Edgar Filing: MOODYS CORP /DE/

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2013

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

For the transition period from to

Commission file number 1-14037

Moody’s Corporation

(Exact name of registrant as specified in its charter)


Delaware		13-3998945
(State of Incorporation)		(I.R.S. Employer Identification No.)

7 World Trade Center at 250 Greenwich Street, New York, N.Y.		10007
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(212) 553-0300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months, or for such shorter period that the registrant was required to submit and post such files. Yes x No ¨

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

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

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


Title of Each Class		Shares Outstanding at June 30, 2013
Common Stock, par value $0.01 per share		220.4 million

MOODY’S CORPORATION

INDEX TO FORM 10-Q


		Page(s)
	Glossary of Terms and Abbreviations		3-7
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		8
	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012		8
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012		9
	Consolidated Balance Sheets (Unaudited) at June 30, 2013 and December 31, 2012		10
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and 2012		11
	Notes to Condensed Consolidated Financial Statements (Unaudited)		12-40
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
	The Company		41
	Critical Accounting Estimates		41
	Operating Segments		42
	Results of Operations		43-54
	Liquidity and Capital Resources		55-65
	2013 Outlook		65-66
	Recently Issued Accounting Pronouncements		66
	Contingencies		66-69
	Regulation		69-70
	Forward-Looking Statements		70-71
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		71
Item 4.	Controls and Procedures		71
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		72
Item 1A.	Risk Factors		72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		72
Item 5.	Other Information		72
Item 6.	Exhibits		73

SIGNATURES			74
Exhibits Filed Herewith
12	Statement of Computation of Ratios of Earnings to Fixed Charges
31.1	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

Adjusted Operating Income		Operating income excluding restructuring and depreciation and amortization

Adjusted Operating Margin		Operating margin excluding restructuring and depreciation and amortization

Americas		Represents countries within North and South America, excluding the U.S.

Analytics		Moody’s 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

Asia-Pacific		Represents countries in Asia also including but not limited to: Australia and its proximate islands, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand

ASU		The FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC

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

Basel III		A new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

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

CDOs		Collateralized debt obligation

CFG		Corporate finance group; an LOB of MIS

CLO		Collateralized loan obligation

CMBS		Commercial mortgage-backed securities; part of CREF

Cognizant		Cognizant Corporation – a former affiliate of Old D&B; comprised the IMS Health and NMR businesses

Commission		European Commission

Company		Moody’s Corporation and its subsidiaries; MCO; Moody’s


TERM		DEFINITION

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

CP		Commercial paper

CP Program		The Company’s commercial paper program entered into on October 3, 2007

CRAs		Credit rating agencies

CRA1		Regulation (EC) No 1060/2009 of the European Parliament and of the Council, establishing an oversight regime for the CRA industry in the EU

CRA2		Regulation (EU) No 513/2011 of the European Parliament and of the Council, which transferred direct supervisory responsibility for the registered CRA industry in the EU to ESMA

CRA3		Regulation (EU) No 462/2013 of the European Parliament and of the Council, which updated the regulatory regimes imposing additional procedural requirements on CRAs

CREF		Commercial real estate finance which includes REITs, commercial real estate CDOs and mortgage-backed securities; part of SFG

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&B’s Dun & Bradstreet operating company

DBPP		Defined benefit pension plans

Debt/EBITDA		Ratio of Total Debt to EBITDA

EBITDA		Earnings before interest, taxes, depreciation and amortization

ECB		European Central Bank

EMEA		Represents countries within Europe, the Middle East and Africa

EPS		Earnings per share

ERS		The enterprise risk solutions LOB within MA (formerly RMS); which offers risk management software products as well as software implementation services and related risk management advisory engagements

ESMA		European Securities and Markets Authority

ESPP		The 1999 Moody’s Corporation Employee Stock Purchase Plan

ETR		Effective tax rate

EU		European Union

EUR		Euros

Excess Tax Benefits		The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time the option or restricted share is expensed under GAAP

Exchange Act		The Securities Exchange Act of 1934, as amended

FASB		Financial Accounting Standards Board

FDIC		Federal Deposit Insurance Corporation

FIG		Financial institutions group; an LOB of MIS

Financial Reform Act		Dodd-Frank Wall Street Reform and Consumer Protection Act


TERM		DEFINITION

Free Cash Flow		Net cash provided by operating activities less cash paid for capital additions

FSTC		Financial Services Training and Certifications; a reporting unit within the MA segment that includes classroom-based training services and CSI

FX		Foreign exchange

GAAP		U.S. Generally Accepted Accounting Principles

GBP		British pounds

G-8		The finance minister and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K., that meet annually

G-20		The G-20 is an informal forum of industrial and emerging-market countries who comment on key issues related to global economic stability. 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, the U.K. and the U.S. and The EU who is represented by the rotating Council presidency and ECB

IMS Health		A spin-off of Cognizant; provides services to the pharmaceutical and healthcare industries

IRS		Internal Revenue Service

Legacy Tax Matter(s)		Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution

LIBOR		London Interbank Offered Rate

LOB		Line of business

MA		Moody’s Analytics – a reportable segment of MCO formed in January 2008, which includes the non-rating commercial activities of MCO

M&A		Mergers and acquisitions

Make Whole Amount		The prepayment penalty amount relating to the Series 2005-1 Notes, Series 2007-1 Notes, 2010 Senior Notes and 2012 Senior Notes which is a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal

MCO		Moody’s Corporation and its subsidiaries; the Company; Moody’s

MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations

MIS		Moody’s Investors Service – a reportable segment of MCO; consists of four LOBs – SFG, CFG, FIG and PPIF

Moody’s		Moody’s Corporation and its subsidiaries; MCO; the Company

Net Income		Net income attributable to Moody’s Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder

New D&B		The New D&B Corporation – which comprises the D&B Business

NM		Percentage change is not meaningful

NMR		Nielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services

NRSRO		Nationally Recognized Statistical Rating Organization


TERM		DEFINITION

Old D&B		The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation

PPIF		Public, project and infrastructure finance; an LOB of MIS

Profit Participation Plan		Defined contribution profit participation plan that covers substantially all U.S. employees of the Company

PS		Professional Services, an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs

RD&A		Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and other analytical tools that are produced within MA

Redeemable Noncontrolling		Represents minority shareholders’ interest in entities which are controlled but not

Interest		wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is in the control of the minority shareholders

Reform Act		Credit Rating Agency Reform Act of 2006

RMBS		Residential mortgage-backed security; part of SFG

Retirement Plans		Moody’s funded and unfunded pension plans, the retirement healthcare plans and retirement life insurance plans

S&P		Standard & Poor’s Ratings Services; a division of The McGraw-Hill Companies, Inc.

SEC		U.S. Securities and Exchange Commission

Securities Act		Securities Act of 1933

Series 2005-1 Notes		Principal amount of $300 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement

Series 2007-1 Notes		Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement

SFG		Structured finance group; an LOB of MIS

SG&A		Selling, general and administrative expenses

T&E		Travel and entertainment expenses

Total Debt		All indebtedness of the Company as reflected on the consolidated balance sheets

U.K.		United Kingdom

U.S.		United States

USD		U.S. dollar

UTBs		Unrecognized tax benefits

UTPs		Uncertain tax positions

2000 Distribution		The distribution by Old D&B to its shareholders of all the outstanding shares of New D&B common stock on September 30, 2000

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 rulings on certain tax matters and certain other potential tax liabilities


TERM		DEFINITION

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

2008 Term Loan		Five-year $150 million senior unsecured term loan entered into by the Company on May 7, 2008

2010 Indenture		Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes

2010 Senior Notes		Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture

2012 Indenture		Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes

2012 Senior Notes		Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture

2012 Facility		Revolving credit facility of $1 billion entered into on April 18, 2012, expiring in 2017

7WTC		The Company’s corporate headquarters located at 7 World Trade Center in New York, NY

7WTC Lease		Operating lease agreement entered into on October 20, 2006

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in millions, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Revenue	$	756.0		$	640.8		$	1,487.8		$	1,287.6


Expenses
Operating		197.1			180.6			397.9			366.1
Selling, general and administrative		185.0			159.6			412.0			328.4
Depreciation and amortization		23.1			22.1			46.7			45.6


Total expenses		405.2			362.3			856.6			740.1


Operating income		350.8			278.5			631.2			547.5


Non-operating (expense) income, net
Interest income (expense), net		(21.7	)		(16.6	)		(43.7	)		(26.9	)
Other non-operating income (expense), net		7.7			2.7			16.5			2.6


Total non-operating (expense) income, net		(14.0	)		(13.9	)		(27.2	)		(24.3	)


Income before provisions for income taxes		336.8			264.6			604.0			523.2
Provision for income taxes		108.4			88.9			184.5			172.0


Net income		228.4			175.7			419.5			351.2
Less: Net income attributable to noncontrolling interests		2.9			3.2			5.6			5.2

Net income attributable to Moody’s	$	225.5		$	172.5		$	413.9		$	346.0


Earnings per share attributable to Moody’s common shareholders
Basic	$	1.01		$	0.77		$	1.86		$	1.55

Diluted	$	1.00		$	0.76		$	1.83		$	1.52


Weighted average number of shares outstanding
Basic		222.3			223.9			222.8			223.7

Diluted		226.2			227.2			226.7			227.3

Dividends declared per share attributable to Moody’s common shareholders	$	0.20		$	0.16		$	0.20		$	0.16

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

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in millions)


	Three Months Ended June 30, 2013									Three Months Ended June 30, 2012
	Pre-tax amounts			Tax amounts			After-tax amounts			Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	228.4								$	175.7


Other comprehensive loss:
Foreign currency translation adjustments	$	(13.0	)	$	—			(13.0	)	$	(37.9	)	$	—			(37.9	)

Cash flow and net investment hedges, net of tax:
Net realized and unrealized (loss) gain on cash flow and net investment hedges		(0.4	)		0.1			(0.3	)		(2.5	)		1.0			(1.5	)
Reclassification of losses included in net income		0.1			—			0.1			1.1			(0.4	)		0.7

Pension and other retirement benefits, net of tax:
Amortization of actuarial losses and prior service costs included in net income		2.8			(1.2	)		1.6			2.2			(0.9	)		1.3
Net actuarial losses and prior service costs		0.9			(0.4	)		0.5			(9.5	)		3.9			(5.6	)

Total other comprehensive loss	$	(9.6	)	$	(1.5	)		(11.1	)	$	(46.6	)	$	3.6			(43.0	)

Comprehensive income								217.3									132.7
Less: comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest								2.9									2.3

Comprehensive income attributable to Moody’s							$	214.4								$	130.4


	Six Months Ended June 30, 2013									Six Months Ended June 30, 2012
	Pre-tax amounts			Tax amounts			After-tax amounts			Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	419.5								$	351.2


Other comprehensive income:
Foreign currency translation adjustments	$	(72.8	)	$	—			(72.8	)	$	(9.3	)	$	—			(9.3	)

Cash flow and net investment hedges, net of tax:
Net realized and unrealized (loss) gain on cash flow and net investment hedges		1.0			(0.5	)		0.5			(2.7	)		1.1			(1.6	)
Reclassification of losses included in net income		0.7			(0.2	)		0.5			2.2			(0.9	)		1.3

Pension and other retirement benefits, net of tax:
Amortization of actuarial losses and prior service costs included in net income		5.9			(2.4	)		3.5			5.0			(2.0	)		3.0
Net actuarial losses and prior service costs		0.9			(0.4	)		0.5			(8.0	)		2.4			(5.6	)

Total other comprehensive loss	$	(64.3	)	$	(3.5	)		(67.8	)	$	(12.8	)	$	0.6			(12.2	)

Comprehensive income								351.7									339.0
Less: comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest								5.6									6.3

Comprehensive income attributable to Moody’s							$	346.1								$	332.7

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

MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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


	June 30, 2013			December 31, 2012
ASSETS

Current assets:
Cash and cash equivalents	$	1,633.0		$	1,755.4
Short-term investments		17.9			17.9
Accounts receivable, net of allowances of $30.2 in 2013 and $29.1 in 2012		607.7			621.8
Deferred tax assets, net		36.5			38.7
Other current assets		147.6			91.9

Total current assets		2,442.7			2,525.7
Property and equipment, net of accumulated depreciation of $343.4 in 2013 and $314.3 in 2012		287.4			307.1
Goodwill		619.8			637.1
Intangible assets, net		202.0			226.5
Deferred tax assets, net		152.5			168.5
Other assets		89.9			96.0

Total assets	$	3,794.3		$	3,960.9


LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	312.8		$	555.3
Current portion of long-term debt		—			63.8
Deferred revenue		584.3			545.8

Total current liabilities		897.1			1,164.9
Non-current portion of deferred revenue		104.8			94.9
Long-term debt		1,605.0			1,607.4
Deferred tax liabilities, net		54.4			58.1
Unrecognized tax benefits		184.6			156.6
Other liabilities		412.9			410.1

Total liabilities		3,258.8			3,492.0
Contingencies (Note 13)
Redeemable noncontrolling interest		78.7			72.3

Shareholders’ equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding		—			—
Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at June 30, 2013 and December 31, 2012, respectively.		3.4			3.4
Capital surplus		358.7			365.1
Retained earnings		5,082.1			4,713.3
Treasury stock, at cost; 122,470,202 and 119,650,254 shares of common stock at June 30, 2013 and December 31, 2012, respectively		(4,846.7	)		(4,614.5	)
Accumulated other comprehensive loss		(149.9	)		(82.1	)

Total Moody’s shareholders’ equity		447.6			385.2
Noncontrolling interests		9.2			11.4

Total shareholders’ equity		456.8			396.6

Total liabilities, redeemable noncontrolling interest and shareholders’ equity	$	3,794.3		$	3,960.9

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

MOODY’S CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)


	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities
Net income	$	419.5		$	351.2
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization		46.7			45.6
Stock-based compensation expense		33.3			29.9
Deferred income taxes		10.8			47.5
Excess tax benefits from stock-based compensation plans		(27.0	)		(9.2	)
Changes in assets and liabilities:
Accounts receivable		2.4			(40.5	)
Other current assets		(56.6	)		(32.4	)
Other assets		(0.8	)		(3.2	)
Accounts payable and accrued liabilities		(168.4	)		(115.8	)
Deferred revenue		59.6			45.6
Unrecognized tax benefits and other non-current tax liabilities		34.5			(73.9	)
Other liabilities		15.1			(9.3	)


Net cash provided by operating activities		369.1			235.5


Cash flows from investing activities
Capital additions		(18.1	)		(21.9	)
Purchases of short-term investments		(17.5	)		(24.7	)
Sales and maturities of short-term investments		16.6			24.2
Cash paid for acquisitions		—			(3.5	)


Net cash used in investing activities		(19.0	)		(25.9	)


Cash flows from financing activities
Repayments of notes		(63.8	)		(7.5	)
Net proceeds from stock-based compensation plans		60.8			34.9
Cost of treasury shares repurchased		(350.4	)		(100.0	)
Excess tax benefits from settlement of stock-based compensation plans		27.0			9.2
Payment of dividends		(89.1	)		(71.6	)
Payment of dividends to noncontrolling interests		(8.2	)		(4.5	)
Contingent consideration paid		(2.5	)		(0.5	)
Debt issuance costs and related fees		—			(2.5	)


Net cash used in financing activities		(426.2	)		(142.5	)
Effect of exchange rate changes on cash and cash equivalents		(46.3	)		(3.0	)


Net (decrease) increase in cash and cash equivalents		(122.4	)		64.1
Cash and cash equivalents, beginning of the period		1,755.4			760.0


Cash and cash equivalents, end of the period	$	1,633.0		$	824.1

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

MOODY’S CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(tabular dollar and share amounts in millions, except per share data)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is 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 Company’s non-rating commercial activities, develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. It also provides fixed income pricing in the Asia-Pacific region. Within its Enterprise Risk Solutions business, MA provides software solutions as well as related risk management services. The Professional Services business provides outsourced research and analytical services along with financial training and certification programs.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2012 annual report on Form 10-K filed with the SEC on February 26, 2013. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2. STOCK-BASED COMPENSATION

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Stock-based compensation cost	$	16.1	$	14.9	$	33.3	$	29.9
Tax benefit	$	5.8	$	5.4	$	12.0	$	10.8

During the first six months of 2013, the Company granted 0.5 million employee stock options, which had a weighted average grant date fair value of $17.58 per share based on the Black-Scholes option-pricing model. The Company also granted 1.3 million shares of restricted stock in the first six months of 2013, which had a weighted average

grant date fair value of $46.51 per share and generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.3 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $44.07 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2013:


Expected dividend yield		1.72	%
Expected stock volatility		42.6	%
Risk-free interest rate		1.53	%
Expected holding period		7.2 years
Grant date fair value	$	17.58

Unrecognized compensation expense at June 30, 2013 was $14.6 million and $94.8 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.4 years and 1.8 years, respectively. Additionally, there was $18.8 million of unrecognized compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of one year.

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


	Six Months Ended June 30,
Stock option exercises:	2013		2012
Proceeds from stock option exercises	$	89.2	$	46.7
Aggregate intrinsic value	$	66.7	$	26.6
Tax benefit realized upon exercise	$	24.4	$	10.1
Number of shares exercised		2.7		1.9

	Six Months Ended June 30,
Restricted stock vesting:	2013		2012
Fair value of shares vested	$	53.8	$	37.5
Tax benefit realized upon vesting	$	19.1	$	13.2
Number of shares vested		1.1		1.0

	Six Months Ended June 30,
Performance-based awards vesting:	2013		2012
Fair value of shares vested	$	25.5	$	—
Tax benefit realized upon vesting	$	9.7	$	—
Number of shares vested		0.5		—

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 32.2% and 33.6% for the three months ended June 30, 2013 and 2012, respectively and 30.5% and 32.9% for the six months ended June 30, 2013 and 2012, respectively. The decrease in the effective tax rate in both periods is primarily due to U.S. tax legislation enacted in the first quarter of 2013 which retroactively extended certain favorable tax benefits to the 2012 tax year and prospectively extended these tax benefits to the 2013 tax year. Additionally, there were lower taxes on foreign income. The decrease in the ETR for the six months ended June 30, 2013 also reflects the tax effect of the litigation settlement in the first quarter of 2013.

The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net. The Company had an overall increase in its UTPs of $17.4 million ($14.7 million net of federal tax benefit) during the second quarter of 2013 and an overall increase in its UTPs during the first six months of 2013 of $28.0 million ($23.0 million net of federal tax benefits).

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2010 are under examination and its 2011 return remains open to examination. The Company’s New York State and New York City income tax returns for 2011 remain open to examination. Income tax filings in the U.K. for 2007 through 2010 are under examination and 2011 remains open to examination.

For ongoing audits, it is possible the balance of UTBs could decrease in the next 12 months as a result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which could necessitate increases to the balance of UTBs. As the Company is unable to predict the timing or outcome of these audits, it is unable to estimate the amount of changes to the balance of UTBs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years by tax jurisdiction in accordance with the applicable provisions of Topic 740 of the ASC regarding UTBs.

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


	Six Months Ended June 30,
	2013		2012
Income Taxes Paid*	$	231.6	$	235.0

*	Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012.

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

Three Months Ended
June 30,

Six Months Ended
June 30,

2013

2012

2013

2012

Basic

222.3

223.9

222.8

223.7

Dilutive effect of shares issuable under stock-based compensation plans

3.9

3.3

3.9

3.6

Diluted

226.2

227.2

226.7

227.3

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

4.4

7.2

4.7

7.1

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2013 and 2012. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

NOTE 5. SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. The remaining contractual maturities of the short-term investments were one month to 12 months and one month to 11 months as of June 30, 2013 and December 31, 2012, respectively. Interest and dividends are recorded into income when earned.

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.

Interest Rate Swaps

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the Series 2005-1 Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.

In May 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, further described in Note 12. These interest rate swaps were designated as cash flow hedges. Accordingly, changes in the fair value of these swaps were recorded to other comprehensive income or loss, to the extent that the hedge is effective, and such amounts were reclassified to earnings in the same period during which the hedged transaction affects income. At June 30, 2013, the 2008 Term Loan has been repaid in full in accordance with the payment terms set forth in Note 12. Accordingly, all amounts in accumulated other comprehensive income have been reclassified to interest income (expense), net in the Company’s consolidated statements of operations.

Foreign Exchange Forwards

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than the subsidiary’s functional currency. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through September 2013.

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


	June 30,		December 31,
	2013		2012
Notional amount of currency pair:
Contracts to purchase USD with euros	$	25.7	$	34.3
Contracts to sell USD for euros	$	49.6	$	48.4
Contracts to purchase USD with GBP	$	3.5	$	2.1
Contracts to sell USD for GBP	$	0.1	$	1.7
Contracts to purchase USD with other foreign currencies	$	7.0	$	6.7
Contracts to sell USD for other foreign currencies	$	11.4	$	5.1
Contracts to purchase euros with other foreign currencies	€	14.2	€	14.4
Contracts to purchase euros with GBP	€	2.0	€	—
Contracts to sell euros for GBP	€	18.3	€	8.9

Net Investment Hedges

The Company enters into foreign currency forward contracts to hedge the exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against adverse changes in foreign exchange rates. These forward contracts are designated as hedging instruments under the applicable sections of Topic 815 of the ASC. Hedge effectiveness is assessed based on the overall changes in the fair value of the forward contracts on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in the fair value for the hedge is recorded in the currency translation adjustment component of AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statement of operations. These outstanding contracts expire in September 2013.

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


	June 30, 2013		December 31, 2012
Notional amount of currency pair:
Contracts to sell euros for USD	€	50.0	€	50.0

The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instruments:


	Fair Value of Derivative Instruments
Derivatives Instruments	Balance Sheet Location	June 30, 2013		December 31, 2012
Assets:
Derivatives designated as accounting hedges:
Interest rate swaps	Other assets	$	11.2	$	13.8

Total derivatives designated as accounting hedges			11.2		13.8
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilities	Other current assets		1.2		1.4

Total assets		$	12.4	$	15.2


Liabilities:
Derivatives designated as accounting hedges:
Interest rate swaps	Accounts payable and accrued liabilities	$	—	$	0.7
FX forwards on net investment in certain foreign subsidiaries	Accounts payable and accrued liabilities		—		1.0

Total derivatives designated as accounting hedges			—		1.7
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilities	Accounts payable and accrued liabilities		0.5		0.7

Total liabilities		$	0.5	$	2.4

The following table summarizes the net gain (loss) on the Company’s foreign exchange forwards which are not designated as accounting hedges as well as the gain (loss) on the interest rate swaps designated as fair value hedges:


		Amount of Gain (Loss) Recognized in the consolidated statements of operations
		Three Months Ended June 30,					Six Months Ended June 30,
Derivatives designated as accounting hedges	Location on Income Statement	2013		2012			2013			2012
Interest rate swaps	Interest income(expense), net	$	1.0	$	0.9		$	2.1		$	1.7


Derivatives not designated as accounting hedges
Foreign exchange forwards	Other non-operating income (expense), net	$	1.0	$	(1.4	)	$	(0.1	)	$	(0.4	)

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


Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion)					Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)						Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Three Months Ended June 30,						Three Months Ended June 30,							Three Months Ended June 30,
	2013		2012				2013			2012				2013		2012
Interest rate swaps	$	—	$	—		Interest income (expense), net	$	(0.1	)	$	(0.7	)	N/A	$	—	$	—

Total	$	—	$	—			$	(0.1	)	$	(0.7	)		$	—	$	—


	Six Months Ended June 30,						Six Months Ended June 30,							Six Months Ended June 30,
	2013		2012				2013			2012				2013		2012
Interest rate swaps	$	—	$	(0.1	)	Interest income (expense), net	$	(0.5	)	$	(1.3	)	N/A	$	—	$	—

Total	$	—	$	(0.1	)		$	(0.5	)	$	(1.3	)		$	—	$	—

All gains and losses (net of income taxes) on interest rate swaps designated as cash flow hedges are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into interest income (expense), net as the underlying transaction is recognized.

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


Derivatives in Net Investment Hedging Relationships	Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion)						Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)				Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Three Months Ended June 30,							Three Months Ended June 30,					Three Months Ended June 30,
	2013			2012				2013		2012			2013		2012
FX forwards	$	(0.3	)	$	(1.5	)	N/A	$	—	$	—	N/A	$	—	$	—

Total	$	(0.3	)	$	(1.5	)		$	—	$	—		$	—	$	—


	Six Months Ended June 30,							Six Months Ended June 30,					Six Months Ended June 30,
	2013			2012				2013		2012			2013		2012
FX forwards	$	0.5		$	(1.5	)	N/A	$	—	$	—	N/A	$	—	$	—

Total	$	0.5		$	(1.5	)		$	—	$	—		$	—	$	—

All gains and losses (net of income taxes) on derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI.

The cumulative amount of hedge losses recorded in AOCI is as follows:


	Losses, net of tax
	June 30, 2013			December 31, 2012
FX forwards on net investment hedges	$	(1.7	)	$	(2.2	)
Interest rate swaps		(0.2	)		(0.7	)

Total	$	(1.9	)	$	(2.9	)

NOTE 7. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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


	Six Months Ended June 30, 2013
	MIS								MA									Consolidated
	Gross goodwill			Accumulated impairment charge		Net goodwill			Gross goodwill			Accumulated impairment charge			Net goodwill			Gross goodwill			Accumulated impairment charge			Net goodwill
Balance at beginning of year	$	11.5		$	—	$	11.5		$	637.8		$	(12.2	)	$	625.6		$	649.3		$	(12.2	)	$	637.1
Additions/adjustments		—			—		—			—			—			—			—			—			—
Foreign currency translation adjustments		(0.6	)		—		(0.6	)		(16.7	)		—			(16.7	)		(17.3	)		—			(17.3	)

Ending balance	$	10.9		$	—	$	10.9		$	621.1		$	(12.2	)	$	608.9		$	632.0		$	(12.2	)	$	619.8


	Year Ended December 31, 2012
	MIS								MA									Consolidated
	Gross goodwill			Accumulated impairment charge		Net goodwill			Gross goodwill			Accumulated impairment charge			Net goodwill			Gross goodwill			Accumulated impairment charge			Net goodwill
Balance at beginning of year	$	11.0		$	—	$	11.0		$	631.9		$	—		$	631.9		$	642.9		$	—		$	642.9
Additions/adjustments		—			—		—			(4.4	)		—			(4.4	)		(4.4	)		—			(4.4	)
Impairment charge		—			—		—			—			(12.2	)		(12.2	)		—			(12.2	)		(12.2	)
Foreign currency translation adjustments		0.5			—		0.5			10.3			—			10.3			10.8			—			10.8

Ending balance	$	11.5		$	—	$	11.5		$	637.8		$	(12.2	)	$	625.6		$	649.3		$	(12.2	)	$	637.1

The 2012 additions/adjustments for the MA segment in the table above relate to the acquisitions of Copal and B&H in the fourth quarter of 2011.

The 2012 impairment charge in the table above relates to goodwill in the FSTC reporting unit within MA. The Company evaluates its goodwill for potential impairment annually on July 31 or more frequently if impairment indicators arise throughout the year. Projected operating results for the FSTC reporting unit at December 31, 2012 were lower than projections utilized for the annual impairment analysis performed at July 31, 2012 reflecting a contraction in spending for training and certification services for many individuals and global financial institutions amidst macroeconomic uncertainties. Based on this trend and overall macroeconomic uncertainties at the time, the Company lowered its cash

flow forecasts for this reporting unit in the fourth quarter of 2012. Accordingly, the Company performed another goodwill impairment assessment as of December 31, 2012 which resulted in an impairment charge of $12.2 million. The fair value of the FSTC reporting unit utilized in the impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples. There were no impairments to goodwill in the three and six months ended June 30, 2013 and 2012. However, a failure of the FSTC reporting unit to meet its financial projections could result in further goodwill impairment.

Acquired intangible assets and related amortization consisted of:


	June 30, 2013			December 31, 2012
Customer relationships	$	210.3		$	219.6
Accumulated amortization		(79.5	)		(74.0	)

Net customer relationships		130.8			145.6


Trade secrets		31.1			31.4
Accumulated amortization		(17.2	)		(16.0	)

Net trade secrets		13.9			15.4


Software		67.6			73.2
Accumulated amortization		(33.4	)		(33.7	)

Net software		34.2			39.5


Trade names		27.7			28.3
Accumulated amortization		(10.8	)		(10.3	)

Net trade names		16.9			18.0


Other		24.2			24.9
Accumulated amortization		(18.0	)		(16.9	)

Net other		6.2			8.0


Total acquired intangible assets, net	$	202.0		$	226.5

Other intangible assets primarily consist of databases and covenants not to compete.

Amortization expense relating to acquired intangible assets is as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Amortization expense	$	6.9	$	7.1	$	14.0	$	14.4

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


Year Ending December 31,
2013 (after June 30,)	$	16.8
2014		28.9
2015		24.1
2016		17.8
2017		13.1
Thereafter		101.3

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. There were no impairments to intangible assets during the three and six months ended June 30, 2013 and 2012.

NOTE 8. FAIR VALUE

The table below presents information about items, which are carried at fair value on a recurring basis at June 30, 2013 and December 31, 2012:

Fair Value Measurement as of June 30, 2013

Description

Balance

Level 1

Level 2

Level 3

Assets:

Derivatives ^(a)

12.4

—

12.4

—

Total

12.4

—

12.4

—

Liabilities:

Derivatives ^(a)

0.5

—

0.5

—

Contingent consideration arising from acquisitions ^(b)

10.5

—

10.5

Total

11.0

—

0.5

10.5

Fair Value Measurement as of December 31, 2012

Description

Balance

Level 1

Level 2

Level 3

Assets:

Derivatives ^(a)

15.2

—

15.2

—

Total

15.2

—

15.2

—

Liabilities:

Derivatives ^(a)

2.4

—

2.4

—

Contingent consideration arising from acquisitions ^(b)

9.0

—

9.0

Total

11.4

—

2.4

9.0

^(a)	Represents interest rate swaps and FX forwards on certain assets and liabilities as well as on certain non-U.S. dollar net investments in certain foreign subsidiaries as more fully described in Note 6 to the financial statements

^(b)	Represents contingent consideration liabilities pursuant to the agreements for certain MA acquisitions.

The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities:


	Contingent Consideration Six Months Ended June 30,
	2013			2012
Balance as of January 1	$	9.0		$	9.1
Settlements		(2.5	)		(0.5	)
Total losses (realized and unrealized):
Included in earnings		4.1			(2.5	)
Foreign currency translation adjustments		(0.1	)		0.3

Balance as of June 30	$	10.5		$	6.4

The losses included in earnings in the table above are recorded within operating expenses in the Company’s consolidated statements of operations. These losses relate to contingent consideration obligations outstanding at June 30, 2013.

The $10.5 million of contingent consideration obligations as of June 30, 2013 is classified in other liabilities within the Company’s consolidated balance sheet.

The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts and contingent consideration obligations:

Derivatives:

In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.

Contingent consideration:

At June 30, 2013, the Company has contingent consideration obligations related to the acquisitions of CSI and Copal which are based on certain financial and non-financial metrics set forth in the acquisition agreements. These obligations are measured using Level 3 inputs as defined in the ASC. The Company recorded the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management’s best estimates of the achievement of the metrics and the value of the obligations are adjusted quarterly.

The contingent consideration obligation for CSI is based on the achievement of a certain contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At June 30, 2013, the Company expects that this milestone will be reached by the aforementioned date.

There are several contingent consideration obligations relating to the acquisition of Copal. A portion of the contingent cash payments are based on revenue and EBITDA growth for certain of the Copal entities. This growth is calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the put/call option to acquire the remaining 33% ownership interest of Copal Partners Limited which the Company does not currently own, to revenue and EBITDA in Copal’s fiscal year ended March 31, 2011. There are no limitations set forth in the acquisition

agreement relating to the amount payable under this contingent consideration arrangement. Payments under this arrangement, if any, would be made upon the exercise of the aforementioned put/call option. Other contingent cash payments are based on the achievement of revenue targets for Copal’s fiscal year ended March 31, 2012 and 2013, with certain limits on the amount of revenue that can be applied to the calculation of these contingent payments. Each of these contingent payments had a maximum payout of $2.5 million and have been settled as of June 30, 2013. The Company utilizes discounted cash flow methodologies to value these obligations. The expected future cash flows for these obligations are discounted using a risk-free interest rate plus a credit spread based on the option adjusted spread of the Company’s publicly traded debt as of the valuation date. The most significant unobservable input involved in the measurement of these obligations is the projected future financial results of the applicable Copal entities. Also, for the portion of the obligations which are dependent upon the exercise of the call/put option, the Company has utilized a Monte Carlo simulation model to estimate when the option will be exercised, thus triggering the payment of contingent consideration.

A significant increase or decrease in any of the aforementioned significant unobservable inputs related to the fair value measurement of the Company’s contingent consideration obligations would result in a significantly higher or lower reported fair value for these obligations.

NOTE 9. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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


	June 30, 2013		December 31, 2012
Other current assets:
Prepaid taxes	$	94.0	$	31.8
Prepaid expenses		42.8		47.3
Other		10.8		12.8


Total other current assets	$	147.6	$	91.9


	June 30, 2013		December 31, 2012
Other assets:
Investments in joint ventures	$	35.1	$	38.3
Deposits for real-estate leases		9.0		10.0
Other		45.8		47.7


Total other assets	$	89.9	$	96.0


	June 30, 2013		December 31, 2012
Accounts payable and accrued liabilities:
Salaries and benefits	$	63.2	$	79.2
Incentive compensation		62.0		162.6
Profit sharing contribution		—		12.6
Customer credits, advanced payments and advanced billings		23.0		21.5
Self-insurance reserves		36.1		55.8
Dividends		3.4		47.7
Professional service fees		35.5		30.2
Interest accrued on debt		23.1		23.4
Accounts payable		14.9		14.3
Income taxes		2.4		56.1
Deferred rent-current portion		1.0		1.1
Pension and other retirement employee benefits		4.4		4.4
Other		43.8		46.4


Total accounts payable and accrued liabilities	$	312.8	$	555.3


	June 30, 2013		December 31, 2012
Other liabilities:
Pension and other retirement employee benefits	$	206.8	$	213.3
Deferred rent-non-current portion		105.7		110.2
Interest accrued on UTPs		14.4		10.6
Legacy and other tax matters		38.1		37.1
Other		47.9		38.9


Total other liabilities	$	412.9	$	410.1

Redeemable Noncontrolling Interest:

In connection with the acquisition of Copal, the Company and the non-controlling shareholders entered into a put/call option agreement whereby the Company has the option to purchase from the non-controlling shareholders and the non-controlling shareholders have the option to sell to the Company the remaining 33% ownership interest of Copal Partners Limited based on a strike price to be calculated on pre-determined formulas using a combination of revenue and EBITDA multiples when exercised. The value of the estimated put/call option strike price on the date of acquisition was based on a Monte Carlo simulation model. This model contemplated multiple scenarios which simulated certain of Copal’s revenue, EBITDA margins and equity values to estimate the present value of the expected strike price of the option. The option is subject to a minimum exercise price of $46 million. There is no limit as to the maximum amount of the strike price on the put/call option.

The following table shows changes in the redeemable noncontrolling interest related to the acquisition of Copal:


	Six Months Ended June 30, 2013			Year Ended December 31, 2012
(in millions)	Redeemable Noncontrolling Interest

Balance January 1,	$	72.3		$	60.5
Adjustment due to right of offset for UTPs*		—			6.8
Net earnings		2.3			3.6
Dividends		(3.0	)		(3.6	)
FX translation		—			1.6
Adjustment to redemption value		7.1			3.4

Balance	$	78.7		$	72.3

*	Relates to an adjustment for the right of offset pursuant to the Copal acquisition agreement whereby the amount due to the sellers under the put/call arrangement is reduced by the amount of UTPs that the Company may be required to pay.

Noncontrolling Interests:

The following table summarizes the changes in the Company’s noncontrolling interests:


	Six Months Ended June 30, 2013			Year Ended December 31, 2012
(in millions)	Noncontrolling Interests

Balance January 1,	$	11.4		$	10.6
Net earnings		3.4			6.1
Dividends		(5.6	)		(4.7	)
FX translation		—			(0.6	)

Balance	$	9.2		$	11.4

Other Non-Operating (Expense) Income:

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
FX gain/(loss)	$	5.3		$	0.3		$	12.7		$	(1.2	)
Joint venture income		3.2			2.6			4.9			4.6
Other		(0.8	)		(0.2	)		(1.1	)		(0.8	)

Total	$	7.7		$	2.7		$	16.5		$	2.6

Changes in the Company’s self-insurance reserves are as follows:


(in millions)	Six Months Ended June 30, 2013			Year Ended December 31, 2012

Beginning balance	$	55.8		$	27.1
Accruals (reversals), net		(9.3	)		38.1
Payments		(10.4	)		(9.4	)

Ending balance*	$	36.1		$	55.8

*	These reserves primarily relate to legal defense costs for claims from prior years.

NOTE 10. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

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


	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013			Affected line in the consolidated statement of operations
Gains/(losses) on cash flow hedges
Interest rate swap derivative contracts	$	(0.1	)	$	(0.7	)	Interest income (expense),net

Income tax effect of item above		—			0.2		Provision for income taxes

Total gains (losses) on cash flow hedges		(0.1	)		(0.5	)

Pension and other retirement benefits
Amortization of actuarial losses and prior service costs included in net income		(1.8	)		(3.9	)	Operating expense
Amortization of actuarial losses and prior service costs included in net income		(1.0	)		(2.0	)	SG&A expense

Total before income taxes		(2.8	)		(5.9	)
Income tax effect of item above		1.2			2.4		Provision for income taxes

Total pension and other retirement benefits		(1.6	)		(3.5	)

Total losses included in Net Income attributable to reclassifications out of AOCI	$	(1.7	)	$	(4.0	)

Changes in AOCI by component (net of tax) for the period ended June 30, 2013:


	Six Months Ended June 30, 2013
	Gains/(Losses) on Cash Flow and Net Investment Hedges			Pension and Other Retirement Benefits			Foreign Currency Translation Adjustments			Total
Balance December 31, 2012	$	(2.9	)	$	(90.1	)	$	10.9		$	(82.1	)
Other comprehensive income/(loss) before reclassifications		0.5			0.5			(72.8	)		(71.8	)
Amounts reclassified from AOCI		0.5			3.5			—			4.0

Other comprehensive income/(loss)		1.0			4.0			(72.8	)		(67.8	)

Balance June 30, 2013	$	(1.9	)	$	(86.1	)	$	(61.9	)	$	(149.9	)

NOTE 11. PENSION AND OTHER RETIREMENT BENEFITS

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

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

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


	Three Months Ended June 30,
	Pension Plans						Other Retirement Plans
	2013			2012			2013		2012
Components of net periodic expense
Service cost	$	4.7		$	5.0		$	0.4	$	0.4
Interest cost		3.3			3.3			0.2		0.2
Expected return on plan assets		(3.1	)		(3.1	)		—		—
Amortization of net actuarial loss from earlier periods		2.6			2.1			0.1		—
Amortization of net prior service costs from earlier periods		0.1			0.1			—		—

Net periodic expense	$	7.6		$	7.4		$	0.7	$	0.6


	Six Months Ended June 30,
	Pension Plans						Other Retirement Plans
	2013			2012			2013		2012
Components of net periodic expense
Service cost	$	9.9		$	9.5		$	0.8	$	0.7
Interest cost		6.7			6.5			0.4		0.4
Expected return on plan assets		(6.4	)		(6.2	)		—		—
Amortization of net actuarial loss from earlier periods		5.4			4.6			0.2		0.1
Amortization of net prior service costs from earlier periods		0.3			0.3			—		—

Net periodic expense	$	15.9		$	14.7		$	1.4	$	1.2

The Company contributed $16.8 million to its U.S. funded pension plan and made payments of $1.3 million related to its unfunded U.S. DBPPs and $0.3 million to its U.S. other retirement plans, respectively during the six months ended June 30, 2013. The Company presently anticipates making additional payments of $2.3 million related to its unfunded U.S. DBPPs and $0.4 million to its U.S. other retirement plans during the remainder of 2013.

NOTE 12. INDEBTEDNESS

The following table summarizes total indebtedness:


	June 30, 2013		December 31, 2012
2012 Facility	$	—	$	—
Commercial paper		—		—
Notes Payable:
Series 2005-1 Notes, due 2015; which includes the fair value of interest rate swap of $11.0 million at 2013 and $13.8 million at 2012		311.0		313.8
Series 2007-1 Notes due 2017		300.0		300.0
2010 Senior Notes, due 2020, net of unamortized discount of $2.4 million in 2013 and $2.6 million in 2012		497.6		497.4
2012 Senior Notes, due 2022, net of unamortized discount of $3.5 million in 2013 and $3.8 million in 2012		496.4		496.2
2008 Term Loan		—		63.8


Total debt		1,605.0		1,671.2
Current portion		—		(63.8	)


Total long-term debt	$	1,605.0	$	1,607.4

2012 Facility

On April 18, 2012, the Company and certain of its subsidiaries entered into a $1 billion five-year senior, unsecured revolving credit facility in an aggregate principal amount of $1 billion that expires in April 2017. The 2012 Facility replaced the $1 billion 2007 Facility that was scheduled to expire in September 2012. The proceeds from the 2012 Facility will be used for general corporate purposes, including, without limitation, support for the Company’s $1 billion commercial paper program, share repurchases and acquisition financings. Interest on borrowings under the facility is payable at rates that are based on LIBOR plus a premium that can range from 77.5 basis points to 120 basis points per annum of the outstanding amount, depending on the Company’s Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2012 Facility. These quarterly fees can range from 10 basis points of the facility amount to 17.5 basis points, depending on the Company’s Debt/ EBITDA Ratio.

The 2012 Facility contains covenants that, among other things, restrict the ability of the Company and 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 set forth in the facility agreement. The 2012 Facility also contains a financial covenant that requires the Company to maintain a Debt to EBITDA Ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events constituting an event of default under the 2012 Facility, all loans outstanding under the facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all commitments under the facility may be terminated.

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 Company’s 2012 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) federal funds rate; (d) 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 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 Company’s outstanding 7.61% senior notes which matured on September 30, 2005. In the event that Moody’s 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.

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 August 19, 2010, the Company issued $500 million aggregate principal amount of 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 2010 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2010 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 2010 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 2010 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2010 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 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 or (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. Accordingly, the Company has offset the liability for this note against the indemnification asset, thus no balance for this note is carried on the Company’s consolidated balance sheet at June 30, 2013 and December 31, 2012. In the event that the Company would not be required to settle amounts related 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 20, 2012, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2012 Senior Notes bear interest at a fixed rate of 4.50% and mature on September 1, 2022. Interest on the 2012 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2013. The Company may prepay the 2012 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 2012 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2012 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 2012 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 2012 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 2012 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the Indenture, the 2012 Senior notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.

2008 Term Loan

On May 7, 2008, Moody’s entered into a five-year, $150.0 million senior unsecured term loan with several lenders due at various times through May 7, 2013. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan was payable quarterly at rates that were based on LIBOR plus a margin that can range from 125 basis points to 175 basis points depending on the Company’s Debt/EBITDA ratio.

The 2008 Term Loan contained restrictive covenants that, among other things, restricted 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 limited the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contained 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. The 2008 Term Loan was repaid in full at June 30, 2013.

The principal payments due on the Company’s long-term borrowings for each of the next five years are presented in the table below:


Year Ended December 31,	Series 2005-1 Notes		Series 2007-1 Notes		2010 Senior Notes		2012 Senior Notes		Total
2013 (after June 30,)	$	—	$	—	$	—	$	—	$	—
2014		—		—		—		—		—
2015		300.0		—		—		—		300.0
2016		—		—		—		—		—
2017		—		300.0		—		—		300.0
Thereafter		—		—		500.0		500.0		1,000.0

Total	$	300.0	$	300.0	$	500.0	$	500.0	$	1,600.0

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million which converted 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 6 above.

At June 30, 2013, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2012 Facility, the 2007 Facility, the 2005 Agreement, the 2007 Agreement, the 2012 Senior Notes, the 2010 Senior Notes and the 2008 Term Loan contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2013, there were no such cross defaults.

Interest expense, net

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Income	$	1.2		$	1.2		$	2.4		$	2.5
Expense on borrowings		(20.5	)		(16.4	)		(41.5	)		(32.8	)
(Expense) income on UTPs and other tax related liabilities (a)		(2.4	)		(1.5	)		(4.6	)		3.5
Capitalized		—			0.1			—			(0.1	)

Total	$	(21.7	)	$	(16.6	)	$	(43.7	)	$	(26.9	)

(a)	The amount in the six months ended June 30, 2012 contains a benefit of approximately $7 million related to the settlement of state and local income tax audits.

The following table shows the cash paid for interest:


	Six Months Ended June 30,
	2013		2012
Interest paid*	$	41.4	$	32.0

*	Interest paid includes payments of interest relating to the settlement of income tax audits in the first quarter of 2012 as well as net settlements on interest rate swaps more fully discussed in Note 6.

The Company’s 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 Company’s long-term debt as of June 30, 2013 and December 31, 2012 are as follows:


	June 30, 2013				December 31, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Series 2005-1 Notes*	$	311.0	$	322.4	$	313.8	$	326.1
Series 2007-1 Notes		300.0		335.6		300.0		348.3
2010 Senior Notes		497.6		535.7		497.4		562.8
2012 Senior Notes		496.4		501.2		496.2		528.8
2008 Term Loan		—		—		63.8		63.8


Total	$	1,605.0	$	1,694.9	$	1,671.2	$	1,829.8

*	The carrying amount includes an $11.0 million and $13.8 million fair value adjustment on an interest rate hedge at June 30, 2013 and December 31, 2012, respectively.

The fair value of the Company’s long-term debt is estimated using discounted cash flows with inputs based on prevailing interest rates available to the Company for borrowings with similar maturities.

NOTE 13. CONTINGENCIES

From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

Following events in the global credit markets over the last several years, including in the U.S. subprime residential mortgage sector, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other domestic and foreign 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 Moody’s in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased following the events in the U.S. subprime residential mortgage sector and global credit markets more broadly over the last several years.

Two purported class action complaints have been filed by purported purchasers of the Company’s 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 United States 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 Moody’s 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 Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s 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 Moody’s 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. On September 14, 2012, the Company filed a motion for summary judgment, which was fully briefed on December 21, 2012. Oral arguments on the motion for summary judgment took place on April 9, 2013.

On August 25, 2008, Abu Dhabi Commercial Bank filed a purported class action in the United States District Court for the Southern District of New York asserting numerous common-law causes of action against two subsidiaries of the Company, another rating agency, and Morgan Stanley & Co. The action related to securities issued by a structured investment vehicle called Cheyne Finance (the “Cheyne SIV”) and sought, among other things, compensatory and punitive damages. The central allegation against the rating agency defendants was that the credit ratings assigned to the securities issued by the Cheyne SIV were false and misleading. In early proceedings, the court dismissed all claims against the rating agency defendants except those for fraud and aiding and abetting fraud. In June 2010, the court denied plaintiff’s motion for class certification, and additional plaintiffs were subsequently added to the complaint. In January 2012, the rating agency defendants moved for summary judgment with respect to the fraud and aiding and abetting fraud claims. Also in January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that reasserted previously dismissed claims against all defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and related aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the reasserted claims except for the negligent misrepresentation claim, and on September 19, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. On August 17, 2012, the court ruled on the rating agencies’ motion for summary judgment on the plaintiffs’ remaining claims for fraud and aiding and abetting fraud. The court dismissed, in whole or in part, the fraud claims of four plaintiffs as against Moody’s but allowed the fraud claims to proceed with respect to certain claims of one of those plaintiffs and the claims of the remaining 11 plaintiffs. The court also dismissed all claims against Moody’s for aiding and abetting fraud. Three of the plaintiffs whose claims were dismissed filed motions for reconsideration, and on November 7, 2012, the court granted two of these motions, reinstating the claims of two plaintiffs that were previously dismissed. On February 1, 2013, the court dismissed the claims of one additional plaintiff on jurisdictional grounds. Trial on the remaining fraud claims against the rating agencies, and on claims against Morgan Stanley for aiding and abetting

fraud and for negligent misrepresentation, was scheduled for May 2013. On April 24, 2013, pursuant to confidential settlement agreements, the 14 plaintiffs with claims that had been ordered to trial stipulated to the voluntary dismissal, with prejudice, of these claims as against all defendants, and the Court so ordered that stipulation on April 26, 2013. The settlement did not cover certain claims of two plaintiffs that were previously dismissed by the Court. On May 23, 2013, these two plaintiffs filed a Notice of Appeal to the Second Circuit, seeking reversal of the dismissal of their claims and also seeking reversal of the Court’s denial of class certification. According to pleadings filed by plaintiffs in earlier proceedings, they seek approximately $76 million in total compensatory damages in connection with the two claims at issue on the appeal .

In October 2009, plaintiffs King County, Washington and Iowa Student Loan Liquidity Corporation each filed substantially identical putative class actions in the Southern District of New York against two subsidiaries of the Company and several other defendants, including two other rating agencies and IKB Deutsche Industriebank AG. These actions arose out of investments in securities issued by a structured investment vehicle called Rhinebridge Plc (the “Rhinebridge SIV”) and sought, among other things, compensatory and punitive damages. Each complaint asserted a claim for common law fraud against the rating agency defendants, alleging, among other things, that the credit ratings assigned to the securities issued by the Rhinebridge SIV were false and misleading. The case was assigned to the same judge presiding over the litigation concerning the Cheyne SIV, described above. In April 2010, the court denied the rating agency defendants’ motion to dismiss. In June 2010, the court consolidated the two cases and the plaintiffs filed an amended complaint that, among other things, added Morgan Stanley & Co. as a defendant. In January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that asserted claims against the rating agency defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the new claims except for the negligent misrepresentation claim and a claim for aiding and abetting fraud; on September 28, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. Plaintiffs did not seek class certification. On September 7, 2012 the rating agencies filed a motion for summary judgment dismissing the remaining claims against them. On January 3, 2013, the Court issued an order dismissing the claim for aiding and abetting fraud against the rating agencies but allowing the claim for fraud to proceed to trial. In June 2012 and March 2013, respectively, defendants IKB Deutsche Industriebank AG (and a related entity) and Fitch, Inc. informed the court that they had executed confidential settlement agreements with the plaintiffs. On April 24, 2013, pursuant to a confidential settlement agreement, the plaintiffs stipulated to the voluntary dismissal, with prejudice, of all remaining claims as against the remaining defendants, including Moody’s, and the Court so ordered that stipulation on April 26, 2013.

For claims, litigation and proceedings and governmental investigations and inquires 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. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

Legacy Tax Matters

Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of June 30, 2013, Moody’s has recorded liabilities for Legacy Tax Matters totaling $39.8 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 Moody’s future reported results, financial position and cash flows.

The following summary of the relationships among Moody’s, New D&B and their predecessor entities is important in understanding the Company’s 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 Moody’s.

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 Moody’s 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 Moody’s $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 impacting these tax benefits, Moody’s 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, Moody’s 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. In August 2012, New D&B effectively settled examinations for the 2005 and 2006 tax years. As a result, in the third quarter of 2012, Moody’s recorded a reduction of accrued interest expense of $4.4 million ($2.6 million, net of tax) and an increase in other non-operating income of $12.8 million, relating to amounts due to New D&B. As of June 30, 2013, Moody’s liability with respect to this matter totaled $37.7 million. Furthermore, the Company continues to carry a $2.1 million liability for an unrelated Legacy Tax Matter.

NOTE 14. SEGMENT INFORMATION

The Company is organized into two reportable segments: (i) MIS and (ii) MA. The MIS segment is comprised of all of the Company’s ratings activities. All of Moody’s other non-rating commercial activities are included in the MA segment.

The MIS segment consists of four lines of business—corporate finance, structured finance, financial institutions and public, project and infrastructure finance—that 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 Company’s 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, ERS and PS.

Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services. Additionally, overhead costs and corporate expenses of the Company which exclusively benefit only one segment, are fully charged to that segment. Overhead costs and corporate expenses of the Company which benefit both segments are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. Beginning on January 1, 2013, the Company refined its methodology for allocating certain overhead departments to its segments to better align the costs allocated based on each segment’s usage of the overhead service. The refined methodology is reflected in the segment results for the three and six months ended June 30, 2013 and accordingly, the segment results for the three and six months ended June 30, 2012 have been reclassified to conform to the new presentation. “Eliminations” in the table below represent intersegment revenue/expense.

Financial Information by Segment

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


	Three Months Ended June 30,
	2013									2012
	MIS		MA		Eliminations			Consolidated		MIS		MA		Eliminations			Consolidated
Revenue	$	556.3	$	221.4	$	(21.7	)	$	756.0	$	458.7	$	202.5	$	(20.4	)	$	640.8
Operating, SG&A		236.2		167.6		(21.7	)		382.1		211.3		149.3		(20.4	)		340.2

Adjusted Operating Income		320.1		53.8		—			373.9		247.4		53.2		—			300.6

Less:
Depreciation and amortization		11.5		11.6		—			23.1		10.7		11.4		—			22.1

Operating income	$	308.6	$	42.2	$	—		$	350.8	$	236.7	$	41.8	$	—		$	278.5


	Six Months Ended June 30,
	2013									2012
	MIS		MA		Eliminations			Consolidated		MIS		MA		Eliminations			Consolidated
Revenue	$	1,096.4	$	434.8	$	(43.4	)	$	1,487.8	$	928.5	$	399.6	$	(40.5	)	$	1,287.6
Operating, SG&A		520.5		332.8		(43.4	)		809.9		432.4		302.6		(40.5	)		694.5

Adjusted Operating Income		575.9		102.0		—			677.9		496.1		97.0		—			593.1

Less:
Depreciation and amortization		22.8		23.9		—			46.7		21.9		23.7		—			45.6

Operating income	$	553.1	$	78.1	$	—		$	631.2	$	474.2	$	73.3	$	—		$	547.5

MIS and MA Revenue by Line of Business

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
MIS:
Corporate finance (CFG)	$	262.9		$	191.5		$	521.2		$	392.0
Structured finance (SFG)		97.2			90.7			190.2			185.0
Financial institutions (FIG)		84.5			77.8			171.0			156.6
Public, project and infrastructure finance (PPIF)		92.7			81.2			176.1			160.3

Total external revenue		537.3			441.2			1,058.5			893.9

Intersegment royalty		19.0			17.5			37.9			34.6

Total		556.3			458.7			1,096.4			928.5

MA:
Research, data and analytics (RD&A)		130.3			121.8			259.9			241.6
Enterprise risk solutions (ERS)		60.2			51.5			113.2			99.6
Professional services (PS)		28.2			26.3			56.2			52.5

Total external revenue		218.7			199.6			429.3			393.7

Intersegment revenue		2.7			2.9			5.5			5.9

Total		221.4			202.5			434.8			399.6

Eliminations		(21.7	)		(20.4	)		(43.4	)		(40.5	)

Total MCO	$	756.0		$	640.8		$	1,487.8		$	1,287.6

Consolidated Revenue Information by Geographic Area:


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
United States	$	408.4	$	346.1	$	818.3	$	691.2
International:
EMEA		222.5		187.1		429.6		377.1
Asia-Pacific		75.5		63.7		143.7		127.2
Americas		49.6		43.9		96.2		92.1

Total International		347.6		294.7		669.5		596.4

Total	$	756.0	$	640.8	$	1,487.8	$	1,287.6

Total Assets by Segment:

June 30, 2013

December 31, 2012

MIS

Corporate
Assets (a)

Consolidated

MIS

Corporate
Assets (a)

Consolidated

Total Assets

1,133.9

1,231.4

1,429.0

3,794.3

884.9

1,386.7

1,689.3

3,960.9

(a)	Represents common assets that are shared between each segment or utilized by the corporate entity. Such assets primarily include cash and cash equivalents, short-term investments, unallocated property and equipment and deferred taxes.

NOTE 15. RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The objective of this ASU is to improve reporting by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations. The amendments in this ASU are required to be applied prospectively and are effective for reporting periods beginning after December 15, 2012. The Company has fully adopted all provisions of this ASU as of January 1, 2013 and the implementation did not have any impact on the Company’s consolidated financial statements other than to provide additional footnote disclosure which is included in Note 10.

NOTE 16. SUBSEQUENT EVENTS

On July 15, 2013, the Board approved the declaration of a quarterly dividend of $0.25 per share of Moody’s common stock, payable on September 10, 2013 to shareholders of record at the close of business on August 20, 2013.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moody’s Corporation condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 70 for a discussion of uncertainties, risks and other factors associated with these statements.

The Company

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

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

Critical Accounting Estimates

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, restructuring, goodwill and acquired intangible assets, pension and other retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Company’s annual report on Form 10-K for the year ended December 31, 2012, includes descriptions of some of the judgments that Moody’s makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there have been no material changes to the Company’s critical accounting estimates.

Operating Segments

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 fees charged to MIS from MA for the use of certain MA products and services in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to provide these products and services. Overhead charges and corporate expenses 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 resources and information technology.

Beginning on January 1, 2013, the Company refined its methodology for allocating certain overhead departments to its segments to better align the costs allocated based on each segment’s usage of the overhead service. The refined methodology is reflected in the segment results for the three and six months ended June 30, 2013 and accordingly, the segment results for the prior year comparative periods have been reclassified to conform to the new presentation. These reclassifications were not material.

RESULTS OF OPERATIONS

Three months ended June 30, 2013 compared with three months ended June 30, 2012

Executive Summary

Moody’s revenue in the second quarter of 2013 totaled $756.0 million, an increase of $115.2 million compared to 2012 and reflected growth across all LOBs in both reportable segments. Total expenses were $405.2 million, an increase of $42.9 million compared to the prior year primarily due to higher compensation costs relating to headcount growth and annual compensation increases. Additionally, there were higher non-compensation expenses which reflected an increase in IT costs and legal expenses for ongoing matters. Operating income of $350.8 million increased $72.3 million compared to 2012 and resulted in an operating margin of 46.4% in 2013 compared to 43.5% in the prior year period. Adjusted Operating Income of $373.9 million in the second quarter of 2013 increased $73.3 million compared to 2012 resulting in an Adjusted Operating Margin of 49.5% compared to 46.9% in the prior year period. Diluted EPS of $1.00 in the second quarter of 2013 increased $0.24 over the prior year period.


	Three months ended June 30,						% Change Favorable (Unfavorable)
	2013			2012			% Change Favorable (Unfavorable)
Revenue:
United States	$	408.4		$	346.1			18	%

International:
EMEA		222.5			187.1			19	%
Asia Pacific		75.5			63.7			19	%
Americas		49.6			43.9			13	%

Total International		347.6			294.7			18	%

Total		756.0			640.8			18	%

Expenses:
Operating		197.1			180.6			(9	%)
SG&A		185.0			159.6			(16	%)
Depreciation and amortization		23.1			22.1			(5	%)

Total		405.2			362.3			(12	%)

Operating income	$	350.8		$	278.5			26	%

Adjusted Operating Income ⁽¹⁾	$	373.9		$	300.6			24	%

Interest income (expense), net	$	(21.7	)	$	(16.6	)		(31	%)
Other non-operating income (expense), net	$	7.7		$	2.7			185	%
Net income attributable to Moody’s	$	225.5		$	172.5			31	%
Diluted EPS attributable to Moody’s common shareholders	$	1.00		$	0.76			32	%

Operating margin		46.4	%		43.5	%
Adjusted Operating Margin⁽¹⁾		49.5	%		46.9	%

(1)	Adjusted Operating Income and Adjusted Operating Margin are non-GAAP financial measures. Refer to the section entitled “Non-GAAP Financial Measures” of this Management Discussion and Analysis for further information regarding these measures.

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


	June 30,				% Change
	2013		2012
United States		2,686		2,531		6	%
International		4,284		3,955		8	%

Total		6,970		6,486		7	%

Global revenue of $756.0 million in the second quarter of 2013 increased $115.2 million compared to 2012 reflecting growth in both reportable segments. The most notable growth in the ratings segment was from CFG where there were strong rated issuance volumes for high-yield corporate debt and bank loans as well as investment-grade corporate debt. The growth in MA reflects higher revenue across all LOBs, most notably in RD&A and ERS. Transaction revenue accounted for 52% and 47% of global MCO revenue in the second quarter of 2013 and 2012, respectively.

U.S. revenue of $408.4 million increased $62.3 million over 2012, reflecting growth across all ratings LOBs, most notably in CFG and SFG, coupled with growth in all LOBs within MA. Also contributing to the growth were changes in the mix of fee type, new fee initiatives and certain pricing increases in the MIS segment.

Non-U.S. revenue increased $52.9 million compared to 2012, primarily reflecting higher CFG revenue in all international regions partially offset by declines in most asset classes in SFG in the EMEA region. Also contributing to the revenue growth were increases in the RD&A and ERS LOBs within MA in the EMEA region coupled with revenue growth across all MA LOBs in the Asia Pacific region.

Operating expenses were $197.1 million in the second quarter of 2013, an increase of $16.5 million from 2012 and reflected an increase in both compensation and non-compensation costs. The increase in compensation costs of approximately $12 million reflects higher salaries and related employee benefits reflecting headcount growth as well as the impact of annual compensation increases coupled with higher incentive compensation. The increase in incentive compensation reflected greater projected achievement against full-year targeted results through the second quarter of 2013 compared to the same period in 2012 as well as increases in headcount. The increase in non-compensation costs of approximately $4 million is primarily due to higher IT costs for ongoing initiatives.

SG&A expenses of $185.0 million in the second quarter of 2013 increased $25.4 million from 2012 primarily related to growth in both compensation and non-compensation costs of approximately $15 million and $10 million, respectively. The growth in compensation costs reflects higher salaries and related employee benefits due to annual compensation increases and headcount growth in sales personnel within MA as well as in overhead support areas. The growth also reflects higher incentive compensation primarily resulting from greater projected achievement against full-year targeted results through the second quarter of 2013 compared to the same period in 2012 as well as increases in headcount. The increase in non-compensation expenses is primarily due to higher costs for ongoing IT initiatives as well as higher legal fees for ongoing matters.

Operating income of $350.8 million increased $72.3 million from 2012. Adjusted Operating Income was $373.9 million in the second quarter of 2013 and increased $73.3 million compared to 2012. Operating margin and Adjusted Operating Margin in the second quarter of 2013 of 46.4% and 49.5%, respectively, increased 290bps and 260bps, respectively, compared to the prior year, reflecting strong revenue growth exceeding expense growth.

Interest income (expense), net in the second quarter of 2013 was ($21.7) million, a $5.1 million increase in expense compared to 2012. This increase is primarily due to higher interest on borrowings reflecting the issuance of the 2012 Senior Notes in the third quarter of 2012.

Other non-operating income (expense), net was $7.7 million in the second quarter of 2013, a $5.0 million increase in income compared to 2012 and reflected approximately $5 million in FX gains in the second quarter of 2013 compared to immaterial FX gains in the prior year. The FX gains in 2013 primarily related to the strengthening of the euro relative to the British pound.

The Company’s ETR was 32.2% in the second quarter of 2013, down from 33.6% in 2012. The decrease was primarily due to U.S. tax legislation enacted in the first quarter of 2013 which retroactively extended certain tax benefits to the 2012 tax year and prospectively extended these tax benefits to the 2013 tax year. Additionally, there were lower taxes on non-U.S. income.

Net Income in the second quarter of 2013 was $225.5 million, or $1.00 per diluted share. This is an increase of $53.0 million, or $0.24 per diluted share, compared to the second quarter of 2012.

Segment Results

Moody’s Investors Service

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


	Three months ended June 30,						% Change Favorable (Unfavorable)
	2013			2012			% Change Favorable (Unfavorable)
Revenue:
Corporate finance (CFG)	$	262.9		$	191.5			37	%
Structured finance (SFG)		97.2			90.7			7	%
Financial institutions (FIG)		84.5			77.8			9	%
Public, project and infrastructure finance (PPIF)		92.7			81.2			14	%

Total external revenue		537.3			441.2			22	%

Intersegment royalty		19.0			17.5			9	%

Total MIS Revenue		556.3			458.7			21	%

Expenses:
Operating and SG&A (including intersegment expenses)		236.2			211.3			(12	%)

Adjusted Operating Income		320.1			247.4			29	%

Depreciation and amortization		11.5			10.7			(7	%)

Operating income	$	308.6		$	236.7			30	%

Adjusted Operating Margin		57.5	%		53.9	%
Operating margin		55.5	%		51.6	%

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

Global MIS revenue of $537.3 million for the second quarter of 2013 increased $96.1 million compared to 2012, reflecting growth in all ratings LOBs. The most notable growth was within CFG and reflected an increase in rated issuance volumes for speculative-grade corporate debt and bank loans as well as investment-grade corporate debt. The growth over the prior year period also reflected changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. Transaction revenue for MIS was 65% and 60% in the second quarter of 2013 and 2012, respectively.

In the U.S., revenue was $313.2 million in the second quarter of 2013, an increase of $55.2 million, or 21% compared to 2012. The increase primarily reflects strong growth in rated issuance volumes for high-yield corporate debt and bank loans as well as investment-grade corporate debt in CFG coupled with an increase in rated issuance volumes for CMBS and REITs within SFG. Also contributing to the growth over the second quarter of 2012 were benefits from changes in the mix of fee type, new fee initiatives and certain pricing increases.

Non-U.S. revenue was $224.1 million in the second quarter of 2013, an increase of $40.9 million compared to 2012. The growth over 2012 primarily reflects higher revenue from rating speculative-grade corporate debt and bank loans coupled with higher investment-grade corporate debt revenue across all regions and higher infrastructure finance revenue in EMEA. Also contributing to the growth over the second quarter of 2012 were benefits from changes in the mix of fee type, new fee initiatives and certain pricing increases. Partially offsetting these increases were declines in issuance across most asset classes in SFG within the EMEA region.

Global CFG revenue of $262.9 million in the second quarter of 2013 increased $71.4 million from 2012 reflecting strong growth in rated issuance volumes for high-yield corporate debt and bank loans as well as investment-grade corporate debt. Also contributing to the growth in revenue were changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. The aforementioned increase in rated issuance volumes largely reflected issuers taking advantage of the overall low interest rate environment to issue new debt as well as refinance existing borrowings combined with increased investor appetite for higher-yielding fixed income securities. Transaction revenue represented 75% of total CFG revenue in the second quarter of 2013, compared to 70% in 2012. In the U.S., revenue in the second quarter of 2013 was $152.2 million, or $33.7 million higher than 2012. Internationally, revenue of $110.7 million in the second quarter of 2013 increased $37.7 million compared to 2012 reflecting strong high-yield corporate debt issuance in the EMEA and Asia-Pacific regions.

Global SFG revenue of $97.2 million in the second quarter of 2013 increased $6.5 million compared to 2012 and reflected an increase in rated issuance volumes in the CMBS and REIT asset classes in the U.S. being partially offset by declines across most asset classes in the EMEA region. Transaction revenue was 61% of total SFG revenue in the second quarter of 2013 compared to 57% in 2012. In the U.S., revenue of $62.1 million increased $13.9 million compared to 2012, reflecting growth in CMBS and REIT issuance. The growth in these asset classes reflects the current low interest rate environment as well as narrowing credit spreads and increased investor demand for these securities. Non-U.S. revenue in the second quarter of 2013 of $35.1 million decreased $7.4 million compared to 2012 reflecting declines across most asset classes in the EMEA region, most notably in RMBS and ABS. The decline in RMBS issuance reflects fewer deals originating as banks have had alternative access to capital as a result of the “Funding for Lending” program implemented in the U.K which allows institutions to borrow from the Bank of England at favorable rates in exchange for providing mortgage loans as collateral for the borrowing.

Global FIG revenue of $84.5 million in the second quarter of 2013 was $6.7 million higher compared to 2012 with the primary driver of the growth reflecting benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Additionally, the growth reflects higher banking-related rated issuance volumes in the U.S. and EMEA. The increase in rated issuance volumes reflects larger financial institutions coming to market as credit spreads have tightened in this sector. Also contributing to the increase was higher insurance revenue in EMEA primarily reflecting insurers opportunistically refinancing existing borrowings as well as issuance to fund acquisition-related activities. Transaction revenue was 37% of total FIG revenue in the second quarter of 2013 compared to 35% in 2012. In the U.S. and internationally, revenue was $36.0 million and $48.5 million, respectively, in the three months ended June 30, 2013, or 9% and 8% higher, respectively, compared to the second quarter of 2012.

Global PPIF revenue was $92.7 million in the second quarter of 2013, an increase of $11.5 million compared to 2012, with approximately one-half of the increase reflecting benefits from changes in the mix of fee type, new fee initiatives and pricing increases. Additionally, there was growth in infrastructure finance rated issuance volumes across all regions and higher project finance rated issuance volumes in the U.S. These increases reflect issuers coming to market in the current low interest rate environment as well as issuance to expand their liquidity positions while interest rates remain favorable. Revenue generated from new transactions was 65% in the second quarter of 2013 compared to 62% in 2012. In the U.S., revenue in the second quarter of 2013 was $62.9 million and increased $4.5 million compared to 2012. Outside the U.S., PPIF revenue increased $7 million.

Operating and SG&A expenses in the second quarter of 2013 increased $24.9 million compared to 2012 due to growth in both compensation and non-compensation expenses of approximately $17 million and $8 million, respectively. The growth in compensation costs reflects higher salaries and related employee benefits resulting from annual compensation increases, headcount growth in the ratings LOBs as well as in support areas such as IT, finance and human resources for which the costs are allocated to each segment based on a revenue-split methodology. Additionally, there was an increase in incentive compensation which reflects greater achievement against full-year targeted results through the second quarter of 2013 compared to the same period in the prior year coupled with the aforementioned headcount growth. The growth in non-compensation expenses reflects higher costs related to continued investment in IT initiatives as well as higher costs for ongoing legal matters.

Adjusted Operating Income in the second quarter of 2013, which includes intersegment royalty revenue and intersegment expenses was $320.1 million, an increase of $72.7 million compared to 2012. Operating income in the second quarter of 2013 of $308.6 million, which includes intersegment royalty revenue and intersegment expenses, increased $71.9 million from the same period in 2012. Adjusted Operating margin and operating margin and were 57.5% and 55.5%, respectively, or 360bps and 390bps higher compared to the second quarter of 2012 due to strong revenue growth outpacing increases in operating and SG&A expenses.

Moody’s Analytics

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


	Three months ended June 30,						% Change Favorable (Unfavorable)
	2013			2012			% Change Favorable (Unfavorable)
Revenue:
Research, data and analytics (RD&A)	$	130.3		$	121.8			7	%
Enterprise risk solutions (ERS)		60.2			51.5			17	%
Professional services (PS)		28.2			26.3			7	%

Total external revenue		218.7			199.6			10	%

Intersegment revenue		2.7			2.9			(7	%)

Total MA Revenue		221.4			202.5			9	%

Expenses:
Operating and SG&A (including intersegment expenses)		167.6			149.3			(12	%)

Adjusted Operating Income		53.8			53.2			1	%

Depreciation and amortization		11.6			11.4			(2	%)

Operating income	$	42.2		$	41.8			1	%

Adjusted Operating Margin		24.3	%		26.3	%
Operating margin		19.1	%		20.6	%

The following is a discussion of external MA revenue and operating and SG&A expenses:

Global MA revenue increased $19.1 million compared to the second quarter of 2012, and reflected growth across all three LOBs. Recurring revenue comprised 79% of total MA revenue in the second quarter ended June 30, 2013 compared with 80% in the prior year period.

In the U.S., revenue of $95.2 million in the second quarter of 2013 increased $7.1 million, and reflected growth across all three LOBs. International revenue of $123.5 million in the second quarter of 2013 was $12.0 million higher than in the same period in 2012, and also reflected growth in all LOBs.

Global RD&A revenue, which comprised 60% and 61% of total external MA revenue in the second quarter ended June 30, 2013 and 2012, respectively, increased $8.5 million over the prior year period. The growth was primarily due to increased sales of credit research via the CreditView product and solid growth from other data and analytic products. Global ERS revenue in the second quarter of 2013 increased $8.7 million over the same period in 2012, primarily due to revenue from the sale and implementation of regulatory and compliance software to various financial institutions. Revenue from the PS LOB increased $1.9 million compared to the second quarter of 2012, reflecting growth in revenue from outsourced research and analytical services to institutional customers. Revenue from the FSTC reporting unit within the PS LOB was flat compared to the second quarter of 2012. If the FSTC reporting unit does not achieve its financial forecast it could result in a goodwill impairment charge in future quarters. Revenue in the ERS LOB is 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 the second quarter of 2013, which include the intersegment royalty for the right to use and distribute content, data and products developed by MIS, increased $18.3 million compared to 2012 reflecting higher compensation costs of approximately $11 million and higher non-compensation expenses of approximately $7 million. The increase in compensation costs reflects higher headcount to support business growth coupled with annual compensation increases as well as higher headcount in support areas for which the costs are allocated to each segment based on a revenue-split methodology. The expense growth also reflects an increase in incentive compensation resulting from higher projected achievement against full-year targeted results through the second quarter of 2013 compared to projected achievement in the same period of the prior year. The increase in non-compensation expenses reflects higher contingent consideration costs related to the acquisition of Copal coupled with higher professional service fees related to product delivery.

Adjusted Operating Income was $53.8 million in the second quarter of 2013, including intersegment revenue and expenses, and increased $0.6 million compared to 2012. Operating income of $42.2 million in the second quarter of 2013 increased $0.4 million compared to the same period in 2012. Adjusted Operating Margin for the second quarter of 2013 was 24.3%, and decreased 200bps compared to 2012. Operating margin was 19.1%, and decreased 150bps from the prior year.

Six months ended June 30, 2013 compared with six months ended June 30, 2012

Executive Summary

Moody’s revenue in the first half of 2013 totaled $1,487.8 million, an increase of $200.2 million compared to 2012 and reflected growth in both reportable segments, most notably in the high-yield sector of CFG within MIS. Total expenses were $856.6 million, an increase of $116.5 million compared to the prior year and reflected the settlement of the Abu Dhabi and Rhinebridge litigation matters more fully discussed in the “Contingencies” section of this MD&A. Expenses also increased due to higher compensation costs relating to headcount growth and annual compensation increases. Operating income of $631.2 million increased $83.7 million compared to 2012 and resulted in an operating margin of 42.4% in 2013, which was flat compared to the prior year. Adjusted Operating Income of $677.9 million in the first half of 2013 increased $84.8 million compared to 2012 resulting in an Adjusted Operating Margin of 45.6% compared to 46.1% in the prior year period. Diluted EPS of $1.83 in the first half of 2013, which includes a $0.14 charge related to the aforementioned settlement of litigation matters in the first quarter, increased $0.31 over the prior year period. Excluding the litigation settlement in the first quarter of 2013, non-GAAP EPS was $1.97, or $0.45 higher than in in the prior year period.