 

     As of September 30, 2018  
            Gross
Unrealized
Gains
            Balance sheet location  
     Cost      Fair
Value
     Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 32.3      $ —        $ 32.3      $ 32.3      $ —        $ —    

Certificates of deposit and money market deposit accounts (1)

   $ 324.0      $ —        $ 324.0      $ 202.2      $ 110.7      $ 11.1  

Open ended mutual funds

   $ 31.1      $ 3.6      $ 34.7      $ —        $ —        $ 34.7  
     As of December 31, 2017  
            Gross
Unrealized
Gains
            Balance sheet location  
     Cost      Fair
Value
     Cash and cash
equivalents
     Short-term
investments
     Other
assets
 

Money market mutual funds

   $ 42.2      $ —        $ 42.2      $ 42.2      $ —        $ —    

Certificates of deposit and money market deposit accounts (1)

   $ 351.4      $ —        $ 351.4      $ 238.6      $ 111.8      $ 1.0  

Fixed maturity and open ended mutual funds (2)

   $ 16.8      $ 4.3      $ 21.1      $ —        $ —        $ 21.1  

 

(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 to 12 months at both September 30, 2018 and December 31, 2017. The remaining contractual maturities for the certificates of deposits classified in other assets are 13 to 39 months at September 30, 2018 and 15 to 48 months at December 31, 2017. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.

(2) 

At December 31, 2017, the remaining contractual maturities for the fixed maturity instruments were six months to seven months.

As a result of the adoption of ASU 2016-01, as further discussed in Note 1 and Note 2, the money market mutual funds and the fixed maturity and open-ended mutual funds in the table above are deemed to be equity securities with readily determinable fair values with changes in the fair value recognized through net income under ASC Topic 321. The fair value of these instruments is determined using Level 1 inputs as defined in the ASC.

NOTE 8. 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.

Omega Performance

On August 16, 2018, the Company acquired 100% of Omega Performance, a provider of online credit training. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flows is not expected to be material. This business operates in the MA reportable segment and goodwill related to this acquisition has been allocated to the MALS reporting unit.

Bureau van Dijk

On August 10, 2017, a subsidiary of the Company acquired 100% of Yellow Maple I B.V., an indirect parent company of Bureau van Dijk Electronic Publishing B.V., a global provider of business intelligence and company information products. The cash payment of $3,542.0 million was funded with a combination of cash on hand, primarily offshore, and new debt financing. The acquisition extends Moody’s position as a leader in risk data and analytical insight.

 

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

 

(Amounts in millions)                   

Current assets

      $ 158.4  

Property and equipment, net

        4.2  

Intangible assets:

     

Customer relationships (23 year weighted average life)

   $ 998.7     

Product technology (12 year weighted average life)

     258.5     

Trade name (18 year weighted average life)

     82.3     

Database (10 year weighted average life)

     12.9     
     

 

 

    

Total intangible assets (21 year weighted average life)

        1,352.4  

Goodwill

        2,614.7  

Other assets

        5.9  

Liabilities

     

Deferred revenue

   $ (101.1   

Accounts payable and accrued liabilities

     (44.3   

Deferred tax liabilities, net

     (329.8   

Other liabilities

     (118.4   
     

 

 

    

Total liabilities

        (593.6
        

 

 

 

Net assets acquired

         $ 3,542.0  
        

 

 

 

The Company has completed the valuation analysis of the fair market value of assets and liabilities of the Bureau van Dijk business. Current assets in the table above include acquired cash of $36.0 million. Additionally, current assets include accounts receivable of approximately $88.0 million (net of an allowance for uncollectible accounts of 3.7 million).

The acquired deferred revenue balance of approximately $154 million was reduced by $53 million as part of acquisition accounting to establish the fair value of deferred revenue. This will reduce reported revenue by $53 million over the remaining contractual period of in-progress customer arrangements assumed as of the acquisition date. This resulted in approximately $1 million and $17 million less in reported revenue for the three and nine months ended September 30, 2018, respectively, with the remaining approximate $1 million to reduce revenue in the fourth quarter of 2018. Amortization of acquired intangible assets was $17.6 million and $54.2 million for three months and nine months ended September 30, 2018, respectively, compared to $10.0 million in each of the same periods ended September 30, 2017.

Goodwill

Under the acquisition method of accounting for business combinations, the excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill. Goodwill typically results through expected synergies from combining operations of an acquiree and an acquirer, anticipated new customer acquisition and products, as well as from intangible assets that do not qualify for separate recognition. The goodwill recognized as a result of this acquisition includes, among other things, the value of combining the complementary product portfolios of the Company and Bureau van Dijk, which is expected to extend the Company’s reach to new and evolving market segments as well as cost savings synergies, expected new customer acquisitions and products.

Goodwill, which has been assigned to the MA segment, is not deductible for tax purposes.

Bureau van Dijk is a separate reporting unit for purposes of the Company’s annual goodwill impairment assessment.

Other Liabilities Assumed

In connection with the acquisition, the Company assumed liabilities relating to UTPs as well as deferred tax liabilities which relate to acquired intangible assets. These items are included in other liabilities in the table above.

 

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Supplementary Unaudited Pro Forma Information

Supplemental information on an unaudited pro forma basis is presented below for the nine months ended September 30, 2017 as if the acquisition of Bureau van Dijk occurred on January 1, 2016. The pro forma financial information is presented for comparative purposes only and is based on certain estimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of future results of operations or the results that would have been reported if the acquisition had been completed at January 1, 2016. The unaudited pro forma information includes amortization of acquired intangible assets based on the purchase price allocation and an estimate of useful lives reflected above, and incremental financing costs resulting from the acquisition, net of income tax, which was estimated using the weighted average statutory tax rates in effect in the jurisdiction for which the pro forma adjustment relates.

 

(Amounts in millions)    For nine months ended
September 30, 2017
 

Pro forma Revenue

   $ 3,226.9  

Pro forma Net Income attributable to Moody’s

   $ 965.9  

The unaudited pro forma results do not include any anticipated cost savings or other effects of the planned integration of Bureau van Dijk. Accordingly, the pro forma results above are not necessarily indicative of the results that would have been reported if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future. The Bureau van Dijk results included in the table above have been converted to U.S. GAAP from IFRS as issued by the IASB and have been translated to USD at rates in effect for the periods presented.

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.

NOTE 9. 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, net in the Company’s consolidated statement of operations.

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
September 30,
2018
     As of
December 31,
2017
 

2010 Senior Notes due 2020

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

2017 Senior Notes due 2021

     Pay Floating/Receive Fixed      $ 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  

Refer to Note 15 for information on the cumulative amount of fair value hedging adjustments included in the carrying amount of the above hedged items.

 

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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/(loss) recognized in the
consolidated statements  of operations
 
          Three Months  Ended
September 30,
    Nine months ended
September 30,
 
          2018     2017     2018     2017  
Total amounts of financial statement line item presented in the statements of operations in which the effects of fair value hedges are recorded            

Interest expense, net

      $ (56.4   $ (53.1   $ (160.5   $ (150.2

Descriptions

  

Location on Statement of Operations

                        

Net interest settlements and accruals on interest rate swaps

   Interest expense, net    $ (0.5   $ 1.6     $ (1.0   $ 5.8  

Fair value changes on interest rate swaps

   Interest expense, net    $ (3.3   $ (2.3   $ (14.8   $ (2.2

Fair value changes on hedged debt

   Interest expense, net    $ 3.3     $ 2.3     $ 14.8     $ 2.2  

Cash flow hedges

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 was to mitigate FX risk on the remaining principal balance on the 2015 Senior Notes that initially was not designated as a net investment hedge. Under the terms of the swap, the Company paid the counterparty interest on the $110.5 million received at 3.945% per annum and the counterparty paid the Company interest on the €100 million paid at 1.75% per annum. These interest payments were settled in March of each year, beginning in 2016, until early termination of the cross-currency swap in 2017 which was 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 were recognized in OCI. Gains and losses on the swaps initially recognized in OCI were reclassified to the statement of operations in the period in which changes in the underlying hedged item affects net income. On December 18, 2017, when the Company terminated the cross-currency swap, it designated the full €500 million principal of the 2015 Senior Notes as a net investment hedge as discussed below.

Net investment hedges

The Company has designated €500 million of the 2015 Senior Notes Due 2027 as a net investment hedge. This hedge is intended to mitigate FX exposure related to a portion of the Company’s euro net investment in certain foreign subsidiaries against changes in euro/USD exchange rates. This net investment hedge is designated as an accounting hedge under the applicable sections of Topic 815 of the ASC and will end upon the repayment of the notes in 2027 unless terminated earlier at the discretion of the Company.

In addition, during the second quarter of 2018 the Company entered into cross-currency swaps to exchange an aggregate amount of €490.1 million with corresponding interest based on the floating 3-month EURIBOR for an aggregate amount of $580.0 million with corresponding interest based on the floating 3-month U.S. LIBOR, which were designated as net investment hedges under ASC Topic 815. The purpose of these cross-currency swaps is to mitigate FX exposure related to a portion of the Company’s euro net investments in certain foreign subsidiaries against changes in euro/USD exchange rates. These hedges will expire and be settled in 2021 and 2022 for €422.5 million and €67.6 million of the total notional amount, respectively, unless terminated early at the discretion of the Company.

Beginning in 2018 with the Company’s initial application of ASU 2017-12, net periodic interest settlements and accruals on the cross currency swaps (which would include any cross-currency basis spread adjustment) are reported directly in interest expense, net. Changes in the fair value of the cross-currency swaps resulting from changes in the foreign exchange spot rate will continue to be recorded within the cumulative translation component of OCI.

 

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

 

     Amount of
Gain/(Loss) Recognized
in AOCI on Derivative,
net of Tax
     Amount of
Gain/(Loss) Reclassified
from AOCI into Income,

net of Tax
    Gain/(Loss)
Recognized in  Income on
Derivative
(Amount Excluded from
Effectiveness Testing)
 

Derivative and Non-Derivative Instruments in Net
Investment Hedging Relationships

   Three Months  Ended
September 30,
     Three Months  Ended
September 30,
    Three Months  Ended
September 30,
 
     2018      2017 (a)      2018      2017 (a)     2018 (c)      2017 (d)  

Cross currency swaps

   $ 1.8      $ —        $ —        $ —       $ 4.1