Item 1. Financial Statements
MOODYS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
928.9
|
|
|
$
|
918.1
|
|
|
$
|
1,745.0
|
|
|
$
|
1,783.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
258.9
|
|
|
|
243.9
|
|
|
|
508.1
|
|
|
|
488.3
|
|
Selling, general and administrative
|
|
|
228.6
|
|
|
|
227.0
|
|
|
|
461.5
|
|
|
|
448.3
|
|
Depreciation and amortization
|
|
|
31.2
|
|
|
|
27.9
|
|
|
|
61.1
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
518.7
|
|
|
|
498.8
|
|
|
|
1,030.7
|
|
|
|
993.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
410.2
|
|
|
|
419.3
|
|
|
|
714.3
|
|
|
|
790.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating (expense) income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(34.3
|
)
|
|
|
(31.9
|
)
|
|
|
(68.4
|
)
|
|
|
(61.2
|
)
|
Other non-operating income (expense), net
|
|
|
3.0
|
|
|
|
(8.2
|
)
|
|
|
8.6
|
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating (expense) income, net
|
|
|
(31.3
|
)
|
|
|
(40.1
|
)
|
|
|
(59.8
|
)
|
|
|
(66.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provisions for income taxes
|
|
|
378.9
|
|
|
|
379.2
|
|
|
|
654.5
|
|
|
|
723.7
|
|
Provision for income taxes
|
|
|
120.8
|
|
|
|
115.1
|
|
|
|
209.8
|
|
|
|
228.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
258.1
|
|
|
|
264.1
|
|
|
|
444.7
|
|
|
|
495.4
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
2.6
|
|
|
|
2.4
|
|
|
|
4.8
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Moodys
|
|
$
|
255.5
|
|
|
|
261.7
|
|
|
|
439.9
|
|
|
|
491.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Moodys common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.32
|
|
|
|
1.30
|
|
|
|
2.27
|
|
|
|
2.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.30
|
|
|
|
1.28
|
|
|
|
2.24
|
|
|
|
2.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
193.4
|
|
|
|
201.3
|
|
|
|
194.2
|
|
|
|
202.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
195.8
|
|
|
|
204.4
|
|
|
|
196.8
|
|
|
|
205.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share attributable to Moodys common shareholders
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
MOODYS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
2016
|
|
|
Three Months Ended
June 30,
2015
|
|
|
|
Pre-tax
amounts
|
|
|
Tax
amounts
|
|
|
After-tax
amounts
|
|
|
Pre-tax
amounts
|
|
|
Tax
amounts
|
|
|
After-tax
amounts
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
258.1
|
|
|
|
|
|
|
|
|
|
|
$
|
264.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net
|
|
$
|
(45.9
|
)
|
|
$
|
26.5
|
|
|
|
(19.4
|
)
|
|
$
|
26.7
|
|
|
$
|
5.4
|
|
|
|
32.1
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on cash flow hedges
|
|
|
(4.6
|
)
|
|
|
1.7
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of losses included in net income
|
|
|
2.6
|
|
|
|
(0.9
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on available for sale securities
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
1.0
|
|
Reclassification of gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
Pension and Other Retirement Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and prior service costs included in net income
|
|
|
2.3
|
|
|
|
(0.9
|
)
|
|
|
1.4
|
|
|
|
3.1
|
|
|
|
(1.1
|
)
|
|
|
2.0
|
|
Net actuarial gains and prior service costs
|
|
|
5.3
|
|
|
|
(2.0
|
)
|
|
|
3.3
|
|
|
|
10.9
|
|
|
|
(4.2
|
)
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
$
|
(39.7
|
)
|
|
$
|
24.4
|
|
|
|
(15.3
|
)
|
|
$
|
41.5
|
|
|
$
|
0.1
|
|
|
|
41.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
242.8
|
|
|
|
|
|
|
|
|
|
|
|
305.7
|
|
Less: comprehensive income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Moodys
|
|
|
|
|
|
|
|
|
|
$
|
240.2
|
|
|
|
|
|
|
|
|
|
|
$
|
303.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2016
|
|
|
Six Months Ended
June 30, 2015
|
|
|
|
Pre-tax
amounts
|
|
|
Tax
amounts
|
|
|
After-tax
amounts
|
|
|
Pre-tax
amounts
|
|
|
Tax
amounts
|
|
|
After-tax
amounts
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
444.7
|
|
|
|
|
|
|
|
|
|
|
$
|
495.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net
|
|
$
|
2.6
|
|
|
$
|
14.0
|
|
|
|
16.6
|
|
|
$
|
(51.1
|
)
|
|
$
|
(7.3
|
)
|
|
|
(58.4
|
)
|
Foreign currency translation adjustments - reclassification of gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on cash flow hedges
|
|
|
(2.6
|
)
|
|
|
0.9
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of losses included in net income
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on available for sale securities
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
|
|
2.1
|
|
|
|
|
|
|
|
2.1
|
|
Reclassification of gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
Pension and Other Retirement Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and prior service costs included in net income
|
|
|
4.9
|
|
|
|
(1.9
|
)
|
|
|
3.0
|
|
|
|
6.9
|
|
|
|
(2.6
|
)
|
|
|
4.3
|
|
Net actuarial gains and prior service costs
|
|
|
5.3
|
|
|
|
(2.0
|
)
|
|
|
3.3
|
|
|
|
10.9
|
|
|
|
(4.2
|
)
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
11.8
|
|
|
$
|
10.9
|
|
|
|
22.7
|
|
|
$
|
(31.5
|
)
|
|
$
|
(14.1
|
)
|
|
|
(45.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
467.4
|
|
|
|
|
|
|
|
|
|
|
|
449.8
|
|
Less: comprehensive income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Moodys
|
|
|
|
|
|
|
|
|
|
$
|
462.6
|
|
|
|
|
|
|
|
|
|
|
$
|
446.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
9
MOODYS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,674.3
|
|
|
$
|
1,757.4
|
|
Short-term investments
|
|
|
352.5
|
|
|
|
474.8
|
|
Accounts receivable, net of allowances of $27.2 in 2016 and $27.5 in 2015
|
|
|
843.7
|
|
|
|
802.0
|
|
Deferred tax assets, net
|
|
|
|
|
|
|
29.3
|
|
Other current assets
|
|
|
159.6
|
|
|
|
179.6
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,030.1
|
|
|
|
3,243.1
|
|
Property and equipment, net of accumulated depreciation of $560.6 in 2016 and $518.9 in 2015
|
|
|
323.0
|
|
|
|
306.4
|
|
Goodwill
|
|
|
1,047.2
|
|
|
|
976.3
|
|
Intangible assets, net
|
|
|
319.2
|
|
|
|
299.1
|
|
Deferred tax assets, net
|
|
|
167.2
|
|
|
|
137.7
|
|
Other assets
|
|
|
158.2
|
|
|
|
140.4
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,044.9
|
|
|
$
|
5,103.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
453.8
|
|
|
$
|
566.6
|
|
Deferred tax liabilities, net
|
|
|
|
|
|
|
16.7
|
|
Deferred revenue
|
|
|
692.6
|
|
|
|
635.2
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,146.4
|
|
|
|
1,218.5
|
|
Non-current portion of deferred revenue
|
|
|
134.1
|
|
|
|
132.5
|
|
Long-term debt
|
|
|
3,420.4
|
|
|
|
3,380.6
|
|
Deferred tax liabilities, net
|
|
|
111.4
|
|
|
|
83.8
|
|
Unrecognized tax benefits
|
|
|
198.1
|
|
|
|
203.4
|
|
Other liabilities
|
|
|
404.0
|
|
|
|
417.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,414.4
|
|
|
|
5,436.0
|
|
Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Shareholders deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at June 30, 2016 and December
31, 2015, respectively.
|
|
|
3.4
|
|
|
|
3.4
|
|
Capital surplus
|
|
|
457.3
|
|
|
|
451.3
|
|
Retained earnings
|
|
|
7,077.8
|
|
|
|
6,709.0
|
|
Treasury stock, at cost; 150,647,727 and 146,826,744 shares of common stock at June 30, 2016 and December 31, 2015,
respectively
|
|
|
(7,821.7
|
)
|
|
|
(7,389.2
|
)
|
Accumulated other comprehensive loss
|
|
|
(316.8
|
)
|
|
|
(339.5
|
)
|
|
|
|
|
|
|
|
|
|
Total Moodys shareholders deficit
|
|
|
(600.0
|
)
|
|
|
(565.0
|
)
|
Noncontrolling interests
|
|
|
230.5
|
|
|
|
232.0
|
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(369.5
|
)
|
|
|
(333.0
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit
|
|
$
|
5,044.9
|
|
|
$
|
5,103.0
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
10
MOODYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
444.7
|
|
|
$
|
495.4
|
|
Reconciliation of net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
61.1
|
|
|
|
56.5
|
|
Stock-based compensation expense
|
|
|
48.9
|
|
|
|
44.4
|
|
Deferred income taxes
|
|
|
13.7
|
|
|
|
10.6
|
|
Excess tax benefits from stock-based compensation plans
|
|
|
(17.6
|
)
|
|
|
(41.1
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(45.2
|
)
|
|
|
(11.8
|
)
|
Other current assets
|
|
|
19.2
|
|
|
|
(3.3
|
)
|
Other assets
|
|
|
13.7
|
|
|
|
(3.5
|
)
|
Accounts payable and accrued liabilities
|
|
|
(69.8
|
)
|
|
|
(35.0
|
)
|
Deferred revenue
|
|
|
66.7
|
|
|
|
63.0
|
|
Unrecognized tax benefits and other non-current tax liabilities
|
|
|
(4.3
|
)
|
|
|
(12.1
|
)
|
Other liabilities
|
|
|
(2.3
|
)
|
|
|
31.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
528.8
|
|
|
|
594.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Capital additions
|
|
|
(54.3
|
)
|
|
|
(40.7
|
)
|
Purchases of investments
|
|
|
(174.5
|
)
|
|
|
(289.2
|
)
|
Sales and maturities of investments
|
|
|
294.9
|
|
|
|
221.9
|
|
Acquisitions, net of cash acquired
|
|
|
(75.9
|
)
|
|
|
(4.6
|
)
|
Settlement of net investment hedges
|
|
|
2.5
|
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7.3
|
)
|
|
|
(91.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance of notes
|
|
|
|
|
|
|
552.8
|
|
Proceeds from stock-based compensation plans
|
|
|
36.9
|
|
|
|
55.0
|
|
Repurchase of shares for payroll tax withholdings related to stock-based compensation
|
|
|
(43.2
|
)
|
|
|
(59.1
|
)
|
Cost of treasury shares repurchased
|
|
|
(485.9
|
)
|
|
|
(600.7
|
)
|
Excess tax benefits from settlement of stock-based compensation plans
|
|
|
17.6
|
|
|
|
41.1
|
|
Payment of dividends
|
|
|
(143.6
|
)
|
|
|
(137.2
|
)
|
Payment of dividends to noncontrolling interests
|
|
|
(4.6
|
)
|
|
|
(3.7
|
)
|
Debt issuance costs and related fees
|
|
|
|
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(622.8
|
)
|
|
|
(157.6
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
18.2
|
|
|
|
(25.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(83.1
|
)
|
|
|
319.1
|
|
Cash and cash equivalents, beginning of the period
|
|
|
1,757.4
|
|
|
|
1,219.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
1,674.3
|
|
|
$
|
1,538.6
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
11
MOODYS 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
Moodys is
a provider of (i) credit ratings, (ii) credit, capital markets and economic research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial
services training and certification services and (v) outsourced research and analytical services. Moodys has two reportable segments: MIS and MA.
MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the
originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations, which consist primarily of the distribution of
research and fixed income pricing services in the Asia-Pacific region and outsourced services. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.
The MA segment develops a wide range of products and services that support financial analysis and risk management activities of
institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry
studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its Enterprise Risk Solutions business, MA provides
software solutions as well as related risk management services. The Professional Services business provides outsourced research and analytical services along with financial training and certification programs.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction
with the Companys consolidated financial statements and related notes in the Companys 2015 annual report on Form 10-K filed with the SEC on February 25, 2016. The results of interim periods are not necessarily indicative of results
for the full year or any subsequent period. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and
for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States
of America.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
In the first quarter of 2016, the Company adopted ASU No. 2015-17 Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes on a prospective basis, and accordingly, prior year comparative periods have not been adjusted. This ASU requires the classification of all deferred income tax assets and liabilities as noncurrent on the
balance sheet.
In the first quarter of 2016, the Company adopted ASU No. 2015-03,Simplifying the Presentation of
Debt Issuance Costs on a retrospective basis. This ASU requires a company to present debt issuance costs in the balance sheet as a reduction of debt rather than as an asset. The impact to the Companys balance sheet as of
December 31, 2015 and June 30, 2016 relating to the adoption of this ASU is set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
December 31, 2015
|
|
|
Reclassification
|
|
|
December 31, 2015
As adjusted
|
|
|
As reported
June 30, 2016
|
|
|
Reclassification
|
|
|
June 30, 2016
Under previous
accounting guidance
|
|
Long-term debt
|
|
$
|
3,401.0
|
|
|
$
|
(20.4
|
)
|
|
$
|
3,380.6
|
|
|
$
|
3,420.4
|
|
|
$
|
19.1
|
|
|
$
|
3,439.5
|
|
Other assets
|
|
$
|
160.8
|
|
|
$
|
(20.4
|
)
|
|
$
|
140.4
|
|
|
$
|
158.2
|
|
|
$
|
19.1
|
|
|
$
|
177.3
|
|
12
NOTE 2. STOCK-BASED COMPENSATION
Presented below is a summary of the stock-based compensation cost and associated tax benefit included in the accompanying consolidated
statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Stock-based compensation cost
|
|
$
|
23.5
|
|
|
$
|
21.7
|
|
|
$
|
48.9
|
|
|
$
|
44.4
|
|
Tax benefit
|
|
$
|
7.5
|
|
|
$
|
6.7
|
|
|
$
|
15.9
|
|
|
$
|
14.6
|
|
During the first six months of 2016, the Company granted 0.5 million employee stock options, which
had a weighted average grant date fair value of $22.95 per share based on the Black-Scholes option-pricing model. The Company also granted 1.2 million shares of restricted stock in the first six months of 2016, which had a weighted average
grant date fair value of $80.88 per share. Both the employee stock options and restricted stock generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.2 million shares of performance-based awards
whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $76.50 per share.
The following weighted average assumptions were used in determining the fair value for options granted in 2016:
|
|
|
|
|
Expected dividend yield
|
|
|
1.83
|
%
|
Expected stock volatility
|
|
|
32.3
|
%
|
Risk-free interest rate
|
|
|
1.60
|
%
|
Expected holding period
|
|
|
6.8 years
|
|
Grant date fair value
|
|
$
|
22.95
|
|
Unrecognized compensation expense at June 30, 2016 was $13.0 million and $150.7 million for stock
options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.4 years and 1.8 years, respectively. Additionally, there was $16.7 million of unrecognized compensation expense relating to
the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 1.1 years.
13
The following tables summarize information relating to stock option exercises and restricted
stock vesting:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
Exercise of stock options:
|
|
2016
|
|
|
2015
|
|
Proceeds from stock option exercises
|
|
$
|
33.4
|
|
|
$
|
51.9
|
|
Aggregate intrinsic value
|
|
$
|
21.0
|
|
|
$
|
49.9
|
|
Tax benefit realized upon exercise
|
|
$
|
7.4
|
|
|
$
|
17.9
|
|
Number of shares exercised
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
Vesting of restricted stock:
|
|
2016
|
|
|
2015
|
|
Fair value of shares vested
|
|
$
|
90.6
|
|
|
$
|
110.8
|
|
Tax benefit realized upon vesting
|
|
$
|
29.6
|
|
|
$
|
35.6
|
|
Number of shares vested
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
Vesting of performance-based restricted stock:
|
|
2016
|
|
|
2015
|
|
Fair value of shares vested
|
|
$
|
23.6
|
|
|
$
|
43.1
|
|
Tax benefit realized upon vesting
|
|
$
|
8.4
|
|
|
$
|
15.6
|
|
Number of shares vested
|
|
|
0.2
|
|
|
|
0.5
|
|
NOTE 3. INCOME TAXES
Moodys effective tax rate was 31.9% and 30.4% for the three months ended June 30, 2016 and 2015, respectively, and 32.1% and 31.5% for the six month periods ended June 30, 2016 and 2015,
respectively. The increase in the ETR compared to the second quarter of 2015 and the six month period ended June 30, 2015 was primarily due to a benefit in the prior year resulting from a favorable state tax ruling.
The Company classifies interest related to UTBs in interest expense, net in its consolidated statements of operations. Penalties, if
incurred, would be recognized in other non-operating (expense) income, net. The Company had a decrease in its UTBs of $11.7 million ($7.6 million net of federal tax benefit) during the second quarter of 2016 and an overall decrease in its UTBs
during the first six months of 2016 of $5.3 million ($1.4 million net of federal tax benefits).
Moodys Corporation and
subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Companys U.S. federal income tax returns for the years 2011 and 2012 are under examination and its returns for
2013 and 2014 remain open to examination. The Companys New York State tax returns for 2011 through 2014 are currently under examination and the Companys New York City tax return for 2014 remains open to examination. The Companys
U.K. tax return for 2012 is currently under examination and its returns for 2013 and 2014 remain open to examination.
For ongoing audits, it is possible the balance of UTBs could decrease in the next twelve months as a
result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax
authorities which could necessitate increases to the balance of UTBs. As the Company is unable to predict the timing or outcome of these audits, it is therefore unable to estimate the amount of changes to the
balance of UTBs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years by tax jurisdiction in accordance with the applicable provisions of Topic 740 of the ASC
regarding UTBs.
The following table shows the amount the Company paid for income taxes:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Income taxes paid
|
|
$
|
151.8
|
|
|
$
|
191.1
|
|
14
NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic to diluted shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Basic
|
|
|
193.4
|
|
|
|
201.3
|
|
|
|
194.2
|
|
|
|
202.0
|
|
Dilutive effect of shares issuable under stock-based compensation plans
|
|
|
2.4
|
|
|
|
3.1
|
|
|
|
2.6
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
195.8
|
|
|
|
204.4
|
|
|
|
196.8
|
|
|
|
205.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are
excluded from the table above
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
1.5
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and
assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2016 and 2015. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the
awards.
The decrease in the diluted shares outstanding primarily reflects treasury share repurchases under the Companys
Board authorized share repurchase program.
15
NOTE 5. CASH EQUIVALENTS AND INVESTMENTS
The table below provides additional information on the Companys cash equivalents and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Balance sheet location
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Fair
Value
|
|
|
Cash and cash
equivalents
|
|
|
Short-term
investments
|
|
|
Other
assets
|
|
Money market mutual funds
|
|
$
|
55.5
|
|
|
$
|
|
|
|
$
|
55.5
|
|
|
$
|
55.5
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit and money market deposit accounts
(1)
|
|
$
|
913.2
|
|
|
$
|
|
|
|
$
|
913.2
|
|
|
$
|
533.7
|
|
|
$
|
352.5
|
|
|
$
|
27.0
|
|
Fixed maturity and open ended mutual funds
(2)
|
|
$
|
28.5
|
|
|
$
|
4.4
|
|
|
$
|
32.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32.9
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Balance sheet location
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Fair
Value
|
|
|
Cash and cash
equivalents
|
|
|
Short-term
investments
|
|
|
Other
assets
|
|
Money market mutual funds
|
|
$
|
188.3
|
|
|
$
|
|
|
|
$
|
188.3
|
|
|
$
|
188.3
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit and money market deposit accounts
(1)
|
|
$
|
1,307.3
|
|
|
$
|
|
|
|
$
|
1,307.3
|
|
|
$
|
809.4
|
|
|
$
|
474.8
|
|
|
$
|
23.1
|
|
Fixed maturity and open ended mutual funds
(2)
|
|
$
|
28.7
|
|
|
$
|
3.2
|
|
|
$
|
31.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31.9
|
|
(1)
|
Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as
short-term investments were one month to 12 months at both June 30, 2016 and December 31, 2015. The remaining contractual maturities for the certificates of deposits classified in other assets are one month to 21 months at June 30,
2016 and one month to 27 months at December 31, 2015. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.
|
(2)
|
Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity
instruments range from five months to 25 months and 11 months to 31 months at June 30, 2016 and December 31, 2015 respectively.
|
The money market mutual funds as well as the fixed maturity and open ended mutual funds in the table above are deemed to be available for sale under ASC Topic 320 and the fair value of these
instruments is determined using Level 1 inputs as defined in the ASC.
16
NOTE 6. ACQUISITIONS
The business combination described below is accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the
transaction. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. The Company has not presented proforma combined results because the impact on previously reported
statements of operations would not have been material. Additionally, the near term impact to the Companys operations and cash flows is not material.
Gilliland Gold Young (GGY)
On March 1, 2016, subsidiaries of the
Company acquired 100% of GGY, a leading provider of advanced actuarial software for the life insurance industry. The cash payment of $83.4 million made at closing was funded with cash on hand. The acquisition of GGY will allow MA to provide an
industry-leading enterprise risk offering for global life insurers and reinsurers.
The table below details the total
consideration relating to the acquisition:
|
|
|
|
|
Cash paid at closing
|
|
$
|
83.4
|
|
Additional consideration to be paid to sellers in 2016
(1)
|
|
|
3.5
|
|
|
|
|
|
|
Total consideration
|
|
$
|
86.9
|
|
|
|
|
|
|
(1)
|
Represents additional consideration due to the sellers for amounts withheld at closing pending the completion of certain administrative matters
|
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities
assumed, at the date of acquisition:
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
$
|
11.9
|
|
Property and equipment, net
|
|
|
|
|
|
|
2.0
|
|
Indemnification assets
|
|
|
|
|
|
|
1.5
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Trade name (19 year weighted average life)
|
|
$
|
3.7
|
|
|
|
|
|
Client relationships (21 year weighted average life)
|
|
|
13.8
|
|
|
|
|
|
Software (7 year weighted average life)
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets (14 year weighted average life)
|
|
|
|
|
|
|
34.1
|
|
Goodwill
|
|
|
|
|
|
|
59.4
|
|
Liabilities
|
|
|
|
|
|
|
(22.0
|
)
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
86.9
|
|
|
|
|
|
|
|
|
|
|
Current assets in the table above include acquired cash of $7.5 million. Additionally, current assets
include accounts receivable of $2.9 million. Goodwill, which has been assigned to the MA segment, is not deductible for tax.
In connection with the acquisition, the Company assumed liabilities relating to UTPs and certain other tax exposures which are included
in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these amounts. Accordingly, the Company carries an indemnification asset on its
consolidated balance sheet at June 30, 2016.
The Company incurred $0.9 million of costs directly related to the GGY
acquisition of which $0.6 million was incurred in 2015 and $0.3 million was incurred in the first quarter of 2016. These costs are recorded within selling, general and administrative expenses in the Companys consolidated statements of
operations.
GGY is part of the ERS reporting unit for purposes of the Companys annual goodwill impairment assessment.
17
NOTE 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the
Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Derivatives and non-derivative instruments designated as accounting hedges:
Interest Rate Swaps
In the second quarter of 2014, the Company
entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. In the third quarter of 2014, the Company entered into
interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the remaining balance of the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate
the risk associated with changes in the fair value of the 2010 Senior Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of
the 2010 Senior Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Companys
consolidated statement of operations.
In the third quarter of 2014, the Company entered into interest rate swaps with a total
notional amount of $250 million to convert the fixed interest rate on a portion of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. In the first quarter of 2015, the Company entered into interest rate swaps with
a total notional amount of $200 million to convert the fixed interest rate on the remaining balance of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk
associated with changes in the fair value of the 2014 Senior Notes (5-year), thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of
the 2014 Senior Notes (5-year). The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the
Companys consolidated statement of operations.
The following table summarizes the impact to the statement of operations
of the Companys interest rate swaps designated as fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of income recognized in the
consolidated statements of operations
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Derivatives designated as fair value accounting hedges
|
|
Location on Statement of Operations
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest rate swaps
|
|
Interest income(expense), net
|
|
$
|
3.1
|
|
|
$
|
4.1
|
|
|
$
|
6.1
|
|
|
$
|
7.6
|
|
18
Cross-currency swaps
In conjunction with the issuance of the 2015 Senior Notes, the Company entered into a cross-currency swap to exchange 100 million for U.S. dollars on the date of the settlement of the notes.
The purpose of this cross-currency swap is to mitigate FX risk on the remaining principal balance on the 2015 Senior Notes that was not designated as a net investment hedge as more fully discussed below. Under the terms of the swap, the Company will
pay the counterparty interest on the $110.5 million received at 3.945% per annum and the counterparty will pay the Company interest on the 100 million paid at 1.75% per annum. These interest payments will be settled in March of
each year, beginning in 2016, until either the maturity of the cross-currency swap in 2027 or upon early termination at the discretion of the Company. The principal payments on this cross currency swap will be settled in 2027, concurrent with the
repayment of the 2015 Senior Notes at maturity or upon early termination at the discretion of the Company. In March 2016, the Company designated these cross-currency swaps as cash flow hedges. Accordingly, changes in fair value subsequent to the
date the swaps were designated as cash flow hedges will initially be recognized in OCI. Gains and losses on the swaps initially recognized in OCI will be reclassified to the statement of operations in the period in which changes in the underlying
hedged item affects net income. Ineffectiveness, if any, will be recognized in other non-operating (expense), income, net in the Companys consolidated statement of operations.
Net investment hedges
The Company enters into foreign currency
forward contracts which are designated as net investment hedges and has designated 400 million of the 2015 Senior Notes as a net investment hedge. These hedges are intended to mitigate FX exposure related to non-U.S. dollar net
investments in certain foreign subsidiaries against changes in foreign exchange rates. These net investment hedges are designated as accounting hedges under the applicable sections of Topic 815 of the ASC.
Hedge effectiveness is assessed based on the overall changes in the fair value of the hedge. For hedges that meet the effectiveness
requirements, changes in the fair value are recorded in AOCI in the foreign currency translation account. Any change in the fair value of these hedges that is the result of ineffectiveness is recognized immediately in other non-operating (expense)
income in the Companys consolidated statement of operations.
The following table summarizes the notional amounts of the
Companys outstanding net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Notional amount of net investment hedges:
|
|
|
|
|
|
|
|
|
Long-term debt designated as net investment hedge
|
|
|
400.0
|
|
|
|
400.0
|
|
Contracts to sell GBP for euros
|
|
£
|
22.1
|
|
|
£
|
21.2
|
|
Contracts to sell Japanese yen for USD
|
|
¥
|
19,400
|
|
|
¥
|
19,400
|
|
The outstanding contracts to sell Japanese yen for USD expire in November 2016. The outstanding contracts
to sell GBP for euros expire in December 2016. The hedge relating to the portion of the 2015 Senior Notes that was designated as a net investment hedge will end upon the repayment of the notes in 2027 unless terminated earlier at the discretion of
the Company.
19
The following table provides information on the gains/(losses) on the Companys net
investment and cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and non-derivative instruments in
Net Investment Hedging Relationships
|
|
Amount of
Gain/(Loss) Recognized
in AOCI on Derivative
(Effective
Portion)
|
|
|
Location of Gain/(Loss)
Reclassified from AOCI into
Income (Effective Portion)
|
|
Amount of Gain/(Loss)
Reclassified from AOCI into
Income (Effective
Portion)
|
|
|
|
Three Months Ended
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
FX forwards
|
|
$
|
(8.6
|
)
|
|
$
|
2.1
|
|
|
N/A
|
|
$
|
|
|
|
$
|
|
|
Long-term debt
|
|
|
7.1
|
|
|
|
(9.7
|
)
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment hedges
|
|
$
|
(1.5
|
)
|
|
$
|
(7.6
|
)
|
|
N/A
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Three Months Ended
|
|
Derivatives in cash flow hedging relationships
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
Cross currency swap
|
|
$
|
(2.9
|
)
|
|
$
|
|
|
|
Other non-operating income, net
|
|
$
|
(1.7
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4.4
|
)
|
|
$
|
(7.6
|
)
|
|
Total
|
|
$
|
(1.7
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and non-derivative instruments in
Net Investment Hedging Relationships
|
|
Amount of
Gain/(Loss) Recognized
in AOCI on Derivative
(Effective Portion)
|
|
|
Location of Gain/(Loss)
Reclassified from AOCI into
Income (Effective Portion)
|
|
Amount of Gain/(Loss)
Reclassified from AOCI into
Income (Effective Portion)
|
|
|
|
Six Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX forwards
|
|
$
|
(13.2
|
)
|
|
$
|
13.4
|
|
|
N/A
|
|
$
|
|
|
|
$
|
|
|
Long-term debt
|
|
|
(6.0
|
)
|
|
|
(2.1
|
)
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment hedges
|
|
$
|
(19.2
|
)
|
|
$
|
11.3
|
|
|
N/A
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Six Months Ended
|
|
Derivatives in cash flow hedging relationships
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
Cross currency swap
|
|
$
|
(1.7
|
)
|
|
$
|
|
|
|
Other non-operating income, net
|
|
$
|
(0.3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(20.9
|
)
|
|
$
|
11.3
|
|
|
Total
|
|
$
|
(0.3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The cumulative amount of realized and unrecognized net investment hedge and cash flow hedge
gains (losses) recorded in AOCI is as follows:
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses), net of tax
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net investment hedges
|
|
|
|
|
|
|
|
|
FX forwards
|
|
$
|
21.1
|
|
|
$
|
34.3
|
|
Long-term debt
|
|
|
(1.3
|
)
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
Total gains on net investment hedges
|
|
$
|
19.8
|
|
|
$
|
39.0
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
Treasury rate lock
|
|
$
|
(1.1
|
)
|
|
$
|
(1.1
|
)
|
Cross currency swap
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses on cash flow hedges
|
|
|
(2.5
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
Total net gains in AOCI
|
|
$
|
17.3
|
|
|
$
|
37.9
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedges:
Foreign exchange forwards
The Company also enters into foreign
exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiarys functional currency. These forward contracts are not designated as accounting hedges under the
applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income, net in the Companys consolidated statements of operations along with the FX gain
or loss recognized on the assets and liabilities denominated in a currency other than the subsidiarys functional currency. These contracts have expiration dates at various times through December 2016.
The following table summarizes the notional amounts of the Companys outstanding foreign exchange forwards:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Notional amount of currency pair:
|
|
|
|
|
|
|
|
|
Contracts to sell USD for euros
|
|
$
|
72.6
|
|
|
$
|
70.1
|
|
Contracts to purchase euros with other foreign currencies
|
|
|
34.4
|
|
|
|
35.5
|
|
Contracts to sell euros for other foreign currencies
|
|
|
|
|
|
|
1.4
|
|
Contracts to sell euros for GBP
|
|
|
36.2
|
|
|
|
23.1
|
|
The following table summarizes the impact to the consolidated statements of operations relating to the
net gain (loss) on the Companys derivatives which are not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Derivatives not designated as accounting hedges
|
|
Location on Statement of Operations
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Foreign exchange forwards
|
|
Other non-operating income (expense), net
|
|
$
|
(5.7
|
)
|
|
$
|
2.5
|
|
|
$
|
(5.2
|
)
|
|
$
|
(1.9
|
)
|
21
The table below shows the classification between assets and liabilities on the
Companys consolidated balance sheets for the fair value of the derivative instrument as well as the carrying value of its nonderivative debt instruments designated and qualifying as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative and Non-derivative Instruments
|
|
|
|
Balance Sheet
Location
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
FX forwards on certain assets and liabilities
|
|
|
Other current assets
|
|
|
|
|
|
|
|
0.1
|
|
Derivatives designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
FX forwards on net investment in certain foreign subsidiaries
|
|
|
Other current assets
|
|
|
$
|
1.6
|
|
|
$
|
0.4
|
|
Interest rate swaps
|
|
|
Other assets
|
|
|
|
37.4
|
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
39.0
|
|
|
$
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap
|
|
|
Other liabilities
|
|
|
$
|
5.0
|
|
|
|
|
|
FX forwards on net investment in certain foreign subsidiaries
|
|
|
Accounts payable
and accrued
liabilities
|
|
|
|
28.3
|
|
|
|
1.2
|
|
Interest rate swaps
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
0.3
|
|
Non-derivative instrument designated as accounting hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt designated as net investment hedge
|
|
|
Long-term debt
|
|
|
$
|
444.4
|
|
|
$
|
434.5
|
|
Derivatives not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
7.0
|
|
FX forwards on certain assets and liabilities
|
|
|
Accounts payable
and accrued
liabilities
|
|
|
|
3.7
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
$
|
481.4
|
|
|
$
|
444.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
The following table summarizes the activity in goodwill for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
MIS
|
|
|
MA
|
|
|
Consolidated
|
|
|
|
Gross
goodwill
|
|
|
Accumulated
impairment
charge
|
|
|
Net
goodwill
|
|
|
Gross
goodwill
|
|
|
Accumulated
impairment
charge
|
|
|
Net
goodwill
|
|
|
Gross
goodwill
|
|
|
Accumulated
impairment
charge
|
|
|
Net
goodwill
|
|
Balance at beginning of year
|
|
$
|
284.4
|
|
|
$
|
|
|
|
$
|
284.4
|
|
|
$
|
704.1
|
|
|
$
|
(12.2
|
)
|
|
$
|
691.9
|
|
|
$
|
988.5
|
|
|
$
|
(12.2
|
)
|
|
$
|
976.3
|
|
Additions/adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61.1
|
|
|
|
|
|
|
|
61.1
|
|
|
|
61.1
|
|
|
|
|
|
|
|
61.1
|
|
Foreign currency translation adjustments
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
9.9
|
|
|
|
|
|
|
|
9.9
|
|
|
|
9.8
|
|
|
|
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
284.3
|
|
|
$
|
|
|
|
$
|
284.3
|
|
|
$
|
775.1
|
|
|
$
|
(12.2
|
)
|
|
$
|
762.9
|
|
|
$
|
1,059.4
|
|
|
$
|
(12.2
|
)
|
|
$
|
1,047.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
MIS
|
|
|
MA
|
|
|
Consolidated
|
|
|
|
Gross
goodwill
|
|
|
Accumulated
impairment
charge
|
|
|
Net
goodwill
|
|
|
Gross
goodwill
|
|
|
Accumulated
impairment
charge
|
|
|
Net
goodwill
|
|
|
Gross
goodwill
|
|
|
Accumulated
impairment
charge
|
|
|
Net
goodwill
|
|
Balance at beginning of year
|
|
$
|
298.7
|
|
|
$
|
|
|
|
$
|
298.7
|
|
|
$
|
734.6
|
|
|
$
|
(12.2
|
)
|
|
$
|
722.4
|
|
|
$
|
1,033.3
|
|
|
$
|
(12.2
|
)
|
|
$
|
1,021.1
|
|
Additions/adjustments
|
|
|
3.7
|
|
|
|
|
|
|
|
3.7
|
|
|
|
5.0
|
|
|
|
|
|
|
|
5.0
|
|
|
|
8.7
|
|
|
|
|
|
|
|
8.7
|
|
Foreign currency translation adjustments
|
|
|
(18.0
|
)
|
|
|
|
|
|
|
(18.0
|
)
|
|
|
(35.5
|
)
|
|
|
|
|
|
|
(35.5
|
)
|
|
|
(53.5
|
)
|
|
|
|
|
|
|
(53.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
284.4
|
|
|
$
|
|
|
|
$
|
284.4
|
|
|
$
|
704.1
|
|
|
$
|
(12.2
|
)
|
|
$
|
691.9
|
|
|
$
|
988.5
|
|
|
$
|
(12.2
|
)
|
|
$
|
976.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2016 additions/adjustments for the MA segment in the table above primarily relate to the acquisition
of GGY. The 2015 additions/adjustments for the MIS segment in the table above relate to the acquisition of Equilibrium. The 2015 additions/adjustments for the MA segment primarily reflect an adjustment to an indemnification asset recognized as part
of the Copal acquisition, goodwill acquired from the acquisition of a business from BlackBox Logic and adjustments to deferred revenue balances and deferred tax assets recognized as part of the Lewtan acquisition.
The accumulated impairment charge in the table above reflects an impairment charge recognized in 2012 relating to the FSTC reporting unit
within MA. This impairment charge reflected a contraction in spending for training and certification services for many individuals and global financial institutions in 2012 due to macroeconomic uncertainties at the time. The fair value of the FSTC
reporting unit utilized in this impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples.
23
Acquired intangible assets and related amortization consisted of:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Customer relationships
|
|
$
|
315.0
|
|
|
$
|
298.4
|
|
Accumulated amortization
|
|
|
(118.2
|
)
|
|
|
(110.0
|
)
|
|
|
|
|
|
|
|
|
|
Net customer relationships
|
|
|
196.8
|
|
|
|
188.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade secrets
|
|
|
30.0
|
|
|
|
29.7
|
|
Accumulated amortization
|
|
|
(24.4
|
)
|
|
|
(23.1
|
)
|
|
|
|
|
|
|
|
|
|
Net trade secrets
|
|
|
5.6
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
91.8
|
|
|
|
74.7
|
|
Accumulated amortization
|
|
|
(52.9
|
)
|
|
|
(47.7
|
)
|
|
|
|
|
|
|
|
|
|
Net software
|
|
|
38.9
|
|
|
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
76.3
|
|
|
|
72.4
|
|
Accumulated amortization
|
|
|
(17.8
|
)
|
|
|
(16.2
|
)
|
|
|
|
|
|
|
|
|
|
Net trade names
|
|
|
58.5
|
|
|
|
56.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(1)
|
|
|
43.9
|
|
|
|
44.3
|
|
Accumulated amortization
|
|
|
(24.5
|
)
|
|
|
(23.4
|
)
|
|
|
|
|
|
|
|
|
|
Net other
|
|
|
19.4
|
|
|
|
20.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets, net
|
|
$
|
319.2
|
|
|
$
|
299.1
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other intangible assets primarily consist of databases, covenants not to compete, and acquired ratings methodologies and models.
|
Amortization expense relating to acquired intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Amortization expense
|
|
$
|
8.7
|
|
|
$
|
8.0
|
|
|
$
|
16.6
|
|
|
$
|
16.5
|
|
Estimated future amortization expense for acquired intangible assets subject to amortization is as
follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2016 (after June 30)
|
|
$
|
17.0
|
|
2017
|
|
|
32.1
|
|
2018
|
|
|
26.2
|
|
2019
|
|
|
23.4
|
|
2020
|
|
|
22.0
|
|
Thereafter
|
|
|
198.5
|
|
|
|
|
|
|
Total estimated future amortization
|
|
$
|
319.2
|
|
|
|
|
|
|
24
NOTE 9. FAIR VALUE
The table below presents information about items that are carried at fair value at June 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of June 30, 2016
|
|
|
|
Description
|
|
Balance
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(a)
|
|
$
|
39.0
|
|
|
$
|
|
|
|
$
|
39.0
|
|
|
|
Money market mutual funds
|
|
|
55.5
|
|
|
|
55.5
|
|
|
|
|
|
|
|
Fixed maturity and open ended mutual funds
(b)
|
|
|
32.9
|
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
127.4
|
|
|
$
|
88.4
|
|
|
$
|
39.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(a)
|
|
$
|
37.0
|
|
|
$
|
|
|
|
$
|
37.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37.0
|
|
|
$
|
|
|
|
$
|
37.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2015
|
|
|
|
Description
|
|
Balance
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(a)
|
|
$
|
12.6
|
|
|
$
|
|
|
|
$
|
12.6
|
|
|
|
Money market mutual funds
|
|
|
188.3
|
|
|
|
188.3
|
|
|
|
|
|
|
|
Fixed maturity and open ended mutual funds
(b)
|
|
|
31.9
|
|
|
|
31.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
232.8
|
|
|
$
|
220.2
|
|
|
$
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(a)
|
|
$
|
10.4
|
|
|
$
|
|
|
|
$
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10.4
|
|
|
$
|
|
|
|
$
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents FX
forwards, interest rate swaps and cross-currency swaps as more fully described in Note 7 to the financial statements.
|
(b)
|
Consists of
investments in fixed maturity mutual funds and open-ended mutual funds.
|
The following are descriptions of
the methodologies utilized by the Company to estimate the fair value of its derivative contracts, fixed maturity plans, open ended mutual funds and money market mutual funds:
Derivatives:
In determining the fair value of the derivative contracts,
the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as
the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these
guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
Fixed maturity and open ended mutual funds:
The fixed maturity mutual funds and open ended mutual funds primarily represent exchange traded funds in India and are
classified as securities available-for-sale. Accordingly, any unrealized gains and losses are recognized through OCI until the instruments mature or are sold.
Money market mutual funds:
The money market mutual funds represent
publicly traded funds with a stable $1 net asset value.
25
NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION
The following tables contain additional detail related to certain balance sheet captions:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
67.7
|
|
|
$
|
83.3
|
|
Prepaid expenses
|
|
|
58.4
|
|
|
|
66.9
|
|
Other
|
|
|
33.5
|
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
159.6
|
|
|
$
|
179.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Investments in joint ventures
|
|
$
|
16.2
|
|
|
$
|
28.7
|
|
Deposits for real-estate leases
|
|
|
11.5
|
|
|
|
11.4
|
|
Indemnification assets related to acquisitions
|
|
|
20.5
|
|
|
|
19.2
|
|
Mutual funds and fixed deposits
|
|
|
59.9
|
|
|
|
55.0
|
|
Other
|
|
|
50.1
|
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
158.2
|
|
|
$
|
140.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
73.7
|
|
|
$
|
83.0
|
|
Incentive compensation
|
|
|
62.8
|
|
|
|
137.2
|
|
Customer credits, advanced payments and advanced billings
|
|
|
25.4
|
|
|
|
24.6
|
|
Self-insurance reserves
|
|
|
25.1
|
|
|
|
19.7
|
|
Dividends
|
|
|
6.7
|
|
|
|
78.2
|
|
Professional service fees
|
|
|
51.8
|
|
|
|
54.5
|
|
Interest accrued on debt
|
|
|
56.1
|
|
|
|
59.4
|
|
Accounts payable
|
|
|
35.6
|
|
|
|
22.2
|
|
Income taxes
|
|
|
21.7
|
|
|
|
11.5
|
|
Pension and other retirement employee benefits
|
|
|
6.2
|
|
|
|
6.2
|
|
Other
|
|
|
88.7
|
|
|
|
70.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities
|
|
$
|
453.8
|
|
|
$
|
566.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Pension and other retirement employee benefits
|
|
$
|
248.0
|
|
|
$
|
261.7
|
|
Deferred rent-non-current portion
|
|
|
98.0
|
|
|
|
98.4
|
|
Interest accrued on UTPs
|
|
|
30.9
|
|
|
|
27.9
|
|
Legacy and other tax matters
|
|
|
3.0
|
|
|
|
1.7
|
|
Other
|
|
|
24.1
|
|
|
|
27.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
404.0
|
|
|
$
|
417.2
|
|
|
|
|
|
|
|
|
|
|
Changes in the Companys self-insurance reserves for claims insured by the Companys
wholly-owned insurance subsidiary, which primarily relate to legal defense costs for claims from prior years, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Balance January 1,
|
|
$
|
19.7
|
|
|
$
|
21.5
|
|
Accruals
|
|
|
8.8
|
|
|
|
22.2
|
|
Payments
|
|
|
(3.4
|
)
|
|
|
(24.0
|
)
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
25.1
|
|
|
$
|
19.7
|
|
|
|
|
|
|
|
|
|
|
26
Other Non-Operating Income (Expense):
The following table summarizes the components of other non-operating (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
FX gain/(loss)
|
|
$
|
0.8
|
|
|
|
(12.2
|
)
|
|
|
4.8
|
|
|
|
(12.2
|
)
|
Joint venture income
|
|
|
3.0
|
|
|
|
3.4
|
|
|
|
4.9
|
|
|
|
5.3
|
|
Other
|
|
|
(0.8
|
)
|
|
|
0.6
|
|
|
|
(1.1
|
)
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3.0
|
|
|
|
(8.2
|
)
|
|
|
8.6
|
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table provides details about the reclassifications out of AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, 2016
|
|
|
Six
Months
Ended June 30, 2016
|
|
|
Affected line in the
consolidated statement of
operations
|
|
Losses on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap
|
|
|
(2.6
|
)
|
|
|
(0.4
|
)
|
|
|
Other non-operating
income (expense), net
|
|
Income tax effect of item above
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
Provision for
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses on cash flow hedges
|
|
|
(1.7
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other retirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and prior service costs included in net income
|
|
|
(1.5
|
)
|
|
|
(3.1
|
)
|
|
|
Operating expense
|
|
Amortization of actuarial losses and prior service costs included in net income
|
|
|
(0.8
|
)
|
|
|
(1.8
|
)
|
|
|
SG&A expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income taxes
|
|
|
(2.3
|
)
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of item above
|
|
|
0.9
|
|
|
|
1.9
|
|
|
|
Provision for
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension and other retirement benefits
|
|
|
(1.4
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses included in Net Income attributable to reclassifications out of AOCI
|
|
$
|
(3.1
|
)
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
2015
|
|
|
Six Months Ended
June 30, 2015
|
|
|
Affected line in the
consolidated statement of
operations
|
|
Losses on foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation of foreign subsidiary
|
|
$
|
|
|
|
$
|
0.1
|
|
|
|
Other non-operating
income (expense),
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses on foreign translation adjustments
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on available for sale securities
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
Other non-operating
income (expense),
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains on available for sale securities
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other retirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and prior service costs included in net income
|
|
|
(2.0
|
)
|
|
|
(4.3
|
)
|
|
|
Operating expense
|
|
Amortization of actuarial losses and prior service costs included in net income
|
|
|
(1.1
|
)
|
|
|
(2.6
|
)
|
|
|
SG&A expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income taxes
|
|
|
(3.1
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of item above
|
|
|
1.1
|
|
|
|
2.6
|
|
|
|
Provision for
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension and other retirement benefits
|
|
|
(2.0
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses included in Net Income attributable to reclassifications out of AOCI
|
|
$
|
(1.8
|
)
|
|
$
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The following table shows changes in AOCI by component (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
Gains/
(Losses) on
Cash Flow
Hedges
|
|
|
Pension
and Other
Retirement
Benefits
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Gains on
Available
for Sale
Securities
|
|
|
Total
|
|
|
Pension
and Other
Retirement
Benefits
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Gains on
Available
for Sale
Securities
|
|
|
Total
|
|
Balance March 31,
|
|
$
|
(1.3
|
)
|
|
|
(84.1
|
)
|
|
|
(220.0
|
)
|
|
|
3.9
|
|
|
$
|
(301.5
|
)
|
|
|
(103.1
|
)
|
|
|
(221.3
|
)
|
|
|
2.0
|
|
|
$
|
(322.4
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
|
(2.9
|
)
|
|
|
3.3
|
|
|
|
(19.4
|
)
|
|
|
0.6
|
|
|
|
(18.4
|
)
|
|
|
6.7
|
|
|
|
32.1
|
|
|
|
1.0
|
|
|
|
39.8
|
|
Amounts reclassified from AOCI
|
|
|
1.7
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
|
|
2.0
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss)
|
|
|
(1.2
|
)
|
|
|
4.7
|
|
|
|
(19.4
|
)
|
|
|
0.6
|
|
|
|
(15.3
|
)
|
|
|
8.7
|
|
|
|
32.1
|
|
|
|
0.8
|
|
|
|
41.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30,
|
|
$
|
(2.5
|
)
|
|
$
|
(79.4
|
)
|
|
$
|
(239.4
|
)
|
|
$
|
4.5
|
|
|
$
|
(316.8
|
)
|
|
$
|
(94.4
|
)
|
|
$
|
(189.2
|
)
|
|
$
|
2.8
|
|
|
$
|
(280.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
Gains/
(Losses) on
Cash Flow
Hedges
|
|
|
Pension
and Other
Retirement
Benefits
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Gains on
Available
for Sale
Securities
|
|
|
Total
|
|
|
Pension
and Other
Retirement
Benefits
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Gains on
Available
for Sale
Securities
|
|
|
Total
|
|
Balance December 31,
|
|
$
|
(1.1
|
)
|
|
|
(85.7
|
)
|
|
|
(256.0
|
)
|
|
|
3.3
|
|
|
$
|
(339.5
|
)
|
|
|
(105.4
|
)
|
|
|
(130.7
|
)
|
|
|
0.9
|
|
|
$
|
(235.2
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
|
(1.7
|
)
|
|
|
3.3
|
|
|
|
16.6
|
|
|
|
1.2
|
|
|
|
19.4
|
|
|
|
6.7
|
|
|
|
(58.4
|
)
|
|
|
2.1
|
|
|
|
(49.6
|
)
|
Amounts reclassified from AOCI
|
|
|
0.3
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
4.3
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss)
|
|
|
(1.4
|
)
|
|
|
6.3
|
|
|
|
16.6
|
|
|
|
1.2
|
|
|
|
22.7
|
|
|
|
11.0
|
|
|
|
(58.5
|
)
|
|
|
1.9
|
|
|
|
(45.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30,
|
|
$
|
(2.5
|
)
|
|
|
(79.4
|
)
|
|
|
(239.4
|
)
|
|
|
4.5
|
|
|
$
|
(316.8
|
)
|
|
|
(94.4
|
)
|
|
|
(189.2
|
)
|
|
|
2.8
|
|
|
$
|
(280.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS
Moodys maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a
cash balance formula based on years of service and career average salary for its employees or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The
retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moodys funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively
referred to herein as the Retirement Plans. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the Other Retirement Plans.
Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008.
New U.S. employees will instead receive a retirement contribution of similar benefit value under the Companys Profit Participation Plan. Current participants of the Companys DBPPs continue to accrue benefits based on existing plan
formulas.
The components of net periodic benefit expense related to the Retirement Plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Pension Plans
|
|
|
Other Retirement Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Components of net periodic expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
4.9
|
|
|
$
|
5.0
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Interest cost
|
|
|
4.5
|
|
|
|
4.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Expected return on plan assets
|
|
|
(4.2
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss from earlier periods
|
|
|
2.3
|
|
|
|
2.8
|
|
|
|
|
|
|
|
0.1
|
|
Amortization of net prior service costs from earlier periods
|
|
|
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic expense
|
|
$
|
7.5
|
|
|
$
|
8.6
|
|
|
$
|
0.7
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Pension Plans
|
|
|
Other Retirement Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Components of net periodic expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
10.1
|
|
|
$
|
10.8
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
Interest cost
|
|
|
9.1
|
|
|
|
8.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Expected return on plan assets
|
|
|
(8.5
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss from earlier periods
|
|
|
4.9
|
|
|
|
6.2
|
|
|
|
|
|
|
|
0.2
|
|
Amortization of net prior service costs from earlier periods
|
|
|
|
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic expense
|
|
$
|
15.6
|
|
|
$
|
18.7
|
|
|
$
|
1.5
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made a contribution of $22.4 million to its funded pension plan well as payments of $1.9
million related to its unfunded U.S. DBPPs and $0.3 million to its U.S. other retirement plans during the six months ended June 30, 2016. The Company anticipates making payments of $3.2 million related to its unfunded U.S. DBPPs and $0.5
million to its U.S. other retirement plans, respectively, during the remainder of 2016.
29
NOTE 13. INDEBTEDNESS
The following table summarizes total indebtedness:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Principal
Amount
|
|
|
Fair Value of
Interest Rate
Swap
(1)
|
|
|
Unamortized
(Discount)
Premium
|
|
|
Unamortized
Debt
Issuance
Costs
(2)
|
|
|
Carrying
Value
|
|
Notes Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.06% Series 2007-1 Notes due 2017
|
|
$
|
300.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.1
|
)
|
|
$
|
299.9
|
|
5.50% 2010 Senior Notes, due 2020
|
|
|
500.0
|
|
|
|
25.5
|
|
|
|
(1.5
|
)
|
|
|
(1.8
|
)
|
|
|
522.2
|
|
4.50% 2012 Senior Notes, due 2022
|
|
|
500.0
|
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
(2.3
|
)
|
|
|
495.1
|
|
4.875% 2013 Senior Notes, due 2024
|
|
|
500.0
|
|
|
|
|
|
|
|
(2.2
|
)
|
|
|
(2.9
|
)
|
|
|
494.9
|
|
2.75% 2014 Senior Notes (5-Year), due 2019
|
|
|
450.0
|
|
|
|
12.0
|
|
|
|
(0.5
|
)
|
|
|
(2.1
|
)
|
|
|
459.4
|
|
5.25% 2014 Senior Notes (30-Year), due 2044
|
|
|
600.0
|
|
|
|
|
|
|
|
3.3
|
|
|
|
(6.0
|
)
|
|
|
597.3
|
|
1.75% 2015 Senior Notes, due 2027
|
|
|
555.5
|
|
|
|
|
|
|
|
|
|
|
|
(3.9
|
)
|
|
|
551.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
3,405.5
|
|
|
$
|
37.5
|
|
|
$
|
(3.5
|
)
|
|
$
|
(19.1
|
)
|
|
$
|
3,420.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Principal
Amount
|
|
|
Fair Value of
Interest Rate
Swap
(1)
|
|
|
Unamortized
(Discount)
Premium
|
|
|
Unamortized
Debt Issuance
Costs
(2)
|
|
|
Carrying
Value
|
|
Notes Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.06% Series 2007-1 Notes due 2017
|
|
$
|
300.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.2
|
)
|
|
$
|
299.8
|
|
5.50% 2010 Senior Notes, due 2020
|
|
|
500.0
|
|
|
|
9.4
|
|
|
|
(1.6
|
)
|
|
|
(2.0
|
)
|
|
|
505.8
|
|
4.50% 2012 Senior Notes, due 2022
|
|
|
500.0
|
|
|
|
|
|
|
|
(2.8
|
)
|
|
|
(2.5
|
)
|
|
|
494.7
|
|
4.875% 2013 Senior Notes, due 2024
|
|
|
500.0
|
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
(3.1
|
)
|
|
|
494.6
|
|
2.75% 2014 Senior Notes (5-Year), due 2019
|
|
|
450.0
|
|
|
|
2.3
|
|
|
|
(0.5
|
)
|
|
|
(2.4
|
)
|
|
|
449.4
|
|
5.25% 2014 Senior Notes (30-Year), due 2044
|
|
|
600.0
|
|
|
|
|
|
|
|
3.4
|
|
|
|
(6.2
|
)
|
|
|
597.2
|
|
1.75% 2015 Senior Notes, due 2027
|
|
|
543.1
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
539.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
3,393.1
|
|
|
$
|
11.7
|
|
|
$
|
(3.8
|
)
|
|
$
|
(20.4
|
)
|
|
$
|
3,380.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company has entered into interest rate swaps on the 2010 Senior Notes and the 2014 Senior Notes (5-Year) which are more fully discussed in Note 7
above.
|
(2)
|
Pursuant to ASU
No. 2015-03, unamortized debt issuance costs are presented as a reduction to the carrying value of the notes payable. See Note 1 for additional discussion.
|
At June 30, 2016, the Company was in compliance with all covenants contained within all of the debt agreements. The 2015 Facility,
the 2015 Senior Notes, the 2014 Senior Notes (5-year), the 2014 Senior Notes (30-year), the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes all contain cross default provisions. These provisions state that
default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2016, there were no
such cross defaults.
30
Interest expense, net
The following table summarizes the components of interest as presented in the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Income
|
|
$
|
2.8
|
|
|
$
|
2.3
|
|
|
$
|
5.7
|
|
|
$
|
4.2
|
|
Expense on borrowings
|
|
|
(35.4
|
)
|
|
|
(30.7
|
)
|
|
|
(70.0
|
)
|
|
|
(59.0
|
)
|
Expense on UTPs and other tax related liabilities
|
|
|
(1.7
|
)
|
|
|
(3.5
|
)
|
|
|
(4.5
|
)
|
|
|
(6.7
|
)
|
Capitalized
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(34.3
|
)
|
|
$
|
(31.9
|
)
|
|
$
|
(68.4
|
)
|
|
$
|
(61.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the cash paid for interest:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Interest paid
|
|
$
|
73.9
|
|
|
$
|
53.3
|
|
The fair value and carrying value of the Companys long-term debt as of June 30, 2016 and
December 31, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Series 2007-1 Notes
|
|
$
|
299.9
|
|
|
$
|
316.6
|
|
|
$
|
299.8
|
|
|
$
|
320.6
|
|
2010 Senior Notes
|
|
|
522.2
|
|
|
|
566.9
|
|
|
|
505.8
|
|
|
|
551.2
|
|
2012 Senior Notes
|
|
|
495.1
|
|
|
|
558.7
|
|
|
|
494.7
|
|
|
|
530.0
|
|
2013 Senior Notes
|
|
|
494.9
|
|
|
|
569.9
|
|
|
|
494.6
|
|
|
|
533.8
|
|
2014 Senior Notes (5-Year)
|
|
|
459.4
|
|
|
|
463.8
|
|
|
|
449.4
|
|
|
|
454.3
|
|
2014 Senior Notes (30-Year)
|
|
|
597.3
|
|
|
|
734.0
|
|
|
|
597.2
|
|
|
|
617.7
|
|
2015 Senior Notes
|
|
|
551.6
|
|
|
|
577.6
|
|
|
|
539.1
|
|
|
|
520.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,420.4
|
|
|
$
|
3,787.5
|
|
|
$
|
3,380.6
|
|
|
$
|
3,527.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Companys long-term debt is estimated based on quoted market prices for
similar instruments. Accordingly, the inputs used to estimate the fair value of the Companys long-term debt are classified as Level 2 inputs within the fair value hierarchy.
NOTE 14. CONTINGENCIES
Moodys is involved in legal and tax
proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Companys business, including claims based on ratings assigned by MIS. Moodys is also subject to ongoing tax audits in the normal
course of business. Management periodically assesses the Companys liabilities and contingencies in connection with these matters based upon the latest information available. Moodys discloses material pending legal proceedings pursuant to
SEC rules and other pending matters as it may determine to be appropriate.
Following the global credit crisis of 2008, MIS
and other credit rating agencies have been the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, and civil litigation. Legislative, regulatory and enforcement entities around the world are
considering additional legislation, regulation and enforcement actions, including with respect to MISs compliance with regulatory standards. Moodys periodically receives and is continuing to address subpoenas and inquiries from various
governmental authorities, including the U.S. Department of Justice and states attorneys general, and is responding to such investigations and inquiries.
31
In addition, the Company is facing litigation from market participants relating to the
performance of MIS rated securities. Although Moodys in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased following the events in the U.S. subprime residential mortgage
sector and global credit markets more broadly over the last several years.
For claims, litigation and proceedings and
governmental investigations and inquiries not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial
statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another
amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information
becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and
similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual
outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its
financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and
the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some such matters, the absence of similar court rulings on the theories of law asserted and uncertainties regarding
apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
NOTE 15. SEGMENT
INFORMATION
The Company is organized into three operating segments: (i) MIS, (ii) MA and (iii) Copal Amba.
The Copal Amba operating segment has been aggregated with the MA operating segment based on the fact that it has similar economic characteristics to MA. Accordingly, the Company reports in two reportable segments: MIS and MA.
The MIS segment consists of five LOBs. The CFG, SFG, FIG and PPIF LOBs generate revenue principally from fees for the assignment and
ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other LOB primarily consists of the distribution of research and financial instruments pricing services in the
Asia-Pacific region as well as ICRA non-ratings revenue.
The MA segment develops a wide range of products and services that
support the risk management activities of institutional participants in global financial markets. The MA segment consists of three LOBsRD&A, ERS and PS.
Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS
approximates the fair value of the aforementioned content, data and products and is generally based on comparable market transactions. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA
products and services utilized in MISs ratings process. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services. Additionally, overhead costs and corporate expenses of the Company that
exclusively benefit only one segment are fully charged to that segment. Overhead costs and corporate expenses of the Company that benefit both segments are allocated to each segment based on a revenue-split methodology. Accordingly, a reportable
segments share of these costs will increase as its proportion of revenue relative to Moodys total revenue increases. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance,
human resources and information technology. Eliminations in the table below represent intersegment revenue/expense. Moodys does not report the Companys assets by reportable segment, as this metric is not used by the chief
operating decision maker to allocate resources to the segments. Consequently, it is not practical to show assets by reportable segment.
32
Financial Information by Segment
The table below shows revenue, Adjusted Operating Income and operating income by reportable segment. Adjusted Operating Income is a
financial metric utilized by the Companys chief operating decision maker to assess the profitability of each reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
MIS
|
|
|
MA
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
MIS
|
|
|
MA
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
650.2
|
|
|
$
|
306.1
|
|
|
$
|
(27.4
|
)
|
|
$
|
928.9
|
|
|
$
|
662.9
|
|
|
$
|
282.0
|
|
|
$
|
(26.8
|
)
|
|
$
|
918.1
|
|
Operating, SG&A
|
|
|
281.3
|
|
|
|
233.6
|
|
|
|
(27.4
|
)
|
|
|
487.5
|
|
|
|
287.0
|
|
|
|
210.7
|
|
|
|
(26.8
|
)
|
|
|
470.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
|
368.9
|
|
|
|
72.5
|
|
|
|
|
|
|
|
441.4
|
|
|
|
375.9
|
|
|
|
71.3
|
|
|
|
|
|
|
|
447.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
18.2
|
|
|
|
13.0
|
|
|
|
|
|
|
|
31.2
|
|
|
|
15.8
|
|
|
|
12.1
|
|
|
|
|
|
|
|
27.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
350.7
|
|
|
$
|
59.5
|
|
|
$
|
|
|
|
$
|
410.2
|
|
|
$
|
360.1
|
|
|
$
|
59.2
|
|
|
$
|
|
|
|
$
|
419.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
MIS
|
|
|
MA
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
MIS
|
|
|
MA
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
1,199.3
|
|
|
$
|
599.9
|
|
|
$
|
(54.2
|
)
|
|
$
|
1,745.0
|
|
|
$
|
1,287.5
|
|
|
$
|
548.6
|
|
|
$
|
(52.4
|
)
|
|
$
|
1,783.7
|
|
Operating, SG&A
|
|
|
559.9
|
|
|
|
463.9
|
|
|
|
(54.2
|
)
|
|
|
969.6
|
|
|
|
568.3
|
|
|
|
420.7
|
|
|
|
(52.4
|
)
|
|
|
936.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
|
639.4
|
|
|
|
136.0
|
|
|
|
|
|
|
|
775.4
|
|
|
|
719.2
|
|
|
|
127.9
|
|
|
|
|
|
|
|
847.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
35.7
|
|
|
|
25.4
|
|
|
|
|
|
|
|
61.1
|
|
|
|
31.8
|
|
|
|
24.7
|
|
|
|
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
603.7
|
|
|
$
|
110.6
|
|
|
$
|
|
|
|
$
|
714.3
|
|
|
$
|
687.4
|
|
|
$
|
103.2
|
|
|
$
|
|
|
|
$
|
790.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIS and MA Revenue by Line of Business
The table below presents revenue by LOB within each reportable segment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
MIS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate finance (CFG)
|
|
$
|
304.8
|
|
|
$
|
319.6
|
|
|
$
|
545.1
|
|
|
$
|
618.3
|
|
Structured finance (SFG)
|
|
|
111.5
|
|
|
|
121.2
|
|
|
|
202.1
|
|
|
|
222.5
|
|
Financial institutions (FIG)
|
|
|
89.7
|
|
|
|
90.4
|
|
|
|
184.6
|
|
|
|
184.2
|
|
Public, project and infrastructure finance (PPIF)
|
|
|
112.3
|
|
|
|
99.9
|
|
|
|
203.8
|
|
|
|
200.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ratings revenue
|
|
|
618.3
|
|
|
|
631.1
|
|
|
|
1,135.6
|
|
|
|
1,225.6
|
|
MIS Other
|
|
|
7.3
|
|
|
|
8.1
|
|
|
|
15.1
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
|
625.6
|
|
|
|
639.2
|
|
|
|
1,150.7
|
|
|
|
1,241.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment royalty
|
|
|
24.6
|
|
|
|
23.7
|
|
|
|
48.6
|
|
|
|
46.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
650.2
|
|
|
|
662.9
|
|
|
|
1,199.3
|
|
|
|
1,287.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, data and analytics (RD&A)
|
|
|
168.3
|
|
|
|
157.5
|
|
|
|
333.2
|
|
|
|
307.1
|
|
Enterprise risk solutions (ERS)
|
|
|
97.5
|
|
|
|
83.2
|
|
|
|
187.0
|
|
|
|
160.3
|
|
Professional services (PS)
|
|
|
37.5
|
|
|
|
38.2
|
|
|
|
74.1
|
|
|
|
74.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
|
303.3
|
|
|
|
278.9
|
|
|
|
594.3
|
|
|
|
542.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenue
|
|
|
2.8
|
|
|
|
3.1
|
|
|
|
5.6
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
306.1
|
|
|
|
282.0
|
|
|
|
599.9
|
|
|
|
548.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(27.4
|
)
|
|
|
(26.8
|
)
|
|
|
(54.2
|
)
|
|
|
(52.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MCO
|
|
$
|
928.9
|
|
|
$
|
918.1
|
|
|
$
|
1,745.0
|
|
|
$
|
1,783.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Consolidated Revenue Information by Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
545.9
|
|
|
$
|
545.9
|
|
|
$
|
1,025.9
|
|
|
$
|
1,045.7
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
229.3
|
|
|
|
217.4
|
|
|
|
439.5
|
|
|
|
445.0
|
|
Asia-Pacific
|
|
|
97.5
|
|
|
|
99.2
|
|
|
|
179.5
|
|
|
|
185.3
|
|
Americas
|
|
|
56.2
|
|
|
|
55.6
|
|
|
|
100.1
|
|
|
|
107.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
383.0
|
|
|
|
372.2
|
|
|
|
719.1
|
|
|
|
738.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
928.9
|
|
|
$
|
918.1
|
|
|
$
|
1,745.0
|
|
|
$
|
1,783.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU outlines a comprehensive
new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In
August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date which defers the effective date of the ASU for annual and interim reporting periods beginning after
December 15, 2017, with early adoption permitted up to the original effective date of December 15, 2016. In addition, in the first and second quarter of 2016, the FASB issued additional updates clarifying the implementation guidance for
the new revenue recognition standard.
The Company intends to adopt the new revenue guidance as of January 1, 2018 and is
currently evaluating the application of a transition method and the impact that adoption of these updates will have on its consolidated financial statements. Currently, the Company believes this ASU will have an impact on: i) the capitalization
of certain contract implementation costs for its ERS business which will be expensed as incurred under the new standard; ii) the accounting for certain software subscription revenue in MA whereby the license rights within the arrangement would be
recognized at the inception of the contract based on estimated stand-alone selling price with the remainder recognized over the subscription period; iii) the accounting for certain ERS revenue arrangements where VSOE is not available should result
in the acceleration of revenue recognition and iv) the accounting for contract acquisition costs which will be expensed as incurred under the new standard.
In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The amendments
in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the
impact of this ASU on the Companys financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows will depend on
classification as either a finance or operating lease. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. This standard must be adopted using a modified retrospective approach whereby leases
will be presented in accordance with the new standard as of the earliest period presented. The Company is currently evaluating the impact of this ASU on the Companys financial statements.
In March 2016, the FASB issued ASU No. 2016-07, Investments Equity Method and Joint Ventures (Topic 323), Simplifying
the Transition to the Equity Method of Accounting. This ASU amends the accounting for an investment not previously accounted for under the equity method that subsequently qualifies for the equity method of accounting. It requires a company to
add the cost of the additional interest acquired to its current basis and the commencement of the equity method of accounting when the criteria are met. In addition, the unrealized gains or losses in accumulated other comprehensive related to an
available for sale equity security should be recognized through earnings if the investment subsequently qualifies for the equity method of accounting. The amendments of this ASU are effective for fiscal years beginning after December 15, 2016,
with early adoption permitted. The adoption of this ASU will only impact the Company if an investment not previously accounted for under the equity method qualifies for accounting under the equity method.
34
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee
Share-Based Payment Accounting. This ASU changes various aspects related to the accounting for share-based payments including: i) accounting for Excess Tax Benefits and shortfalls; ii) the accounting for forfeitures; iii) restrictions on the
value of shares retained by an entity to fund the employees portion of payroll taxes; and iv) classification of Excess Tax Benefits in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016
and early adoption is permitted if all amendments are adopted in the same period. The Company is evaluating the impact of this ASU on its financial statements but currently expects that the most significant effect of this ASU will be the impact on
its reported Net Income and Diluted EPS as Excess Tax Benefits and shortfalls will be recorded to the provision for income taxes under this ASU as compared to a charge to capital surplus under current GAAP.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (Topic 326), Measurement of Credit
Losses on Financial Instruments. The amendments in this ASU require the use of an expected credit loss impairment model for most financial assets reported at amortized cost which will require entities to estimate expected credit
losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to
the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. This ASU is effective for annual and interim reporting periods beginning after December 15,
2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standards provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the
first effective reporting period. The Company is currently evaluating the impact of this ASU on its financial statements.
NOTE 17.
SUBSEQUENT EVENT
On July 11, 2016, the Board approved the declaration of a quarterly dividend of $0.37 per share of
Moodys common stock, payable on September 12, 2016 to shareholders of record at the close of business on August 22, 2016.
35
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moodys
Corporation condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q.
This Managements Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See Forward-Looking Statements commencing on page 55 for a
discussion of uncertainties, risks and other factors associated with these statements.
The Company
Moodys is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical
tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services. Moodys has
two reportable segments: MIS and MA.
MIS, the credit rating agency, publishes credit ratings on a wide range of debt
obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors.
Additionally, MIS earns revenue from certain non-ratings-related operations, which consist primarily of the distribution of research and fixed income pricing services in the Asia-Pacific region, and from ICRA non-ratings services. The revenue from
these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.
The MA segment
develops a wide range of products and services that primarily support financial analysis and risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes research and data
developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and
analytical tools such as quantitative credit risk scores. Within its ERS business, MA provides software solutions as well as related risk management services. The PS business provides outsourced research and analytical services and financial
training and certification programs.
Critical Accounting Estimates
Moodys discussion and analysis of its financial condition and results of operations are based on the Companys consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moodys to make estimates and judgments that affect reported
amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on
other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moodys evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, goodwill and
acquired intangible assets, pension and other retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Companys
annual report on Form 10-K for the year ended December 31, 2015, includes descriptions of some of the judgments that Moodys makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there
have been no material changes to the Companys critical accounting estimates.
Reportable Segments
The Company is organized into two reportable segments at June 30, 2016: MIS and MA.
The MIS segment is comprised primarily of all of the Companys ratings operations. The MIS segment consists of five LOBs CFG,
SFG, FIG, PPIF and MIS Other. The ratings LOBs generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other
LOB consists of certain non-ratings operations managed by MIS which consists of non-rating revenue from ICRA as well as certain research and fixed income pricing service operations in the Asia-Pacific region.
The MA segment develops a wide range of products and services that support financial analysis and risk management activities of
institutional participants in global financial markets. The MA segment consists of three lines of business RD&A, ERS and PS.
36
The following is a discussion of the results of operations of the Company and its reportable
segments. Total MIS revenue and total MA expenses include the intersegment royalty revenue for MIS and expense charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS
approximates the fair value of the aforementioned content, data and products developed by MIS. Total MA revenue and total MIS expenses include intersegment fees charged to MIS from MA for the use of certain MA products and services in MISs
ratings process. These fees charged by MA are generally equal to the costs incurred by MA to provide these products and services. Overhead charges and corporate expenses that exclusively benefit one segment are fully charged to that segment.
Additionally, overhead costs and corporate expenses of the Company that benefit both segments are generally allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information
technology and support staff such as finance, human resources and information technology.
RESULTS OF OPERATIONS
Three months ended June 30, 2016 compared with three months ended June 30, 2015
Executive Summary
|
|
|
Moodys revenue in the three months ended June 30, 2016 totaled $928.9 million, an increase of $10.8 million, or 1%, compared to 2015 and
reflected good growth in MA partially offset by modest declines in MIS.
|
|
|
|
MIS revenue decreased 2% compared to the prior year primarily reflecting challenges in the U.S. securitization markets, most notably in the CLO asset
class. Also contributing to the decline were lower rated issuance volumes for high-yield corporate debt in the U.S. and investment-grade corporate debt in the Asia-Pacific region. These declines were partially offset by benefits from changes in the
mix of fee type, new fee initiatives and pricing increases coupled with higher infrastructure finance revenue across all regions.
|
|
|
|
MA revenue was 9% higher than the prior year reflecting increases in ERS and RD&A across all regions. Revenue grew in all product areas of ERS and
included revenue from the first quarter 2016 acquisition of GGY. In RD&A, revenue growth was primarily driven by credit research subscriptions and licensing of ratings data.
|
|
|
|
Total operating expenses increased $19.9 million, or 4%, compared to the second quarter of 2015 primarily reflecting:
|
|
|
|
higher compensation costs of $21.1 million associated with headcount growth (including costs from the acquisition of GGY) and annual compensation
increases partially offset by a decline in incentive compensation costs;
|
partially offset by:
|
|
|
lower non-compensation expenses of $4.5 million primarily reflecting cost reduction initiatives in response to the current challenging business
conditions in MIS.
|
|
|
|
Operating income of $410.2 million in the second quarter of 2016 was down $9.1 million compared to 2015. Operating margin was 44.2% compared to 45.7%
in the prior year. Adjusted Operating Income of $441.4 million in the second quarter of 2016 decreased $5.8 million compared to 2015. Adjusted Operating Margin was 47.5% compared to 48.7% in the prior year period.
|
|
|
|
The ETR in the second quarter of 2016 was 150 BPS higher primarily due to benefits in the prior year resulting from a favorable state tax ruling.
|
|
|
|
The decrease in non-operating expense, net, compared to the prior year is primarily due to FX gains in Q2 2016 of approximately $1 million compared to
FX losses in 2015 of approximately $12 million. This was partially offset by higher interest expense on borrowings primarily due to $300 million of additional borrowings under the 2014 Senior Notes (30-Year) in November 2015.
|
|
|
|
Diluted EPS of $1.30 in the second quarter of 2016 increased $0.02 from 2015 reflecting a 4% reduction in diluted weighted average shares outstanding
partially offset by a 2% decrease in Net Income.
|
37
Moodys Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
% Change
Favorable
(Unfavorable)
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
545.9
|
|
|
$
|
545.9
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
229.3
|
|
|
|
217.4
|
|
|
|
5
|
%
|
Asia-Pacific
|
|
|
97.5
|
|
|
|
99.2
|
|
|
|
(2
|
%)
|
Americas
|
|
|
56.2
|
|
|
|
55.6
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
383.0
|
|
|
|
372.2
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
928.9
|
|
|
|
918.1
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
258.9
|
|
|
|
243.9
|
|
|
|
(6
|
%)
|
SG&A
|
|
|
228.6
|
|
|
|
227.0
|
|
|
|
(1
|
%)
|
Depreciation and amortization
|
|
|
31.2
|
|
|
|
27.9
|
|
|
|
(12
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
518.7
|
|
|
|
498.8
|
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
410.2
|
|
|
$
|
419.3
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
(1)
|
|
$
|
441.4
|
|
|
$
|
447.2
|
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
$
|
(34.3
|
)
|
|
$
|
(31.9
|
)
|
|
|
(8
|
%)
|
Other non-operating income (expense), net
|
|
$
|
3.0
|
|
|
$
|
(8.2
|
)
|
|
|
NM
|
|
Net income attributable to Moodys
|
|
$
|
255.5
|
|
|
$
|
261.7
|
|
|
|
(2
|
%)
|
Diluted weighted average shares outstanding
|
|
|
195.8
|
|
|
|
204.4
|
|
|
|
4
|
%
|
Diluted EPS attributable to Moodys common shareholders
|
|
$
|
1.30
|
|
|
$
|
1.28
|
|
|
|
2
|
%
|
Operating margin
|
|
|
44.2
|
%
|
|
|
45.7
|
%
|
|
|
|
|
Adjusted Operating Margin
(1)
|
|
|
47.5
|
%
|
|
|
48.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjusted Operating Income and Adjusted Operating Margin are non-GAAP financial measures. Refer to the section entitled Non-GAAP Financial
Measures of this Management Discussion and Analysis for further information regarding these measures.
|
The table below shows Moodys global staffing by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
% Change
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
United States
|
|
|
3,442
|
|
|
|
3,257
|
|
|
|
6
|
%
|
International
|
|
|
7,372
|
|
|
|
6,906
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,814
|
|
|
|
10,163
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Global revenue of $928.9 million in the second quarter of 2016 increased $10.8 million, or
1%, compared to 2015 reflecting good growth in MA partially offset by modest declines in MIS.
The $13.6 million decrease in
MIS revenue primarily reflects challenges in the U.S. securitization markets, most notably in the CLO asset class. Also contributing to the decline were lower rated issuance volumes for high-yield corporate debt in the U.S. and investment-grade
corporate debt in the Asia-Pacific region. These declines were partially offset by benefits from changes in the mix of fee type, new fee initiatives and pricing increases coupled with higher infrastructure finance revenue across all regions.
The growth in MA reflects increases in ERS and RD&A across all regions. Revenue grew in all product areas of ERS and
included revenue from the acquisition of GGY. In RD&A, revenue growth was primarily driven by credit research subscriptions and licensing of ratings data.
Transaction revenue accounted for 50% of global MCO revenue in the second quarter of 2016 compared to 52% in the prior year.
U.S. revenue of $545.9 million in the second quarter of 2016 was flat compared to the prior year, reflecting declines in MIS revenue being offset by good growth in MA.
Non-U.S. revenue of $383.0 million increased $10.8 million compared to the second quarter of 2015. This increase primarily reflects good
growth in international MA revenue, which includes revenue from the acquisition of GGY in the first quarter of 2016.
Operating expenses were $258.9 million in the second quarter of 2016, or 6% higher compared to 2015 and included an increase in
compensation costs reflecting higher expenses resulting from the impact of annual compensation increases and increased headcount (including headcount from the acquisition of GGY). These increases were partially offset by lower incentive compensation
costs reflecting lower projected achievement against full-year targeted results compared to the prior year and lower non-compensation costs reflecting cost reduction initiatives in response to the current challenging business conditions in MIS.
SG&A expenses of $228.6 million in the second quarter of 2016 increased 1% from the prior year period reflecting modestly
higher compensation and non-compensation costs. The growth in compensation costs was primarily due to higher expenses resulting from annual compensation increases, headcount growth in MIS and MA as well as in overhead support areas coupled with
higher headcount from the GGY acquisition. These increases were partially offset by lower incentive compensation costs reflecting lower projected achievement against full-year targeted results compared to the prior year. The slight increase in
non-compensation expenses reflects higher rent and occupancy costs mostly offset by cost reduction initiatives in response to the current challenging business conditions within MIS.
Operating income of $410.2 million in the second quarter of 2016 was down $9.1 million compared to 2015, resulting in an operating margin
of 44.2%, compared to 45.7% in the prior year. Adjusted Operating Income of $441.4 million in the second quarter of 2016 decreased $5.8 million compared to 2015, resulting in an Adjusted Operating Margin of 47.5% compared to 48.7% in the prior year
period.
Interest income (expense), net in the second quarter of 2016 was ($34.3) million, a $2.4 million increase in expense
compared to 2015 reflecting interest on the $300 million of additional borrowings under the 2014 Senior Notes (30-Year) in November 2015.
Other non-operating income (expense), net was $3.0 million in the second quarter of 2016, an $11.2 million change compared to 2015 reflecting FX gains of approximately $1 million compared to FX losses of
approximately $12 million in the prior year.
The Companys ETR was 31.9% in the second quarter of 2016, compared with
30.4% in 2015 primarily due to benefits in the prior year resulting from a favorable state tax ruling.
Net Income in the
second quarter of 2016 was $255.5 million, or $6.2 million lower than 2015. Diluted EPS was $1.30 or $0.02 higher compared to 2015. The increase in diluted EPS reflects a 4% reduction in diluted weighted average shares outstanding partially offset
by the decrease in Net Income. The reduction in diluted weighted average shares outstanding reflects share repurchases under the Companys Board authorized share repurchase program partially offset by shares issued under the employee
stock-based compensation programs.
39
Segment Results
Moodys Investors Service
The table below provides a summary
of revenue and operating results, followed by further insight and commentary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
% Change
Favorable
(Unfavorable)
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate finance (CFG)
|
|
$
|
304.8
|
|
|
$
|
319.6
|
|
|
|
(5
|
%)
|
Structured finance (SFG)
|
|
|
111.5
|
|
|
|
121.2
|
|
|
|
(8
|
%)
|
Financial institutions (FIG)
|
|
|
89.7
|
|
|
|
90.4
|
|
|
|
(1
|
%)
|
Public, project and infrastructure finance (PPIF)
|
|
|
112.3
|
|
|
|
99.9
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ratings revenue
|
|
|
618.3
|
|
|
|
631.1
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIS Other
|
|
|
7.3
|
|
|
|
8.1
|
|
|
|
(10
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
|
625.6
|
|
|
|
639.2
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment royalty
|
|
|
24.6
|
|
|
|
23.7
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
650.2
|
|
|
|
662.9
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and SG&A (external)
|
|
|
278.5
|
|
|
|
283.9
|
|
|
|
2
|
%
|
Operating and SG&A (intersegment)
|
|
|
2.8
|
|
|
|
3.1
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
|
368.9
|
|
|
|
375.9
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
18.2
|
|
|
|
15.8
|
|
|
|
(15
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
350.7
|
|
|
$
|
360.1
|
|
|
|
(3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Margin
|
|
|
56.7
|
%
|
|
|
56.7
|
%
|
|
|
|
|
Operating margin
|
|
|
53.9
|
%
|
|
|
54.3
|
%
|
|
|
|
|
The following is a discussion of external MIS revenue and operating expenses:
Global MIS revenue of $625.6 million in the second quarter of 2016 was down 2% compared to 2015. The decline compared to 2015 reflects
challenges in the U.S. securitization markets, most notably in the CLO asset class. Also contributing to the decline were lower rated issuance volumes for high-yield corporate debt in the U.S. and investment-grade corporate debt in the Asia-Pacific
region. These declines were partially offset by the impact of changes in the mix of fee type, new fee initiatives and pricing increases as well as higher infrastructure finance revenue across all regions.
Transaction revenue for MIS was 62% in the second quarter of 2016 compared to 64% in the second quarter of 2015.
In the U.S., revenue was $399.0 million in the second quarter of 2016, a decrease of $13.0 million compared to 2015 reflecting declines
in CLO and RMBS issuance coupled with lower rated issuance volumes for high-yield corporate debt. Partially offsetting these declines was the impact of changes in the mix of fee type, new fee initiatives and pricing increases coupled with growth in
project & infrastructure finance revenue as well as growth in revenue from rating bank loans.
Non-U.S. revenue was
$226.6 million in the second quarter of 2016, or flat compared to 2015. There were higher rated issuance volumes in high-yield and investment-grade corporate debt in EMEA in advance of the Brexit referendum in late June as well as increases across
most SFG asset classes in EMEA. Additionally, there were increases in infrastructure finance revenue across all regions. Offsetting these increases were lower investment-grade corporate debt issuance volumes in Asia-Pacific.
40
Global CFG revenue of $304.8 million in the second quarter of 2016 was down 5% compared to
2015. The decline reflects lower rated issuance volumes for speculative-grade corporate debt, most notably in the U.S., resulting from wider average credit spreads for high-yield instruments during the second quarter compared to the prior year.
Also, there were lower rated issuance volumes for investment-grade corporate debt in Asia-Pacific. Partially offsetting these decreases were benefits from changes in the mix of fee type, new fee initiatives and pricing increases as well as higher
rated issuance volumes in high-yield and investment-grade corporate debt in EMEA in advance of the Brexit referendum in late June. Transaction revenue represented 71% and 73% of total CFG revenue in the second quarter of 2016 and 2015, respectively.
In the U.S., revenue was $208.1 million, or $8.3 million lower than the prior year. Internationally, revenue of $96.7 million decreased $6.5 million compared to the prior year.
Global SFG revenue of $111.5 million in the second quarter of 2016 decreased $9.7 million, or 8%, compared to 2015, primarily due to
lower U.S. securitization activity. U.S. revenue of $72.9 million decreased $14.3 million compared to the second quarter of 2015 primarily reflecting lower CLO formation due to wider credit spreads resulting from market volatility and declining
availability of collateral for these instruments. The U.S. decline also reflects lower market activity in the RMBS asset class. Non-U.S. revenue in the second quarter of 2016 of $38.6 million increased $4.6 million primarily reflecting growth in
RMBS and ABS deals in EMEA. Transaction revenue was 61% of total SFG revenue in the second quarter of 2016 compared to 66% in the prior year.
Global FIG revenue of $89.7 million in the second quarter of 2016 was flat compared to 2015. In the U.S., revenue was $40.8 million, $2.8 million higher compared to 2015 reflecting growth in
insurance revenue due to M&A activity in the sector coupled with the favorable impact of changes in the mix of fee type, new fee initiatives and pricing increases. Internationally, revenue was $48.9 million in the second quarter of 2016, or $3.5
million lower compared to 2015 reflecting lower banking revenue in EMEA due to an unfavorable shift in issuance mix. Transaction revenue was 33% of total FIG revenue in the second quarter of 2016 compared to 36% in the same period in 2015.
Global PPIF revenue was $112.3 million in the second quarter of 2016, an increase of $12.4 million, or 12%, compared to 2015.
In the U.S., revenue in the second quarter of 2016 was $75.0 million, an increase of $7.3 million compared to 2015 reflecting higher project & infrastructure finance volumes coupled with benefits from changes in the mix of fee type, new fee
initiatives and pricing increases. Outside the U.S., PPIF revenue increased $5.1 million compared to 2015, primarily due to higher infrastructure finance revenue across all regions. Transaction revenue was 65% and 62% of total PPIF revenue in second
quarter of 2016 and 2015, respectively.
Operating and SG&A expenses in the second quarter of 2016 decreased $5.4 million
compared to 2015 primarily due to lower non-compensation expense of approximately $5 million reflecting cost reduction initiatives in place resulting from the current challenging market conditions in the ratings business. Compensation expenses were
flat and included a decrease in incentive compensation costs reflecting lower projected achievement against full-year targeted results compared to the prior year. Offsetting the decrease in incentive compensation were higher salaries and employee
benefits costs reflecting annual compensation increases, headcount growth in the ratings LOBs as well as the support areas such as IT, finance and human resources for which the costs are allocated to each segment based on a revenue-split
methodology.
Adjusted Operating Income and operating income in the second quarter of 2016, which includes intersegment
royalty revenue and intersegment expenses, were $368.9 million and $350.7 million, respectively, down 2% and 3%, respectively, compared to 2015. Adjusted Operating Margin of 56.7% was flat compared to 2015. Operating margin of 53.9% was 40bps lower
than 2015.
41
Moodys Analytics
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
% Change
Favorable
(Unfavorable)
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, data and analytics (RD&A)
|
|
$
|
168.3
|
|
|
|
157.5
|
|
|
|
7
|
%
|
Enterprise risk solutions (ERS)
|
|
|
97.5
|
|
|
|
83.2
|
|
|
|
17
|
%
|
Professional services (PS)
|
|
|
37.5
|
|
|
|
38.2
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
|
303.3
|
|
|
|
278.9
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenue
|
|
|
2.8
|
|
|
|
3.1
|
|
|
|
(10
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MA Revenue
|
|
|
306.1
|
|
|
|
282.0
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and SG&A (external)
|
|
|
209.0
|
|
|
|
187.0
|
|
|
|
(12
|
%)
|
Operating and SG&A (intersegment)
|
|
|
24.6
|
|
|
|
23.7
|
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
|
72.5
|
|
|
|
71.3
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13.0
|
|
|
|
12.1
|
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
59.5
|
|
|
$
|
59.2
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Margin
|
|
|
23.7
|
%
|
|
|
25.3
|
%
|
|
|
|
|
Operating margin
|
|
|
19.4
|
%
|
|
|
21.0
|
%
|
|
|
|
|
The following is a discussion of external MA revenue and operating expenses:
Global MA revenue increased $24.4 million, or 9%, compared to the second quarter of 2015 reflecting growth in RD&A as well as ERS,
which included revenue from the acquisition of GGY. Recurring revenue comprised 76% of total MA revenue in both the second quarter of 2016 and 2015.
In the U.S., revenue of $146.9 million in the second quarter of 2016 increased $13.0 million, and reflected growth in ERS and RD&A.
Non-U.S. revenue of $156.4 million in the second quarter of 2016 was $11.4 million higher than in 2015 reflecting growth in RD&A and
ERS.
Global RD&A revenue of $168.3 million, which comprised 55% and 56% of total external MA revenue in the second
quarter of 2016 and 2015, respectively, increased $10.8 million, or 7%, over the prior year period. This growth, which was most notable in the U.S. and Asia-Pacific, reflected strong sales of credit research and licensing of ratings data. In the
U.S., revenue of $96.3 million increased 7% over the prior year. Non-U.S. revenue of $72.0 million also increased 7%.
Global
ERS revenue in the second quarter of 2016 of $97.5 million increased $14.3 million, or 17%, over 2015 due to increases across all product offerings as well as revenue from the acquisition of GGY in March of 2016. Revenue in ERS is subject to
quarterly volatility resulting from the variable nature of project timing and the concentration of software implementation and license revenue in a relatively small number of engagements. In the U.S., revenue of $37.9 million increased 21% compared
to the prior year. Non-U.S. revenue of $59.6 million increased 15% compared to the prior year.
Global PS revenue of $37.5
million in the second quarter of 2016 decreased $0.7 million compared to 2015 primarily reflecting declines in the outsourced research and analytical services business. In the U.S., revenue of $12.7 million was flat. Non-U.S. revenue of $24.8
million was down 3% compared to the prior year.
42
Operating and SG&A expenses in the second quarter of 2016 increased $22.0 million
compared to 2015. The expense growth is primarily due to an increase in compensation costs due to higher headcount to support business growth as well as higher headcount in support areas, for which MA is receiving a higher allocation based on a
revenue-split methodology. Headcount from the acquisition of GGY as well as annual merit increases also contributed to the compensation expense growth.
Adjusted Operating Income was $72.5 million in the second quarter of 2016 and increased 2% compared to the same period in 2015. Operating income of $59.5 million in the second quarter of 2016 was flat
compared to the same period in 2015. Adjusted Operating Margin for the second quarter of 2016 was 23.7%, compared to 25.3% in 2015. Operating margin was 19.4% compared to 21.0% in the prior year. Operating margin and Adjusted Operating Margin in
2016 were suppressed due to a larger proportion of overhead costs allocated to MA under the Companys revenue-split methodology. Adjusted operating income and operating income both include intersegment revenue and expense.
RESULTS OF OPERATIONS
Six months ended June 30, 2016 compared with six months ended June 30, 2015
Executive Summary
|
|
|
Moodys revenue in the first half of 2016 totaled $1,745.0 million, a decrease of $38.7 million, or 2%, compared to 2015 reflecting declines in
MIS revenue partially offset by good growth in MA.
|
|
|
|
MIS revenue decreased 7% compared to the prior year reflecting challenges in the high-yield and investment-grade corporate debt sectors due to market
volatility in the first quarter of 2016. Additionally, the decrease reflected lower 2016 securitization activity in the U.S., most notably in the U.S. CLO and CMBS asset classes which reflected the aforementioned market volatility as well as
uncertainty relating to the implementation of certain regulatory requirements for these asset classes.
|
|
|
|
MA revenue was 10% higher than the prior year reflecting increases in ERS and RD&A across all regions. Revenue grew in all product areas of ERS and
included revenue from the acquisition of GGY. In RD&A, revenue growth was primarily driven by credit research subscriptions and licensing of ratings data as well as growth in SAV and ECCA.
|
|
|
|
Total operating expenses increased $37.6 million, or 4%, reflecting higher compensation costs associated with headcount growth (including costs from
the acquisition of GGY) and annual compensation increases partially offset by lower incentive compensation costs and cost reduction initiatives in response to the current challenging business conditions in MIS.
|
|
|
|
Operating income of $714.3 million in the first six months of 2016 was down $76.3 million compared to 2015 and resulted in an operating margin of 40.9%
compared to 44.3% in the prior year. Adjusted Operating Income of $775.4 million in the first six months of 2016 decreased $71.7 million compared to 2015, resulting in an Adjusted Operating Margin of 44.4% compared to 47.5% in the prior year.
|
|
|
|
The ETR in the first half of 2016 was 60 BPS higher than the prior year primarily due to benefits in the prior year resulting from a favorable state
tax ruling.
|
|
|
|
The change in non-operating income (expense), net, compared to the prior year is primarily due to FX gains of approximately $5 million in 2016 compared
to FX losses of approximately $12 million in the prior year. Partially offsetting this change was higher interest expense due to the 2015 Senior Notes issued in March 2015 and the $300 million of additional borrowings under the 2014 Senior Notes
(30-Year) in November 2015.
|
|
|
|
Diluted EPS of $2.24 in the first half of 2016 decreased $0.15 from 2015 reflecting lower Net Income partially offset by a 4% reduction in diluted
weighted average shares outstanding.
|
43
Moodys Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
% Change
Favorable
(Unfavorable)
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,025.9
|
|
|
$
|
1,045.7
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
439.5
|
|
|
|
445.0
|
|
|
|
(1
|
%)
|
Asia-Pacific
|
|
|
179.5
|
|
|
|
185.3
|
|
|
|
(3
|
%)
|
Americas
|
|
|
100.1
|
|
|
|
107.7
|
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
719.1
|
|
|
|
738.0
|
|
|
|
(3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,745.0
|
|
|
|
1,783.7
|
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
508.1
|
|
|
|
488.3
|
|
|
|
(4
|
%)
|
SG&A
|
|
|
461.5
|
|
|
|
448.3
|
|
|
|
(3
|
%)
|
Depreciation and amortization
|
|
|
61.1
|
|
|
|
56.5
|
|
|
|
(8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,030.7
|
|
|
|
993.1
|
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
714.3
|
|
|
$
|
790.6
|
|
|
|
(10
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
(1)
|
|
$
|
775.4
|
|
|
$
|
847.1
|
|
|
|
(8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
$
|
(68.4
|
)
|
|
$
|
(61.2
|
)
|
|
|
(12
|
%)
|
Other non-operating income (expense), net
|
|
$
|
8.6
|
|
|
$
|
(5.7
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense), net
|
|
$
|
(59.8
|
)
|
|
$
|
(66.9
|
)
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Moodys
|
|
$
|
439.9
|
|
|
$
|
491.8
|
|
|
|
(11
|
%)
|
Diluted weighted average shares outstanding
|
|
|
196.8
|
|
|
|
205.4
|
|
|
|
4
|
%
|
Diluted EPS attributable to Moodys common shareholders
|
|
$
|
2.24
|
|
|
$
|
2.39
|
|
|
|
(6
|
%)
|
Operating margin
|
|
|
40.9
|
%
|
|
|
44.3
|
%
|
|
|
|
|
Adjusted Operating Margin
(1)
|
|
|
44.4
|
%
|
|
|
47.5
|
%
|
|
|
|
|
(1)
|
Adjusted Operating Income and Adjusted Operating Margin are non-GAAP financial measures. Refer to the section entitled Non-GAAP Financial
Measures of this Management Discussion and Analysis for further information regarding these measures.
|
Global revenue of $1,745.0 million in the first half of 2016 decreased $38.7 million, or 2%, compared to 2015 and reflected lower MIS
revenue partially offset by good growth in MA revenue, which included revenue from the first quarter 2016 acquisition of GGY.
The $90.8 million decrease in MIS revenue reflects challenges in the high-yield and investment-grade corporate debt sectors due to market
volatility, which was most notable in the first quarter of 2016. Additionally, the decrease reflected lower securitization activity in the U.S. in the first six months of 2016, primarily in the U.S. CLO and CMBS asset classes which reflected the
aforementioned market volatility as well as uncertainty relating to the implementation of certain regulatory requirements.
The $52.1 million growth in MA reflects increases in ERS and RD&A across all regions. Revenue grew in all product areas of ERS and
included revenue from the 2016 acquisition of GGY. In RD&A, revenue growth was primarily driven by credit research, subscriptions and licensing of ratings data as well as growth in the SAV and ECCA businesses.
Transaction revenue accounted for 47% of global MCO revenue in the first half of 2016 compared to 52% in the prior year.
44
U.S. revenue of $1,025.9 million in the first half of 2016 decreased $19.8 million from the
prior year, reflecting declines in MIS being partially offset by good growth in MA.
Non-U.S. revenue of $719.1 million
decreased $18.9 million compared to the first half of 2015. This decrease is due to declines in MIS across all regions being partially offset by growth in MA across all regions.
Operating expenses were $508.1 million in the first half of 2016, up $19.8 million compared to 2015 and included an increase in
compensation costs of approximately $29 million reflecting higher salaries and employee benefit expenses resulting from the impact of annual compensation increases and increased headcount (including headcount from the acquisition of GGY). These
increases were partially offset by lower incentive compensation costs reflecting lower projected achievement against full-year targeted results compared to the prior year. Additionally, there was an approximate $9 million decrease in
non-compensation expenses reflecting cost reduction initiatives in response to the current challenging business conditions in MIS.
SG&A expenses of $461.5 million in the first half of 2016 grew $13.2 million from the prior year period reflecting increased compensation costs of approximately $9 million primarily due to annual
compensation increases, headcount growth in MIS and MA as well as in overhead support areas coupled with higher headcount from the GGY acquisition. These increases were partially offset by reduced incentive compensation costs reflecting lower
projected achievement against full-year targeted results compared to the prior year. Additionally, there was an approximate $4 million increase in non-compensation expenses reflecting higher rent and occupancy costs and legal expenses being
partially offset by cost reduction initiatives in response to the current challenging business conditions in MIS.
Operating
income of $714.3 million decreased $76.3 million from the first half of 2015. Adjusted Operating Income was $775.4 million in the first half of 2016, a decrease of $71.7 million compared to 2015. Operating margin of 40.9% decreased 340 BPS compared
to the first half of 2016. Adjusted Operating Margin of 44.4% decreased 310 BPS compared to the prior year.
Interest income
(expense), net in the first half of 2016 was ($68.4) million, a $7.2 million increase in expense compared to 2015 reflecting interest on the 2015 Senior Notes which were issued in March 2015 as well as interest on the $300 million of additional
borrowings under the 2014 Senior Notes (30-Year) in November 2015.
Other non-operating income (expense), net was $8.6 million
in the first half of 2016, a $14.3 million change compared to 2015 reflecting approximately $5 million in FX gains compared to approximately $12 million in FX losses in the prior year. The gains in 2016 are primarily due to the strengthening of the
euro to the British pound over the previous six months.
The Companys ETR was 32.1% in the first half of 2016, compared
with 31.5% in 2015 primarily due to benefits in the prior year resulting from a favorable state tax ruling.
Net Income in the
first half of 2016 was $439.9 million, or $2.24 per diluted share, a decrease of $51.9 million, or $0.15 per diluted share, compared to 2015. The decrease in diluted EPS reflects lower Net Income partially offset by a 4% reduction in diluted
weighted average shares outstanding. This reduction in diluted weighted average shares outstanding reflects share repurchases under the Companys Board authorized share repurchase program partially offset by shares issued under the employee
stock-based compensation programs.
45
Segment Results
Moodys Investors Service
The table below provides a summary
of revenue and operating results, followed by further insight and commentary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
% Change
Favorable
(Unfavorable)
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate finance (CFG)
|
|
$
|
545.1
|
|
|
$
|
618.3
|
|
|
|
(12
|
%)
|
Structured finance (SFG)
|
|
|
202.1
|
|
|
|
222.5
|
|
|
|
(9
|
%)
|
Financial institutions (FIG)
|
|
|
184.6
|
|
|
|
184.2
|
|
|
|
|
|
Public, project and infrastructure finance (PPIF)
|
|
|
203.8
|
|
|
|
200.6
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ratings revenue
|
|
|
1,135.6
|
|
|
|
1,225.6
|
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIS Other
|
|
|
15.1
|
|
|
|
15.9
|
|
|
|
(5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
|
1,150.7
|
|
|
|
1,241.5
|
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment royalty
|
|
|
48.6
|
|
|
|
46.0
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,199.3
|
|
|
|
1,287.5
|
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and SG&A (external)
|
|
|
554.3
|
|
|
|
561.9
|
|
|
|
1
|
%
|
Operating and SG&A (intersegment)
|
|
|
5.6
|
|
|
|
6.4
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
|
639.4
|
|
|
|
719.2
|
|
|
|
(11
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
35.7
|
|
|
|
31.8
|
|
|
|
(12
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
603.7
|
|
|
$
|
687.4
|
|
|
|
(12
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Margin
|
|
|
53.3
|
%
|
|
|
55.9
|
%
|
|
|
|
|
Operating margin
|
|
|
50.3
|
%
|
|
|
53.4
|
%
|
|
|
|
|
The following is a discussion of external MIS revenue and operating expenses:
Global MIS revenue of $1,150.7 million in the first half of 2016 was down 7% compared to 2015 reflecting challenges in the high-yield and
investment-grade corporate debt sectors due to overall market volatility, which was most notable in the first quarter of 2016. Additionally, the decrease reflected lower securitization activity in the U.S. in the first six months of 2016, primarily
in the U.S. CLO and CMBS asset classes, which reflected the aforementioned market volatility as well as uncertainty relating to the implementation of certain regulatory requirements for these asset classes.
Transaction revenue for MIS was 59% in the first half of 2016 compared to 64% in the first half of 2015.
In the U.S., revenue was $735.0 million in the first half of 2016, a decrease of $48.5 million compared to 2015 and reflected lower rated
issuance volumes for high-yield corporate debt. Additionally, there were declines in securitization activity within the CLO asset class within SFG. Partially offsetting these decreases were benefits from changes in the mix of fee type, new fee
initiatives and pricing increases as well as higher monitoring fee revenue and higher insurance-related issuance volumes.
Non-U.S. revenue was $415.7 million in the first half of 2016, a decrease of $42.3 million compared to 2015 primarily reflecting lower
revenue from rating high-yield and investment-grade corporate debt across all regions.
46
Global CFG revenue of $545.1 million in the first half of 2016 was down 12% compared to
2015. The decline reflects lower rated issuance volumes for speculative-grade corporate debt across all regions due to credit spread and capital market volatility for high-yield instruments, which was most notable in the first quarter of 2016 and
resulted from global economic growth concerns and weak commodity prices. Also, there was lower investment-grade corporate debt revenue across all non-U.S. regions reflecting the aforementioned market volatility in the first quarter of 2016.
Partially offsetting these decreases were the benefits from changes in the mix of fee type, new fee initiatives and pricing increases as well as higher monitoring fees across all regions. Transaction revenue represented 67% and 72% of total CFG
revenue in the first half of 2016 and 2015, respectively. In the U.S., revenue was $380.5 million, or $28.0 million lower than the prior year. Internationally, revenue of $164.6 million decreased $45.2 million compared to the prior year.
Global SFG revenue of $202.1 million in the first half of 2016 decreased $20.4 million, or 9%, compared to 2015. In the U.S., revenue of
$132.9 million decreased $25.0 million compared to 2015. This decrease primarily reflected lower CLO formation due to continued wide credit spreads and declining availability of collateral for these instruments. Additionally, the decrease reflected
lower securitization activity in the CMBS and RMBS asset classes reflecting higher credit spreads as well as uncertainties relating to the implementation of certain regulatory requirements for these asset classes. Non-U.S. revenue in the first half
of 2016 of $69.2 million increased $4.6 million compared to the prior year primarily reflecting an increase in RMBS activity in EMEA. Transaction revenue was 58% of total SFG revenue in the first half of 2016 compared to 64% in the prior year.
Global FIG revenue of $184.6 million in the first half of 2016 was flat compared to 2015. In the U.S., revenue was $81.0
million, up modestly compared to 2015 primarily reflecting benefits from changes in the mix of fee type, new fee initiatives and pricing increases as well as higher M&A rated issuance volumes in the insurance sector. These increases were mostly
offset by reduced banking-related issuance volumes due to market volatility in the first quarter of 2016. Internationally, revenue was $103.6 million in the first half of 2016, or flat compared to 2015. Transaction revenue was 36% of total FIG
revenue in the first half of 2016 compared to 38% in the same period in 2015.
Global PPIF revenue was $203.8 million in the
first half of 2016 and increased $3.2 million, or 2%, compared to 2015. In the U.S., revenue of $136.1 million increased $3.1 million compared to 2015 due to benefits from changes in the mix of fee type, new fee initiatives and pricing increases as
well as higher infrastructure finance rated issuance volumes. Outside the U.S., PPIF revenue was flat compared to 2015. Transaction revenue was 62% and 63% of total PPIF revenue in first half of 2016 and 2015, respectively.
Operating and SG&A expenses in the first half of 2016 decreased $7.6 million compared to 2015 primarily reflecting lower
non-compensation expenses due overall cost control initiatives. Compensation expenses were flat compared to the prior year reflecting annual salary increases, headcount growth in the ratings LOBs as well as in the support areas such as IT, finance
and human resources for which the costs are allocated to each segment based on a revenue-split methodology. These increases in compensation expense were offset by reduced incentive compensation costs reflecting lower projected achievement against
full-year targeted results compared to the prior year.
Adjusted Operating Income and operating income in the first half of
2016, which includes intersegment royalty revenue and intersegment expenses, were $639.4 million and $603.7 million, respectively, and decreased $79.8 million and $83.7 million, respectively, compared to 2015. Adjusted Operating Margin and operating
margin were 53.3% and 50.3%, respectively, compared to 55.9% and 53.4%, in the prior year, respectively.
47
Moodys Analytics
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
Favorable
(Unfavorable)
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, data and analytics (RD&A)
|
|
$
|
333.2
|
|
|
$
|
307.1
|
|
|
|
8
|
%
|
Enterprise risk solutions (ERS)
|
|
|
187.0
|
|
|
|
160.3
|
|
|
|
17
|
%
|
Professional services (PS)
|
|
|
74.1
|
|
|
|
74.8
|
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
|
594.3
|
|
|
|
542.2
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenue
|
|
|
5.6
|
|
|
|
6.4
|
|
|
|
(13
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MA Revenue
|
|
|
599.9
|
|
|
|
548.6
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and SG&A (external)
|
|
|
415.3
|
|
|
|
374.7
|
|
|
|
(11
|
%)
|
Operating and SG&A (intersegment)
|
|
|
48.6
|
|
|
|
46.0
|
|
|
|
(6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
|
136.0
|
|
|
|
127.9
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25.4
|
|
|
|
24.7
|
|
|
|
(3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
110.6
|
|
|
$
|
103.2
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Margin
|
|
|
22.7
|
%
|
|
|
23.3
|
%
|
|
|
|
|
Operating margin
|
|
|
18.4
|
%
|
|
|
18.8
|
%
|
|
|
|
|
The following is a discussion of external MA revenue and operating expenses:
Global MA revenue increased $52.1 million, or 10%, compared to the first half of 2015 reflecting growth in RD&A as well as ERS, which
included revenue from the acquisition of GGY. Recurring revenue comprised 76% of total MA revenue in both the first half of 2016 and 2015.
In the U.S., revenue of $290.9 million in the first half of 2016 increased $28.7 million, and reflected growth in ERS and RD&A.
Non-U.S. revenue of $303.4 million in the first half of 2016 was $23.4 million higher than in 2015 reflecting growth in RD&A and ERS.
Global RD&A revenue of $333.2 million, which comprised 56% and 57% of total external MA revenue in the first half of 2016
and 2015, respectively, increased $26.1 million, or 8%, over the prior year period and reflected growth across all regions. The growth reflected strength in credit research subscriptions and licensing of ratings data as well as higher revenue within
SAV and ECCA. In the U.S., revenue of $192.5 million increased 11% over the prior year. Non-U.S. revenue of $140.7 million increased 6%.
Global ERS revenue in the first half of 2016 of $187.0 million increased $26.7 million, or 17%, over 2015 reflecting increases across all product offerings and included revenue from the acquisition of GGY
in March of 2016. Revenue in ERS is subject to quarterly volatility resulting from the variable nature of project timing and the concentration of software implementation and license revenue in a relatively small number of engagements. In the U.S.,
revenue of $73.1 million increased 18% compared to the prior year. Non-U.S. revenue of $113.9 million increased 16%.
Global
PS revenue of $74.1 million in the first half of 2016 declined modestly compared to 2015. In the U.S., revenue of $25.3 million decreased 3%. Non-U.S. revenue of $48.8 million was flat compared to the prior year.
Operating and SG&A expenses in the first half of 2016 increased $40.6 million compared to 2015. The expense growth reflects an
increase in compensation costs primarily due to higher headcount to support business growth as well as higher headcount in support areas, for which the costs are allocated based on the Companys revenue-split methodology. Headcount from the
acquisition of GGY and annual merit increases also contributed to the growth in compensation costs.
Adjusted Operating Income
was $136.0 million in the first half of 2016 and increased $8.1 million compared to 2015. Operating income of $110.6 million in the first half of 2016 increased $7.4 million compared to 2015. Adjusted Operating Margin for the first half of 2016 was
22.7% compared to 23.3% in 2015. Operating margin was 18.4% in the first half of 2016 compared to 18.8% in the prior year. Operating margin and Adjusted Operating Margin in 2016 were suppressed due to a larger proportion of
overhead costs allocated to MA under the Companys revenue split methodology. Adjusted operating income and operating income both include
intersegment revenue and expense.
48
Liquidity and Capital Resources
Cash Flow
The
Company is currently financing its operations, capital expenditures and share repurchases from cash flow from operating and financing activities. The following is a summary of the changes in the Companys cash flows followed by a brief
discussion of these changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
$ Change
Favorable
(Unfavorable)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
528.8
|
|
|
$
|
594.4
|
|
|
$
|
(65.6
|
)
|
Net cash used in investing activities
|
|
$
|
(7.3
|
)
|
|
$
|
(91.8
|
)
|
|
$
|
84.5
|
|
Net cash used in financing activities
|
|
$
|
(622.8
|
)
|
|
$
|
(157.6
|
)
|
|
$
|
(465.2
|
)
|
Free Cash Flow*
|
|
$
|
474.5
|
|
|
$
|
553.7
|
|
|
$
|
(79.2
|
)
|
*
|
Free Cash Flow is a non-GAAP financial measure. Refer to the section Non-GAAP Financial Measures of this MD&A for further information on this financial
measure. Free Cash Flow declined from 2015 due to lower net income coupled with higher capital expenditures and the timing of pension contributions as noted below.
|
Net cash provided by operating activities
Net cash flows from
operating activities decreased $65.6 million compared to the prior year primarily due to:
|
|
|
A decrease in net income of $50.7 million;
|
|
|
|
an approximate $22 million contribution to the Companys funded U.S. funded pension plan in the first half of 2016 (the contribution in 2015 was
made in the third quarter);
|
Partially offset by
:
|
|
|
an approximate $16 million increase relating to higher incentive compensation payouts in 2015 compared to 2016 which reflected lower achievement
against full-year targeted results in 2015 compared to achievement in 2014. The remaining decrease in cash flow from operations is due to various other changes in working capital.
|
Net cash used in investing activities
The $84.5 million decrease in cash used in investing activities is primarily due to:
|
|
|
lower net purchases of investments of $187.7 million;
|
Partially offset by:
|
|
|
cash paid, net of cash acquired, of $75.9 million to acquire GGY;
|
|
|
|
$18.3 million less cash received upon maturity of FX forward contracts designated as net investment hedges.
|
49
Net cash used in financing activities
The $465.2 million increase in cash used in financing activities was attributed to:
|
|
|
net proceeds of $552.8 million in 2015 reflecting the issuance of the 2015 Senior Notes;
|
Partially offset by:
|
|
|
treasury shares repurchased of $485.9 million in the first half of 2016 compared to $600.7 million repurchased in the prior year period.
|
Cash and short-term investments held in non-U.S. jurisdictions
The Companys aggregate cash and cash equivalents and short-term investments of $2.0 billion at June 30, 2016 consisted of
approximately $1.6 billion located outside of the U.S. Approximately 26% of the Companys aggregate cash and cash equivalents and short-term investments is denominated in euros and British pounds. Approximately 95% of the cash and cash
equivalents and short-term investments in the Companys non-U.S. operations are held by entities whose undistributed earnings are indefinitely reinvested in the Companys foreign operations. Accordingly, the Company has not provided
deferred income taxes on these indefinitely reinvested earnings. A future distribution or change in assertion regarding reinvestment by the foreign subsidiaries relating to these earnings could result in additional tax liability to the Company. It
is not practicable to determine the amount of the potential additional tax liability due to complexities in the tax laws and in the hypothetical calculations that would have to be made. The Company manages both its U.S. and international cash flow
to maintain sufficient liquidity in all regions to effectively meet its operating needs.
Indebtedness
At June 30, 2016, Moodys had $3.4 billion of outstanding debt and $1.0 billion of additional capacity available under the 2015
Facility. At June 30, 2016, the Company was in compliance with all covenants contained within all of the debt agreements. The 2015 Facility, the 2007 Agreement, the 2010 Indenture, the 2012 Indenture, the 2013 Indenture, the 2014 Indenture and
the 2015 Indenture contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those
instruments to be immediately due and payable. At June 30, 2016, there were no such cross defaults.
The repayment
schedule for the Companys borrowings is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Series 2007-1
Notes
|
|
|
2010 Senior
Notes
|
|
|
2012 Senior
Notes
|
|
|
2013 Senior
Notes
|
|
|
2014 Senior
Notes (5-Year)
|
|
|
2014 Senior
Notes (30-Year)
|
|
|
2015 Senior
Notes
(1)
|
|
|
Total
|
|
2016 (after June 30,)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2017
|
|
|
300.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300.0
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450.0
|
|
|
|
|
|
|
|
|
|
|
|
450.0
|
|
2020
|
|
|
|
|
|
|
500.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500.0
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
500.0
|
|
|
|
500.0
|
|
|
|
|
|
|
|
600.0
|
|
|
|
555.5
|
|
|
|
2,155.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
300.0
|
|
|
$
|
500.0
|
|
|
$
|
500.0
|
|
|
$
|
500.0
|
|
|
$
|
450.0
|
|
|
$
|
600.0
|
|
|
$
|
555.5
|
|
|
$
|
3,405.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on end of quarter FX rates
|
Management may consider pursuing additional long-term financing when it is appropriate in light of cash requirements for operations, share repurchases and other strategic opportunities, which would result
in higher financing costs.
50
Other Material Future Cash Requirements
The Company believes that it has the financial resources needed to meet its cash requirements and expects to have positive operating cash
flow for the next twelve months. Cash requirements for periods beyond the next twelve months will depend, among other things, on the Companys profitability and its ability to manage working capital requirements. The Company may also borrow
from various sources.
The Company remains committed to using its strong cash flow to create value for shareholders by
investing in growing areas of the business, reinvesting in ratings quality initiatives, making selective acquisitions, repurchasing stock and paying a dividend, all in manner consistent with maintaining sufficient liquidity after giving effect to
any additional indebtedness that may be incurred. In July 2016, the Board of Directors of the Company declared a quarterly dividend of $0.37 per share of Moodys common stock, payable on September 12, 2016 to shareholders of record at the
close of business on August 20, 2016. The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board. In December 2015, the Board authorized $1.0 billion of share repurchase authority that has a remaining
repurchase authority of approximately $980 million at June 30, 2016. Full-year 2016 total share repurchases are expected to be approximately $1 billion, subject to available cash, market conditions and other ongoing capital allocation
decisions.
On February 6, 2008, the Company entered into an operating lease agreement to occupy six floors of an office
tower located in the Canary Wharf district of London, England with an initial term of 17.5-years and a total of 15 years of renewal options. The total remaining lease payments as of June 30, 2016 are approximately £87 million, of
which approximately £9 million will be paid in the next twelve months. Payments under this lease agreement are included in the contractual obligations table below.
On October 20, 2006, the Company entered into an operating lease agreement with 7 World Trade Center, LLC for 589,945 square-feet of an office building located at 7WTC at 250 Greenwich Street, New
York, New York, which is serving as Moodys headquarters. The 7WTC Lease has an initial term of 21 years with a total of 20 years of renewal options. The total remaining lease payments are approximately $402 million, of which approximately $32
million will be paid during the next twelve months. Payments under this lease agreement are included in the contractual obligations table below.
Off-Balance Sheet Arrangements
At June 30, 2016, Moodys did not
have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose or variable interest entities where Moodys is the primary beneficiary, which would have been established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, Moodys is not exposed to any financing, liquidity market or credit risk that could arise if it had engaged in such
relationships.
51
Contractual Obligations
The following table presents payments due under the Companys contractual obligations as of June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
(in millions)
|
|
Total
|
|
|
Less Than 1 Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
Over 5 Years
|
|
Indebtedness
(1)
|
|
$
|
4,899.5
|
|
|
$
|
130.5
|
|
|
$
|
533.6
|
|
|
$
|
1,155.4
|
|
|
$
|
3,080.0
|
|
Operating lease obligations
|
|
|
785.5
|
|
|
|
93.5
|
|
|
|
170.3
|
|
|
|
140.6
|
|
|
|
381.1
|
|
Capital lease obligations
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
167.6
|
|
|
|
74.1
|
|
|
|
63.0
|
|
|
|
30.5
|
|
|
|
|
|
Pension obligations
(2)
|
|
|
160.7
|
|
|
|
28.8
|
|
|
|
43.7
|
|
|
|
17.3
|
|
|
|
70.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(3)
|
|
$
|
6,014.3
|
|
|
$
|
327.5
|
|
|
$
|
811.0
|
|
|
$
|
1,343.8
|
|
|
$
|
3,532.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects principal payments, related interest and applicable fees due on the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes, the
2013 Senior Notes, the 2014 Senior Notes (5-year), the 2014 Senior Notes (30-year), the 2015 Senior Notes and the 2015 Facility as described in Note 13 to the condensed consolidated financial statements.
|
(2)
|
Reflects projected benefit contributions to the Companys funded U.S. DBPP and payments relating to the Companys U.S. unfunded DBPPs and
Retirement and Other Plans described in Note 12 to the condensed consolidated financial statements
|
(3)
|
The table above does not include the Companys net long-term tax liabilities of $199.9 million relating to UTPs since the expected cash outflow of
such amounts by period cannot be reasonably estimated.
|
Dividends
On July 11, 2016, the Board approved the declaration of a quarterly dividend of $0.37 per share of Moodys common stock, payable
on September 12, 2016 to shareholders of record at the close of business on August 22, 2016.
52
Non-GAAP Financial Measures:
In addition to its reported results, Moodys has included in this MD&A certain adjusted results that the SEC defines as
non-GAAP financial measures. Management believes that such non-GAAP financial measures, when read in conjunction with the Companys reported results, can provide useful supplemental information for investors analyzing period to
period comparisons of the Companys performance, facilitate comparisons to competitors operating results and can provide greater transparency to investors of supplemental information used by management in its financial and operational
decision-making. These non-GAAP measures, as defined by the Company, are not necessarily comparable to similarly defined measures of other companies. Furthermore, these non-GAAP measures should not be viewed in isolation or used as a substitute for
other GAAP measures in assessing the operating performance or cash flows of the Company. Below are brief descriptions of the Companys non-GAAP financial measures accompanied by a reconciliation of the non-GAAP measure to its most directly
comparable GAAP measure:
Adjusted Operating Income and Adjusted Operating Margin
:
The Company presents Adjusted Operating Income because management deems this metric to be a useful measure of assessing the operating
performance of Moodys, measuring the Companys ability to service debt, fund capital expenditures, and expand its business. Adjusted Operating Income excludes depreciation and amortization because companies utilize productive assets of
different ages and use different methods of both acquiring and depreciating productive assets. Management believes that the exclusion of this item, detailed in the reconciliation below, allows for a more meaningful comparison of the Companys
results from period to period and across companies. The Company defines Adjusted Operating Margin as adjusted operating income divided by revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Operating income
|
|
$
|
410.2
|
|
|
$
|
419.3
|
|
|
$
|
714.3
|
|
|
$
|
790.6
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
31.2
|
|
|
|
27.9
|
|
|
|
61.1
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
441.4
|
|
|
$
|
447.2
|
|
|
$
|
775.4
|
|
|
$
|
847.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Margin
|
|
|
44.2
|
%
|
|
|
45.7
|
%
|
|
|
40.9
|
%
|
|
|
44.3
|
%
|
Adjusted Operating Margin
|
|
|
47.5
|
%
|
|
|
48.7
|
%
|
|
|
44.4
|
%
|
|
|
47.5
|
%
|
Free Cash Flow:
The Company defines free cash flow as net cash provided by operating activities minus payments for capital additions. Management believes that free cash flow is a useful metric in assessing the
Companys cash flows to service debt, pay dividends and to fund acquisitions and share repurchases. Management deems capital expenditures essential to the Companys product and service innovations and maintenance of Moodys
operational capabilities. Accordingly, capital expenditures are deemed to be a recurring use of Moodys cash flow. Below is a reconciliation of the Companys net cash flows from operating activities to free cash flow:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash flows provided by operating activities
|
|
$
|
528.8
|
|
|
$
|
594.4
|
|
Capital additions
|
|
|
(54.3
|
)
|
|
|
(40.7
|
)
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
474.5
|
|
|
$
|
553.7
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(7.3
|
)
|
|
$
|
(91.8
|
)
|
Net cash used in financing activities
|
|
$
|
(622.8
|
)
|
|
$
|
(157.6
|
)
|
53
Recently Issued Accounting Standards
For information regarding recently issued accounting standards, see Item 1Financial Statements, Note 16
Recently Issued Accounting Standards.
Contingencies
Legal proceedings in which the company is involved also may impact Moodys liquidity or operating results. No assurance can be
provided as to the outcome of such proceedings. In addition, litigation inherently involves significant costs. For information regarding legal proceedings, see Item 1Financial Statements, Note 14 Contingencies.
Regulation
MIS and many of the securities that it rates are subject to extensive regulation in both the U.S. and in other countries (including by state and local authorities). Thus, existing and proposed laws and
regulations can impact the Companys operations and the markets for securities that it rates. Additional laws and regulations have been adopted but not yet implemented or have been proposed or are being considered. Each of the existing,
adopted, proposed and potential laws and regulations can increase the costs and legal risk associated with the issuance of credit ratings and may negatively impact Moodys operations or profitability, the Companys ability to compete, or
result in changes in the demand for credit ratings, in the manner in which ratings are utilized and in the manner in which Moodys operates.
The regulatory landscape has changed rapidly in recent years, and continues to evolve. In the EU, the CRA industry is registered and supervised through a pan-European regulatory framework. The European
Securities and Markets Authority has direct supervisory responsibility for the registered CRA industry throughout the EU. MIS is a registered entity and is subject to formal regulation and periodic inspection. Applicable rules include procedural
requirements with respect to ratings of sovereign issuers, liability for intentional or grossly negligent failure to abide by applicable regulations, mandatory rotation requirements of CRAs hired by issuers of securities for ratings of
resecuritizations, restrictions on CRAs or their shareholders if certain ownership thresholds are crossed, reporting requirements to ESMA regarding fees, and additional procedural and substantive requirements on the pricing of services. CRA3 also
requires that ESMA and the European Commission produce several reports on the industrys structure and the use of ratings. In October 2015, ESMA published its reports, wherein it acknowledged the impact of regulation on the industry, and stated
that it will continue to monitor the industry structure over the next three to five years. The European Commission may publish its reports before the end of 2016.
Separately, on June 23, 2016 the U.K. voted through a referendum to exit the EU. The longer-term impacts of the decision to leave the EU on the overall regulatory framework for the U.K. will depend,
in part, on the relationship that the U.K. negotiates with the EU in the future. In the interim, however, the U.K.s markets regulator (the Financial Conduct Authority) has said that all EU financial regulations will stay in place and that
firms must continue to abide by their existing obligations. As a consequence, at this point in time, there is no change to the regulatory framework under which MIS operates and ESMA remains MISs regulator both in the EU and in the U.K.
In the U.S., CRAs are subject to extensive regulation primarily pursuant to the Reform Act and the Financial Reform Act. The
SEC is required by these legislative acts to publish two annual reports to Congress on NRSROs. The Financial Reform Act requires the SEC to examine each NRSRO once a year and issue an annual report summarizing the examination findings, among other
requirements. The annual report required by the Reform Act details the SECs views on the state of competition, transparency and conflicts of interests among NRSROs, among other requirements. The SEC voted in August 2014 to adopt its final
rules for NRSROs as required by the Financial Reform Act. The Company has made and continues to make substantial IT and other investments, and has implemented the relevant compliance obligations.
In light of the regulations that have gone into effect in both the EU and the U.S. (as well as many other countries), from time to time
and as a matter of course pursuant to their enabling legislation these regulatory authorities have and will continue to publish reports that describe their oversight activities over the industry. In addition, other legislation and/or interpretation
of existing
54
regulation relating to credit rating and research services is being considered by local, national and multinational bodies and this type of activity is likely to continue in the future. Finally,
in certain countries, governments may provide financial or other support to locally-based rating agencies. For example, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating
local issuers. If enacted, any such legislation and regulation could change the competitive landscape in which MIS operates. The legal status of rating agencies has been addressed by courts in various decisions and is likely to be considered and
addressed in legal proceedings from time to time in the future. Management of the Company cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or regulatory or
legislative actions, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of Moodys.
Forward-Looking Statements
Certain statements
contained in this quarterly report on Form 10-Q are forward-looking statements and are based on future expectations, plans and prospects for the Companys business and operations that involve a number of risks and uncertainties. Such statements
involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements.
Those statements appear at various places throughout this quarterly report on Form 10-Q, including in the section entitled Contingencies under Item 2. MD&A, commencing on page 36 of this quarterly report on Form
10-Q, under Legal Proceedings in Part II, Item 1, of this Form 10-Q, and elsewhere in the context of statements containing the words believe, expect, anticipate, intend,
plan, will, predict, potential, continue, strategy, aspire, target, forecast, project, estimate, should,
could, may and similar expressions or words and variations thereof relating to the Companys views on future events, trends and contingencies. Stockholders and investors are cautioned not to place undue reliance on these
forward-looking statements. The forward-looking statements and other information are made as of the date of this quarterly report on Form 10-Q, and the Company undertakes no obligation (nor does it intend) to publicly supplement, update or revise
such statements on a going-forward basis, whether as a result of subsequent developments, changed expectations or otherwise. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the
Company is identifying examples of factors, risks and uncertainties that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements.
Those factors, risks and uncertainties include, but are not limited to, the current world-wide credit market disruptions and economic
slowdown, which is affecting and could continue to affect the volume of debt and other securities issued in domestic and/or global capital markets; other matters that could affect the volume of debt and other securities issued in domestic and/or
global capital markets, including regulation, credit quality concerns, changes in interest rates and other volatility in the financial markets such as that due to the U.K.s referendum vote whereby the U.K. citizens voted to withdraw from the
EU; the level of merger and acquisition activity in the U.S. and abroad; the uncertain effectiveness and possible collateral consequences of U.S. and foreign government initiatives to respond to the current world-wide credit market disruptions and
economic slowdown; concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility of independent credit agency ratings; the introduction of competing products or technologies by other
companies; pricing pressure from competitors and/or customers; the level of success of new product development and global expansion; the impact of regulation as an NRSRO, the potential for new U.S., state and local legislation and regulations,
including provisions in the Financial Reform Act and regulations resulting from that Act; the potential for increased competition and regulation in the EU and other foreign jurisdictions; exposure to litigation related to our rating opinions, as
well as any other litigation, government and regulatory proceedings, investigations and inquires to which the Company may be subject from time to time; provisions in the Financial Reform Act legislation modifying the pleading standards, and EU
regulations modifying the liability standards, applicable to credit rating agencies in a manner adverse to credit rating agencies; provisions of EU regulations imposing additional procedural and substantive requirements on the pricing of services;
the possible loss of key employees; failures or malfunctions of our operations and infrastructure; any vulnerabilities to cyber threats or other cybersecurity concerns; the outcome of any review by controlling tax authorities of the Companys
global tax planning initiatives; exposure to potential criminal sanctions or civil remedies if the Company fails to comply with foreign and U.S. laws and regulations that are applicable in the jurisdictions in which the Company operates, including
sanctions laws, anti-corruption laws, and local laws prohibiting corrupt payments to government officials; the impact of mergers, acquisitions or other business combinations and the ability of the Company to successfully integrate acquired
businesses; currency and foreign exchange volatility; the level of future cash flows; the levels of capital investments; and a decline in the demand for credit risk management tools by financial institutions. These factors, risks and uncertainties
as well as other risks and uncertainties that could cause Moodys actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements are described in greater detail under
Risk Factors in Part I, Item 1A of the Companys annual report on Form 10-K for the year ended December 31, 2015, and in other filings made by the Company from time to time with the SEC or in materials
55
incorporated herein or therein. Stockholders and investors are cautioned that the occurrence of any of these factors, risks and uncertainties may cause the Companys actual results to differ
materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements, which could have a material and adverse effect on the Companys business, results of operations and financial condition. New
factors may emerge from time to time, and it is not possible for the Company to predict new factors, nor can the Company assess the potential effect of any new factors on it.