UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-14037
MOODYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE | 13-3998945 | |
(STATE OF INCORPORATION) | (I.R.S. EMPLOYER IDENTIFICATION NO.) |
7 World Trade Center at 250 Greenwich Street, NEW YORK, NEW YORK 10007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 553-0300.
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED | |
COMMON STOCK, PAR VALUE $.01 PER SHARE |
NEW YORK STOCK EXCHANGE |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of accelerated filer and large accelerated filer in Exchange Act Rule 12b-2).
Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated Filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of Moodys Corporation Common Stock held by nonaffiliates* on June 30, 2011 (based upon its closing transaction price on the Composite Tape on such date) was approximately $8.7 billion.
As of January 31, 2012, 222.9 million shares of Common Stock of Moodys Corporation were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for use in connection with its annual meeting of stockholders scheduled to be held on April 16, 2012, are incorporated by reference into Part III of this Form 10-K.
The Index to Exhibits is included as Part IV, Item 15(3) of this Form 10-K.
* | Calculated by excluding all shares held by executive officers and directors of the Registrant without conceding that all such persons are affiliates of the Registrant for purposes of federal securities laws. |
MOODYS 2011 10-K | 1 |
MOODYS CORPORATION
2 | MOODYS 2011 10-K |
|
Page(s) | |||||
PART III. | ||||||
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATION GOVERNANCE | 112 | ||||
Item 11. | EXECUTIVE COMPENSATION | 112 | ||||
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 112 | ||||
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 112 | ||||
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES | 112 | ||||
PART IV. | ||||||
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 113 | ||||
SIGNATURES | 114 | |||||
115-119 |
Exhibits |
| |
10.42 | Fourth Amendment to the Moodys Corporation Retirement Account | |
10.44 | First Amendment to the Profit Participation Plan of Moodys Corporation | |
10.45 | Second Amendment to the Profit Participation Plan of Moodys Corporation | |
10.46 | Third Amendment to the Profit Participation Plan of Moodys Corporation | |
21 | SUBSIDIARIES OF THE REGISTRANT | |
23.1 | CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 2011 and 2010 | |
31.1 | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.DEF | XBRL Definitions Linkbase Document | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101. CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
MOODYS 2011 10-K | 3 |
GLOSSARY OF TERMS AND ABBREVIATIONS
The following terms, abbreviations and acronyms are used to identify frequently used terms in this report:
TERM |
DEFINITION | |
ACNielsen | ACNielsen Corporation a former affiliate of Old D&B | |
Analytics | Moodys Analytics a reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO | |
AOCI | Accumulated other comprehensive income (loss); a separate component of shareholders equity (deficit) | |
ASC | The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants | |
ASU | The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC | |
B&H | Barrie & Hibbert Limited, an acquisition completed in December 2011; part of the MA segment, a leading provider of risk management modeling tools for insurance companies worldwide | |
Basel II | Capital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision | |
Board | The board of directors of the Company | |
Bps | Basis points | |
Canary Wharf Lease | Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009 | |
CFG | Corporate finance group; an LOB of MIS | |
CMBS | Commercial mortgage-backed securities; part of CREF | |
Cognizant | Cognizant Corporation a former affiliate of Old D&B, which comprised the IMS Health and NMR businesses | |
Commission | European Commission | |
Common Stock | The Companys common stock | |
Company | Moodys Corporation and its subsidiaries; MCO; Moodys | |
Copal | Copal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of outsourced research and analytical services to institutional investors. | |
Corporate Family Ratings | Rating opinion of a corporate familys ability to honor all of its financial obligations which is assigned to the corporate family as if it had a single class of debt and a single consolidated legal entity structure. This rating is often issued in connection with ratings of leveraged finance transactions | |
COSO | Committee of Sponsoring Organizations of the Treadway Commission | |
Council | Council of European Finance Ministers | |
CP | Commercial paper | |
CP Notes | Unsecured CP notes | |
CP Program | The Companys CP program entered into on October 3, 2007 | |
CRAs | Credit rating agencies | |
CREF | Commercial real estate finance which includes REITs, commercial real estate collateralized debt obligations and CMBS; part of SFG | |
CSI | CSI Global Education, Inc., an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada | |
D&B Business | Old D&Bs Dun & Bradstreet operating company | |
DBPPs | Defined benefit pension plans | |
DCF | Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate |
4 | MOODYS 2011 10-K |
TERM |
DEFINITION | |
Debt/EBITDA | Ratio of Total Debt to EBITDA | |
Directors Plan | The 1998 Moodys Corporation Non-Employee Directors Stock Incentive Plan | |
Distribution Date | September 30, 2000; the date which Old D&B separated into two publicly traded companies Moodys Corporation and New D&B | |
ECAIs | External Credit Assessment Institutions | |
ECB | European Central Bank | |
EMEA | Represents countries within Europe, the Middle East and Africa | |
EPS | Earnings per share | |
ESPP | The 1999 Moodys Corporation Employee Stock Purchase Plan | |
ETR | Effective tax rate | |
EU | European Union | |
EUR | Euros | |
Excess Tax Benefit | The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP | |
Exchange Act | The Securities Exchange Act of 1934, as amended | |
FASB | Financial Accounting Standards Board | |
FIG | Financial institutions group; an LOB of MIS | |
Fitch | Fitch Ratings, a part of the Fitch Group | |
Financial Reform Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |
FX | Foreign exchange | |
GAAP | U.S. Generally Accepted Accounting Principles | |
GBP | British pounds | |
G-8 | The finance ministers and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K. | |
G-20 | The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K., U.S. and the EU, which is represented by the rotating Council presidency and the ECB | |
IMS Health | A spin-off of Cognizant, which provides services to the pharmaceutical and healthcare industries | |
Indenture | Indenture and supplemental indenture dated August 19, 2010, relating to the 2010 Senior Notes | |
Indicative Ratings | These are ratings which are provided as of a point in time, and not published or monitored. They are primarily provided to potential or current issuers to indicate what a rating may be based on business fundamentals and financial conditions as well as based on proposed financings | |
Intellectual Property | The Companys intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials | |
IOSCO | International Organization of Securities Commissions | |
IOSCO Code | Code of Conduct Fundamentals for CRAs issued by IOSCO | |
IRS | Internal Revenue Service | |
Korea | Republic of South Korea | |
LIBOR | London Interbank Offered Rate |
MOODYS 2011 10-K | 5 |
TERM |
DEFINITION | |
LOB | Line of Business | |
MA | Moodys Analytics a reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO | |
Make Whole Amount | The prepayment penalty relating to the Series 2005-1 Notes and Series 2007-1 Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal | |
MCO | Moodys Corporation and its subsidiaries; the Company; Moodys | |
MD&A | Managements Discussion and Analysis of Financial Condition and Results of Operations | |
MIS | Moodys Investors Service a reportable segment of MCO | |
MIS Code | Moodys Investors Service Code of Professional Conduct | |
Moodys | Moodys Corporation and its subsidiaries; MCO; the Company | |
Net Income | Earnings attributable to Moodys Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders | |
New D&B | The New D&B Corporation which comprises the D&B business after September 30, 2000 | |
NM | Not-meaningful percentage change (over 400%) | |
NMR | Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services | |
NRSRO | Nationally Recognized Statistical Rating Organization | |
Old D&B | The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moodys Corporation | |
Post-Retirement Plans | Moodys funded and unfunded U.S. pension plans, the U.S. post-retirement healthcare plans and the U.S. post-retirement life insurance plans | |
PPIF | Public, project and infrastructure finance; an LOB of MIS | |
Profit Participation Plan | Defined contribution profit participation plan that covers substantially all U.S. employees of the Company | |
PPP | Profit Participation Plan | |
RD&A | Research, Data and Analytics; an LOB within MA that distributes investor-oriented research and data, including in-depth research on major debt issuers, industry studies, commentary on topical credit events, economic research and analytical tools such as quantitative risk scores | |
Redeemable Noncontrolling Interest |
Represents minority shareholders interest in entities which are controlled but not wholly-owned by Moodys and for which Moodys obligation to redeem the minority shareholders interest is in the control of the minority shareholders | |
Reform Act | Credit Rating Agency Reform Act of 2006 | |
REITs | Real estate investment trusts | |
Reorganization | The Companys business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008 | |
RMBS | Residential mortgage-backed securities; part of SFG | |
RMS | The Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services | |
S&P | Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. | |
SEC | Securities and Exchange Commission | |
Series 2005-1 Notes | Principal amount of $300 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement | |
SFG | Structured finance group; an LOB of MIS | |
SG&A | Selling, general and administrative expenses | |
Stock Plans | The Old D&Bs 1998 Key Employees Stock Incentive Plan and the Restated 2001 Moodys Corporation Key Employees Stock Incentive Plan |
6 | MOODYS 2011 10-K |
TERM |
DEFINITION | |
T&E | Travel and entertainment expenses | |
TPE | Third party evidence, as defined in the ASC, used to determine selling price based on a vendors or any competitors largely interchangeable products or services in standalone sales transactions to similarly situated customers | |
Total Debt | Current and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable and accrued liabilities incurred in the ordinary course of business | |
U.S. | United States | |
USD | U.S. dollar | |
UTBs | Unrecognized tax benefits | |
UTPs | Uncertain tax positions | |
VSOE | Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority | |
WACC | Weighted average cost of capital | |
1998 Plan | Old D&Bs 1998 Key Employees Stock Incentive Plan | |
2000 Distribution | The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000 | |
2000 Distribution Agreement |
Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities | |
2001 Plan | The Amended and Restated 2001 Moodys Corporation Key Employees Stock Incentive Plan | |
2005 Agreement | Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes | |
2007 Agreement | Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes | |
2007 Facility | Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012 | |
2007 Restructuring Plan | The Companys 2007 restructuring plan approved December 31, 2007 | |
2008 Term Loan | Five-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008 | |
2009 Restructuring Plan | The Companys 2009 restructuring plan approved March 27, 2009 | |
2010 Senior Notes | Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2010 pursuant to the Indenture | |
7WTC | The Companys corporate headquarters located at 7 World Trade Center | |
7WTC Lease | Operating lease agreement entered into on October 20, 2006 |
MOODYS 2011 10-K | 7 |
ITEM 1. | BUSINESS |
As used in this report, except where the context indicates otherwise, the terms Moodys or the Company refer to Moodys Corporation, a Delaware corporation, and its subsidiaries. The Companys executive offices are located at 7 World Trade Center at 250 Greenwich Street, New York, NY 10007 and its telephone number is (212) 553-0300. Prior to September 30, 2000, the Company operated as part of The Dun & Bradstreet Corporation.
Moodys is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) risk management software, (iv) quantitative credit risk measures, credit portfolio management solutions, training and financial credentialing and certification services and (v) outsourced research and analytical services to institutional customers. Moodys reports in two reportable segments: MIS and MA. The MIS segment consists of all credit rating activity. All of Moodys other non-rating commercial activities are included within the MA segment. Financial information and operating results of these segments, including revenue, expenses, operating income and total assets, are included in Part II, Item 8. Financial Statements of this annual report, and are herein incorporated by reference.
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, including various corporate and governmental obligations, structured finance securities and commercial paper programs. Revenue is derived from the originators and issuers of such transactions who use MIS ratings to support the distribution of their debt issues to investors. MIS provides ratings in more than 110 countries. Ratings are disseminated via press releases to the public through a variety of print and electronic media, including the Internet and real-time information systems widely used by securities traders and investors. As of December 31, 2011, MIS had ratings relationships with approximately 11,000 corporate issuers and approximately 22,000 public finance issuers. Additionally, the Company has rated and currently monitors ratings on approximately 94,000 structured finance obligations (representing approximately 14,000 transactions). The aforementioned amounts relating to the number of issuers and transactions represent issuers or transactions that had an active rating at any point during the year ended December 31, 2011.
The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes investor-oriented research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies, commentary on topical credit related events and also provides economic research and credit data and analytical tools such as quantitative credit risk scores. Within its Risk Management Software business, MA provides both economic and regulatory capital risk management software and implementation services. Within its Professional Services business it provides quantitative credit risk measures, credit portfolio management solutions, training, financial credentialing and certification services as well as outsourced research and analytical services to institutional investors. MA customers represent more than 4,600 institutions worldwide operating in approximately 115 countries. During 2011 Moodys research web site was accessed by over 226,000 individuals including 28,000 client users.
The Company operated as part of Old D&B until September 30, 2000, when Old D&B separated into two publicly traded companies Moodys Corporation and New D&B. At that time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B comprised the business of Old D&Bs Dun & Bradstreet operating company. The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services and was renamed Moodys Corporation. For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a distribution agreement, tax allocation agreement and employee benefits agreement.
8 | MOODYS 2011 10-K |
Over recent decades, global fixed-income markets grew significantly in terms of the amount and the types of securities or other obligations outstanding. Beginning in mid-2007, there was a severe market disruption and a global decline in issuance activity for some significant asset classes. Despite the market disruption, Moodys believes that the overall long-term outlook remains favorable for continued global growth of fixed-income markets including the market for related financial information such as credit opinions, data, analytics and related services. Moodys growth is influenced by a number of trends that impact financial information markets including:
| Health of the worlds major economies; |
| Debt capital markets activity; and |
| Business investment spending. |
Throughout 2011 there were continued signs of gradual improvement in the health of the U.S. economy while the global economy continued to experience more volatility with European sovereign debt and related banking sector concerns offset by strong economic growth in emerging markets. Continued improvement of the U.S. economy and housing sector as well as a potential resolution to the European sovereign debt crisis should influence the Companys growth over the near term. Furthermore, Moodys is well positioned to benefit from a long-term recovery in global credit market activity and a more informed use of credit ratings, research and related analytical products in an environment of renewed attention to risk analysis and risk management. Moodys expects that these developments will support continued long-term demand for high-quality, independent credit opinions, research, data and risk management tools and services. An expectation of recovery-driven growth in capital market activity, supported by initiatives to increase market share, leverage pricing opportunities, capture disintermediation activity in developed and developing markets and develop additional data, research and rating products, represent key growth drivers for Moodys.
Growth in global fixed income markets in a given year is dependent on many macroeconomic and capital market factors including interest rates, business investment spending, corporate refunding needs, merger and acquisition activity and consumer borrowing and securitization. Rating fees paid by debt issuers account for most of the revenue of MIS. Therefore, a substantial portion of MISs revenue is dependent upon the dollar-equivalent volume and number of ratable debt securities issued in the global capital markets. MISs results can be affected by factors such as the performance and the prospects for growth of the major world economies, the fiscal and monetary policies pursued by their governments and the decisions of issuers to request MIS ratings to aid investors in their investment decision process. However, annual fee arrangements with frequent debt issuers, annual debt monitoring fees and annual fees from commercial paper and medium-term note programs, bank and insurance company financial strength ratings, mutual fund ratings, and other areas partially mitigate MISs dependence on the volume or number of new debt securities issued in the global capital markets. Furthermore, the strong growth trend seen in the issuance of structured finance securities from the mid-1990s reversed dramatically in 2008 due to market turmoil, with continued declines seen in 2009 and 2010. The market disruptions that escalated in 2008 are expected to continue in the immediate term, however Moodys has seen some revenue stabilization from this market in 2011. Despite significant declines from peak market levels, Moodys believes that structured finance securities will continue to play a role in global credit markets and will provide opportunities for longer term revenue growth. Moodys will continue to monitor this market and adapt to meet the changing needs of its participants.
Longer term growth in global fixed-income markets is also attributable to a number of forces and trends such as advances in information technology and disintermediation of financial systems. The pace of change in technology and communication over the past two decades makes information about investment alternatives widely available throughout the world and facilitates issuers ability to place securities outside their national markets and investors capacity to obtain information about securities issued outside their national markets. Technology also allows issuers and investors the ability to more readily obtain information about new financing techniques and new types of securities that they may wish to purchase or sell, which in the absence of the appropriate technology may not be easily obtainable. This availability of information promotes the ongoing integration and expansion of financial markets worldwide giving issuers and investors access to a wider range of developed capital markets and a number of new capital markets. As technology provides for wider access to worldwide markets, it also results in a greater need for credible, globally comparable opinions about credit risk, data, analytics and related services. Additionally, information technology also provides opportunities to further build a global platform to support Moodys continued expansion in developing markets.
An ongoing trend in the worlds capital markets is the disintermediation of financial systems. Issuers increasingly raise capital in the global public capital markets, in addition to, or in substitution for, traditional financial intermediaries. Moreover, financial intermediaries have sold assets in the global public capital markets, in addition to, or instead of, retaining those assets. Recent credit market disruptions which began in mid-2007 initially slowed the trend of disintermediation globally, but Moodys believes that debt capital markets offer advantages in capacity and efficiency compared to the traditional banking systems. In fact, disintermediation has accelerated in some markets over the past year as deleveraging by banks has encouraged corporations and other entities to seek alternative funding in bond
MOODYS 2011 10-K | 9 |
markets, while in key emerging markets strong economic growth is out pacing banking system capacity. Thus, disintermediation is expected to accelerate in the longer-term, with Moodys continuing to target investment and resources to growing international markets where disintermediation and bond issuance should remain more robust.
In response to the 2008-2009 credit crisis, and to address new regulation and ongoing volatility in the capital markets, financial institutions are investing in people, processes and systems to enhance risk management and compliance functions. Regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel II, Basel III, Solvency II and others may stimulate demand for Moodys Analytics products. Financial institutions are also investing in advanced qualitative and quantitative tools and services to support their management of complex balance sheets and diverse portfolios. Moodys Analytics offers a suite of risk management products and services to address these needs, including but not limited to risk management software, economic analysis, training and professional services.
Legislative bodies and regulators in the U.S., Europe and selective other jurisdictions continue to conduct regulatory reviews of CRAs, which may result in, for example, an increased number of competitors, changes to the business model or restrictions on certain business activities of MIS, or increased costs of doing business for MIS. Therefore, in order to broaden the potential for expansion of non-ratings services, Moodys reorganized in January 2008 into two distinct businesses: MIS, consisting solely of the ratings business, and MA. MA conducts all non-ratings activities including the sale of credit research produced by MIS and the production and sale of other economic and credit-related products and services. The reorganization broadens the opportunities for expansion by MA into activities which may have otherwise been restricted for MIS, due to the potential for conflicts of interest with the ratings business. At present, Moodys is unable to assess the nature and effect that any regulatory changes may have on future growth opportunities.
Moodys operations are subject to various risks, as more fully described in Part I, Item 1A Risk Factors, inherent in conducting business internationally. Such risks include currency fluctuations and possible nationalization, expropriation, exchange and price controls, changes in the availability of data from public sector sources, limits on providing information across borders and other restrictive governmental actions. Management believes that the risks of nationalization or expropriation are reduced because the Companys basic service is the creation and dissemination of information, rather than the production of products that require manufacturing facilities or the use of natural resources. However, the formation of, for example, a new government-sponsored regional or global rating agency would pose a risk to MISs growth prospects. Management believes that this risk, compared to other regulatory changes under consideration for the credit rating industry, is relatively low because of the likelihood that substantial investments over a sustained period would be required, with uncertainty about the likelihood of financial success for the entity.
The MIS business competes with other CRAs and with investment banks and brokerage firms that offer credit opinions and research. Many users of MISs ratings also have in-house credit research capabilities. MISs largest competitor in the global credit rating business is Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. There are some rating markets, based on industry, geography and/or instrument type, in which Moodys has made investments and obtained market positions superior to S&P Ratings Services, while in other markets, the reverse is true.
In addition to S&P Ratings Services, MISs competitors include Fitch Ratings, Dominion Bond Rating Service Ltd., A.M. Best Company Inc., Japan Credit Rating Agency Ltd., Kroll Bond Rating Agency Inc., Morningstar Inc. and Egan-Jones Ratings Company. In Europe, examples of competitors include Euler Hermes Rating, Feri EuroRating, Creditreform Rating, PSR Rating, ICAP Group and Companhia Portuguesa de Rating. There are additional competitors in other regions and countries, for example, in China where Moodys operates through a joint venture. These competitors include China Lianhe Credit Rating Co Ltd., Shanghai Brilliance Credit Rating & Investors Service Co Ltd., Dagong Global Credit Rating Co Ltd. and Pengyuan Credit Rating Co Ltd.
MA competes broadly in the financial information industry against diversified competitors such as Thomson Reuters Markets Division, Bloomberg, S&P Capital IQ/S&P Indices, Fitch Solutions, Dun & Bradstreet, IBM, Wolters Kluwer, Sungard, SAS, Fiserv, MSCI and Markit Group among others. MAs main competitors within RD&A include S&P Capital IQ/S&P Indices, CreditSights, Thomson-Reuters, Intex, IHS Global Insight, BlackRock Solutions, FactSet and other smaller boutique providers of fixed income analytics, valuations, economic data and research. In RMS, MA faces competition from both large software providers such as IBM Algorithmics, SunGard, SAS, Oracle, Mysis, Oliver Wyman, Verisk and other various smaller vendors and in-house solutions. Within professional services, MA competes with Omega Performance, DC Gardner, and a host of financial training and education boutiques, and with Evalueserve, AMBA, CRISIL Global Research & Analytics, and other providers of outsourced research and consulting services.
10 | MOODYS 2011 10-K |
Moodys corporate strategy is to be the worlds most respected authority serving credit sensitive markets. The key aspects to implement this strategy are to:
| Defend and enhance the core business |
| Invest in growth |
Moodys will invest to defend and enhance the core businesses in an attempt to position the Company to fully capture market opportunities resulting from global debt capital market expansion and increased business investment spending. Moodys will also make strategic investments to achieve scale in attractive financial information markets, move into attractive adjacencies where the Company can leverage its core competencies and expand our footprint in high growth emerging markets.
To broaden the Companys potential, Moodys reorganized in 2008, creating the MA business focused on all non-ratings activities. This adds considerable value in three ways. First, MA adds a significant base of recurring revenue to offset potential volatility in ratings issuance volumes impacting MIS. Second, MA provides a foothold in emerging markets, selling products and services, such as training, consulting and bank system implementation, before these debt capital markets are fully mature. Finally, MA provides holistic financial risk management credit solutions sought by the Companys customers.
Moodys invests in a portfolio of initiatives to implement our strategy through organic development and targeted acquisitions. Example initiatives include:
| Risk management software and services |
| Expansion in emerging markets |
| New products and services such as CreditView and RiskCalc China |
The 2011 acquisitions of Barrie & Hibbert and majority stake in the companies of Copal Partners advanced Moodys strategy. B&H is a leading provider of risk management modeling tools for insurance companies worldwide. Copal is among the worlds leading providers of outsourced research and analytical services to institutional customers. Both companies will help the Company pursue its objective to be the worlds foremost authority and services provider in credit risk-sensitive markets.
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.
In the U.S., MIS has been designated as an NRSRO by the SEC since 1975 and, pursuant to the substantive regulatory authority granted to the SEC under the Credit Rating Agency Reform Act of 2006, has been registered as an NRSRO since September 2007. The Reform Act provided the SEC with authority to oversee NRSROs, while prohibiting the SEC from regulating the substance of credit ratings or the procedures and methodologies by which any NRSRO determines credit ratings. Pursuant to the Reform Act, the SEC has adopted regulations applicable to rating agencies which register as NRSROs, addressing among other things:
| the NRSRO application and registration process; |
| recordkeeping, financial reporting, prevention of misuse of material non-public information, conflicts of interest, and prohibited acts and practices; |
| additional requirements for managing conflicts of interest, enhancing record keeping requirements, and improving transparency of ratings performance and methodologies; |
| additional disclosure requirements applicable to rating histories; and |
| a prohibition on rating structured finance products unless the issuer makes the same information accessible to all NRSROs that it provides to any NRSRO that it hires to rate the product. |
MOODYS 2011 10-K | 11 |
Provisions of the Financial Reform Act, which was enacted in 2010, seek, among other things, to enhance transparency and accountability in the credit rating agency industry, and to reduce the regulatory reliance on credit ratings. The majority of the provisions of Subtitle C of Title IX of the Financial Reform Act seek to regulate the activities of those CRAs that are registered under the SECs regulatory framework for NRSROs, and thus apply to MIS.
Among other provisions applicable to NRSROs, the Financial Reform Act:
| rescinded Rule 436(g) under the Securities Act of 1933 (the Securities Act), which provided NRSROs with an exemption from expert liability under the Securities Act when ratings information was included in a registration statement relating to a securities offering. |
| created new pleading standards that may affect NRSROs liability in cases brought against them; |
| heightened compliance standards, including by adoption of enhanced corporate governance and conflicts of interest policies and procedures, implementation of professional standards for credit analysts and providing for periodic compliance examinations; |
| increased public disclosures by NRSROs, including disclosure of the ratings process and methodology, factors relied upon in formulating ratings, results of third-party due diligence and accuracy of prior ratings; |
| deleted or replaced references to credit ratings in certain federal laws and mandated that federal agencies delete or replace references to credit ratings in their regulations; and |
| mandated that the SEC study the feasibility of establishing a system in which a utility or a self-regulatory organization assigns NRSROs to determine the credit ratings of structured finance products to address so-called rating-shopping by issuers and underwriters of structured financial products. |
The SEC and other federal regulators are in the process of implementing provisions of the Financial Reform Act applicable to NRSROs and rating agencies. Events surrounding the implementation have included:
| In September 2011, an SEC rule went into effect requiring NRSROs to disclose information about the representations and warranties of the structured finance securities they rate; |
| In July 2011, the SEC adopted a rule that removed references to credit ratings in certain rules and forms applicable to issuers; and |
| Financial institution regulators closed the comment period on proposed alternatives to credit ratings that could be incorporated into banking regulations. |
The SEC also has adopted or proposed a number of regulations affecting securities that are rated by MIS and that otherwise affect the market for ratings, including proposals to require disclosure about credit ratings in certain registered securities offerings, and rules affecting disclosures and the operation of the structured finance products.
Internationally, several regulatory developments have occurred:
EUIn 2009, the European Parliament passed a new regulation (EU Regulation) that establishes an oversight regime for the CRA industry in the European Union. The framework for the EU Regulation requires the registration, formal regulation and periodic inspection of CRAs operating in the EU. The EU Regulation also sets out specific requirements for the use of ratings that are produced outside of the EU and are used for regulatory purposes in the EU. Among these is a requirement for the relevant competent authority in the EU and the competent authority of the non-EU jurisdiction where that rating has been produced to enter into a cooperation agreement containing provisions related to the exchange of information and the coordination of supervisory activities. The EU Regulation became fully effective in September 2010. MIS applied for registration in August 2010 and was granted registration in October 2011. In addition, the European Securities and Market Authority (ESMA) was established in January 2011 and has had direct supervisory responsibility for registered CRA industry in the EU since July 2011.
The regulatory framework of the CRA industry continues to be discussed in the European Union.
In November 2011, the European Commission issued proposed amendments to its existing regulations. If enacted as proposed, the revised regulations, among other things, would:
| impose various additional procedural requirements with respect to ratings of sovereign issuers; |
| require member states to adopt laws imposing liability on credit rating agencies for an intentional or grossly negligent failure to abide by the applicable regulations; |
| potentially impose a greater burden of proof on credit rating agencies accused of failing to abide by applicable regulations; |
12 | MOODYS 2011 10-K |
| impose mandatory rotation requirements on the rating agencies hired by issuers of securities, thereby limiting the number of years a credit rating agency can issue ratings for securities of a particular issuer; |
| enhance ESMAs role in reviewing rating methodologies; and |
| impose additional procedural and substantive requirements on the pricing of services. |
The next stages of the legislative process include deliberation and potential amendments by both the European Parliament and the Council of European Finance Ministers. The Parliament, Council and Commission must all confer and agree on a final text. The Company expects this process may take from four to eight months, during which time Moodys will continue to consult with relevant authorities and market participants as to the impact of the specific proposals on the financial markets, issuers and investors.
The G-8 and the G-20 have over the past several years:
| Committed to implement oversight of the CRAs, consistent with the strengthened International Organization of Securities Commissions Code of Conduct, described below, and agreed that, in the medium term, countries should implement a registration system for CRAs; |
| Agreed to extend regulatory oversight to and require registration of CRAs in order to ensure that they adhere to the international code of good practice; and |
| Expressed the view that the development of good practices for due diligence by asset managers investing in structured finance products will result in reduced reliance on credit ratings. |
IOSCO has published a Code of Conduct Fundamentals for Credit Rating Agencies. In 2009, IOSCO published its second review of the CRAs implementation of the IOSCO Code. The report noted that seven out of the 21 CRAs reviewed had implemented the IOSCO Code in their own codes of conduct. In particular, MIS was found to have substantially implemented the 2008 revisions to the IOSCO Code. In addition, IOSCO announced in 2009 the establishment of a new standing committee that will address global issues regarding the CRA industry.
MIS has revised its Code of Professional Conduct (fashioned on the IOSCO Code) on several occasions to reflect the changes made to the IOSCO Code and the broader changes in the regulatory environment for CRAs. Beginning in 2006, MIS has annually published a report that describes its implementation of its Code. The MIS Code and implementation reports can be found on the Companys website.
The Basel CommitteeIn 2004, the Basel Committee on Banking Supervision published a bank capital adequacy framework, called Basel II, to replace its initial 1988 framework. Under Basel II, ratings assigned by recognized CRAs or ECAIs, can be used by banks in determining credit risk weights for many of their institutional credit exposures. Recognized ECAIs could be subject to a broader range of oversight. MIS has been recognized as an ECAI in many jurisdictions. As a result of the recent developments in the financial markets, the banking authorities of the Basel Committee have been reconsidering the overall framework. Work on the new framework, Basel III, is now complete. It is to be implemented in stages, beginning in 2010 and concluding in 2018. Basel III continues to use credit ratings as a tool in bank supervision, however the form and extent of this use is currently under debate by global prudential regulators.
Other legislation and 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. In addition, 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 MIS 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.
Moodys and its affiliates own and control a variety of intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials that, in the aggregate, are of material importance to Moodys business. Management of Moodys believes that each of the trademarks and related corporate names, marks and logos containing the term Moodys are of material importance to the Company.
The Company, primarily through MA, licenses certain of its databases, software applications, credit risk models, training courses in credit risk and capital markets, research and other publications and services that contain Intellectual Property to its customers. These licenses are provided pursuant to standard fee-bearing agreements containing customary restrictions and intellectual property protections.
MOODYS 2011 10-K | 13 |
In addition, Moodys licenses certain technology and other intellectual property rights owned and controlled by others. Specifically, Moodys licenses financial information (such as market and index data, financial statement data, third party research, default data, and security identifiers) as well as software development tools and libraries. The Company obtains such technology and intellectual property rights from generally available commercial sources. Most of such technology and intellectual property is available from a variety of sources. Although certain financial information (particularly security identifiers and certain pricing or index data) is available only from a limited number of sources, Moodys does not believe it is dependent on any one data source for a material aspect of its business.
The Company considers its Intellectual Property to be proprietary, and Moodys relies on a combination of copyright, trademark, trade secret, patent, non-disclosure and other contractual safeguards for protection. Moodys also pursues instances of third-party infringement of its Intellectual Property in order to protect the Companys rights. The Company owns a single, non-material patent. None of the Intellectual Property is subject to a specific expiration date, except to the extent that the copyright in items that the Company authors (such as credit reports, research, and other written opinions) expires pursuant to relevant law, currently 95 years from first publication in the US; and the single patent that Moodys owns expires in 2028.
The names of Moodys products and services referred to herein are trademarks, service marks or registered trademarks or service marks owned by or licensed to Moodys or one or more of its subsidiaries.
As of December 31, 2011 the number of full-time equivalent employees of Moodys was approximately 6,100.
Moodys investor relations Internet website is http://ir.moodys.com/. Under the SEC Filings tab at this website, the Company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are filed with, or furnished to, the SEC.
The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and other information statements that the Company files electronically with the SEC. The SECs internet site is http://www.sec.gov/.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME, AGE AND POSITION |
BIOGRAPHICAL DATA |
Mark E. Almeida, 52 PresidentMoodys Analytics |
Mr. Almeida has served as President of Moodys Analytics since January 2008. Prior to this position, Mr. Almeida was Senior Vice President of Moodys Corporation from August 2007 to January 2008, Senior Managing Director of the Investor Services Group (ISG) at Moodys Investors Service, Inc. from December 2004 to January 2008 and was Group Managing Director of ISG from June 2000 to December 2004. Mr. Almeida joined Moodys Investors Service, Inc. in April 1988 and has held a variety of positions with the company in both the U.S. and overseas. |
Richard Cantor, 54 Chief Risk Officer |
Mr. Cantor has served as Chief Risk Officer of Moodys Corporation since December 2008 and as Chief Credit Officer of Moodys Investors Service, Inc. since November 2008. From July 2008 to November 2008, Mr. Cantor served as Acting Chief Credit Officer. Prior thereto, Mr. Cantor was Managing Director of Moodys Credit Policy Research Group from June 2001 to July 2008, after serving as Senior Vice President in the Financial Guarantors Rating Group. Mr. Cantor joined Moodys in 1997 from the Federal Reserve Bank of New York, where he served as Assistant Vice President in the Research Group and was Staff Director at the Discount Window. Prior to the Federal Reserve, Mr. Cantor taught Economics at UCLA and Ohio State and has taught on an adjunct basis at the business schools of Columbia University and New York University. |
14 | MOODYS 2011 10-K |
Robert Fauber, 41 Senior Vice PresidentCorporate Development |
Mr. Fauber has served as Senior Vice PresidentCorporate Development of Moodys Corporation since April 2009 and as Vice President-Corporate Development since he joined Moodys in September 2005 to April 2009. Prior to joining Moodys, Mr. Fauber served in several roles at Citigroup from 1999 to 2005, including most recently, Director of Planning and Business Development for Citigroups Alternative Investments division. Prior to that, Mr. Fauber worked as a Director in Corporate Strategy & Business Development for Citigroup and a Vice President and Associate in the Financial Sponsor and Telecom investment banking groups at the firms Salomon Smith Barney subsidiary. From 1992-1996, Mr. Fauber worked at NationsBank (now Bank of America), working in the middle market commercial banking group and also ran the firms Global Finance college recruiting program in 1997. | |
John J. Goggins, 51 Executive Vice President and
General |
Mr. Goggins has served as the Companys Executive Vice President and General Counsel since April 2011 and the Companys Senior Vice President and General Counsel from October 2000 until April 2011. Mr. Goggins joined Moodys Investors Service, Inc. in February 1999 as Vice President and Associate General Counsel. Prior thereto, he served as counsel at Dow Jones & Company from 1995 to 1999, where he was responsible for securities, acquisitions and general corporate matters. Prior to Dow Jones, he was an associate at Cadwalader, Wickersham & Taft from 1985 to 1995, where he specialized in mergers and acquisitions. | |
Linda S. Huber, 53 Executive Vice President and Chief Financial Officer |
Ms. Huber has served as the Companys Executive Vice President and Chief Financial Officer since May 2005. Prior thereto, she served as Executive Vice President and Chief Financial Officer at U.S. Trust Company, a subsidiary of Charles Schwab & Company, Inc., from 2003 to 2005. Prior to U.S. Trust, she was Managing Director at Freeman & Co. from 1998 through 2002. She served PepsiCo as Vice President of Corporate Strategy and Development from 1997 until 1998 and as Vice President and Assistant Treasurer from 1994 until 1997. She served as Vice President in the Energy Investment Banking Group at Bankers Trust Company from 1991 until 1994 and as an Associate in the Energy Group at First Boston Corporation from 1986 through 1990. She also held the rank of Captain in the U.S. Army where she served from 1980 to 1984. | |
Michel Madelain, 56 President and
Chief Operating Officer |
Mr. Madelain has served as President of Moodys Investors Service Inc. since November 2010 and as Chief Operating Officer since May 2008. Prior to this, Mr. Madelain served as Executive Vice President, Fundamental Ratings from September 2007 to May 2008, with responsibility for all Global Fundamental Ratings, including Corporate Finance, Financial Institutions, Public Finance and Infrastructure Finance. He managed the Financial Institutions group from March 2007 until September 2007. Mr. Madelain served as Group Managing Director, EMEA Corporate Ratings from November 2000 to March 2007 and prior thereto held several Managing Director positions in the U.S. and U.K. Fundamental Rating Groups. Prior to joining Moodys in 1994, Mr. Madelain served as a Partner of Ernst & Young, Auditing Practice. Mr. Madelain is qualified as a Chartered Accountant in France. | |
Joseph (Jay) McCabe, 61 Senior Vice
PresidentCorporate |
Mr. McCabe has served as the Companys Senior Vice PresidentCorporate Controller since December 2005. Mr. McCabe joined Moodys in July 2004 as Vice President and Corporate Controller. Before joining the Company, he served as Vice PresidentCorporate Controller at PPL Corporation, an energy and utility holding company, from 1994 to 2003. Prior to PPL Corporation, he served Deloitte & Touche as Partner from 1984 to 1993 and as a member of the firms audit practice from 1973 to 1984. |
MOODYS 2011 10-K | 15 |
Raymond W. McDaniel, Jr., 54 Chairman and Chief Executive Officer |
Raymond W. McDaniel, Jr., has served as the Chairman and Chief Executive Officer of the Company since April 2005 and serves on the MIS and International Business Development Committees of the Board of Directors. Mr. McDaniel served as the Companys President from October 2004 until April 2005 and the Companys Chief Operating Officer from January 2004 until April 2005. He has served as Chairman and Chief Executive Officer of Moodys Investors Service, Inc., a subsidiary of the Company, since October 2007 and held the additional title of President from November 2001 to August 2007 and December 2008 to November 2010. Mr. McDaniel served as the Companys Executive Vice President from April 2003 to January 2004, and as Senior Vice President, Global Ratings and Research from November 2000 until April 2003. He served as Senior Managing Director, Global Ratings and Research, of Moodys Investors Service from November 2000 until November 2001 and as Managing Director, International from 1996 to November 2000. Mr. McDaniel currently is a Director of John Wiley & Sons, Inc. | |
Lisa S. Westlake, 50 Senior Vice President and Chief Human |
Ms. Westlake has served as the Companys Senior Vice President and Chief Human Resources Officer since November 2008. Prior to this position, Ms. Westlake served as Vice PresidentInvestor Relations from December 2006 to December 2008 and Managing DirectorFinance from September 2004 to December 2006. Prior to joining the Company, Ms. Westlake was a senior consultant with the Schiff Consulting Group from 2003 to 2004. From 1996 to 2003 Ms. Westlake worked at American Express Company where she held several different positions such as Vice President and Chief Financial Officer for the OPEN Small Business Network, Vice President and Chief Financial Officer for Establishment Services and Vice President and Chief Financial Officer for Relationship Services. From 1989 to 1995 Ms. Westlake held a range of financial management positions at Dun & Bradstreet Corporation and its subsidiary at the time, IMS International. From 1984 to 1987 Ms. Westlake served at Lehman Brothers in both the investment banking and municipal trading areas. |
ITEM 1A. | RISK FACTORS |
The following risk factors and other information included in this annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that the Companys management currently deems minor or insignificant also may impair its business operations. If any of the following risks occur, Moodys business, financial condition, operating results and cash flows could be materially adversely affected.
Laws and Regulations Affecting the Credit Rating Industry are Rapidly Evolving and May Negatively Impact the Nature and Economics of the Companys Business
Credit rating agencies are regulated in both the U.S. (by federal, state and local authorities) and in other countries. Over the past few years, many jurisdictions have adopted or proposed new laws and regulations that impact the operation of credit rating agencies and the markets for securities that are rated. Additional laws and regulations have been proposed or are being considered, and further legislation or regulation may be proposed or implemented in the future. Some of the more prominent developments are discussed below or under the section entitled Regulation in Part I, Item 1 of this Form 10-K. These laws and regulations are intended to cause, or may result in, increased competition in the credit rating business. In addition, these laws or regulations may cause or result in (i) alternatives to credit ratings, (ii) regulations or restrictions on how information is used in the development or maintenance of credit ratings, (iii) increased regulatory oversight of the credit markets and credit rating agency operation, (iv) limits on the number of years that a credit rating agency can rate securities of a particular issuer, or (v) changes in the pricing of credit ratings. All of these items could result in an increase in costs that Moodys may not be able to pass through to customers and a decrease in the demand for or changes in the use of credit ratings.
New pleading and liability standards that have been adopted in the U.S. and proposed elsewhere may subject credit rating agencies to a greater number of legal proceedings claiming liability for losses suffered by investors on rated securities, may place greater burdens on credit rating agencies to defend themselves, could result in such legal proceedings continuing for a greater period of time before being resolved, and could result in increased uncertainty over and exposure to liability of credit rating agencies. As new laws and regulations applicable to credit ratings and rating agencies rapidly evolve, the costs of compliance are expected to increase, and Moodys may not be able to pass on these costs through the pricing of its services. In addition, there may be greater uncertainty over the scope, interpretation and administration of new laws and regulations, which may increase compliance costs and increase the possibility of fines, penalties or other sanctions (including restrictions on activities) being imposed.
16 | MOODYS 2011 10-K |
Given the comparatively recent adoption and the number of additional reforms that have been or are proposed to be adopted, including those under the legislative and regulatory initiatives discussed below, Moodys is unable to accurately assess the future impact of any regulatory changes that may result or the impact on Moodys competitive position, current practices or business prospects. Although these recent and pending legislative and regulatory initiatives apply to rating agencies and credit markets generally, they may affect Moodys in a disproportionate manner. Responding to these developments will increase Moodys fixed and variable costs of operations, perhaps to a degree that is significantly greater than Moodys currently expects, and may materially reduce MIS revenue. Moodys may not be able to pass through or otherwise recoup or offset such costs or lost revenue. These developments may alter MISs communications with issuers as part of the rating assignment process, alter the manner in which MISs ratings are developed, assigned and communicated, and decrease demand or affect the manner in which MIS or its customers or users of credit ratings operate, and alter the economics of the credit ratings business, including by restricting or mandating the business models under which a rating agency is permitted to operate. Moodys stock price may also be affected by speculation regarding legislative and regulatory initiatives and their potential impact on Moodys business and by increased uncertainty over potential liability and adverse legal or judicial determinations. Each of these developments 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 in ways that cannot presently be predicted.
In the U.S., MIS is designated as an NRSRO pursuant to SEC regulations adopted under the Reform Act. One of the central tenets of the Reform Act was to encourage competition among rating agencies. The Reform Act established standards for the SEC to have direct jurisdiction over credit rating agencies that seek NRSRO status and to inspect their operations.
In the U.S., one of the tenets of the Financial Reform Act enacted in 2011 is that credit rating agencies play an important role in the financial market and should be subject to enhanced oversight standards that could result in enhanced liability. The Financial Reform Act amends a number of laws and regulations, requires the SEC to adopt a number of rules affecting rating agencies and the use of credit ratings, especially in structured finance markets, and authorizes a number of studies relating to the operations and legal standards applicable to CRAs. Provisions of the Financial Reform Act and other rules that have recently been or may be adopted by the SEC in furtherance of the Financial Reform Act that pose risks to the Companys business include, among others:
| heightened compliance standards; |
| increased disclosure obligations; |
| provisions seeking to diminish regulatory and investor reliance on credit ratings, including the elimination of SEC rules that include eligibility standards based on credit ratings; |
| rules potentially mandating disclosure of sensitive issuer information provided to CRAs for the purpose of developing a rating; |
| a mandate that the SEC study the feasibility of establishing a system in which a utility or a self-regulatory organization assigns NRSROs to determine the credit ratings of structured finance products to address so-called rating-shopping by issuers and underwriters of structured financial products; and |
| changes to the pleading standards and, by repealing Rule 436(g) under the Securities Act, the liability standards under the federal securities laws if a CRA consents to have a rating included in a registration statement or prospectus. |
The Financial Reform Acts rescission of Rule 436(g) under the Securities Act, which was an exemption from expert liability under the Securities Act for ratings information included in registration statements, could impact Moodys in a number of ways. SEC rules relating to offerings of asset-backed securities that are registered with the SEC require certain disclosures regarding credit ratings if, as is common in the market for such securities, the issuance or sale of any class of such asset-backed securities is conditioned on the assignment of a rating by one or more rating agencies. As a result of the repeal of Rule 436(g) under the Securities Act and accordingly the imposition of a heightened liability standard that would result from such disclosures, MIS and other credit rating agencies have declined to consent to issuers of such securities making such disclosures regarding their ratings. The staff of the SEC has informally advised issuers of asset-backed securities that, pending further review of rulemaking required under the Financial Reform Act, the SEC staff will not recommend enforcement action if an issuer omits the ratings disclosure required by SEC rules for registered offerings of asset-backed securities. If the SEC staff position were reversed or if SEC rules otherwise were adopted or applied in a manner that resulted in rating agencies being subject to heightened standards of liability in such offerings, it could adversely impact the volume of securities sold in such offerings, demand for MISs ratings, the pricing structure for ratings issued by MIS and/or Moodys exposure to liability and could have other effects that Moodys is not able to predict, any of which could have a material adverse effect on the Companys business.
In addition, in October 2009, the SEC proposed a rule providing that, if credit ratings are used in connection with an offering of any other type of security that is registered under the Securities Act (which as proposed would include use of a credit rating for certain
MOODYS 2011 10-K | 17 |
unregistered securities offerings that are subsequently subject to a registered exchange offer), the ratings must be included in the registration statement. If adopted, this proposal, coupled with the Financial Reform Acts rescission of Rule 436(g), would mean that common practices used in the U.S. to market and sell securities in such offerings would have to be altered unless MIS or other credit rating agencies consented to subject themselves to expert liability provisions of the Securities Act with respect to their credit ratings. Adoption of this or a similar rule could impact the volume of securities sold in such offerings, demand for MISs ratings, the pricing structure for ratings issued by MIS and/or Moodys exposure to liability and could have other effects that Moodys is not able to predict, any of which could have a material adverse effect on the Companys business.
Both the G-8 and the G-20 have sought to analyze and arrive at a consistent approach for addressing various areas of the financial market and have made a variety of recommendations as to regulation of rating agencies and the markets for ratings. Specifically, the G-20 has agreed to require the registration of rating agencies in their home jurisdiction. As a result of the internationally coordinated approach, countries other than the U.S. (which as noted above had already adopted a registration regime for NRSROs) have begun the process of implementing registration regimes for the oversight of CRAs. In particular, the EU adopted a new regulatory framework for rating agencies operating in the EU. The regulation seeks to introduce a common EU regulatory approach to the oversight of CRAs. Its primary objective is to enhance the integrity, transparency, responsibility, governance and reliability of credit rating activities, by establishing conditions for the issuance of credit ratings and rules on the organization and conduct of credit rating agencies, including restrictions on certain activities that are deemed to create a conflict of interest and special requirements for the rating of structured finance instruments. The regulation became fully effective on September 6, 2010. MIS applied for registration in August 2010 and was granted registration in October 2011.
In addition, the European Securities and Market Authority became fully operational in July 2011 and now has direct supervisory authority for CRAs in the EU.
The European Commission published a consultation paper on CRAs at the end of 2010 which covered the following topics:
| the potential for increasing the liability or changing the basis of liability of CRAs for their ratings; |
| the issuer-pay CRA business model; |
| amending existing regulations to reduce reliance on ratings by governments and regulated industries; |
| proposed changes to the business model associated with the rating of sovereigns; and |
| increasing competition among CRAs. |
The EU Parliament also published its own report discussing a number of these issues.
In furtherance of the foregoing, the European Commission issued proposed amendments to the existing regulations. If enacted as proposed, the revised regulations, among other things, would:
| impose various additional procedural requirements with respect to ratings of sovereign issuers; |
| require EU member states to adopt laws imposing liability on credit rating agencies for an intentional or grossly negligent failure to abide by the applicable regulations; |
| potentially impose a greater burden of proof on credit rating agencies accused of failing to abide by applicable regulations; |
| impose rotation requirements on issuers of securities, thereby limiting the number of years a credit rating agency can issue ratings for securities of a particular issuer; |
| enhance ESMAs role in reviewing rating methodologies; and |
| impose additional procedural and substantive requirements on the pricing of services. |
The foregoing initiatives, if implemented and depending on their terms, could have a significant negative effect on Moodys operations or profitability, ability to compete or the markets for its products and services, including in ways that Moodys presently is unable to predict. In particular, exposure to increased liability under future EU regulation may further increase costs and legal risks associated with the issuance of credit ratings and materially and adversely affect Moodys results of operations. Moodys also believes that the Commissions proposed rotation requirements, if enacted, would lead to a potentially significant decrease in revenue by restricting MIS from continuing to rate issuers that currently pay for ratings and in particular frequent issuers. Compliance with the amended regulations may also increase costs of operations.
In addition to the foregoing, in the wake of the credit crisis, legislative and regulatory bodies in both the US and in other countries have adopted or are studying or pursuing new laws and regulations addressing CRAs and the use of credit ratings, particularly in the area of structured finance securities, and the role of CRAs leading up to the credit crisis.
18 | MOODYS 2011 10-K |
Moodys believes that there is still the potential for additional rulemaking that can significantly impact Moodys business. It is likely that other jurisdictions will adopt additional laws or regulations affecting Moodys operations or the markets for its products and services. This could include adopting regulations that affect the need for debt securities to be rated, establish criteria for credit ratings or authorize only certain entities to provide credit ratings. However, Moodys cannot predict the extent of the regulations that may be implemented, or the effect that they may have on Moodys operations or the potential for increased exposure to liability.
Exposure to Litigation Related to Moodys Rating Opinions
Moodys has received subpoenas and inquiries from states attorneys general and governmental authorities as part of ongoing investigations following the credit crisis, and is responding to those inquiries. In addition, Moodys faces a greater amount of litigation than has historically been the case from parties claiming damages relating to ratings actions, as well as other related business practices. Due to the difficult economic times and turbulent markets over the last several years, the market value of credit-dependent instruments has declined and defaults have increased, significantly increasing the number of legal proceedings, including investigations, Moodys is currently facing. These proceedings impose additional expenses on the Company, which may increase over time as these matters progress procedurally, require the attention of senior management to an extent that may significantly reduce their ability to devote time addressing other business issues, and, given the number of these proceedings and significant amount of damages that may be sought, present a greater risk that Moodys may be subject to fines, penalties or damages if Moodys is deemed to have violated any laws or regulations. In jurisdictions outside the U.S., these types of proceedings may increase or become more costly because foreign jurisdictions may not have legal protections or liability standards comparable to those that currently exist in the U.S. (such as protections for the expression of credit opinions as provided by the First Amendment), may adopt legislation potentially imposing liability under specified circumstances and loosening pleading requirements and may pose a greater risk of criminal rather than civil penalties. These risks often are and may continue to be difficult to assess or quantify. Moodys may not have adequate insurance or reserves to cover these risks, and their existence and magnitude often remains unknown for substantial periods of time. Furthermore, to the extent that Moodys is unable to achieve dismissals from the various litigation at an early stage and matters proceed to trial, the aggregate legal defense costs to be incurred by Moodys could increase substantially, regardless of the ultimate outcome.
In addition, as discussed above, the Financial Reform Act revised pleading and liability standards and other provisions potentially subjecting CRAs to increased liability under securities law claims. The Financial Reform Act and regulations that will be adopted as a result of it may result in a material increase in the number of legal proceedings, especially as related to future ratings, and, together with judicial decisions under the Financial Reform Act and under pre-existing legal standards, may increase the potential legal exposure of CRAs. Changes in liability standards, as well as pleading standards, applicable in markets outside the U.S., such as those recently proposed by the European Commission, also could create a greater potential for liability from operating in such markets. The Company believes that adoption of these provisions could negatively impact credit markets, including causing CRAs to cease to issue ratings on certain securities or issuers, increasing the cost of ratings, delaying issuances of ratings and restricting the public availability of ratings, which changes could materially negatively impact the Companys business and prospects. It is possible that implementing changes to the Companys operations to address the changed pleading and liability standards may result in lower revenues and/or increased expenses that the Company may not be able to recoup or offset, which could be material, and the Company may not be successful in avoiding or mitigating the impact of the heightened or changed pleading and liability standards.
Changes in the Volume of Debt Securities Issued in Domestic and/or Global Capital Markets and Changes in Interest Rates and Other Volatility in the Financial Markets
Approximately 58% of MISs revenue for 2011 was transaction-based, compared to 57% of MISs revenue in 2010 and 50% of MISs revenue in 2009. Revenue from rating transactions is dependent on the number and dollar volume of debt securities issued in the capital markets. Accordingly, any conditions that either reduce investor demand for debt securities or reduce issuers willingness or ability to issue such securities could reduce the number and dollar-equivalent volume of debt issuances for which MIS provides ratings services and thereby have an adverse effect on the fees derived from the issuance of ratings.
A significant disruption in world financial markets, particularly in the credit markets, began in mid-2007, when many credit markets experienced a severe lack of liquidity. This disruption continues to adversely affect our business as the markets struggle to recover. Credit market disruptions, including those resulting from the sovereign debt crisis in Europe, together with the persistent economic slowdown have negatively impacted the volume of debt securities issued in global capital markets and the demand for credit ratings. Future debt issuances could be negatively affected by a sharp increase in long-term interest rates or factors which cause instability or volatility in the global capital markets, such as the recent credit market disruptions resulting from the sovereign debt crises in certain European countries. New debt issuances in the structured finance market are likely to continue to be significantly below peak levels reached in the middle of the past decade. Consequently, the Company has experienced a reduction in the overall demand for rating newly issued debt securities. Changes in the markets for such securities and in the role and regulation of rating agencies may materially adversely affect the Company even if the volume of securities issuances in all sectors recovers to or exceeds those experienced prior to 2007.
The timing, nature, extent and sustainability of any recovery in the credit and other financial markets remains uncertain, and there can be no assurance that overall market conditions will improve in the future, or that Moodys financial results will not continue to be
MOODYS 2011 10-K | 19 |
adversely affected. A sustained period of market decline or weakness, especially if it relates to credit sensitive securities, for which there was historically a high level of demand for ratings, could have a material adverse effect on Moodys business and financial results. Initiatives that the Company has undertaken to reduce costs may not be sufficient and further cost reductions may be difficult or impossible to obtain in the near term, due in part to rent, technology, compliance and other fixed costs associated with some of the Companys operations as well as the need to monitor outstanding ratings. Further, the cost-reduction initiatives undertaken to date could result in strains in the Companys operations if the credit markets and demand for ratings in all sectors return to levels that prevailed prior to mid-2007 or otherwise unexpectedly increase. Other factors that could further reduce investor demand for debt securities or reduce issuers willingness or ability to issue such securities include increases in interest rates or credit spreads, continued volatility in financial markets or the interest rate environment, significant regulatory, political or economic events, the use of alternative sources of credit including financial institutions and government sources, defaults of significant issuers and other unfavorable market and economic conditions.
Furthermore, issuers of debt securities may elect to issue securities without ratings or securities which are rated or evaluated by non-traditional parties such as financial advisors, rather than traditional credit rating agencies, such as MIS. Changing regulatory considerations and other market developments could negatively affect the demand for credit ratings even if debt security issuances and activities increase. As such, no assurance can be given as to the amount of revenues that may be derived therefrom.
Legal, Economic and Regulatory Risks of Operating in Foreign Jurisdictions
Moodys maintains offices outside the U.S. and derives a significant portion of its revenue from sources outside the U.S. In addition to the regulatory risks discussed above, operations in different countries expose Moodys to a number of legal, economic and regulatory risks such as restrictions on the ability to convert local currency into U.S. dollars and currency fluctuations; the costs of repatriating cash held by entities outside the U.S., U.S. laws affecting overseas operations including domestic and foreign export and import restrictions, tariffs and other trade barriers; different legal or civil liability standards, political and economic instability; the possibility of nationalization, expropriation, price controls and other restrictive governmental actions; longer payment cycles and possible problems in collecting receivables; and potentially adverse tax consequences.
As Moodys derives a significant portion of its revenue from sources outside the U.S., Moodys business also is subject to changes in the economic condition of the various economies outside the U.S. in which it operates. For example, economic developments in the European zone, which is presently experiencing a degree of economic uncertainty, or in Southeast Asia could affect the number of securities offerings undertaken within the particular area, which, in turn, could affect Moodys business.
In its non-U.S. operations, Moodys is subject to regulations applicable under the Office of Foreign Asset Control, the Foreign Corrupt Practices Act (the FCPA) and other anti-corruption laws that generally prohibit U.S. companies and their intermediaries from offering, promising, authorizing or making improper payments to foreign government officials (which may include companies affiliated with foreign governments) for the purpose of obtaining or retaining business. Other countries in which Moodys operates, such as the United Kingdom, have also enacted similar laws. Violations of the FCPA, the U.K. Bribery Act and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties and the SEC and U.S. Department of Justice and their counterparts outside the U.S. have increased their enforcement activities with respect to the FCPA and similar laws, increasing the likelihood that a company will face costly investigations or penalties for actual or alleged violations of these laws. Internal controls, policies and procedures and employee training and compliance programs that the Company has implemented to deter prohibited practices may not be effective in prohibiting its employees, contractors or agents from violating or circumventing its policies and the law. If Moodys employees or agents fail to comply with applicable laws or Company policies governing its international operations, the Company may face investigations, prosecutions and other legal proceedings and actions which could result in damage to our reputation as well as civil penalties, administrative remedies and criminal sanctions. Any determination that the Company has violated the FCPA or other similar laws could have a material adverse effect on Moodys financial condition. Compliance with international and U.S. laws and regulations that apply to the Companys international operations increases the cost of doing business in foreign jurisdictions.
In addition to competition from other rating agencies that operate in a number of international jurisdictions and specialized companies that provide ratings for particular types of financial products or issuers (such as A.M. Best Company, Inc., with respect to the insurance industry), in many foreign countries MIS competes with rating agencies that may have a stronger local presence and greater familiarity or a longer operating history in those markets. These local providers or comparable competitors that may emerge in the future may receive support from local governments or other institutions that MIS does not receive, putting MIS at a competitive disadvantage.
Increased Pricing Pressure from Competitors and/or Customers
In the credit rating, research and credit risk management markets, competition for customers and market share has spurred more aggressive tactics by some competitors in areas such as pricing and service, as well as increased competition from non-NRSROs that evaluate debt risk for issuers or investors. At the same time, bankruptcies and consolidation of customers, particularly those involved in structured finance products, and other factors affecting demand may enhance the market power of customers. While Moodys seeks to compete primarily on the basis of the quality of its products and service, if its pricing and services are not sufficiently competitive with
20 | MOODYS 2011 10-K |
its current and future competitors, Moodys may lose market share. In addition, one of the central goals of the Reform Act was to encourage competition among rating agencies. The formation of additional NRSROs may increase pricing, as well as other competitive pressures.
Exposure to Reputational and Credibility Concerns
Moodys reputation is one of the key bases on which the Company competes. To the extent that the rating agency business as a whole or Moodys, relative to its competitors, has suffered a loss in credibility in the course of the credit crisis, or, in the future, suffers a loss in credibility, Moodys business could be adversely affected. Factors that may have already affected credibility and could potentially continue to have an impact in this regard include the appearance of a conflict of interest, the performance of securities relative to the rating assigned to such securities, the timing and nature of changes in ratings, adverse publicity as to the ratings process and its implementation with respect to one or more securities, a major compliance failure, publicity associated with ongoing litigation and new laws and regulations and increased criticism by users of ratings, regulators and legislative bodies. These concerns may be disclosed or highlighted in the course of various investigations or lawsuits that have been or may be instituted, through legislative or regulatory hearings or special studies that are mandated by legislation, or through journalists or others attempting to chronicle or report on the recent credit crisis. Operational errors, whether by Moodys or a Moodys competitor, could harm the reputation of the credit rating industry and adversely affect Moodys business.
Introduction of Competing Products or Technologies by Other Companies
The markets for credit ratings, research and credit risk management services are highly competitive. The ability to provide innovative products and technologies that anticipate customers changing requirements and to utilize emerging technological trends is a key factor in maintaining market share. Competitors may develop quantitative methodologies or related services for assessing credit risk that customers and market participants may deem preferable, more cost-effective or more valuable than the credit risk assessment methods currently employed by Moodys, or may price or market their products in manners that differ from those utilized by Moodys. Customers or others may develop alternative, proprietary systems for assessing credit risk. Such developments could affect demand for Moodys products and its growth prospects. In addition, Moodys growth prospects also could be adversely affected by limitations of its information technologies that fail to provide adequate capacity and capabilities to meet increased demands of producing quality ratings and research products at levels achieved by competitors.
Significant Amount of Intangible Assets
Moodys has a significant amount of intangible assets on its balance sheet consisting of $642.9 million of goodwill and $253.6 million of amortizable intangible assets. Approximately 99% of these intangibles reside in the MA business and are allocated to the five reporting units within MA: RD&A; RMS; Training, CSI, and Copal. Failure to achieve business objectives and financial projections in one or all of these reporting units could result in an asset impairment charge which would reduce net income in the period the impairment is recorded. Impairment of goodwill or intangibles would result in a non-cash charge to operating expenses. An impairment would be recorded if the fair value of a reporting unit or asset group which holds goodwill or any intangible assets is less than the carrying amount of its net assets. A significant factor in the determination of the fair value of a reporting unit or asset group is its projected cash flows. Future cash flows of MA are dependent on a variety of factors such as, but not limited to, general economic growth, capital market activity, product innovation, pricing, market share and competition. Changes in these factors or in the conduct of Moodys operations in response to such factors could lead to reduced cash flows resulting in an asset impairment charge.
Possible Loss of Key Employees and Related Compensation Cost Pressures
Moodys success depends in part upon recruiting, retaining and motivating highly skilled, experienced financial analysts and other professionals. Competition for qualified staff in the financial services industry is intense, and Moodys ability to attract staff could be impaired if it is unable to offer competitive compensation and other incentives or if the regulatory environment mandates restrictions on or disclosures about individual employees that would not be necessary in competing analytical industries. Investment banks, investors and competitors may seek to attract analyst talent by providing more favorable working conditions or offering higher compensation than Moodys. Moodys also may not be able to identify and hire employees in some markets outside the U.S. with the required experience or skills to perform sophisticated credit analysis.
The Trading Price of Moodys Stock Could be Affected by Third Party Actions
Ownership of Moodys stock is highly concentrated with a majority of shares held by a few institutional stockholders. Due to this concentrated stockholder base, the trading price of Moodys stock could be affected considerably by actions of significant stockholders to increase or decrease their positions in Moodys stock.
MOODYS 2011 10-K | 21 |
Moodys Operations and Infrastructure may Malfunction or Fail
Moodys ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports its businesses and the communities in which Moodys is located, including having its headquarters in New York City and offices in major cities worldwide. This may include a disruption involving electrical, communications or other services used by the Company or third parties with or through whom Moodys conducts business, whether due to human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism, acts of terrorism or war or otherwise. Moodys efforts to secure and plan for potential disruptions of major operating systems may not be successful. The Company, in a number of instances, relies on third party providers to provide essential services. While the Company believes that such third parties are reliable, the Company, obviously, has less control over the performance of such providers. The Company also does not have fully redundant systems for most of its smaller office locations and low-risk systems, and its disaster recovery plan does not include restoration of non-essential services. If a disruption occurs in one of Moodys locations or systems and its personnel in those locations or those who rely on such systems are unable to utilize other systems or communicate with or travel to other locations, their ability to service and interact with Moodys clients and customers may suffer. The Companys operations also rely on the secure processing, storage and transmission of confidential and other information in its computer systems and networks. The business relies upon and processes a great deal of data through its systems, the security and quality of which must be maintained in order for the business units to perform. Protective measures that Moodys takes may be circumvented or may not be sufficient to guard its computer systems, software and networks from unauthorized access, computer viruses or other malicious events that could have a security impact. If one or more of such events occur, this could jeopardize Moodys or its clients or counterparties confidential and other information processed and stored in, and transmitted through, its computer systems and networks, or otherwise cause interruptions or malfunctions in the Companys, its clients, its counterparties or third parties operations. Moodys may be required to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures, and the Company may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by Moodys.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Moodys corporate headquarters is located at 7 World Trade Center at 250 Greenwich Street, New York, New York 10007, with approximately 668,513 square feet of leased space. As of December 31, 2011, Moodys operations were conducted from 18 U.S. offices and 58 non-U.S. office locations, all of which are leased. These properties are geographically distributed to meet operating and sales requirements worldwide. These properties are generally considered to be both suitable and adequate to meet current operating requirements.
ITEM 3. | LEGAL PROCEEDINGS |
From time to time, Moodys is involved in legal and tax proceedings, governmental investigations, 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 events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last several years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, 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 newly imposed regulatory standards. Moodys has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries.
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 the credit markets more broadly over the last several years.
On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Companys securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants oversight of MISs ratings of RMBS and constant-proportion debt obligations, and their participation
22 | MOODYS 2011 10-K |
in the alleged public dissemination of false and misleading information about MISs ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Companys securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Companys securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint also asserts various causes of action relating to the Companys ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants participation in the alleged public dissemination of false and misleading information about MISs ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Companys processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.
Two purported class action complaints have been filed by purported purchasers of the Companys securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S. District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moodys Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Companys securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Companys business conduct, business prospects, business conditions and financial results relating primarily to MISs ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others. On January 22, 2010, plaintiffs moved to certify a class of individuals who purchased Moodys Corporation common stock between February 3, 2006 and October 24, 2007, which the Company opposed. On March 31, 2011, the court issued an opinion denying plaintiffs motion to certify the proposed class. On April 14, 2011, plaintiffs filed a petition in the United States Court of Appeals for the Second Circuit seeking discretionary permission to appeal the decision. The Company filed its response to the petition on April 25, 2011. On July 20, 2011, the Second Circuit issued an order denying plaintiffs petition for leave to appeal.
For claims, litigation and proceedings not related to income taxes, where it is both probable that a liability is expected to be 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. 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, 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 the pending matters referred to above 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 inherent uncertainties involved in these matters, the large or indeterminate damages sought in some of them and the novel theories of law asserted, an estimate of the
MOODYS 2011 10-K | 23 |
range of possible losses cannot be made at this time. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
24 | MOODYS 2011 10-K |
ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Information in response to this Item is set forth under the captions below.
MOODYS PURCHASES OF EQUITY SECURITIES
For the Three Months Ended December 31, 2011
Period |
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program |
Approximate Dollar Value of Shares That May yet be Purchased Under the Program (2) |
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October 1 31 | 1,642 | $ | | | $ | 873.8 million | ||||||||||
November 1 30 | | $ | | | $ | 873.8 million | ||||||||||
December 1 31 | 9 | $ | | | $ | 873.8 million | ||||||||||
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Total | 1,651 | $ | | | ||||||||||||
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(1) | Includes the surrender to the Company of 1,642 shares of common stock in October and 9 shares of common stock in December to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees. |
(2) | As of the last day of each of the months. On July 30, 2007 the Companys Board authorized a $2.0 billion share repurchase program which the Company began utilizing in January 2008 upon completion of the June 2006 authorization. There is no established expiration date for the remaining authorization. |
During the fourth quarter of 2011, Moodys issued 0.4 million shares under employee stock-based compensation plans.
MOODYS 2011 10-K | 25 |
COMMON STOCK INFORMATION AND DIVIDENDS
The Companys common stock trades on the New York Stock Exchange under the symbol MCO. The table below indicates the high and low sales price of the Companys common stock and the dividends declared and paid for the periods shown. The number of registered shareholders of record at January 31, 2012 was 3,039. A substantially greater number of the Companys common stock is held by beneficial holders whose shares are held of record by banks, brokers and other financial institutions.
Price Per Share | Dividends Per Share | |||||||||||||||
High | Low | Declared | Paid | |||||||||||||
2011: | ||||||||||||||||
First quarter | $ | 34.74 | $ | 26.49 | $ | | $ | 0.115 | ||||||||
Second quarter | 41.93 | 34.26 | 0.14 | 0.14 | ||||||||||||
Third quarter | 40.28 | 26.79 | 0.14 | 0.14 | ||||||||||||
Fourth quarter | 37.15 | 28.29 | 0.30 | 0.14 | ||||||||||||
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Year ended December 31, 2011 | $ | 0.58 | $ | 0.535 | ||||||||||||
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2010: | ||||||||||||||||
First quarter | $ | 31.04 | $ | 26.12 | $ | | $ | 0.105 | ||||||||
Second quarter | 30.31 | 18.50 | 0.105 | 0.105 | ||||||||||||
Third quarter | 26.13 | 19.46 | 0.105 | 0.105 | ||||||||||||
Fourth quarter | 28.93 | 24.82 | 0.22 | 0.105 | ||||||||||||
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Year Ended December 31, 2010 | $ | 0.43 | $ | 0.42 | ||||||||||||
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During 2009, the Company paid a quarterly dividend of $0.10 per share of Moodys common stock in each of the quarters, resulting in dividends paid per share during the year ended December 31, 2009 of $0.40.
On December 13, 2011, the Board of the Company approved the declaration of a quarterly dividend of $0.16 per share of Moodys common stock, payable on March 10, 2012 to shareholders of record at the close of business on February 20, 2012. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board.
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth, as of December 31, 2011, certain information regarding the Companys equity compensation plans.
Plan Category |
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (2) |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding Securities Reflected in Column (a) |
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(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders | 21,616,127 | (1) | $ | 39.60 | 13,790,885 | (3) | ||||||
Equity compensation plans not approved by security holders | | $ | | | ||||||||
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Total |
21,616,127 | $ | 39.60 | 13,790,885 | ||||||||
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(1) | Includes 16,863,860 options and unvested restricted shares outstanding under the Companys 2001 Key Employees Stock Incentive Plan, 3,241,536 options and unvested restricted shares outstanding under the Companys 1998 Key Employees Stock Incentive Plan, and 53,489 options and unvested restricted shares outstanding under the 1998 Non-Employee Directors Stock Incentive Plan. This number also includes a maximum of 1,457,242 performance shares outstanding under the Companys 2001 Key Employees Stock Incentive Plan, which is the maximum number of shares issuable pursuant to performance share awards assuming the maximum payout at 200% of the target award. |
(2) | Does not reflect unvested restricted shares or performance share awards included in column (a) because these awards have no exercise price. |
26 | MOODYS 2011 10-K |
(3) | Includes 10,509,412 shares available for issuance as options, shares of restricted stock, performance shares or other stock-based awards under the 2001 Stock Incentive Plan and 126,678 shares available for issuance as options, shares of restricted stock or performance shares under the 1998 Directors Plan, and 3,154,795 shares available for issuance under the Companys Employee Stock Purchase Plan. No new grants may be made under the 1998 Stock Incentive Plan, which expired by its terms in June 2008. |
The following graph compares the total cumulative shareholder return of the Company to the performance of Standard & Poors 500 Stock Composite Index and the Russell 3000 Financial Services Index. Both of the aforementioned indexes are easily accessible to the Companys shareholders in newspapers, the internet and other readily available sources for purposes of the following graph.
The comparison assumes that $100.00 was invested in the Companys common stock and in each of the foregoing indices on December 31, 2006. The comparison also assumes the reinvestment of dividends, if any. The total return for the Companys common stock was (48%) during the performance period as compared with a total return during the same period of (50%) for the Russell 3000 Financial Services Index and (1%) for the S&P 500 Composite Index.
Comparison of Cumulative Total Return
Moodys Corporation, Russell 3000 Financial Services Index and S&P 500 Composite Index
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
Among Moodys Corporation, the S&P 500 Index,
and the Russell 3000 Financial Services
Year Ended December 31, | ||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||
Moodys Corporation | $ | 100.00 | $ | 52.01 | $ | 29.64 | $ | 40.18 | $ | 40.49 | $ | 52.22 | ||||||||||||
S&P 500 Composite Index | 100.00 | 105.49 | 66.46 | 84.05 | 96.71 | 98.75 | ||||||||||||||||||
Russell 3000 Financial Services Index | 100.00 | 83.73 | 42.76 | 50.29 | 56.62 | 49.87 |
The comparisons in the graph above are provided in response to disclosure requirements of the SEC and are not intended to forecast or be indicative of future performance of the Companys common stock.
MOODYS 2011 10-K | 27 |
ITEM 6. | SELECTED FINANCIAL DATA |
The Companys selected consolidated financial data should be read in conjunction with Item 7. MD&A and the Moodys Corporation consolidated financial statements and notes thereto.
Year Ended December 31, | ||||||||||||||||||||
amounts in millions, except per share data |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Results of operations | ||||||||||||||||||||
Revenue |
$ | 2,280.7 | $ | 2,032.0 | $ | 1,797.2 | $ | 1,755.4 | $ | 2,259.0 | ||||||||||
Operating and SG&A expenses |
1,313.1 | 1,192.8 | 1,028.1 | 934.6 | 1,035.1 | |||||||||||||||
Depreciation and amortization |
79.2 | 66.3 | 64.1 | 75.1 | 42.9 | |||||||||||||||
Restructuring |
| 0.1 | 17.5 | (2.5 | ) | 50.0 | ||||||||||||||
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Operating income | 888.4 | 772.8 | 687.5 | 748.2 | 1,131.0 | |||||||||||||||
Non-operating (expense) income, net (1) |
(48.6 | ) | (58.4 | ) | (41.3 | ) | (18.4 | ) | (9.0 | ) | ||||||||||
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Income before provision for income taxes | 839.8 | 714.4 | 646.2 | 729.8 | 1,122.0 | |||||||||||||||
Provision for income taxes |
261.8 | 201.0 | 239.1 | 268.2 | 415.2 | |||||||||||||||
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Net income (2) | 578.0 | 513.4 | 407.1 | 461.6 | 706.8 | |||||||||||||||
Less: Net income attributable to noncontrolling interests |
6.6 | 5.6 | 5.1 | 4.0 | 5.3 | |||||||||||||||
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Net income attributable to Moodys | $ | 571.4 | $ | 507.8 | $ | 402.0 | $ | 457.6 | $ | 701.5 | ||||||||||
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Earnings per share | ||||||||||||||||||||
Basic |
$ | 2.52 | $ | 2.16 | $ | 1.70 | $ | 1.89 | $ | 2.63 | ||||||||||
Diluted |
$ | 2.49 | $ | 2.15 | $ | 1.69 | $ | 1.87 | $ | 2.58 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||||||
Basic |
226.3 | 235.0 | 236.1 | 242.4 | 266.4 | |||||||||||||||
Diluted |
229.4 | 236.6 | 237.8 | 245.3 | 272.2 | |||||||||||||||
Dividends declared per share | $ | 0.58 | $ | 0.43 | $ | 0.405 | $ | 0.40 | $ | 0.34 | ||||||||||
December 31, | ||||||||||||||||||||
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2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
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Balance sheet data | ||||||||||||||||||||
Total assets | $ | 2,876.1 | $ | 2,540.3 | $ | 2,003.3 | $ | 1,773.4 | $ | 1,714.6 | ||||||||||
Long-term debt | $ | 1,172.5 | $ | 1,228.3 | $ | 746.2 | $ | 750.0 | $ | 600.0 | ||||||||||
Total Moodys shareholders deficit | $ | (169.0 | ) | $ | (309.6 | ) | $ | (606.2 | ) | $ | (994.4 | ) | $ | (783.6 | ) |
(1) | The 2011, 2010, 2009, 2008 and 2007 amounts include benefits of $10.1 million, $2.5 million, $6.5 million, $13.3 million and $31.9 million, respectively, related to the favorable resolution of certain Legacy Tax Matters. |
(2) | The 2011, 2010, 2009, 2008 and 2007 amounts include benefits of $7.0 million, $4.6 million, $8.2 million, $10.7 million and $52.3 million, respectively, related to the resolution of certain Legacy Tax Matters. |
28 | MOODYS 2011 10-K |
ITEM 7. | 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 consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K.
This MD&A contains Forward-Looking Statements. See Forward-Looking Statements commencing on page 59 and Item 1A. Risk Factors commencing on page 16 for a discussion of uncertainties, risks and other factors associated with these statements.
Moodys is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) risk management software, (iv) quantitative credit risk measures, credit portfolio management solutions, training and financial credentialing and certification services and (v) outsourced research and analytical services to institutional customers. Moodys operates in two reportable segments: MIS and MA.
MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors.
The MA segment, which includes all of the Companys non-rating commercial activities, develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes investor-oriented 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 and provides economic research and credit data and analytical tools such as quantitative credit risk scores. Within its RMS business, MA provides both economic and regulatory capital risk management software solutions. Within its professional services business it provides quantitative credit risk measures, credit portfolio management solutions, training, financial credentialing and certification services as well as outsourced research and analytical services to institutional investors.
Moodys purchased CSI and Copal in November 2010 and 2011, respectively, which are currently separate reporting units within MA and for which revenues are reported within the professional services LOB. Moodys purchased B&H in December 2011, which is currently part of the RMS reporting unit and LOB within MA.
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 GAAP. 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 intangible assets, restructuring liabilities, pension and other post-retirement benefits, UTBs and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions. The following accounting estimates are considered critical because they are particularly dependent on managements judgment about matters that are uncertain at the time the accounting estimates are made and changes to those estimates could have a material impact on the Companys consolidated results of operations or financial condition.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). The standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration based on the relative selling price of each deliverable. The Company has adopted ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. If applied in the same manner to the year ended December 31, 2009, ASU 2009-13 would not have had a material impact on net revenue reported for both its MIS and MA segments in terms of the timing and pattern of revenue recognition. The adoption of ASU 2009-13 did not have a significant effect on the Companys net revenue in the period of adoption and is also not expected to have a significant effect on the
MOODYS 2011 10-K | 29 |
Companys net revenue in periods after the initial adoption when applied to multiple element arrangements based on the currently anticipated business volume and pricing.
For 2010 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.
The Companys products and services will generally continue to qualify as separate units of accounting under ASU 2009-13. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item, the delivery and performance of the undelivered item is considered probable and substantially in the Companys control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.
The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in the Companys market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASU 2009-13, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to its pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.
In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which ranged from two to 51 years at December 31, 2011. At December 31, 2011, 2010 and 2009, deferred revenue related to these securities was approximately $79 million, $76 million and $78 million, respectively.
Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. Beginning January 1, 2010, in instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings. Prior to January 1, 2010 and pursuant to the previous accounting standards, for these types of arrangements the initial rating fee was first allocated to the monitoring service determined based on the estimated fair market value of monitoring services, with the residual amount allocated to the initial rating. Under ASU 2009-13 this practice can no longer be used for non-software deliverables.
MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers most recent reported quarterly data. At December 31, 2011, 2010 and 2009, accounts receivable included approximately $24 million, $25 million and $27 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period and revenue is accrued ratably over the monitoring period.
In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or
30 | MOODYS 2011 10-K |
first copy is delivered or transferred to and accepted by the customer. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from services rendered within the professional services line of business is generally recognized as the services are performed. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.
Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.
If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements.
Prior to January 1, 2010 and pursuant to the previous accounting standards, the Company allocated revenue in a multiple element arrangement to each deliverable based on its relative fair value, or for software elements, based on VSOE. If the fair value was not available for an undelivered element, the revenue for the entire arrangement was deferred.
Accounts Receivable Allowance
Moodys records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Billing adjustments and uncollectible account write-offs are charged against the allowance. Moodys evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current aging status of customer accounts. Moodys also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moodys adjusts its allowance as considered appropriate in the circumstances. This process involves a high degree of judgment and estimation and could involve significant dollar amounts. Accordingly, Moodys results of operations can be affected by adjustments to the allowance. Management believes that the allowance for uncollectible accounts receivable is adequate to cover anticipated adjustments and write-offs under current conditions. However, significant changes in any of the above factors, or actual write-offs or adjustments that differ from the estimated amounts could impact the Companys consolidated results of operations.
Contingencies
Accounting for contingencies, including those matters described in the Contingencies section of this MD&A, commencing on page 57 is highly subjective and requires the use of judgments and estimates in assessing their magnitude and likely outcome. In many cases, the outcomes of such matters will be determined by third parties, including governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent managements best estimates of the then current status of such matters and their potential outcome based on a review of the facts and in consultation with outside legal counsel where deemed appropriate. The Company would record a material loss contingency in its financial statements if the loss is both probable of occurring and the loss can be reasonably estimated. The Company regularly reviews contingencies and as new information becomes available may, in the future, adjust its associated liabilities.
Goodwill and Other Acquired Intangible Assets
Moodys evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of November 30 or more frequently if impairment indicators arise in accordance with ASC Topic 350. These impairment indicators could include significant events or circumstances that would reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit.
At November 30, 2011, the Company had six primary reporting units: one in MIS that encompasses all of Moodys ratings operations and five reporting units within MA: RD&A, RMS, training, CSI and Copal. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The RMS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for
MOODYS 2011 10-K | 31 |
implementation and maintenance. The training reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training. In November 2010, the Company acquired CSI, which was analyzed separately as its own reporting unit for the annual goodwill impairment assessment as of November 30, 2011 as the entity has not yet been integrated with one of the aforementioned MA reporting units. In the fourth quarter of 2011, the Company acquired Copal which is deemed to be separate reporting unit at December 31, 2011. Additionally, in December 2011, the Company acquired B&H which is part of the RMS reporting unit.
In 2011, the FASB issued an ASU which permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before proceeding with a quantitative assessment. The Company has adopted the provisions of this ASU and accordingly, the Company evaluates the recoverability of goodwill using a three-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit is compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company must perform a third step of the impairment test to determine the implied fair value of the reporting units goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge. For the reporting units where the Company is consistently able to conclude on impairment using only a qualitative approach, the Companys accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years.
Determining the fair value of a reporting unit or an indefinite-lived acquired intangible asset involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and appropriate market comparables. The Company bases its fair value estimates on assumptions believed to be reasonable. However, as these estimates and assumptions are unpredictable and inherently uncertain, actual future results may differ from these estimates. In addition, the Company also makes certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units.
Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition. Other assets and liabilities, including applicable corporate assets, are allocated to the extent they are related to the operation of respective reporting units.
The Company performed a qualitative analysis as of November 30, 2011 on all reporting units excluding Copal, which was acquired in the fourth quarter of 2011 and as such, its purchase price represents the fair value of the net assets acquired. The qualitative assessment considered the impact of various macroeconomic conditions as well as factors specific to the reporting unit that could impact future cash flows. The most significant estimates in these qualitative assessments are projected results for each reporting unit and the WACC.
Based upon the aforementioned qualitative assessment, the Company determined that for all of its reporting units excluding its training reporting unit, it was not more likely than not that the fair value of a reporting unit was less than its carrying amount. In addition to analyzing macroeconomic factors that could potentially impact the cash flows of the reporting units, the Company analyzed the growth rates and the WACC for each reporting unit, noting that changes in the assumptions from those used as of November 30, 2010 would be favorable to the reporting units valuation. Accordingly, no quantitative test was performed on these reporting units. For the training reporting unit, the Companys projected cash flows for this reporting unit were slightly lower than projected in 2010 primarily due to macroeconomic uncertainties in the U.S. and EMEA. As a result, for the training reporting unit, the Company proceeded to step two of the impairment test more fully described above. Based on the result of this test, the Company does not believe that the goodwill relating to its training reporting unit is at risk of impairment as the fair value for the reporting unit is substantially in excess of its carrying value.
32 | MOODYS 2011 10-K |
The following table identifies the amount of goodwill allocated to each reporting unit as of December 31, 2011 as well as the amount by which the net assets of each reporting unit would exceed the fair value under Step 2 of the goodwill impairment test as prescribed in ASC Topic 350, assuming hypothetical reductions in their fair values as of November 30, 2010 for all reporting units excluding the training reporting unit. For these reporting units, the Company has deemed their fair values at November 30, 2010 to approximate their fair values at November 30, 2011 based on the qualitative assessment described above. The sensitivity analysis for the training reporting unit is shown as of November 30, 2011:
Sensitivity Analysis | ||||||||||||||||||||
Deficit Caused by a Hypothetical Reduction to Fair Value | ||||||||||||||||||||
Goodwill | 10% | 20% | 30% | 40% | ||||||||||||||||
MIS | $ | 13.9 | $ | | $ | | $ | | $ | | ||||||||||
RD&A | 157.9 | | | | | |||||||||||||||
RMS | 209.6 | | | | | |||||||||||||||
Training | 17.7 | | | (0.5 | ) | (3.5 | ) | |||||||||||||
CSI | 104.7 | * | * | * | * | |||||||||||||||
Copal | 139.1 | * | * | * | * | |||||||||||||||
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$ | 642.9 | $ | | $ | | $ | (0.5 | ) | $ | (3.5 | ) | ||||||||
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* | Copal was excluded from the sensitivity analysis in the table above as well as the sensitivity analyses on the WACC and future cash flow assumptions discussed below as it was acquired in the fourth quarter of 2011. Accordingly, the carrying value of the net assets acquired approximates their fair value at November 30, 2011. Additionally, CSI is excluded from the aforementioned analyses as this acquisition occurred subsequent to the date of the last quantitative goodwill test. For this reporting unit, the Company utilized a qualitative assessment to determine the likelihood of its goodwill being impaired in 2011 and as discussed above, there was no indication of potential impairment based on the assessment. B&H was acquired subsequent to the annual assessment of potential impairment to goodwill which is performed as of November 30. Accordingly, B&H is also excluded from this sensitivity analysis. |
The following is a discussion regarding the Companys methodology for determining the fair value of its reporting units at November 30, 2010 (excluding the training reporting unit for which a quantitative test was performed as of November 30, 2011), which was the last date that the Company performed a quantitative test to assess the potential impairment of goodwill. Assumptions for deriving the fair value of the training reporting unit have been updated as of November 30, 2011. This discussion excludes B&H, Copal and CSI which have not yet been subject to a full quantitative impairment analysis as of December 31, 2011 due to the timing of the acquisitions of these entities:
The fair value of each reporting unit was estimated using a discounted cash flow methodology. The results of the DCF were evaluated against comparable public company and precedent transaction multiples in order to assess the reasonableness of the DCF fair values. The DCF analysis requires significant judgments regarding the derivation of fair value, including estimation of future operating results and cash flows of each reporting unit, which is based on internal budgets and strategic plans, expected long-term growth rates, terminal values, weighted average cost of capital and the effects of external factors and market conditions. Changes in these estimates and assumptions could materially affect the determination of the fair value and goodwill impairment for each reporting unit which could result in an impairment charge to reduce the carrying value of goodwill, which could be material to the Companys financial position and results of operations. Moodys allocates newly acquired goodwill to reporting units based on the reporting unit expected to benefit from the acquisition. The Company evaluates its reporting units on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments.
The following discusses the key assumptions utilized in the discounted cash flow valuation methodology which requires significant management judgment:
| WACC The WACC is the rate to discount each reporting units estimated future cash flows. The WACC is calculated based on the proportionate weighting of the cost of debt and equity. The cost of equity is based on a risk-free interest rate, an equity risk factor which is derived from public companies similar to the reporting unit and which captures the perceived risks and uncertainties associated with the reporting units cash flows. The cost of debt component is calculated as the weighted average cost associated with all of the Companys outstanding borrowings as of the date of the impairment test and was immaterial to the computation of the WACC. The cost of debt and equity is weighted based on the debt to market capitalization ratio of publicly traded companies with similarities to the reporting unit being tested. The WACC for all reporting units ranged from 9% to 12% in the last quantitative assessment performed. Differences in the WACC used between reporting units is due primarily to distinct risks and uncertainties regarding the cash flows of the different reporting units. A sensitivity analysis of the WACC was performed on all reporting units. An increase in the WACC of one percentage point for each of the reporting units would not have resulted in the carrying value of the reporting unit exceeding its respective estimated fair value under step one of the goodwill impairment test as prescribed in ASC Topic 350. |
MOODYS 2011 10-K | 33 |
| Future cash flow assumptionsThe projections for future cash flows utilized in the models are derived from historical experience and assumptions regarding future growth and profitability of each reporting unit. These projections are consistent with the Companys operating and strategic plan. Cash flows for each of the next five years subsequent to the date of the last quantitative assessment were estimated based on annual revenue growth rates ranging from 4% to 19%. The growth rates assumed a gradual increase in revenue from financial service customers based on a continued improvement in the global economy and capital markets which began in the second half of 2009. Beyond five years a terminal value was determined using a perpetuity growth rate based on inflation and real GDP growth rates. A sensitivity analysis of the growth rates was performed on all reporting units. A decrease in the growth rates used in the discounted cash flow calculation of 10% for each of the reporting units would not have resulted in the carrying value of the reporting unit exceeding its respective estimated fair value under step one of the goodwill impairment test as prescribed in ASC Topic 350. |
Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no such events or changes during 2011 that would indicate that the carrying amount of amortizable intangible assets in any of the Companys reporting units may not be recoverable. This determination was made based on improving market conditions and an assessment of projected cash flows for all reporting units. Additionally, there were no events or circumstances during 2011 that would indicate the need for an adjustment of the remaining useful lives of the Companys amortizable intangible assets.
Pension and Other Post-Retirement Benefits
The expenses, assets and liabilities that Moodys reports for its Post-Retirement Plans are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions include the following:
| future compensation increases, based on the Companys long-term actual experience and future outlook |
| long-term return on pension plan assets, based on historical portfolio results and the expected future average annual return for each major asset class within the plans portfolio (which is principally comprised of equity and fixed-income investments) |
| future healthcare cost trends, based on historical market data, near-term outlooks and assessments of likely long-term trends |
| discount rates, based on current yields on high-grade corporate long-term bonds |
The discount rates selected to measure the present value of the Companys benefit obligation for its Post-Retirement Plans as of December 31, 2011 were derived using a cash flow matching method whereby the Company compares each plans projected payment obligations by year with the corresponding yield on the Citibank pension discount curve. The cash flows by plan are then discounted back to present value to determine the discount rate applicable to each plan.
Moodys major assumptions vary by plan and assumptions used are set forth in Note 12 to the consolidated financial statements. In determining these assumptions, the Company consults with outside actuaries and other advisors as deemed appropriate. While the Company believes that the assumptions used in its calculations are reasonable, differences in actual experience or changes in assumptions could have a significant effect on the expenses, assets and liabilities related to the Companys Post-Retirement Plans.
When actual plan experience differs from the assumptions used, actuarial gains or losses arise. Excluding differences between the expected long-term rate of return assumption and actual experience on plan assets, the Company amortizes, as a component of annual pension expense, total outstanding gains or losses over the estimated average future working lifetime of active plan participants to the extent that the gain/loss exceeds 10% of the greater of the beginning-of-year projected benefit obligation or the market-related value of plan assets. For Moodys Post-Retirement Plans, the total losses as of December 31, 2011 that have not been recognized in annual expense are $119.7 million, and Moodys expects to recognize net periodic benefit expense of $9.4 million in 2012 related to the amortization of actuarial losses.
For Moodys funded U.S. pension plan, the differences between the expected long-term rate of return assumption and actual experience could also affect the net periodic pension expense. As permitted under ASC Topic 715, the Company spreads the impact of asset experience over a five-year period for purposes of calculating the market-related value of assets that is used in determining the expected return on assets component of annual expense and in calculating the total unrecognized gain or loss subject to amortization. As of December 31, 2011, the Company has an unrecognized asset loss of $13.6 million, of which $9.3 million will be recognized in the market-related value of assets that is used to calculate the expected return on assets component of 2012 expense.
34 | MOODYS 2011 10-K |
The table below shows the estimated effect that a one percentage-point decrease in each of these assumptions will have on Moodys 2012 operating income. These effects have been calculated using the Companys current projections of 2012 expenses, assets and liabilities related to Moodys Post-Retirement Plans, which could change as updated data becomes available.
Assumption Used for 2012 | Estimated Impact on 2012 Operating Income (Decrease)/Increase |
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Weighted Average Discount Rates* | 4.25% / 4.05% | $ | (8.5 | ) | ||||
Weighted Average Assumed Compensation Growth Rate | 4.00% | $ | 2.1 | |||||
Assumed Long-Term Rate of Return on Pension Assets | 7.85% | $ | (1.6 | ) |
* Weighted average discount rates of 4.25% and 4.05% for pension plans and other post-retirement plans, respectively.
A one percentage-point increase in assumed healthcare cost trend rates will not affect 2012 projected expenses. Based on current projections, the Company estimates that expenses related to Post-Retirement Plans will be $30.1 million in 2012 compared with $24.1 million in 2011, excluding the effect of pension settlement charges. The expected expense increase in 2012 reflects the effects of higher benefit obligations primarily due to lower discount rate assumptions and higher amortization of actuarial losses.
Stock-Based Compensation
The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions and estimates that the Company believes are reasonable. Some of the assumptions and estimates, such as share price volatility and expected option holding period, are based in part on Moodys experience during the period since becoming a public company. The use of different assumptions and estimates in the Black-Scholes option pricing model could produce materially different estimated fair values for option awards and related expense.
An increase in the following assumptions would have had the following estimated effect on operating income in 2011 (dollars in millions):
Assumption Used for |
Increase in Assumption |
Estimated impact on Operating Income in 2011 Increase/(Decrease) |
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Average Expected Dividend Yield | 0.4% - 2.1% | 0.1% | $ | 0.2 | ||||
Average Expected Share Price Volatility | 23% - 48.7% | 5% | $ | (2.1 | ) | |||
Expected Option Holding Period | 5.5 - 7.6 years | 1.0 year | $ | (1.4 | ) |
Income Taxes
The Company is subject to income taxes in the U.S. and various foreign jurisdictions. The Companys tax assets and liabilities are affected by the amounts charged for service provided and expenses incurred as well as other tax matters such as intercompany transactions. The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes, and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.
Moodys is subject to tax audits in various jurisdictions which involve Legacy Tax and other tax matters. The Company regularly assesses the likely outcomes of such audits in order to determine the appropriateness of liabilities for UTPs. The Company classifies interest related to income taxes as a component of interest expense in the Companys consolidated financial statements and associated penalties, if any, as part of other non-operating expenses.
For UTPs, ASC Topic 740 requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. As the determination of liabilities related to UTPs and associated interest and penalties requires significant estimates to be made by the Company, there can be no assurance that the Company will accurately predict the outcomes of these audits, and thus the eventual outcomes could have a material impact on the Companys operating results or financial condition.
For certain of its foreign subsidiaries, the Company has deemed a portion of the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these
MOODYS 2011 10-K | 35 |
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 for 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.
Other Estimates
In addition, there are other accounting estimates within Moodys consolidated financial statements, including recoverability of deferred tax assets, anticipated dividend distributions from non-U.S. subsidiaries and valuation of investments in affiliates. Management believes the current assumptions and other considerations used to estimate amounts reflected in Moodys consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in Moodys consolidated financial statements, the resulting changes could have a material adverse effect on Moodys consolidated results of operations or financial condition.
See Note 2 to the consolidated financial statements for further information on significant accounting policies that impact Moodys.
Moodys operates in two reportable segments: MIS and MA.
The MIS segment consists of four lines of businesscorporate finance, structured finance, financial institutions and public, project and infrastructure financethat 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 MA segment, which includes all of the Companys non-rating commercial activities, 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 lines of business RD&A, Risk Management Software and Professional Services.
In the fourth quarter of 2011, subsidiaries of the Company acquired Copal and B&H. Copal is an outsourced research and consulting business. B&H is a provider of insurance risk management tools. Additionally, in November 2010, a subsidiary of the Company acquired CSI, which is Canadas leading provider of financial learning, credentials and certification. B&H is part of the MA segment and its revenue is included in the RMS LOB and Copals and CSIs revenue is included in the professional services LOB within MA.
The following is a discussion of the results of operations of these segments, including 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 discussion also includes intersegment license fees charged to MIS from MA for the use of certain MA products and services in MISs ratings process. Overhead charges and corporate expenses which exclusively benefit one segment are fully charged to that segment. Additionally, overhead costs and corporate expenses of the Company which 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 resource and information technology. Beginning on January 1, 2011, the Company refined its methodology for allocating the aforementioned overhead and corporate costs to its segments to better align these costs based on each segments usage of the overhead services. The refined methodology is reflected in the segment results for the year ended December 31, 2011 and accordingly, the segment results for the same period in 2010 and 2009 have been reclassified to conform to the new presentation.
Certain prior year amounts have been reclassified to conform to the current presentation.
Year Ended December 31, 2011 compared with Year Ended December 31, 2010
Executive Summary
Moodys revenue for the year ended December 31, 2011 totaled $2,280.7 million, an increase of $248.7 million compared to the same period in 2010. Excluding the favorable impact from changes in FX translation rates, revenue in the year ended December 31, 2011 increased approximately $221 million compared to 2010. Total expenses were $1,392.3 million, an increase of $133.1 million compared to 2010 of which approximately $25 million was due to unfavorable changes in FX translation rates. Operating income of $888.4 million in the year ended December 31, 2011 increased $115.6 million compared to the same period in the prior year. Diluted EPS of $2.49 for the year ended December 31, 2011, which included a $0.03 benefit related to favorable resolutions of Legacy Tax Matters as well as other tax benefits totaling $0.09, increased $0.34 over the prior year period, which included a $0.15 tax benefit on foreign earnings that are indefinitely reinvested, foreign tax credits and lower state taxes. Excluding the $0.03 favorable impact relating to the resolution of Legacy Tax Matters in 2011, diluted EPS of $2.46 increased $0.33, or 15%, from $2.13 in 2010, which excludes a prior year favorable impact of $0.02 related to the resolution of a Legacy Tax Matter.
36 | MOODYS 2011 10-K |
Moodys Corporation
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Year Ended December 31, | % Change Favorable (Unfavorable) |
|||||||||||
2011 | 2010 | |||||||||||
Revenue: | ||||||||||||
United States |
$ | 1,177.0 | $ | 1,089.5 | 8 | % | ||||||
|
|
|
|
|||||||||
International: |
||||||||||||
EMEA |
708.4 | 627.4 | 13 | % | ||||||||
Other |
395.3 | 315.1 | 25 | % | ||||||||
|
|
|
|
|||||||||
Total International |
1,103.7 | 942.5 | 17 | % | ||||||||
|
|
|
|
|||||||||
Total |
2,280.7 | 2,032.0 | 12 | % | ||||||||
|
|
|
|
|||||||||
Expenses: | ||||||||||||
Operating |
683.5 | 604.8 | (13 | %) | ||||||||
SG&A |
629.6 | 588.0 | (7 | %) | ||||||||
Restructuring |
| 0.1 | 100 | % | ||||||||
Depreciation and amortization |
79.2 | 66.3 | (19 | %) | ||||||||
|
|
|
|
|||||||||
Total |
1,392.3 | 1,259.2 | (11 | %) | ||||||||
|
|
|
|
|||||||||
Operating income | $ | 888.4 | $ | 772.8 | 15 | % | ||||||
|
|
|
|
|||||||||
Interest (expense) income, net | $ | (62.1 | ) | $ | (52.5 | ) | (18 | %) | ||||
Other non-operating (expense) income, net | $ | 13.5 | $ | (5.9 | ) | 329 | % | |||||
Net income attributable to Moodys | $ | 571.4 | $ | 507.8 | 13 | % | ||||||
Diluted EPS | $ | 2.49 | $ | 2.15 | 16 | % |
The table below shows Moodys global staffing by geographic area:
December 31, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
United States | 2,465 | 2,333 | 6 | % | ||||||||
International | 3,661 | 2,128 | 72 | % | ||||||||
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|
|||||||||
Total * | 6,126 | 4,461 | 37 | % | ||||||||
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|
* Total as of December 31, 2011 includes approximately 1,300 staff from fourth quarter 2011 MA acquisitions, of which a significant portion are based in low cost jurisdictions
Global revenue of $2,280.7 million in the year ended December 31, 2011 increased $248.7 million compared to the same period in 2010 reflecting strong growth in both segments. The increase in ratings revenue compared to the year ended December 31, 2010 reflects growth across all ratings LOBs, most notably from within CFG and SFG. The growth in MA revenue reflects higher revenue across all LOBs, most notably in professional services which includes revenue from CSI and Copal which were acquired in the fourth quarter of 2010 and 2011, respectively. Transaction revenue accounted for 46% of global MCO revenue in the year ended December 31, 2011, compared to 44% in the same period of the prior year.
U.S. revenue of $1,177.0 million increased $87.5 million over 2010, primarily reflecting growth in CFG largely due to changes in the mix of fee type, new fee initiatives and certain pricing increases. The growth over the prior year also reflects strong rated issuance volumes in the first half of 2011 for investment-grade corporate debt. Further contributing to the growth in U.S. ratings revenue over the prior year were higher rated issuance volumes in CREF within SFG. The aforementioned growth in ratings revenue was partially offset by declines in U.S. public and project finance rated issuance. Additionally, the increase over the year ended December 31, 2010 reflects positive results in all LOBs within MA.
Non-U.S. revenue increased $161.2 million over 2010, reflecting growth in all LOBs within both segments. The most notable growth in non-U.S. ratings revenue resulted from higher rated issuance volumes in the EMEA and Asia regions for most asset classes within SFG as
MOODYS 2011 10-K | 37 |
well as higher investment-grade and speculative-grade issuance in the EMEA region in the first half of 2011. Additionally, the growth over 2010 reflects higher infrastructure finance and banking-related issuance in the EMEA and Asia regions. Furthermore, there was strong growth in indicative ratings across all regions. The increase in non-U.S. MA revenue reflects growth across all LOBs, most notably in professional services, where over 90% of the growth for this LOB is attributed to the acquisitions of CSI and Copal in the fourth quarter of 2010 and 2011, respectively. Changes in FX translation rates had an approximate $28 million favorable impact on non-U.S. revenue for the year ended December 31, 2011.
Operating expenses were $683.5 million in the year ended December 31, 2011, an increase of $78.7 million from the same period in 2010 and reflected both higher compensation and non-compensation costs. Compensation costs increased approximately $44 million from the prior year reflecting higher salaries and related employee benefits which has resulted from increases in headcount in both the MIS and MA segments coupled with annual merit increases. Non-compensation costs have increased approximately $34 million over the same period in 2010 reflecting higher costs resulting from the Companys ongoing investments in technology infrastructure as well as higher travel-related and other variable costs which are correlated with improved overall business conditions in both segments. Also, the increase is due to unfavorable changes in FX translation rates compared to the prior year. Additionally, the increase in both compensation and non-compensation costs compared to the prior year reflects costs from CSI which was acquired in the fourth quarter of 2010 as well as costs related to Copal and B&H which were acquired in the fourth quarter of 2011.
SG&A expenses of $629.6 million in the year ended December 31, 2011 increased $41.6 million from the same period in 2010. Compensation costs increased approximately $41 million primarily due to higher salaries and related employee benefits which reflects annual merit increases and headcount growth in support areas such as compliance and IT. Non-compensation expenses were flat compared to the prior year reflecting the offsetting effects of higher professional service costs relating to ongoing investments in technology infrastructure and fees relating to fourth quarter 2011 acquisitions in the MA segment being offset by lower legal and litigation-related costs.
Depreciation and amortization of $79.2 million in the year ended December 31, 2011 increased $12.9 million from the same period in 2010 and reflected higher amortization for software developed or obtained for internal use coupled with higher amortization related to intangible assets acquired as part of the fourth quarter 2010 and 2011 MA acquisitions.
Operating income of $888.4 million increased $115.6 million from the same period in 2010, reflecting the 12% increase in revenue exceeding the 11% increase in operating expenses. Changes in FX translation rates had an approximate $4 million favorable impact on operating income in the year ended December 31, 2011.
Interest (expense) income, net for the year ended December 31, 2011 was ($62.1) million, a $9.6 million increase in expense compared to the same period in 2010. This increase is primarily due to higher expense on borrowings reflecting a full-year of interest on the $500 million 2010 Senior Notes issued in August 2010 partially offset by lower interest expense on the $300 million Series 2005-1 Notes resulting from benefits on interest rate swaps entered into in the fourth quarter of 2010 to convert the fixed rate of interest on the notes to a floating LIBOR-based rate. This increase in interest expense on borrowings was partially offset by a reversal of interest on UTPs of approximately $3 million related to the favorable resolution of a state tax matter. Additionally, there were benefits of $3.7 million and $2.5 million, in the year ended December 31, 2011 and 2010, respectively, related to the favorable resolution of Legacy Tax Matters. The benefit in 2011 consists of a $2.8 million reversal of interest expense related to a matter for which the statute of limitations had lapsed coupled with $0.9 million in interest income received for the settlement of a matter for a tax year that preceded the 2000 Distribution. The benefit in 2010 reflects interest income received for the favorable settlement of Legacy Tax Matters.
Other non-operating (expense) income, net of $13.5 million in the year ended December 31, 2011 increased $19.4 million compared to the same period in 2010. The increase in income reflects a $6.4 million reversal of reserves in the first half of 2011 for the lapse of a statute of limitations relating to a Legacy Tax Matter. Additionally, there were FX gains of approximately $3 million in the year ended December 31, 2011 compared to FX losses of approximately $5 million in the prior year period. The gains in 2011 primarily reflect transaction gains on the euro and British pound in the first half of 2011. The losses in the prior year period primarily reflected the weakening of the euro to the British pound over the course of 2010.
Moodys ETR was 31.2% in the year ended December 31, 2011, up from 28.1% in 2010. The increase was primarily due to tax benefits in 2010 relating to utilization of foreign tax credits, lower state taxes and the indefinite reinvestment of certain foreign earnings, which were only partially offset by beneficial UTB adjustments relating to a foreign tax ruling and the settlement of state tax audits in 2011.
Net Income for the year ended December 31, 2011 was $571.4 million, or $2.49 per diluted share and increased $63.6 million, or $0.34 per diluted share, compared to the same period in 2010. The increase in EPS over the prior year reflects higher Net Income coupled with fewer diluted shares outstanding compared to 2010. Excluding net benefits from the favorable resolution of Legacy Tax Matters in both periods as well as minor restructuring-related adjustments in 2010, Net Income increased $61.1 million, or 12%, to $564.4 million, resulting in a $0.33, or 15%, increase in diluted EPS compared to the prior year.
38 | MOODYS 2011 10-K |
Segment Results
Moodys Investors Service
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Year Ended December 31, | % Change Favorable (Unfavorable) |
|||||||||||
2011 | 2010 | |||||||||||
Revenue: | ||||||||||||
Corporate finance (CFG) |
$ | 652.1 | $ | 563.9 | 16 | % | ||||||
Structured finance (SFG) |
344.6 | 290.8 | 19 | % | ||||||||
Financial institutions (FIG) |
294.9 | 278.7 | 6 | % | ||||||||
Public, project and infrastructure finance (PPIF) |
277.3 | 271.6 | 2 | % | ||||||||
|
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|
|
|||||||||
Total external revenue |
1,568.9 | 1,405.0 | 12 | % | ||||||||
Intersegment royalty |
65.8 | 61.3 | 7 | % | ||||||||
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|
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Total MIS Revenue |
1,634.7 | 1,466.3 | 11 | % | ||||||||
Expenses: | ||||||||||||
Operating and SG&A (including intersegment expenses) |
831.0 | 781.5 | (6 | %) | ||||||||
Restructuring |
| 0.1 | 100 | % | ||||||||
Depreciation and amortization |
41.0 | 35.0 | (17 | %) | ||||||||
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|
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Total |
872.0 | 816.6 | (7 | %) | ||||||||
|
|
|
|
|||||||||
Operating income | $ | 762.7 | $ | 649.7 | 17 | % | ||||||
|
|
|
|
The following is a discussion of external MIS revenue and operating expenses:
Global MIS revenue of $1,568.9 million for the year ended December 31, 2011 increased $163.9 million compared to 2010, reflecting growth across all ratings LOBs. The principal driver of the MIS revenue growth reflected changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. The growth also reflected higher rated issuance for investment-grade corporate debt and bank loans, most notably in the first half of 2011, resulting from the low interest rate environment throughout 2011. These increases were partially offset by significant declines in speculative-grade corporate debt issuance in the second half of 2011 which reflected a considerable widening of high-yield credit spreads relating to uncertainties in the U.S. and EMEA capital markets. Additionally, there was growth across most asset classes within SFG compared to challenging conditions in the securitization markets in the prior year as well as stronger banking and insurance-related issuance within FIG and infrastructure finance revenue within PPIF in the first half of the year. Transaction revenue for MIS in the year ended December 31, 2011 was 58% of total revenue compared to 57% in 2010, with the increase primarily reflecting the aforementioned growth in rated issuance in the CFG and SFG LOBs.
In the U.S., revenue was $879.1 million in the year ended December 31, 2011 and increased $63.7 million, or 8%, compared to the same period in 2010. The increase reflects the aforementioned changes in the mix of fee type, new fee initiatives and certain pricing increases as well as strong rated issuance volumes for investment-grade corporate debt and bank loans in the first half of 2011. Additionally, there were higher rated issuance volumes in the CREF asset class within SFG compared to the same period in 2010. These increases were partially offset by declines in rated issuance volumes for high-yield corporate debt in the second half of 2011 coupled with declines in rated issuance for U.S. public finance in 2011.
Non-U.S. revenue was $689.8 million in the year ended December 31, 2011 and increased $100.2 million, or 17%, compared to the same period in the prior year. The increase reflects higher rated issuance volumes in the EMEA region across most asset classes within SFG as well as higher infrastructure finance revenue across all regions. Additionally, the increase reflects good growth in revenue from rating high-yield and investment-grade corporate debt as well as higher banking and insurance-related rated issuance in the EMEA region. Changes in FX translation rates had an approximate $28 million favorable impact on non-U.S. MIS revenue in the year ended December 31, 2011.
Global CFG revenue of $652.1 million in the year ended December 31, 2011 increased $88.2 million from the same period in 2010. The principal driver of the revenue growth reflected changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. The increase over the prior year also includes strong growth in rated issuance volumes in the first half of the year for investment-grade corporate bonds and bank loans reflecting issuers taking advantage of the overall low interest rate environment to refinance existing borrowings. These increases were partially offset by declines in rated issuance volumes in the second half of 2011
MOODYS 2011 10-K | 39 |
resulting from higher credit spreads on speculative-grade corporate debt which reflected uncertainties in the EU sovereign debt markets coupled with concerns over the potential weakening of macroeconomic conditions in the U.S. Additionally, the growth over the prior year period reflects higher surveillance revenue. Transaction revenue represented 71% of total CFG revenue in the year ended December 31, 2011 compared to 73% in the prior year period. In the U.S., revenue in 2011 was $422.3 million, or $52.8 million higher than the same period in 2010. The increase primarily reflected the aforementioned changes in the mix of fee type, new fee initiatives and certain pricing increases coupled with growth in rated issuance for investment-grade corporate debt throughout 2011 as well as bank loans in the first half of 2011. These increases in rated issuance volumes reflect the overall current low interest rate environment which has resulted in issuers opportunistically refinancing debt ahead of scheduled maturities. Also, the growth in investment-grade corporate debt reflects an increase in issuance to fund merger and acquisition-related activity. These increases were partially offset by declines in rated issuance volumes for high-yield corporate debt in the second half of 2011 due to significantly higher credit spreads on these securities reflecting macroeconomic uncertainty in the U.S. and EMEA. Internationally, revenue of $229.8 million in 2011 increased $35.4 million compared to the same period in 2010. This increase was driven by rated issuance growth in high-yield corporate debt and bank loans in the first half of 2011 before sovereign debt uncertainties in the EMEA region, which were exacerbated in the second half of 2011, resulted in a pull-back of both investment-grade and high-yield issuance. The growth in non-U.S. revenue over the prior year period also reflected an increase in Indicative Ratings assigned. Favorable changes in FX translation rates had an approximate $9 million impact on international CFG revenue in 2011.
Global SFG revenue of $344.6 million in 2011 increased $53.8 million compared to the same period in 2010, primarily reflecting growth in most asset classes internationally coupled with strong growth in rated CMBS issuance volumes in the U.S. The aforementioned growth resulted in transaction revenue increasing to 52% of total SFG revenue in 2011 compared to 43% in the prior year period. In the U.S., revenue of $161.6 million increased $18.7 million compared to 2010, reflecting good growth in CMBS rated issuance volumes due to the current favorable credit market environment and narrow credit spreads for this asset class for most of 2011. Non-U.S. revenue in the year ended December 31, 2011 of $183.0 million increased $35.1 million compared to the same period in the prior year, primarily reflecting growth across most asset classes within the EMEA region, most notably in the ABS, RMBS and covered bonds sectors compared to a challenging prior year period in the non-U.S. securitization markets. The increases in ABS and RMBS also reflected issuers requesting a second rating for these securities in the first quarter of 2011, which was a new requirement by the ECB for existing asset-backed securities that could be used as collateral in Eurosystem credit operations. Favorable changes in FX translation rates had an approximate $10 million impact on international SFG revenue in 2011.
Global FIG revenue of $294.9 million in 2011 increased $16.2 million compared to the same period in 2010 with the increase almost entirely reflecting the favorable impact of the aforementioned changes in the mix of fee type, new fee initiatives and pricing increases, primarily in the U.S. Additionally, higher rated issuance volumes in the first half of 2011 were mostly offset by volume declines in the second half of 2011 which resulted from uncertainties in the European sovereign debt markets. Transaction revenue was 34% of total FIG revenue in 2011, compared to 37% in 2010. In the U.S., revenue of $118.7 million for the year ended December 31, 2011 increased $4.3 million compared to the prior year. Outside the U.S., revenue in 2011 was $176.2 million, or $11.9 million higher than in the prior year, and was primarily due to growth in banking and insurance revenue in the EMEA and Asia regions. Favorable changes in FX translation rates had an approximate $6 million impact on international FIG revenue in the year ended December 31, 2011.
Global PPIF revenue was $277.3 million in 2011, an increase of $5.7 million compared to the same period in 2010. The principal driver of the increase reflected changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. This increase was partially offset by declines in U.S. public and project finance issuance. Revenue generated from new transactions was 58% of total PPIF revenue in 2011, compared to 59% in the prior year period. In the U.S., revenue for the year ended December 31, 2011 of $176.5 million decreased $12.1 million compared to the prior year primarily due to declines in public and project finance rated issuance partially offset by the aforementioned changes in the mix of fee type, new fee initiatives and pricing changes. These declines in rated issuance volumes reflected decreases in state and local government spending and the expiration of the Build America Bond Program in the fourth quarter of 2010, which was implemented in the U.S. as part of the American Recovery and Reinvestment Act of 2009. Outside the U.S., PPIF revenue increased 21% compared to 2010 due to growth in infrastructure finance revenue across all non-U.S. regions. Favorable changes in FX translation rates had an approximate $4 million impact on international PPIF revenue in 2011.
Operating and SG&A expenses in 2011 increased $49.5 million compared to the same period in 2010 reflecting higher compensation costs of approximately $41 million coupled with higher non-compensation expenses of approximately $7 million. The increase in compensation costs reflects higher salaries and related employee benefits resulting from annual merit increases, modest headcount growth in the ratings LOBs as well as in support areas such as IT for which the costs are allocated to each segment based on a revenue-split methodology. The increase in non-compensation expenses reflects: (i) higher costs related to the Companys continued investment in IT infrastructure, (ii) higher rent and occupancy costs relating to various real estate relocation and expansion projects and (iii) higher variable costs such as T&E to support business growth. These increases were partially offset by lower legal and litigation-related costs as well as lower bad debt expense compared to the prior year.
40 | MOODYS 2011 10-K |
Operating income in 2011 of $762.7 million, which includes intersegment royalty revenue and intersegment license expense, increased $113.0 million from the same period in 2010 and reflects the 11% increase in total MIS revenue outpacing the 7% increase in total operating expenses.
Moodys Analytics
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Year Ended December 31, | % Change Favorable (Unfavorable) |
|||||||||||
2011 | 2010 | |||||||||||
Revenue: | ||||||||||||
Research, data and analytics (RD&A) |
$ | 451.3 | $ | 425.0 | 6 | % | ||||||
Risk management software (RMS) |
183.4 | 173.2 | 6 | % | ||||||||
Professional services |
77.1 | 28.8 | 168 | % | ||||||||
|
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|
|
|||||||||
Total external revenue |
711.8 | 627.0 | 14 | % | ||||||||
|
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|
|
|||||||||
Intersegment license fees |
10.6 | 9.3 | 14 | % | ||||||||
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|
|
|||||||||
Total MA Revenue |
722.4 | 636.3 | 14 | % | ||||||||
Expenses: | ||||||||||||
Operating and SG&A (including intersegment expenses) |
558.5 | 481.9 | (16 | %) | ||||||||
Depreciation and amortization |
38.2 | 31.3 | (22 | %) | ||||||||
|
|
|
|
|||||||||
Total |
596.7 | 513.2 | (16 | %) | ||||||||
|
|
|
|
|||||||||
Operating income | $ | 125.7 | $ | 123.1 | 2 | % | ||||||
|
|
|
|
The following is a discussion of external MA revenue and operating expenses:
Global MA revenue increased $84.8 million compared to the year ended December 31, 2010, with 72% of the growth generated internationally, and reflected revenue from CSI which was acquired in the fourth quarter of 2010 as well as revenue from Copal and B&H which were acquired in the fourth quarter of 2011. Recurring revenue comprised 80% of total MA revenue in 2011 compared to 85% in the same period of the prior year.
In the U.S., revenue of $297.9 million in the year ended December 31, 2011 increased $23.8 million, primarily reflecting growth in RD&A and RMS. International revenue of $413.9 million for the year ended December 31, 2011 was $61.0 million higher than the same period in 2010. The increase reflected growth across all LOBs, most notably in professional services which includes revenue from the CSI and Copal acquisitions which were completed in the fourth quarter of 2010 and 2011, respectively.
Global RD&A revenue, which comprised over 63% of MA revenue in both of the years ended December 31, 2011 and 2010, increased $26.3 million over the prior year reflecting greater demand for products that support analysis for investment and commercial credit applications. Global RMS revenue in 2011 increased $10.2 million over the same period in 2010, due to the final delivery and client acceptance of software licenses and implementations. Revenue from the professional services LOB increased $48.3 million compared to the same period in 2010, with approximately 91% of the growth reflecting the acquisitions of CSI and Copal in the fourth quarter of 2010 and 2011, respectively, coupled with growth in the base business. Revenue in the RMS and professional services LOBs are subject to quarterly volatility resulting from the variable nature of project timing and the concentration of revenue in a relatively small number of engagements.
Operating and SG&A expenses in 2011, which include the intersegment royalty for the right to use and distribute content, data and products developed by MIS, increased $76.6 million compared to the same period in 2010 reflecting both higher compensation and non-compensation costs of approximately $44 million and $28 million, respectively. The increase in compensation costs reflects higher salaries and related employee benefits resulting from annual merit increases coupled with a full year of compensation costs relating to the acquisition of CSI in the fourth quarter of 2010 as well as increased headcount to support business growth. Additionally, the increase in compensation costs reflects higher incentive compensation primarily due to the aforementioned growth in headcount. The increase in non-compensation costs reflects a full-year of expenses related to CSI which was acquired in the fourth quarter of 2010, approximately $8 million in costs directly related to the fourth quarter 2011 acquisitions of Copal and B&H as well as higher variable costs, such as T&E, that are correlated with business growth.
MOODYS 2011 10-K | 41 |
Depreciation and amortization of $38.2 million in the year ended December 31, 2011 increased $6.9 million from the same period in 2010 and reflected higher amortization related to intangible assets acquired as part of the acquisitions of CSI in the fourth quarter of 2010 as well as Copal and B&H in the fourth quarter of 2011.
Operating income of $125.7 million in 2011, which includes intersegment license fee revenue and intersegment royalty expense, increased $2.6 million compared to the same period in 2010, reflecting the $86.1 million increase in total MA revenue exceeding the $83.5 million increase in total expenses.
Year Ended December 31, 2010 compared with Year Ended December 31, 2009
Executive Summary
Moodys revenue for the year ended December 31, 2010 totaled $2,032.0 million, an increase of $234.8 million compared to the same period in 2009. Total expenses were $1,259.2 million, an increase of $149.5 million compared to 2009. Operating income of $772.8 million in 2010 increased $85.3 million compared to the same period in the prior year. Excluding the restructuring charge in 2009 and minor restructuring-related adjustments in both years, operating income increased $67.9 million from $705.0 million in the prior year period. Diluted EPS of $2.15 for the year ended December 31, 2010 increased $0.46, or 27% over the prior year period and included a benefit of $0.02 associated with the resolution of a Legacy Tax Matter as well as other tax benefits of $0.15 in 2010 relating to foreign earnings that are indefinitely reinvested, foreign tax credits and lower state taxes. Excluding the aforementioned Legacy Tax Matter in 2010, diluted EPS of $2.13 increased $0.43, or 25%, from $1.70 in 2009, which excludes a prior year favorable impact of $0.04 related to the resolution of a Legacy Tax Matter and an unfavorable $0.05 impact for restructuring.
Moodys Corporation
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Year Ended December 31, | % Change Favorable (Unfavorable) |
|||||||||||
2010 | 2009 | |||||||||||
Revenue: | ||||||||||||
United States |
$ | 1,089.5 | $ | 920.8 | 18 | % | ||||||
|
|
|
|
|||||||||
International: |
||||||||||||
EMEA |
627.4 | 624.7 | | |||||||||
Other |
315.1 | 251.7 | 25 | % | ||||||||
|
|
|
|
|||||||||
Total International |
942.5 | 876.4 | 8 | % | ||||||||
|
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|
|
|||||||||
Total |
2,032.0 | 1,797.2 | 13 | % | ||||||||
|
|
|
|
|||||||||
Expenses: | ||||||||||||
Operating |
604.8 | 532.4 | (14 | %) | ||||||||
SG&A |
588.0 | 495.7 | (19 | %) | ||||||||
Restructuring |
0.1 | 17.5 | 99 | % | ||||||||
Depreciation and amortization |
66.3 | 64.1 | (3 | %) | ||||||||
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|
|
|||||||||
Total |
1,259.2 | 1,109.7 | (13 | %) | ||||||||
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|
|||||||||
Operating income | $ | 772.8 | $ | 687.5 | 12 | % | ||||||
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|
|||||||||
Interest (expense) income, net | $ | (52.5 | ) | $ | (33.4 | ) | (57 | %) | ||||
Other non-operating (expense) income, net | $ | (5.9 | ) | $ | (7.9 | ) | 25 | % | ||||
Net income attributable to Moodys | $ | 507.8 | $ | 402.0 | 26 | % | ||||||
Diluted EPS | $ | 2.15 | $ | 1.69 | 27 | % |
The table below shows Moodys global staffing by geographic area:
December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
United States | 2,333 | 2,144 | 9 | % | ||||||||
International | 2,128 | 1,834 | 16 | % | ||||||||
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Total | 4,461 | 3,978 | 12 | % | ||||||||
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|
42 | MOODYS 2011 10-K |
Global revenue of $2,032.0 million in 2010 increased $234.8 million compared to the same period in 2009, reflecting good growth in both ratings and MA revenue. The growth in ratings revenue is primarily due to strong issuance activity in 2010 within the corporate finance, financial institution and public finance debt markets. The growth in MA is due to higher revenue across all LOBs. Transaction revenue accounted for 44% of global MCO revenue in 2010 compared to 37% in the same period of the prior year.
U.S. revenue increased $168.7 million over 2009 reflecting growth in all ratings LOBs, most notably in rated issuance volumes for bank loans and speculative-grade corporate bonds. There was also good growth over the prior year in U.S. public finance and CREF rated issuance. Additionally, there was growth in all LOBs within the MA segment, most notably in RMS.
International revenue increased $66.1 million compared to the same period in 2009 primarily reflecting growth in CFG revenue, particularly in speculative-grade ratings in EMEA, coupled with higher banking related revenue across all regions. Additionally, the growth reflects higher revenue across all MA LOBs, primarily from within the Asia and the Americas regions. These increases were partially offset by declines in most asset classes within SFG as well as declines in investment-grade rated issuance within the EMEA region.
Operating expenses were $604.8 million in 2010, an increase of $72.4 million from the same period in 2009 and were primarily due to both higher compensation and non-compensation costs. Compensation costs increased approximately $63 million reflecting approximately $30 million higher incentive compensation primarily resulting from greater achievement against targeted results compared to achievement against targeted results in the prior year period, a $7 million global profit sharing contribution due to the Companys growth in diluted EPS over 2009 and approximately $29 million higher salaries and related employee benefits primarily due to annual merit increases coupled with higher headcount in both operating segments to support business growth. Non-compensation costs increased approximately $9 million reflecting higher professional service costs for ongoing investments in technology infrastructure as well as higher travel-related costs which reflects improving business conditions compared to 2009.
SG&A expenses of $588.0 million in 2010 increased $92.3 million from the same period in 2009. Non-compensation expenses increased approximately $47 million over the prior year primarily reflecting higher professional service costs relating to ongoing investments in technology infrastructure as well as higher legal and litigation-related costs related to ongoing matters. Compensation costs increased approximately $45 million primarily due to higher salaries and related employee benefits which reflects annual merit increases and headcount growth in sales personnel within MA as well as in support areas such as compliance and IT. Additionally there was approximately $10 million higher incentive compensation costs compared to 2009 which primarily reflects greater achievement against targeted results compared to the achievement of targeted results in the prior year period. Furthermore, there was an approximate $6 million profit sharing contribution in 2010 due to the Companys year-over-year growth in diluted EPS.
Restructuring expense in 2009 reflects severance costs associated with the 2009 Restructuring Plan approved on March 27, 2009 and adjustments to the previous estimates for both the 2007 and 2009 Restructuring Plans.
Operating income of $772.8 million was up $85.3 million from the same period in 2009, reflecting the 13% increase in revenue being partially offset by the $149.5 million increase in expenses. Excluding the restructuring charge in 2009 and minor restructuring-related adjustments in both periods, operating income increased $67.9 million over 2009.
Interest (expense) income, net for the year ended December 31, 2010 was $(52.5) million, a $19.1 million increase in expense compared to the same period in 2009. The increase relates primarily to an interest expense reduction of approximately $12 million in the first quarter of 2009 for UTBs and other tax-related liabilities that did not recur in 2010. Also, there was an approximate $7 million increase in interest expense on borrowings which primarily reflects interest on the 2010 Senior Notes issued in the third quarter of 2010. Additionally, there was interest income related to the favorable settlement of Legacy Tax Matters of $2.5 million and $6.5 million in 2010 and 2009, respectively.
Other non-operating (expense) income, net of $(5.9) million in 2010 decreased $2.0 million compared to the prior year. This decrease primarily reflects FX losses of approximately $(5) million in 2010 compared to losses of approximately $(10) million in 2009. The FX losses in both periods primarily reflect the weakening of the euro to the British pound over both of the twelve month periods ended December 31, 2010 and 2009.
Moodys ETR was 28.1% for the year ended December 31, 2010, down from 37.0% in 2009 and was primarily due to increased taxable income internationally; indefinite reinvestment of certain foreign earnings; utilization of foreign tax credits; lower state taxes; and a resolution of a non-U.S. tax audit resulting in a reduction of UTBs. Additionally, the 2009 ETR reflects a non-taxable $12 million interest expense reduction related to UTBs and other tax-related liabilities. The 2010 and 2009 tax expense included benefits of $2.1 million and $1.7 million, respectively, relating to the favorable resolution of Legacy Tax Matters (see Contingencies Legacy Tax Matters below for further information). Excluding the Legacy Tax Matters in both years, the ETR in 2010 of 28.5% decreased 910 Bps from 2009.
MOODYS 2011 10-K | 43 |
Net Income for the year ended December 31, 2010 was $507.8 million, or $2.15 per diluted share, and increased $105.8 million, or $0.46 per diluted share, compared to the prior year. Included in the 2010 Net Income were tax benefits of approximately $36 million, or $0.15 per diluted share, relating to the indefinite reinvestment of certain foreign earnings, utilization of foreign tax credits and lower state taxes. Excluding benefits for favorable resolutions of Legacy Tax Matters in both 2010 and 2009, as well as the restructuring charge in 2009 and related adjustments in both years, Net Income increased $98.6 million, or 24%, to $503.3 million, resulting in a $0.43, or 25%, increase in diluted EPS compared to the prior year.
Segment Results
Moodys Investors Service
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Year Ended December 31, | % Change Favorable (Unfavorable) |
|||||||||||
2010 | 2009 | |||||||||||
Revenue: | ||||||||||||
Corporate finance (CFG) |
$ | 563.9 | $ | 408.2 | 38 | % | ||||||
Structured finance (SFG) |
290.8 | 304.9 | (5 | %) | ||||||||
Financial institutions (FIG) |
278.7 | 258.5 | 8 | % | ||||||||
Public, project and infrastructure finance (PPIF) |
271.6 | 246.1 | 10 | % | ||||||||
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Total external revenue |
1,405.0 | 1,217.7 | 15 | % | ||||||||
Intersegment royalty |
61.3 | 60.0 | 2 | % | ||||||||
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|
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Total MIS Revenue |
1,466.3 | 1,277.7 | 15 | % | ||||||||
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|
|||||||||
Expenses: | ||||||||||||
Operating and SG&A (including intersegment expenses) |
781.5 | 674.7 | (16 | %) | ||||||||
Restructuring |
0.1 | 8.7 | 99 | % | ||||||||
Depreciation and amortization |
35.0 | 31.3 | (12 | %) | ||||||||
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|
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Total |
816.6 | 714.7 | (14 | %) | ||||||||
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|
|||||||||
Operating income | $ | 649.7 | $ | 563.0 | 15 | % | ||||||
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The following is a discussion of external MIS revenue as well as operating expenses:
Global MIS revenue of $1,405.0 million for the year ended December 31, 2010 increased $187.3 million compared to the same period in 2009. The increase reflects strong growth in rated issuance volumes for high-yield corporate debt and bank loans within CFG as well as good growth from public finance and banking related issuance within PPIF and FIG, respectively. These increases were partially offset by declines in derivatives and investment-grade corporate debt rated issuance volumes within SFG and CFG, respectively. Transaction revenue for MIS in 2010 was 57% of total revenue compared to 50% in 2009, with the increase primarily reflecting the aforementioned strong rated issuance in the high-yield corporate debt and bank loan sectors within CFG.
In the U.S., revenue was $815.4 million in 2010, an increase of $152.3 million, or 23%, compared to the same period in 2009. The increase relates primarily to strong rated issuance volumes in bank loans and high-yield corporate debt within CFG, higher rated issuance in the CREF sector within SFG and good growth in PPIF. These increases were partially offset by declines in derivatives and consumer asset-backed securities rated issuance within SFG.
Non-U.S. revenue was $589.6 million in 2010, an increase of $35.0 million, or 6%, over the prior year. The increase reflects growth in banking related revenue across all non-U.S. regions as well as higher speculative-grade corporate debt issuance in the EMEA region. Additionally, there was higher revenue in 2010 for Indicative Ratings and Corporate Family Ratings in the EMEA region. These increases were partially offset by declines within the EMEA region in most asset classes within SFG coupled with lower rated issuance volumes for investment-grade corporate debt.
Global CFG revenue of $563.9 million in 2010 increased $155.7 million from the prior year primarily due to higher rated issuance volumes in the high-yield corporate debt and bank loan sectors, coupled with an increase in Indicative Ratings and Corporate Family Ratings. The aforementioned growth was partially offset by declines in rated issuance for investment-grade corporate debt which reflects a strong prior year comparative period where many companies were refinancing their debt ahead of expected maturities.
44 | MOODYS 2011 10-K |
Transaction revenue represented 73% of total CFG revenue in 2010, compared to 64% in the prior year. In the U.S., revenue in 2010 was $369.5 million, or 47% higher than the same period in 2009. This increase is primarily due to higher bank loan issuance reflecting the narrowing of credit spreads and the low interest rate environment in 2010 which has resulted in a high volume of refinancing activity coupled with increased issuance related to leveraged buy-out activity. Additionally, there was higher speculative-grade corporate debt issuance reflecting increased investor appetite for high-yield instruments as stability has gradually returned to the corporate credit markets. Internationally, revenue of $194.4 million in 2010 increased 24% compared to the same period in 2009, driven primarily by growth in rated issuance volumes for speculative-grade corporate debt across all regions which reflects the aforementioned increased investor confidence in the high-yield markets coupled with higher revenue from Indicative Ratings and Corporate Family Ratings in the EMEA region. These increases were partially offset by declines in investment-grade rated issuance in EMEA reflecting a strong comparative prior year period where many companies were refinancing their debt ahead of expected maturities.
Global SFG revenue of $290.8 million in 2010 decreased $14.1 million compared to the same period in 2009 reflecting lower revenue in the derivatives and consumer asset-backed securities asset classes partially offset by increased rated issuance activity in U.S. CREF. Transaction revenue represented 43% of total SFG revenue in 2010 compared to 41% in the prior year period. In the U.S., revenue of $142.9 million in 2010 increased $0.8 million compared to the prior year reflecting growth in both commercial mortgage-backed securities and real estate investment trusts rated issuance resulting from the low interest rate environment and narrowing credit spreads in these sectors. The aforementioned growth was almost completely offset by continued declines in the derivatives sector as well as declines in consumer asset-backed securities issuance reflecting continued lack of investor demand as well as regulatory uncertainties pertaining to these asset classes. Non-U.S. revenue of $147.9 million in 2010 decreased $14.9 million compared to the prior year, reflecting declines in most asset classes within the EMEA region as uncertainties surrounding the EU sovereign debt markets at various times throughout 2010 has reduced investor demand for structured products.
Global FIG revenue of $278.7 million in 2010 increased $20.2 million from the prior year, primarily reflecting higher banking related revenue. Transaction revenue increased to 37% of global FIG revenue, up from 31% in the prior year period. In the U.S., revenue of $114.4 million in 2010 increased $7.1 million compared to the prior year. The growth over the prior year was driven by higher insurance related rated issuance which reflected insurers taking advantage of the low interest rate environment in 2010 to refinance debt ahead of expected maturities as well as issuance to fund acquisition activity. Outside the U.S., revenue in 2010 was $164.3 million, or 9% higher than in the prior year, and was primarily due to growth in banking revenue across all non-U.S. regions, most notably in the Asia and Americas regions, compared to a challenging prior year period.
Global PPIF revenue was $271.6 million in 2010, an increase of $25.5 million compared to the same period in 2009, primarily reflecting increases in public and project finance revenue. Revenue generated from new transactions was 59% of total PPIF revenue in 2010, unchanged from the prior year period. In the U.S., revenue for the year ended December 31, 2010 of $188.6 million increased 16% over the prior year primarily due to growth in public finance revenue which reflects modest price increases compared to the prior year coupled with issuance relating to the Build America Bond Program which was implemented in the U.S. as part of the American Recovery and Reinvestment Act of 2009. Additionally, there was higher project and infrastructure finance revenue as issuers took advantage of the low interest rate environment and the Build America Bond Program to fund capital expenditure needs. Outside the U.S., PPIF revenue decreased 1% compared to prior year reflecting declines in infrastructure and project finance revenue within the EMEA region due to uncertainties in the EU debt markets at various times during 2010 coupled with a strong comparative prior year period. These decreases were offset by higher project finance rated issuance in the Asia and Americas regions.
Operating and SG&A expenses in 2010 increased $106.8 million compared to the prior year and reflected increases in compensation and non-compensation expenses of approximately $63 million and $45 million, respectively. The increase in compensation expenses relates to higher salaries reflecting annual merit increases, modest headcount growth within the ratings LOBs as well as support areas such as compliance and IT for which the costs are allocated to each segment based on a revenue-split methodology. Additionally, there was higher incentive compensation due to greater achievement against targeted results in 2010 compared to the achievement against targeted results in the prior year. Furthermore, there was a profit sharing contribution in 2010 reflecting the Companys diluted EPS growth over 2009. The increase in non-compensation expenses primarily reflects higher legal and litigation- related costs relating to ongoing matters and higher IT consulting costs relating to investments in technology infrastructure.
The restructuring charge of $8.7 million in the prior year period reflects costs associated with the 2009 Restructuring Plan approved in the first quarter of 2009 as well as minor adjustments made to both the 2009 and 2007 restructuring plans.
Operating income in 2010 of $649.7 million, which includes the intersegment royalty revenue, increased $86.7 million from the prior year and reflects the 15% increase in total MIS revenue exceeding the 14% increase in operating expenses. Excluding the restructuring-related amounts in both periods, operating income in 2010 was $649.8 million, an increase of $78.1 million from the same period in 2009.
MOODYS 2011 10-K | 45 |
Moodys Analytics
The table below provides a summary of revenue and operating results, followed by further insight and commentary:
Year Ended December 31, | % Change Favorable (Unfavorable) |
|||||||||||
2010 | 2009 | |||||||||||
Revenue: | ||||||||||||
Research, data and analytics (RD&A) |
$ | 425.0 | $ | 413.6 | 3 | % | ||||||
Risk management software (RMS) |
173.2 | 145.1 | 19 | % | ||||||||
Professional services |
28.8 | 20.8 | 38 | % | ||||||||
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Total external revenue |
627.0 | 579.5 | 8 | % | ||||||||
|
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|
|
|||||||||
Intersegment license fees | 9.3 | 10.6 | (12 | %) | ||||||||
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|
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Total |
636.3 | 590.1 | 8 | % | ||||||||
|
|
|
|
|||||||||
Expenses: | ||||||||||||
Operating and SG&A (including intersegment expenses) |
481.9 | 424.0 | (14 | %) | ||||||||
Restructuring |
| 8.8 | 100 | % | ||||||||
Depreciation and amortization |
31.3 | 32.8 | (5 | %) | ||||||||
|
|
|
|
|||||||||
Total |
513.2 | 465.6 | (10 | %) | ||||||||
|
|
|
|
|||||||||
Operating income | $ | 123.1 | $ | 124.5 | (1 | %) | ||||||
|
|
|
|
Global MA revenue in 2010 increased $47.5 million over the prior year primarily reflecting growth in all three LOBs. Recurring revenue, which includes subscriptions and software maintenance fees, comprised 85% of MA revenue in 2010, down from 89% in the same period of 2009.
Revenue in the U.S. increased $16.4 million, or 6%, over the prior year and reflected growth across all LOBs, most notably in RMS. International revenue, which represented 56% of total MA revenue in both 2010 and 2009, increased 10% over the prior year reflecting growth in all LOBs.
Global RD&A revenue, which comprised over 67% of total MA revenue in both 2010 and 2009, increased $11.4 million, or 3%, over the prior year. The increase reflects greater demand for products that support analysis for investment and commercial credit applications and also the gradual stabilization among capital markets customers as disruption from the global financial crisis recedes. Global RMS revenue in 2010 increased $28.1 million over the prior year primarily due to the final delivery and client acceptance of software licenses and implementations, primarily from within the U.S and Asia regions. Revenue from professional services increased $8.0 million compared to 2009, with approximately 40% of the growth related to the acquisition of CSI in the fourth quarter of 2010. Revenue in the RMS and professional services LOBs are subject to quarterly volatility resulting from the variable nature of project timing and the concentration of revenue in a relatively small number of engagements.
Operating and SG&A expenses in 2010, which include the intersegment royalty for the right to use and distribute content, data and products developed by MIS, increased $57.9 million compared to 2009 reflecting both higher compensation and non-compensation costs of approximately $45 million and $12 million, respectively. The increase in compensation costs is primarily due to higher incentive compensation reflecting greater achievement against targeted results in 2010 compared to achievement against targeted results in the prior year coupled with a profit sharing contribution in 2010 reflecting the Companys diluted EPS growth over 2009. Additionally, there were higher salaries reflecting annual merit increases and headcount increases to support business growth coupled with an increase in commission expense compared to the prior year reflecting higher MA sales. The increase in non-compensation costs reflects higher legal and litigation-related costs relating to ongoing matters that Moodys Corporation is exposed to, which are allocated to MA as part of the allocation of overhead and corporate expenses which is based on a revenue-split methodology. Additionally, the increase in non-compensation expenses reflects higher travel and entertainment costs due to improving business conditions over the prior year.
The restructuring charge of $8.8 million in the prior year period reflects severance costs associated with the 2009 Restructuring Plan approved in the first quarter of 2009, which includes costs related to the divestiture of non-strategic assets and contract termination costs for office closures as well as minor adjustments made to original estimates for the 2007 Restructuring Plan.
46 | MOODYS 2011 10-K |
Operating income of $123.1 million in 2010, which includes the intersegment royalty expense, decreased $1.4 million compared to the prior year, reflecting the $47.6 million increase in total expenses exceeding the $46.2 million increase in revenue. Excluding the 2009 restructuring charge and minor restructuring-related adjustments for both restructuring plans in 2009, operating income decreased $10.2 million from the same period in 2009.
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. These non-GAAP financial measures relate to expenses and adjustments made to both the Companys 2007 and 2009 Restructuring Plans and Legacy Tax Matters, further described in Note 11 and Note 18, respectively, to the Companys consolidated financial statements. The table below shows Moodys consolidated results for each of the years ended December 31, 2011, 2010 and 2009, adjusted to exclude the impact of the aforementioned items:
Year Ended December 31, | ||||||||||||||||||||||||||||
Amounts in millions, except per share amounts |
2011 | 2010 | ||||||||||||||||||||||||||
As Reported |
Legacy Tax (a) |
Non-GAAP Financial Measures |
As Reported |
Restructuring (b) | Legacy Tax (a) |
Non-GAAP Financial Measures |
||||||||||||||||||||||
Total expenses | $ | 1,392.3 | $ | | $ | 1,392.3 | $ | 1,259.2 | $ | (0.1 | ) | $ | | $ | 1,259.1 | |||||||||||||
Operating income | $ | 888.4 | $ | | $ | 888.4 | $ | 772.8 | $ | 0.1 | $ | | $ | 772.9 | ||||||||||||||
Interest (expense), income, net | $ | (62.1 | ) | $ | (0.9 | ) | $ | (63.0 | ) | $ | (52.5 | ) | $ | | $ | (2.5 | ) | $ | (55.0 | ) | ||||||||
Other non-operating (expense) income, net | $ | 13.5 | $ | (6.4 | ) | $ | 7.1 | $ | (5.9 | ) | $ | | $ | | $ | (5.9 | ) | |||||||||||
Provision for income taxes | $ | 261.8 | $ | (0.3 | ) | $ | 261.5 | $ | 201.0 | $ | | $ | 2.1 | $ | 203.1 | |||||||||||||
Net income attributable to Moodys Corporation | $ | 571.4 | $ | (7.0 | ) | $ | 564.4 | $ | 507.8 | $ | 0.1 | $ | (4.6 | ) | $ | 503.3 | ||||||||||||
Earnings per share attributable to Moodys common shareholders | ||||||||||||||||||||||||||||
Basic |
$ | 2.52 | $ | (0.03 | ) | $ | 2.49 | $ | 2.16 | $ | | $ | (0.02 | ) | $ | 2.14 | ||||||||||||
Diluted |
$ | 2.49 | $ | (0.03 | ) | $ | 2.46 | $ | 2.15 | $ | | $ | (0.02 | ) | $ | 2.13 |
Year Ended December 31, | ||||||||||||||||
2009 | ||||||||||||||||
As Reported |
Restructuring (b) | Legacy Tax (a) |
Non-GAAP Financial Measures |
|||||||||||||
Total expenses | $ | 1,109.7 | $ | (17.5 | ) | $ | | $ | 1,092.2 | |||||||
Operating income | $ | 687.5 | $ | 17.5 | $ | | $ | 705.0 | ||||||||
Interest (expense) income, net | $ | (33.4 | ) | $ | | $ | (6.5 | ) | $ | (39.9 | ) | |||||
Provision for income taxes | $ | 239.1 | $ | 6.6 | $ | 1.7 | $ | 247.4 | ||||||||
Net income attributable to Moodys Corporation | $ | 402.0 | $ | 10.9 | $ | (8.2 | ) | $ | 404.7 | |||||||
Earnings per share attributable to Moodys common shareholders | ||||||||||||||||
Basic |
$ | 1.70 | $ | 0.05 | $ | (0.04 | ) | $ | 1.71 | |||||||
Diluted |
$ | 1.69 | $ | 0.05 | $ | (0.04 | ) | $ | 1.70 |
(a) | To exclude benefits and related tax resulting from the resolution of certain Legacy Tax Matters. |
(b) | To exclude amounts related to the 2009 restructuring charge as well as minor adjustments related to both the 2009 and 2007 restructuring charges. |
Additionally, | includes the tax impacts of the aforementioned adjustments. |
MOODYS 2011 10-K | 47 |
Foreign exchange risk:
Moodys maintains a presence in 27 countries outside the U.S. In 2011, approximately 47% and 51% of the Companys revenue and expenses, respectively, were in currencies other than the U.S. dollar, principally in the GBP and the euro. As such, the Company is exposed to market risk from changes in FX rates. As of December 31, 2011, approximately 55% of Moodys assets were located outside the United States making the Company susceptible to fluctuations in FX rates. The effects of translating assets and liabilities of non-U.S. operations with non-U.S. functional currencies to the U.S. dollar are charged or credited to the cumulative translation adjustment account in the consolidated statements of shareholders equity (deficit).
The effects of revaluing assets and liabilities that are denominated in currencies other than an entitys functional currency are charged to other non-operating income (expense), net in the Companys consolidated statements of operations. Accordingly, the Company enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than an entitys functional currency. If all foreign currencies in the Companys foreign exchange forward portfolio were to devalue 10% compared to the U.S. dollar, there would be an approximate $3 million unfavorable impact to the fair value of the forward contracts. This unfavorable change in fair value of the foreign exchange forward contracts would be offset by favorable FX revaluation gains in future earnings on underlying assets and liabilities denominated in currencies other than an entitys functional currency. Additional information on the Companys forward contracts can be found in Note 5 to the consolidated financial statements located in Item 8 of this Form 10K.
Credit and Interest rate risk:
The Companys interest rate risk management objective is to reduce the funding cost and volatility to the Company and to alter the interest rate exposure to the desired risk profile. Moodys uses interest rate swaps as deemed necessary to assist in accomplishing this objective.
The Company is exposed to interest rate risk as it relates to its floating rate $150 million 2008 Term Loan entered into on May 7, 2008. The Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate. These swaps are adjusted to fair market value based on prevailing interest rates at the end of each reporting period and fluctuations related to unrealized gains and losses are recorded into AOCI, while net interest payments are recorded in interest expense (income), net in the consolidated statements of operations. A hypothetical change of 100bps in the LIBOR-based swap rate would result in an approximate $1 million change to the fair value of these interest rate swaps which would be recognized in the statement of operations over the swaps remaining contractual term. Additional information on this interest rate swap is disclosed in Note 5 to the consolidated financial statements located in Item 8 of this Form 10K.
Additionally, the Company is exposed to interest rate risk on its various outstanding fixed rate debt for which the fair value of the outstanding fixed rate debt fluctuates based on changes in interest rates. The Company entered into interest rate swaps with a total notional amount of $300 million in the fourth quarter of 2010 to convert the fixed rate of interest on its $300 million Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. These swaps are adjusted to fair market value based on prevailing interest rates at the end of each reporting period and fluctuations are recorded as a reduction or addition to the carrying value of the Series 2005-1 Notes, while net interest payments are recorded as interest expense/income in the Companys consolidated statements of operations. A hypothetical change of 100bps in the LIBOR-based swap rate would result in an approximate $12 million change to the fair value of these interest rate swaps. Additional information on this interest rate swap is disclosed in Note 5 to the consolidated financial statements located in Item 8 of this Form 10K.
Moodys aggregate cash and cash equivalents of $760.0 million at December 31, 2011 consisted of approximately $550 million located outside the U.S. Moodys cash equivalents consist of investments in high-quality investment-grade securities within and outside the U.S. with maturities of three months or less when purchased. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high-grade commercial paper and by limiting the amount it can invest with any single issuer. Short-term investments primarily consist of certificates of deposit and high quality investment-grade corporate bonds in Korea.
48 | MOODYS 2011 10-K |
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The Company is currently financing its operations, capital expenditures and share repurchases through cash flow from operations.
The following is a summary of the changes in the Companys cash flows followed by a brief discussion of these changes:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2011 | 2010 | $ Change Favorable (unfavorable) |
2010 | 2009 | $ Change Favorable (unfavorable) |
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Net cash provided by operating activities | $ | 803.3 | $ | 653.3 | $ | 150.0 | $ | 653.3 | $ | 643.8 | $ | 9.5 | ||||||||||||
Net cash used in investing activities | $ | (267.6 | ) | $ | (228.8 | ) | $ | (38.8 | ) | $ | (228.8 | ) | $ | (93.8 | ) | $ | (135.0 | ) | ||||||
Net cash used in financing activities | $ | (417.7 | ) | $ | (241.3 | ) | $ | (176.4 | ) | $ | (241.3 | ) | $ | (348.8 | ) | $ | 107.5 |
Net cash provided by operating activities
Year ended December 31, 2011 compared to the year ended December 31, 2010:
The $150.0 million increase in net cash flows provided by operating activities resulted from an increase in net income of $64.6 million, which was further impacted by the following changes in assets and liabilities:
| An approximate $118 million increase in cash flows reflecting lower prepaid tax balances in 2011 resulting from both a refund received from the Internal Revenue Service in 2011 for tax overpayments made in 2010 as well as the application of a portion of the aforementioned overpayments to 2011 quarterly estimated tax payments; |
| A $71.5 million increase in cash flow due to higher cash collections in the twelve months ended December 31, 2011 compared to the same period in 2010 reflecting the collection of fees billed in the fourth quarter of 2010 and the first half of 2011 when there was strong growth in rated issuance volumes within CFG, particularly in high-yield corporate debt and bank loans. A decline in rated issuance volumes in the second half of 2011 resulted in steeper declines in accounts receivable balances in 2011 compared to 2010. Approximately 25% and 21% of the Companys accounts receivable balance at December 31, 2011 and 2010, respectively, represent unbilled receivables which primarily reflect certain annual fees in MIS which are invoiced in arrears; |
| An approximate $65 million decrease in cash flows reflecting higher incentive compensation payments made in 2011 compared to the prior year. The higher payouts in 2011 reflect greater achievement against targeted results in 2010 as compared to achievement against targets in 2009. Additionally, the decrease reflects a profit sharing contribution paid to eligible employees of the Company in 2011 which was based on the Companys diluted EPS growth from 2009 to 2010. There was no such contribution made in 2010; |
| A decrease in cash flow of approximately $26 million relating to contributions and payments made by the Company to its funded and unfunded U.S. DBPPs and its U.S. other post-retirement plans in 2011; |
| The remaining decrease in cash flows of approximately $13 million is due to changes in various other assets and liabilities. |
Year ended December 31, 2010 compared to the year ended December 31, 2009:
The $9.5 million increase in net cash flows provided by operating activities resulted from an increase in net income of $106.3 million, which was partially offset by the following:
| A $27.1 million reduction in cash flow related to a non-cash benefit from deferred income taxes primarily related to basis differences on non-U.S. earnings that are permanently reinvested as well as accruals for legal and litigation-related costs; |
| A $39.5 million reduction in cash flow due to changes in year-to-date accounts receivable balances from December 31, 2008 to December 31, 2009 compared to the same periods in 2010. The higher accounts receivable balances in 2010 reflect stronger fundamental ratings issuance in the fourth quarter of 2010 as compared to the same period in 2009 as well as timing of billings for certain software maintenance fees within the MA segment; |
| An approximate $108 million reduction in cash flows reflecting higher prepaid tax balances in 2010, which are included in other current assets, resulting from higher than anticipated estimated tax payments in excess of required amounts; |
| A $51.8 million increase in cash flows from UTBs primarily related to a $51 million payment in 2009 for the settlement of a tax audit for the 2001-2007 tax years; |
MOODYS 2011 10-K | 49 |
| An approximate $29 million increase in cash flows reflecting higher incentive compensation accruals as compared to the prior year, which are included in accounts payable and accrued liabilities. This increase reflects greater achievement against targeted results in 2010 compared to achievement against targeted results in the prior year and an accrual for a profit sharing contribution based on the Companys diluted EPS growth over 2009. |
Net cash used in investing activities
Year ended December 31, 2011 compared to the year ended December 31, 2010:
Net cash used in investing activities in 2011 increased $38.8 million compared to the prior year period with the 2011 cash outflow primarily reflecting payments made, net of cash acquired, for Copal and B&H. The 2010 amount primarily reflects payments made, net of cash acquired, for the acquisition of CSI in the fourth quarter of 2010. The $11.3 million reduction in capital expenditures compared to 2010 primarily reflects a decrease in costs relating to the build-out of the Canary Wharf leased facility in London, England in the current year as the project is now complete.
Year ended December 31, 2010 compared to the year ended December 31, 2009:
Net cash used in investing activities in 2010 increased $135.0 million compared to the prior year period and reflected payments made, net of cash acquired, for the acquisition of CSI in the fourth quarter of 2010 of $148.6 million. The $11.7 million reduction in capital expenditures compared to 2009 reflects less costs relating to the build-out the Canary Wharf leased facility in London, England in the current year as the project nears completion partially offset by higher cash outlays relating to the Companys continued investment in IT infrastructure.
Net cash used in financing activities
Year ended December 31, 2011 compared to the year ended December 31, 2010:
The $176.4 million increase in cash used in financing activities was primarily attributed to:
| A $110.2 million increase in treasury shares repurchased compared to 2010; |
| Higher dividends paid of $22.4 million due to an increase in the March 2011 payout reflecting an increase in the Companys quarterly dividend from 10.5 cents to 11.5 cents per share of Moodys common stock as well as an increase from 11.5 cents per share to 14 cents per share for the June, September and December 2011 payout; |
| Proceeds received in August 2010 of $496.9 million relating to the issuance of the 2010 Senior Notes; |
Partially offset by:
| A $443.6 million decrease in net repayments on short-term borrowings under the Companys CP program. The Company had paid all outstanding CP Notes during 2010 and has no borrowings outstanding under the CP program or the revolving credit facility as of December 31, 2011. |
Year ended December 31, 2010 compared to the year ended December 31, 2009:
The $107.5 million decrease in cash used in financing activities was primarily attributed to:
| Proceeds received of $496.9 million relating to the issuance of the 2010 Senior Notes in August 2010; |
Partially offset by:
| A $223.6 million increase in treasury shares repurchased. There were no share repurchases in 2009 as the Company instead utilized its operating cash flow to repay outstanding borrowings; |
| A $169.6 million increase in net repayments in short-term borrowings under the Companys CP program and revolving credit facility. |
Cash held in non-U.S. jurisdictions
The Companys aggregate cash and cash equivalents of $760.0 million at December 31, 2011 consisted of approximately $550 million located outside of the U.S. The cash held in the Companys non-U.S. operations contains approximately $438 million in 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.
50 | MOODYS 2011 10-K |
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 in related businesses, repurchasing stock and paying a dividend, all in the manner consistent with maintaining sufficient liquidity. In December of 2011, the Board of Directors of the Company declared a quarterly dividend of $0.16 per share of Moodys common stock, payable on March 10, 2012 to shareholders of a record at the close of business on February 20, 2012. The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board. Additionally, the Company expects to continue share repurchases in 2012 subject to available cash flow, market conditions and other capital allocation decisions. The Company repurchased $333.8 million of shares in the year ended December 31, 2011. As of December 31, 2011, Moodys had $0.9 billion of share repurchase authority remaining under its current program, which does not have an established expiration.
In January 2012, the Company paid approximately $89 million to New York State for tax assessments, including interest, related to the completion of audits for the years 2004-2010. The Company had accrued for this liability as of December 31, 2011 and thus the payment is not expected to have a material impact to the provision for income taxes or Net Income in 2012. The Company anticipates making additional payments totaling $30 to $40 million in 2012 relating to the potential settlement of various tax audits.
As part of the Copal acquisition in November 2011, Moodys and the non-controlling shareholders entered into a put/call arrangement whereby the noncontrolling shareholders have the option to sell the portion of Copal that Moodys does not currently own and Moodys has the option to purchase this portion from the noncontrolling shareholders. The exercise price of this option was valued at $68 million at the time of acquisition and will fluctuate based the financial results of Copal subject to a floor exercise price of approximately $46 million. There is no limit as to the amount of the strike price on the put/call option. It is estimated that the exercise of the put/call arrangement will take place in the next three to six years based on a Monte Carlo simulation. This put/call arrangement expires on the sixth anniversary date of the acquisition.
At December 31, 2011, Moodys had $1.2 billion of outstanding debt, which is further described in the Indebtedness section of this MD&A below, with $1.0 billion of additional capacity available. Principal payments on the 2008 Term Loan commenced in September 2010 and will continue through its maturity in accordance with the schedule of payments outlined in the Indebtedness section of this MD&A below.
On February 6, 2008, the Company entered into a 17.5 year operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The total base rent of the Canary Wharf Lease over its 17.5-year term is approximately 134 million GBP, and the Company began making base rent payments in 2011. In addition to the base rent payments the Company will be obligated to pay certain customary amounts for its share of operating expenses and tax obligations. The total remaining lease payments as of December 31, 2011 are approximately 130 million GBP, of which approximately 7 million GBP will be paid in the next twelve months.
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 base rent of 7WTC Lease over its initial 21-year term is approximately $536 million including rent credits from the World Trade Center Rent Reduction Program promulgated by the Empire State Development Corporation. On March 28, 2007, the 7WTC lease agreement was amended for the Company to lease an additional 78,568 square-feet at 7WTC. The additional base rent is approximately $106 million over a 20-year term. The total remaining lease payments as of December 31, 2011, including the aforementioned rent credits, are approximately $536 million, of which approximately $29 million will be paid during the next twelve months.
During the year ended December 31, 2012, the Company anticipates making contributions of $17.5 million to its funded pension plan and anticipates making payments of $3.0 million to its unfunded U.S. pension plans and $0.8 million to its other U.S. post-retirement plans.
MOODYS 2011 10-K | 51 |
INDEBTEDNESS
The following table summarizes total indebtedness:
December 31, | ||||||||
2011 | 2010 | |||||||
2007 Facility | $ | | $ | | ||||
Commercial paper | | | ||||||
Notes payable: | ||||||||
Series 2005-1 Notes due 2015, including fair value of interest rate swap of $11.5 million at 2011 and $(3.7) million at 2010 |
311.5 | 296.3 | ||||||
Series 2007-1 Notes due in 2017 |
300.0 | 300.0 | ||||||
2010 Senior Notes, due 2020, net of unamortized discount of $2.7 million and $3.0 million in 2011 and 2010, respectively |
497.3 | 497.0 | ||||||
2008 Term Loan, various payments through 2013 | 135.0 | 146.3 | ||||||
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Total debt | 1,243.8 | 1,239.6 | ||||||
Current portion | (71.3 | ) | (11.3 | ) | ||||
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Total long-term debt | $ | 1,172.5 | $ | 1,228.3 | ||||
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2007 Facility
On September 28, 2007, the Company entered into a $1.0 billion five-year senior, unsecured revolving credit facility, expiring in September 2012. The 2007 Facility will serve, in part, to support the Companys CP Program described below. Interest on borrowings is payable at rates that are based on LIBOR plus a premium that can range from 16.0 to 40.0 basis points of the outstanding borrowing amount depending on the Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range from 4.0 to 10.0 basis points per annum of the facility amount, depending on the Companys Debt/EBITDA ratio. The Company also pays a utilization fee of 5.0 basis points on borrowings outstanding when the aggregate amount outstanding exceeds 50% of the total facility. The 2007 Facility contains certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.
Commercial Paper
On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Companys 2007 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods.
Notes Payable
On November 4, 2011, in connection with the acquisition of Copal, a subsidiary of the Company issued a $14.2 million non-interest bearing note to the sellers which represented a portion of the consideration transferred to acquire the Copal entities. If a seller subsequently transfers to the Company all of its shares, the Company must repay the seller its proportion of the principal on the later of (i) the fourth anniversary date of the note or (ii) within a time frame set forth in the acquisition agreement relating to the resolution of certain income tax uncertainties pertaining to the transaction. Otherwise, the Company must repay any amount outstanding on the earlier of (i) two business days subsequent to the exercise of the put/call option to acquire the remaining shares of Copal of (ii) the tenth anniversary date of the issuance of the note. The Company has the right to offset payment of the note against certain indemnification assets associated with UTPs related to the acquisition, which are more fully discussed in Note 7. Accordingly, the Company has offset the liability for this note against the indemnification asset, thus no balance for this note is carried on the Companys consolidated balance sheet at December 31, 2011. In the event that the Company would not be required to settle amounts related
52 | MOODYS 2011 10-K |
to the UTPs, the Company would be required to pay the sellers the principal in accordance with the note agreement. The Company may prepay the note in accordance with certain terms set forth in the acquisition agreement.
On August 19, 2010, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2010 Senior Notes bear interest at a fixed rate of 5.50% and mature on September 1, 2020. Interest on the 2010 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2011. The Company may prepay the 2010 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a Change of Control Triggering Event, as defined in the Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Companys or certain of its subsidiaries indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the Indenture, the notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.
On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. Under the terms of the 2007 Agreement, the Company may, from time to time within five years, in its sole discretion, issue additional series of senior notes in an aggregate principal amount of up to $500.0 million pursuant to one or more supplements to the 2007 Agreement. The Company may prepay the Series 2007-1 Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. The 2007 Agreement contains covenants that limit the ability of the Company, and certain of its subsidiaries to, among other things: enter into transactions with affiliates, dispose of assets, incur or create liens, enter into any sale-leaseback transactions, or merge with any other corporation or convey, transfer or lease substantially all of its assets. The Company must also not permit its Debt/EBITDA ratio to exceed 4.0 to 1.0 at the end of any fiscal quarter.
On September 30, 2005, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes due 2015 pursuant to the 2005 Agreement. The Series 2005-1 Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. Proceeds from the sale of the Series 2005-1 Notes were used to refinance $300.0 million aggregate principal amount of the Companys outstanding 7.61% senior notes which matured on September 30, 2005. In the event that Moodys pays all, or part, of the Series 2005-1 Notes in advance of their maturity, such prepayment will be subject to a Make Whole Amount. The Series 2005-1 Notes are subject to certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.
2008 Term Loan
On May 7, 2008, Moodys entered into a five-year, $150.0 million senior unsecured term loan with several lenders. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan is payable quarterly at rates that are based on LIBOR plus a margin that can range from 125 basis points to 175 basis points depending on the Companys Debt/EBITDA ratio. The outstanding borrowings shall amortize in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.
The 2008 Term Loan contains restrictive covenants that, among other things, restrict the ability of the Company to engage or to permit its subsidiaries to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur, or permit its subsidiaries to incur, liens, in each case, subject to certain exceptions and limitations. The 2008 Term Loan also limits the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.
MOODYS 2011 10-K | 53 |
The principal payments due on the Companys long-term borrowings for each of the next five years are presented in the table below:
2008 Term Loan | Series 2005-1 Notes | Total | ||||||||||
Year Ending December 31, |
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2012 | $ | 71.3 | $ | | $ | 71.3 | ||||||
2013 | 63.7 | | 63.7 | |||||||||
2014 | | | | |||||||||
2015 | | 300.0 | 300.0 | |||||||||
2016 | | | | |||||||||
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Total | $ | 135.0 | $ | 300.0 | $ | 435.0 | ||||||
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In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which will convert the fixed rate of interest on the Series 2005-1 Notes to a floating LIBOR-based interest rate. Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan. Both of these interest rate swaps are more fully discussed in Note 5 above.
INTEREST EXPENSE, NET
The following table summarizes the components of interest as presented in the consolidated statements of operations:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Income | $ | 5.3 | $ | 3.1 | $ | 2.5 | ||||||
Expense on borrowings | (65.5 | ) | (52.2 | ) | (45.5 | ) | ||||||
UTBs and other tax related interest | (8.7 | ) | (7.7 | ) | 1.6 | |||||||
Legacy Tax (a) | 3.7 | 2.5 | 6.5 | |||||||||
Interest capitalized | 3.1 | 1.8 | 1.5 | |||||||||
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Total | $ | (62.1 | ) | $ | (52.5 | ) | $ | (33.4 | ) | |||
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Interest paid | $ | 67.2 | $ | 44.0 | $ | 46.1 | ||||||
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(a) | Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 18 to the consolidated financial statements. |
Net interest expense of $33.4 million in 2009 reflects a reduction of approximately $12 million related to tax and tax-related liabilities.
At December 31, 2011, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes and the 2008 Term Loan contain cross default provisions whereby 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.
The Companys long-term debt, including the current portion, is recorded at cost except for the Series 2005-1 Notes which are carried at cost adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Companys long-term debt as of December 31, 2011 and 2010 is as follows:
December 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Series 2005-1 Notes* | $ | 311.5 | $ | 316.5 | $ | 296.3 | $ | 310.6 | ||||||||
Series 2007-1 Notes | 300.0 | 332.7 | 300.0 | 321.3 | ||||||||||||
2010 Senior Notes | 497.3 | 525.6 | 497.0 | 492.1 | ||||||||||||
2008 Term Loan | 135.0 | 135.0 | 146.3 | 146.3 | ||||||||||||
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Total | $ | 1,243.8 | $ | 1,309.8 | $ | 1,239.6 | $ | 1,270.3 | ||||||||
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* The | carrying amount includes an $11.5 million and ($3.7) million fair value adjustment on an interest rate hedge at December 31, 2011 and 2010, respectively. |
54 | MOODYS 2011 10-K |
The fair value of the Companys 2010 Senior Notes is based on quoted market prices. The fair value of the remaining long-term debt, which is not publicly traded, is estimated using discounted cash flows based on prevailing interest rates available to the Company for borrowings with similar maturities.
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.
Off-Balance Sheet Arrangements
At December 31, 2011, 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.
Contractual Obligations
The following table presents payments due under the Companys contractual obligations as of December 31, 2011:
Payments Due by Period | ||||||||||||||||||||
(in millions) |
Total | Less Than 1 Year |
1-3 Years | 3-5 Years | Over 5 Years | |||||||||||||||
Indebtedness(1) | $ | 1,638.5 | $ | 132.3 | $ | 176.3 | $ | 401.6 | $ | 928.3 | ||||||||||
Operating lease obligations | 851.7 | 73.6 | 134.1 | 106.2 | 537.8 | |||||||||||||||
Purchase obligations | 124.3 | 54.0 | 69.8 | 0.5 | | |||||||||||||||
Contingent consideration related to acquisitions(2) | 2.5 | | | 2.5 | | |||||||||||||||
Pension obligations(3) | 106.1 | 21.3 | 9.8 | 11.4 | 63.6 | |||||||||||||||
Payment of UTPs(4) | 119.9 | 119.9 | | | | |||||||||||||||
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Total(5) | $ | 2,843.0 | $ | 401.1 | $ | 390.0 | $ | 522.2 | $ | 1,529.7 | ||||||||||
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(1) | Reflects principal payments, related interest and applicable fees due on the 2008 Term Loan, the Series 2005-1 Notes, the Series 2007-1 Notes, the 2010 Senior Notes, borrowings under the CP Program and the 2007 Facility, as described in Note 15 to the consolidated financial statements |
(2) | Reflects a $2.5 million contingent cash payment related to the November 18, 2010 acquisition of CSI Global Education, Inc. The cash payment is dependent upon the achievement of a certain contractual milestone by January 2016 |
(3) | Reflects projected benefit payments for the next ten years relating to the Companys U.S. unfunded Post-Retirement Benefit Plans described in Note 12 to the condensed consolidated financial statements |
(4) | Reflects the projected settlement of UTPs in various tax jurisdictions |
(5) | The table above does not include the Companys net long-term tax liabilities of $138.2 million relating to UTP and Legacy Tax Matters, since the expected cash outflow of such amounts by period cannot be reasonably estimated. The table above does not include the following relating to the acquisition of Copal; (i) the $14.2 million note payable as described in Note 15 to the consolidated financial statements, (ii) the $6.8 million contingent consideration obligation and the (iii) the $60.5 million Redeemable Noncontrolling Interest, as the expected cash outflow of such amounts by period cannot be reasonably estimated. |
Moodys outlook for 2012 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, and consumer borrowing and securitization. There is an important degree of uncertainty surrounding these assumptions and, if actual conditions differ from these assumptions, Moodys results for the year may differ materially from the current outlook. The Companys guidance assumes foreign currency translation at end-of-quarter exchange rates.
For Moodys overall, the Company expects full-year 2012 revenue to grow in the high-single to low-double-digit percent range. Full-year 2012 expenses are also projected to increase in the high-single to low-double-digit percent range. Full-year 2012 operating margin is projected to be approximately 39 percent. The effective tax rate is expected to be approximately 33 percent. The Company expects diluted earnings per share for full-year 2012 in the range of $2.62 to $2.72.
For the global MIS business, revenue for full-year 2012 is expected to increase in the mid-single-digit percent range. Within the U.S., MIS revenue is expected to increase in the low-double-digit percent range, while non-U.S. revenue is expected to be about flat. Corporate finance revenue is forecasted to grow in the high-single-digit percent range. Revenue from each of structured finance and financial institutions is projected to be flat to slightly down, while public, project and infrastructure finance revenue is expected to increase in the low-teens percent range.
For MA, full-year 2012 revenue is expected to increase in the high-teens percent range both in the U.S. and outside the U.S. Revenue growth is projected in the mid-single-digit percent range for research, data and analytics and in the low 20s percent range for risk
MOODYS 2011 10-K | 55 |
management software, reflecting growth in the core business as well as the December 2011 acquisition of Barrie & Hibbert. Professional services revenue is projected to grow by approximately 70%, inclusive of revenue from the late 2011 acquisition of a majority stake in Copal Partners and continued growth in the Companys legacy businesses.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted:
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. The standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The standard also requires disclosures regarding the fair value for each class of assets and liabilities, which is a subset of assets or liabilities within a line item in a companys balance sheet. Additionally, the standard requires further disclosures surrounding inputs and valuation techniques used in fair value measurements. The disclosures and clarifications of existing disclosures set forth in this ASU are effective for interim and annual reporting periods beginning after December 15, 2009, except for the additional disclosures regarding Level 3 fair value measurements, for which the effective date is for fiscal years and interim periods within those years beginning after December 15, 2010. The Company has fully adopted all provisions of this ASU as of January 1, 2011 and the implementation did not have a material impact on the Companys consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The objective of this ASU is to address diversity in practice regarding proforma disclosures for revenue and earnings of the acquired entity. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective for fiscal years beginning on or after December 15, 2010. The Company will conform to the disclosure requirements set forth in this ASU for any future business combinations for which the impact to the consolidated statement of operations would be material.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350). The objective of this ASU is to simplify how entities test goodwill for impairment. This ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350 of the ASC. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Prior to the issuance of this ASU, an entity was required to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit was less than its carrying amount, then the second step of the test would be performed to measure the amount of the impairment loss, if any. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company adopted this ASU in the fourth quarter of 2011 and applied its provisions in assessing the potential goodwill impairment which is performed at least annually as of November 30.
Not yet adopted:
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The objective of this ASU is to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in this ASU change the wording used to describe current requirements in U.S. GAAP for measuring fair value and for financial statement disclosure about fair value measurements. Some of the amendments in the ASU clarify the FASBs intent or change a particular principle or requirement pertaining to the application of existing fair value measurement requirements or for disclosing information about fair value measurements. The amendments in this ASU are required to be applied prospectively and are effective for fiscal years beginning after December 15, 2011. Early adoption is not permitted. The Company is currently evaluating the potential impact, if any, of the implementation of this ASU on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to show its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income, which indefinitely defers the
56 | MOODYS 2011 10-K |
requirement in ASU No. 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. All other provisions of this ASU, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company intends to adopt all provisions that were not deferred beginning with its Form 10Q for the three months ended March 31, 2012. The adoption of this ASU will not have any impact on the Companys consolidated financial statements other than revising the presentation of the components of comprehensive income.
From time to time, Moodys is involved in legal and tax proceedings, governmental investigations, 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 events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last several years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, 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 newly imposed regulatory standards. Moodys has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries.
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 the credit markets more broadly over the last several years.
On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Companys securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants oversight of MISs ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MISs ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Companys securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Companys securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint also asserts various causes of action relating to the Companys ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants participation in the alleged public dissemination of false and misleading information about MISs ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Companys processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.
Two purported class action complaints have been filed by purported purchasers of the Companys securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S.
MOODYS 2011 10-K | 57 |
District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moodys Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Companys securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Companys business conduct, business prospects, business conditions and financial results relating primarily to MISs ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others. On January 22, 2010, plaintiffs moved to certify a class of individuals who purchased Moodys Corporation common stock between February 3, 2006 and October 24, 2007, which the Company opposed. On March 31, 2011, the court issued an opinion denying plaintiffs motion to certify the proposed class. On April 14, 2011, plaintiffs filed a petition in the United States Court of Appeals for the Second Circuit seeking discretionary permission to appeal the decision. The Company filed its response to the petition on April 25, 2011. On July 20, 2011, the Second Circuit issued an order denying plaintiffs petition for leave to appeal.
For claims, litigation and proceedings not related to income taxes, where it is both probable that a liability is expected to be 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. 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, 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 the pending matters referred to above 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 inherent uncertainties involved in these matters, the large or indeterminate damages sought in some of them and the novel theories of law asserted, an estimate of the range of possible losses cannot be made at this time. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Legacy Tax Matters
Moodys continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of December 31, 2011, Moodys has recorded liabilities for Legacy Tax Matters totaling $54.6 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moodys future reported results, financial position and cash flows.
The following summary of the relationships among Moodys, New D&B and their predecessor entities is important in understanding the Companys exposure to the Legacy Tax Matters.
In November 1996, The Dun & Bradstreet Corporation separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation and Cognizant Corporation. In June 1998, The Dun & Bradstreet Corporation separated into two separate public companies: Old D&B and R.H. Donnelley Corporation. During 1998, Cognizant separated into two separate public companies: IMS Health Incorporated and Nielsen Media Research, Inc. In September 2000, Old D&B separated into two separate public companies: New D&B and Moodys.
Old D&B and its predecessors entered into global tax planning initiatives in the normal course of business. These initiatives are subject to normal review by tax authorities. Old D&B and its predecessors also entered into a series of agreements covering the sharing of any liabilities for payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters, and certain other potential tax liabilities, all as described in such agreements. Further, in connection with the 2000 Distribution and pursuant to the terms of the 2000 Distribution Agreement, New D&B and Moodys have agreed on the financial responsibility for any potential liabilities related to these Legacy Tax Matters.
At the time of the 2000 Distribution, New D&B paid Moodys $55.0 million for 50% of certain anticipated future tax benefits through 2012. In the event that these tax benefits are not claimed or otherwise not realized by New D&B, or there is an IRS audit of New D&B
58 | MOODYS 2011 10-K |
impacting these tax benefits, Moodys would be required to repay to New D&B an amount equal to the discounted value of its share of the related future tax benefits as well as its share of any tax liability incurred by New D&B. In June 2011, the statute of limitations for New D&B relating to the 2004 tax year expired. As a result, in the second quarter of 2011, Moodys recorded a reduction of accrued interest expense of $2.8 million ($1.7 million, net of tax) and an increase in other non-operating income of $6.4 million, relating to amounts due to New D&B. As of December 31, 2011, Moodys liability with respect to this matter totaled $52.6 million.
Additionally, in April 2011, Moodys received a refund of $0.9 million ($0.6 million, net of tax) for interest assessed related to pre-spinoff tax years. Coupled with the $6.4 million noted above (and related interest of $1.7 million), net legacy tax benefits were $8.7 million in the year ended December 31, 2011 of which $7 million was deemed to be unusual in nature.
In 2005, settlement agreements were executed with the IRS with respect to certain Legacy Tax Matters related to the years 1989-1990 and 1993-1996. With respect to these settlements, Moodys and New D&B believed that IMS Health and NMR did not pay their full share of the liability to the IRS under the terms of the applicable separation agreements between the parties. Moodys and New D&B subsequently paid these amounts to the IRS and commenced arbitration proceedings against IMS Health and NMR to resolve this dispute. Pursuant to these arbitration proceedings, the Company received $10.8 million ($6.5 million as a reduction of interest expense and $4.3 million as a reduction of tax expense) in 2009. The aforementioned settlement payment resulted in net income benefits of $8.2 million in 2009. The Company continues to carry a $2 million liability for this matter.
In 2006, New D&B and Moodys each deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential tax deficiencies with respect to the 1997 through 2002 tax years. In 2007, New D&B and Moodys requested a return of that deposit. The IRS applied a portion of the deposit in satisfaction of an assessed deficiency and returned the balance to the Company. Moodys subsequently pursued a refund for a portion of the outstanding amount. In May 2010, the IRS refunded $5.2 million to the Company for the 1997 tax year, which included interest of approximately $2.5 million resulting in an after-tax benefit of $4.6 million.
Certain statements contained in this annual report on Form 10-K 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 annual report on Form 10-K, including in the sections entitled 2012 Outlook and Contingencies under Item 7. MD&A, commencing on page 29 of this annual report on Form 10-K, under Legal Proceedings in Part I, Item 3, of this Form 10-K, 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 annual report on Form 10-K, 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 credit quality concerns, changes in interest rates and other volatility in the financial markets; the uncertain effectiveness and possible collateral consequences of U.S. and foreign government initiatives to respond to the economic slowdown; concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility of independent agency ratings; the introduction of competing products or technologies by other companies; pricing pressure from competitors and/or customers; the impact of regulation as an NRSRO, the potential for new U.S., state and local legislation and regulations, including provisions in the recently enacted Financial Reform Act and anticipated regulations resulting from that law; 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 to which the Company may be subject from time to time; provisions in the Financial Reform Act legislation, and potential EU regulations, modifying the pleading and liability standards applicable to credit rating agencies in a manner adverse to rating agencies; the possible loss of key employees; failures or malfunctions of our operations and infrastructure; the outcome of any review by controlling tax authorities of the Companys global tax planning initiatives; the outcome of those Legacy Tax Matters and legal contingencies that relate to the Company, its predecessors and their affiliated companies for which Moodys has assumed portions of the financial responsibility; the ability of the Company to successfully integrate acquired businesses; currency and foreign exchange volatility; and a decline in the demand for credit risk management tools by financial institutions. These factors, risks and uncertainties as well as other
MOODYS 2011 10-K | 59 |
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 this annual report on Form 10-K, and in other filings made by the Company from time to time with the SEC or in materials 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.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information in response to this Item is set forth under the caption Market Risk in Part II, Item 7 on page 48 of this annual report on Form 10-K.
60 | MOODYS 2011 10-K |
ITEM 8. | FINANCIAL STATEMENTS |
Index to Financial Statements
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Page(s) | |||
Managements Report on Internal Control Over Financial Reporting | 62 | |||
Report of Independent Registered Public Accounting Firm | 63 | |||
Consolidated Financial Statements: | ||||
64 | ||||
Consolidated Balance Sheets as of December 31, 2011 and 2010 |
65 | |||
For the years ended December 31, 2011, 2010 and 2009: |
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66 | ||||
67-69 | ||||
70-110 | ||||
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Schedules are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.
MOODYS 2010 10-K | 61 |
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Moodys Corporation is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Companys principal executive and principal financial officers, or persons performing similar functions, and effected by the Companys Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Moodys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Moodys management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Company has undertaken an assessment of the design and operational effectiveness of the Companys internal control over financial reporting as of December 31, 2011 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The COSO framework is based upon five integrated components of control: risk assessment, control activities, control environment, information and communications and ongoing monitoring.
Based on the assessment performed, management has concluded that Moodys maintained effective internal control over financial reporting as of December 31, 2011.
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.
/s/ RAYMOND W. MCDANIEL, JR.
Raymond W. McDaniel, Jr.
Chairman and Chief Executive Officer
/s/ LINDA S. HUBER
Linda S. Huber
Executive Vice President and Chief Financial Officer
February 27, 2012
62 | MOODYS 2011 10-K |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Moodys Corporation:
We have audited the accompanying consolidated balance sheets of Moodys Corporation (the Company) as of December 31, 2011 and 2010 and the related consolidated statements of operations, cash flows and shareholders deficit, for each of the years in the three-year period ended December 31, 2011. We also have audited Moodys Corporations internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Moodys Corporations management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Moodys Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Moodys Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
New York, New York
February 27, 2012
MOODYS 2011 10-K | 63 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Revenue | $ | 2,280.7 | $ | 2,032.0 | $ | 1,797.2 | ||||||
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Expenses | ||||||||||||
Operating |
683.5 | 604.8 | 532.4 | |||||||||
Selling, general and administrative |
629.6 | 588.0 | 495.7 | |||||||||
Restructuring |
| 0.1 | 17.5 | |||||||||
Depreciation and amortization |
79.2 | 66.3 | 64.1 | |||||||||
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Total expenses |
1,392.3 | 1,259.2 | 1,109.7 | |||||||||
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Operating income | 888.4 | 772.8 | 687.5 | |||||||||
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Interest income (expense), net |
(62.1 | ) | (52.5 | ) | (33.4 | ) | ||||||
Other non-operating income (expense), net |
13.5 | (5.9 | ) | (7.9 | ) | |||||||
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Non-operating income (expense), net |
(48.6 | ) | (58.4 | ) | (41.3 | ) | ||||||
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Income before provision for income taxes | 839.8 | 714.4 | 646.2 | |||||||||
Provision for income taxes |
261.8 | 201.0 | 239.1 | |||||||||
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Net income | 578.0 | 513.4 | 407.1 | |||||||||
Less: Net income attributable to noncontrolling interests |
6.6 | 5.6 | 5.1 | |||||||||
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Net income attributable to Moodys | $ | 571.4 | $ | 507.8 | $ | 402.0 | ||||||
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Earnings per share | ||||||||||||
Basic |
$ | 2.52 | $ | 2.16 | $ | 1.70 | ||||||
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Diluted |
$ | 2.49 | $ | 2.15 | $ | 1.69 | ||||||
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Weighted average shares outstanding | ||||||||||||
Basic |
226.3 | 235.0 | 236.1 | |||||||||
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Diluted |
229.4 | 236.6 | 237.8 | |||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
64 | MOODYS 2011 10-K |
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS, EXPECT SHARE AND PER SHARE DATA)
December 31, | ||||||||
2011 | 2010 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents |
$ | 760.0 | $ | 659.6 | ||||
Short-term investments |
14.8 | 12.7 | ||||||
Accounts receivable, net of allowances of $28.0 in 2011 and $33.0 in 2010 |
489.8 | 497.5 | ||||||
Deferred tax assets, net |
82.2 | 45.3 | ||||||
Other current assets |
77.6 | 127.9 | ||||||
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Total current assets |
1,424.4 | 1,343.0 | ||||||
Property and equipment, net | 326.8 | 319.3 | ||||||
Goodwill | 642.9 | 465.5 | ||||||
Intangible assets, net | 253.6 | 168.8 | ||||||
Deferred tax assets, net | 146.4 | 187.9 | ||||||
Other assets | 82.0 | 55.8 | ||||||
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Total assets |
$ | 2,876.1 | $ | 2,540.3 | ||||
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Liabilities, redeemable noncontrolling interest and shareholders deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities |
$ | 452.3 | $ | 414.4 | ||||
Unrecognized tax benefits |
90.0 | | ||||||
Current portion of long-term debt |
71.3 | 11.3 | ||||||
Deferred revenue |
520.4 | 508.1 | ||||||
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Total current liabilities |
1,134.0 | 933.8 | ||||||
Non-current portion of deferred revenue | 97.7 | 96.6 | ||||||
Long-term debt | 1,172.5 | 1,228.3 | ||||||
Deferred tax liabilities, net | 49.6 | 36.9 | ||||||
Unrecognized tax benefits | 115.4 | 180.8 | ||||||
Other liabilities | 404.8 | 362.3 | ||||||
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Total liabilities |
2,974.0 | 2,838.7 | ||||||
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Contingencies (Note 18) | ||||||||
Redeemable noncontrolling interest | 60.5 | | ||||||
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Shareholders deficit: | ||||||||
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding |
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Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding |
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Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at December 31, 2011 and December 31, 2010, respectively. |
3.4 | 3.4 | ||||||
Capital surplus |
394.5 | 391.5 | ||||||
Retained earnings |
4,176.1 | 3,736.2 | ||||||
Treasury stock, at cost; 120,462,232 and 112,116,581 shares of common stock at December 31, 2011 and December 31, 2010, respectively |
(4,635.5 | ) | (4,407.3 | ) | ||||
Accumulated other comprehensive loss |
(107.5 | ) | (33.4 | ) | ||||
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Total Moodys shareholders deficit |
(169.0 | ) | (309.6 | ) | ||||
Noncontrolling interests |
10.6 | 11.2 | ||||||
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Total shareholders deficit |
(158.4 | ) | (298.4 | ) | ||||
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Total liabilities, redeemable noncontrolling interest and shareholders deficit |
$ | 2,876.1 | $ | 2,540.3 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
MOODYS 2011 10-K | 65 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN MILLIONS)
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income |
$ | 578.0 | $ | 513.4 | $ | 407.1 | ||||||
Reconciliation of net income to net cash provided by operating activities: |
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Depreciation and amortization |
79.2 | 66.3 | 64.1 | |||||||||
Stock-based compensation expense |
56.7 | 56.6 | 57.4 | |||||||||
Deferred income taxes |
10.3 | (10.6 | ) | 16.5 | ||||||||
Excess tax benefits from settlement of stock-based compensation awards |
(7.4 | ) | (7.0 | ) | (5.0 | ) | ||||||
Legacy Tax Matters |
(6.4 | ) | | | ||||||||
Changes in assets and liabilities: |
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Accounts receivable |
17.1 | (54.4 | ) | (14.9 | ) | |||||||
Other current assets |
53.5 | (73.5 | ) | 55.3 | ||||||||
Other assets |
7.5 | 3.7 | (7.4 | ) | ||||||||
Accounts payable and accrued liabilities |
24.4 | 83.5 | 50.4 | |||||||||
Restructuring liability |
(0.5 | ) | (5.2 | ) | 2.6 | |||||||
Deferred revenue |
8.8 | 19.6 | 17.9 | |||||||||
Unrecognized tax benefits and other non-current tax liabilities |
3.9 | 30.8 | (21.0 | ) | ||||||||
Deferred rent |
7.4 | 12.0 | 21.1 | |||||||||
Other liabilities |
(29.2 | ) | 18.1 | (0.3 | ) | |||||||
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Net cash provided by operating activities |
803.3 | 653.3 | 643.8 | |||||||||
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Cash flows from investing activities | ||||||||||||
Capital additions |
(67.7 | ) | (79.0 | ) | (90.7 | ) | ||||||
Purchases of short-term investments |
(43.3 | ) | (26.2 | ) | (17.6 | ) | ||||||
Sales and maturities of short-term investments |
40.9 | 25.0 | 15.4 | |||||||||
Cash paid for acquisitions and investment in affiliates, net of cash acquired |
(197.5 | ) | (148.6 | ) | (0.9 | ) | ||||||
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Net cash used in investing activities |
(267.6 | ) | (228.8 | ) | (93.8 | ) | ||||||
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Cash flows from financing activities | ||||||||||||
Borrowings under revolving credit facilities |
| 250.0 | 2,412.0 | |||||||||
Repayments of borrowings under revolving credit facilities |
| (250.0 | ) | (3,025.0 | ) | |||||||
Issuance of commercial paper |
| 2,232.8 | 11,075.5 | |||||||||
Repayment of commercial paper |
| (2,676.4 | ) | (10,736.5 | ) | |||||||
Issuance of notes |
| 496.9 | | |||||||||
Repayment of notes |
(11.3 | ) | (3.8 | ) | | |||||||
Net proceeds from stock plans |
46.4 | 34.7 | 19.8 | |||||||||
Excess tax benefits from settlement of stock-based compensation awards |
7.4 | 7.0 | 5.0 | |||||||||
Cost of treasury shares repurchased |
(333.8 | ) | (223.6 | ) | | |||||||
Payment of dividends |
(121.0 | ) | (98.6 | ) | (94.5 | ) | ||||||
Payment of dividends to noncontrolling interests |
(5.1 | ) | (4.8 | ) | (3.7 | ) | ||||||
Payments under capital lease obligations |
| (1.2 | ) | (1.4 | ) | |||||||
Contingent consideration paid |
(0.3 | ) | | | ||||||||
Debt issuance costs and related fees |
| (4.3 | ) | | ||||||||
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Net cash used in financing activities |
(417.7 | ) | (241.3 | ) | (348.8 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(17.6 | ) | 2.5 | 26.8 | ||||||||
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Increase in cash and cash equivalents |
100.4 | 185.7 | 228.0 | |||||||||
Cash and cash equivalents, beginning of period |
659.6 | 473.9 | 245.9 | |||||||||
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Cash and cash equivalents, end of period |
$ | 760.0 | $ | 659.6 | $ | 473.9 | ||||||
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The accompanying notes are an integral part of the consolidated financial statements
66 | MOODYS 2011 10-K |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
(AMOUNTS IN MILLIONS)
Shareholders of Moodys Corporation | Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Accumulated Other Comprehensive Income (Loss) |
Total Moodys Shareholders Equity (Deficit) |
Non-Controlling Interests |
Total Shareholders Equity (Deficit) |
Shareholders of Moodys Corporation |
Non-Controlling Interests |
Total Comprehensive Income (Loss) |
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Shares | Amount | Capital Surplus |
Retained Earnings |
Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 | 342.9 | $ | 3.4 | $ | 392.7 | $ | 3,023.2 | (107.8 | ) | $ | (4,361.6 | ) | $ | (52.1 | ) | $ | (994.4 | ) | $ | 8.3 | $ (986.1 | ) | ||||||||||||||||||||||||||||||
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Net income |
402.0 | 402.0 | 5.1 | 407.1 | $ | 402.0 | $ 5.1 | $ | 407.1 | |||||||||||||||||||||||||||||||||||||||||||
Dividends |
(96.2 | ) | (96.2 | ) | (3.7 | ) | (99.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
57.9 | 57.9 | 57.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for stock-based compensation plans, net |
(53.4 | ) | 1.8 | 73.1 | 19.7 | 19.7 | ||||||||||||||||||||||||||||||||||||||||||||||
Net tax shortfalls upon settlement of stock-based compensation awards |
(6.1 | ) | (6.1 | ) | (6.1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustment, (net of tax of $18.5 million) |
22.2 | 22.2 | 0.4 | 22.6 | 22.2 | 0.4 | 22.6 | |||||||||||||||||||||||||||||||||||||||||||||
Net actuarial losses and prior service cost (net of tax of $8.9 million) |
(10.4 | ) | (10.4 | ) | (10.4 | ) | (10.4 | ) | (10.4 | ) | ||||||||||||||||||||||||||||||||||||||||||
Amortization and recognition of prior service costs and actuarial losses, (net of tax of $0.4 million) |
0.6 | 0.6 | 0.6 | 0.6 | 0.6 | |||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized loss on cash flow hedges (net of tax of $1.5 million) |
(1.5 | ) | (1.5 | ) | (1.5 | ) | (1.5 | ) | (1.5 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Comprehensive income | $ | 412.9 | $ 5.5 | $ | 418.4 | |||||||||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2009 | 342.9 | $ | 3.4 | $ | 391.1 | $ | 3,329.0 | (106.0 | ) | $ | (4,288.5 | ) | $ | (41.2 | ) | $ | (606.2 | ) | $ | 10.1 | $ (596.1 | ) | ||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
MOODYS 2011 10-K | 67 |
Shareholders of Moodys Corporation | Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Accumulated Other Comprehensive Income (Loss) |
Total Moodys Shareholders Equity (Deficit) |
Non-Controlling Interests |
Total Shareholders Equity (Deficit) |
Shareholders of Moodys Corporation |
Non-Controlling Interests |
Total Comprehensive Income (Loss) |
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Shares | Amount | Capital Surplus |
Retained Earnings |
Shares | Amount |