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| GLOSSARY OF TERMS AND ABBREVIATIONS | ||||||||||
| The following terms, abbreviations and acronyms are used to identify frequently used terms in this report: | ||||||||||
| TERM | DEFINITION | |||||||||
| Adjusted Operating Income | Operating income excluding restructuring, depreciation and amortization | |||||||||
| Adjusted Operating Income divided by revenue | ||||||||||
| Amba | Amba Investment Services; a provider of outsourced investment research and quantitative analytics for global financial institutions; a majority owned subsidiary of the Company acquired 100% of Amba in December 2013 | |||||||||
| Americas | Represents countries within North and South America, excluding the U.S. | |||||||||
| AOCI | Accumulated other comprehensive income (loss); a separate component of shareholders’ equity | |||||||||
| ASC | The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants | |||||||||
| Asia-Pacific | Represents countries in Asia including but not limited to: Australia, China, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka and Thailand | |||||||||
| ASU | The FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC | |||||||||
| BlackBox | BlackBox Logic; a leading provider of Residential Mortgage-Backed securities loan level data. The Company acquired the customer base and products of BlackBox Logic in December 2015 | |||||||||
| Board | The board of directors of the Company | |||||||||
| BPS | Basis points | |||||||||
| Brexit | Abbreviation of "British exit", which refers to the June 23, 2016 referendum by British voters to exit the European Union | |||||||||
| Canary Wharf Lease | Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009 | |||||||||
| CFG | Corporate finance group; an LOB of MIS | |||||||||
| CLO | Collateralized loan obligation | |||||||||
| CMBS | Commercial mortgage-backed securities; part of the CREF asset class within SFG | |||||||||
| Commission | European Commission | |||||||||
| Common Stock | The Company’s common stock | |||||||||
| Company | Moody’s Corporation and its subsidiaries; MCO; Moody’s | |||||||||
| 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 | |||||||||
| Copal Amba | Operating segment and reporting unit created in January 2014 that consists of all operations from Copal as well as the operations of Amba. The Copal Amba operating segment provides outsourced research and analytical services to the global financial and corporate sectors | |||||||||
| Council | Council of the European Union | |||||||||
| CP | Commercial Paper | |||||||||
| CP Notes | Unsecured CP issued | |||||||||
| CP Program | A program entered into on August 3, 2016 allowing the Company to privately place CP up to a maximum of $1 billion for which the matuirty may not exceed 397 days from the date of issue. | |||||||||
| CRAs | Credit rating agencies | |||||||||
| CRA3 | Regulation (EU) No 462/2013 of the European Parliament and of the Council, which updated the regulatory regimes imposing additional procedural requirements on CRAs | |||||||||
| CREF | and mortgage-backed securities; part of SFGCommercial real estate finance which includes REITs, commercial real estate CDOs | |||||||||
| CSI | CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification services primarily in Canada | |||||||||
| CSPP | Corporate Sector Purchase Programme; quantitative easing program implemented by the ECB. This program allows the central bank to purchase bonds issued by European companies, as well as provide access to the secondary bond market in which existing corporate bonds trade | |||||||||
| D&A | Depreciation and amortization | |||||||||
| DBPP | Defined benefit pension plans | |||||||||
| ECB | European Central Bank | |||||||||
| ECCA | Economics and Consumer Credit Analytics; a business within the RD&A LOB which provides economic and consumer credit trend analytics | |||||||||
| EMEA | Represents countries within Europe, the Middle East and Africa | |||||||||
| EPS | Earnings per share | |||||||||
| Equilibrium | A leading provider of credit rating and research services in Peru and Panama; acquired by Moody’s in May 2015 | |||||||||
| ERS | software products as well as software implementation services and related risk The enterprise risk solutions LOB within MA, which offers risk management management advisory engagements | |||||||||
| ESMA | European Securities and Markets Authority | |||||||||
| 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 | |||||||||
| FIG | Financial institutions group; an LOB of MIS | |||||||||
| Financial Reform Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |||||||||
| Free Cash Flow | Net cash provided by operating activities less cash paid for capital additions | |||||||||
| FSTC | Financial Services Training and Certifications; a reporting unit within the MA segment that includes on-line and classroom-based training services and CSI Foreign exchange | |||||||||
| FX | ||||||||||
| GAAP | U.S. Generally Accepted Accounting Principles | |||||||||
| GBP | British pounds | |||||||||
| GGY | Gilliland Gold Young; a leading provider of advanced actuarial software for the global insurance industry. The Company acquired GGY on March 1, 2016 | |||||||||
| ICRA | ICRA Limited; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to just over 50% through the acquisition of additional shares | |||||||||
| IT | Information technology | |||||||||
| KIS | Korea Investors Service, Inc; a leading Korean rating agency and consolidated subsidiary of the Company | |||||||||
| KIS Pricing | Korea Investors Service Pricing, Inc; a leading Korean provider of fixed income securities pricing and consolidated subsidiary of the Company | |||||||||
| Legacy Tax Matter(s) | Exposures to certain potential tax liabilities assumed in connection with the Company's spin-off from Dun & Bradstreet in 2000. | |||||||||
| Lewtan | Lewtan Technologies; a leading provider of analytical tools and data for the global structured finance market; part of the RD&A LOB within MA; an acquisition completed in October 2014 | |||||||||
| LIBOR | London Interbank Offered Rate | |||||||||
| LOB | Line of business | |||||||||
| MA | Moody’s Analytics – a reportable segment of MCO formed in January 2008 which provides a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets; consists of three LOBs – RD&A, ERS and PS | |||||||||
| M&A | Mergers and acquisitions | |||||||||
| MCO | Moody’s Corporation and its subsidiaries; the Company; Moody’s | |||||||||
| MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||
| MIS | Moody’s Investors Service – a reportable segment of MCO; consists of five LOBs – SFG, CFG, FIG, PPIF and MIS Other | |||||||||
| MIS Other | Consists of non-ratings revenue from ICRA, KIS Pricing and KIS Research. These businesses are components of MIS; MIS Other is an LOB of MIS | |||||||||
| Moody’s | Moody’s Corporation and its subsidiaries; MCO; the Company | |||||||||
| Net Income | Net income attributable to Moody’s Corporation, which excludes net income from | |||||||||
| consolidated noncontrolling interests belonging to the minority interest holder | ||||||||||
| NM | Percentage change is not meaningful | |||||||||
| Non-GAAP | A financial measure not in accordance with GAAP; these measures, when read in | |||||||||
| conjunction with the Company’s reported results, can provide useful supplemental | ||||||||||
| information for investors analyzing period-to-period comparisons of the Company’s | ||||||||||
| performance, facilitate comparisons to competitors’ operating results and to provide | ||||||||||
| greater transparency to investors of supplemental information used by management | ||||||||||
| in its financial and operational decision making | ||||||||||
| NRSRO | Nationally Recognized Statistical Rating Organization | |||||||||
| OCI | Other comprehensive income (loss); includes gains and losses on cash flow and net | |||||||||
| investment hedges, unrealized gains and losses on available for sale securities, certain | ||||||||||
| gains and losses relating to pension and other retirement benefit obligations and | ||||||||||
| foreign currency translation adjustments | ||||||||||
| Other Retirement Plan | The U.S. retirement healthcare and U.S. retirement life insurance plans | |||||||||
| PPIF | Public, project and infrastructure finance; an LOB of MIS | |||||||||
| Profit Participation Plan | Defined contribution profit participation plan that covers substantially all U.S. | |||||||||
| employees of the Company | ||||||||||
| PS | Professional Services, an LOB within MA 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 | ||||||||||
| Reform Act | Credit Rating Agency Reform Act of 2006 | |||||||||
| REIT | Real Estate Investment Trust | |||||||||
| Relationship Revenue | For MIS represents monitoring of a rated debt obligation and/or entities that issue | |||||||||
| such obligations, as well as revenue from programs such as commercial paper, | ||||||||||
| medium-term notes and shelf registrations. For MIS Other represents subscription- | ||||||||||
| based revenue. For MA, represents subscription-based and maintenance revenue | ||||||||||
| Retirement Plans | Moody’s funded and unfunded pension plans, the healthcare plans and life insurance | |||||||||
| plans | ||||||||||
| SAV | Structured Analytics and Valuation; a business within the RD&A LOB which | |||||||||
| provides data and analytics for securitized assets | ||||||||||
| SEC | U.S. Securities and Exchange Commission | |||||||||
| Securities Act | Securities Act of 1933, as amended | |||||||||
| Series 2007-1 Notes | Principal amount of $300 million, 6.06% senior unsecured notes due in September | |||||||||
| 2017 pursuant to the 2007 Agreement | ||||||||||
| SFG | Structured finance group; an LOB of MIS | |||||||||
| SG&A | Selling, general and administrative expenses | |||||||||
| Total Debt | All indebtedness of the Company as reflected on the consolidated balance sheets | |||||||||
| Transaction Revenue | For MIS, represents the initial rating of a new debt issuance as well as other one-time | |||||||||
| fees. For MIS Other, represents revenue from professional services and outsourcing | ||||||||||
| engagements. For MA, represents software license fees and revenue from risk | ||||||||||
| management advisory projects, training and certification services, and outsourced | ||||||||||
| research and analytical engagements | ||||||||||
| U.K. | United Kingdom | |||||||||
| U.S. | United States | |||||||||
| USD | U.S. dollar | |||||||||
| UTBs | Unrecognized tax benefits | |||||||||
| UTPs | Uncertain tax positions | |||||||||
| VSOE | Vendor specific objective evidence; as defined in the ASC, evidence of selling price | |||||||||
| limited to either of the following: the price charged for a deliverable when it is sold | ||||||||||
| separately, or for a deliverable not yet being sold separately, the price established by | ||||||||||
| management having the relevant authority | ||||||||||
| 2007 Agreement | Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes | |||||||||
| 2010 Indenture | Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes | |||||||||
| 2010 Senior Notes | Principal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture | |||||||||
| 2012 Facility | Revolving credit facility of $1 billion entered into on April 18,2012; was replaced with the 2015 Facility | |||||||||
| 2012 Indenture | Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes | |||||||||
| 2012 Senior Notes | Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture | |||||||||
| 2013 Indenture | Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes | |||||||||
| 2013 Senior Notes | Principal amount of the $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture | |||||||||
| 2014 Indenture | Supplemental indenture and related agreements dated July 16, 2014, relating to the 2014 Senior Notes | |||||||||
| 2014 Senior Notes (5-Year) | Principal amount of $450 million, 2.75% senior unsecured notes due in July 2019 | |||||||||
| 2014 Senior Notes (30-Year) | ||||||||||
| 2015 Facility | Five-year unsecured revolving credit facility, with capacity to borrow up to $1 billion; replaces the 2012 Facility | |||||||||
| 2015 Indenture | Supplemental indenture and related agreements dated March 9, 2015, relating to the 2015 Senior Notes | |||||||||
| 2015 Senior Notes | Principal amount €500 million, 1.75% senior unsecured notes issued March 9, 2015 and due in March 2027 | |||||||||
| 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 | |||||||||
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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. Moody’s has two reportable segments: MIS and MA.
MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations, which consist primarily of the distribution of research and fixed income pricing services in the Asia-Pacific region and from ICRA non-ratings services. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.
The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its Enterprise Risk Solutions business, MA provides software solutions as well as related risk management services. The Professional Services business provides outsourced research and analytical services along with financial training and certification programs.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2015 annual report on Form 10-K filed with the SEC on February 25, 2016. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
In the first quarter of 2016, the Company adopted ASU No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” on a prospective basis, and accordingly, prior year comparative periods have not been adjusted. This ASU requires the classification of all deferred income tax assets and liabilities as noncurrent on the balance sheet.
In the first quarter of 2016, the Company adopted ASU No. 2015-03,“Simplifying the Presentation of Debt Issuance Costs” on a retrospective basis. This ASU requires a company to present debt issuance costs in the balance sheet as a reduction of debt rather than as an asset. The impact to the Company’s balance sheet as of December 31, 2015 and September 30, 2016 relating to the adoption of this ASU is set forth in the table below:
| As reported December 31, 2015 | Reclassification | December 31, 2015 As adjusted | As reported September 30, 2016 | Reclassification | September 30, 2016 Under previous accounting guidance | |||||||||
| Long-term debt | $ | 3,401.0 | $ | (20.4) | $ | 3,380.6 | $ | 3,118.2 | $ | 18.5 | $ | 3,136.7 | ||
| Other assets | $ | 160.8 | $ | (20.4) | $ | 140.4 | $ | 154.6 | $ | 18.6 | $ | 173.2 | ||
| Current portion of long-term debt | $ | 299.9 | $ | 0.1 | $ | 300.0 | ||||||||
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| As reported December 31, 2015 | Reclassification | December 31, 2015 As adjusted | As reported September 30, 2016 | Reclassification | September 30, 2016 Under previous accounting guidance | |||||||||
| Long-term debt | $ | 3,401.0 | $ | (20.4) | $ | 3,380.6 | $ | 3,118.2 | $ | 18.5 | $ | 3,136.7 | ||
| Other assets | $ | 160.8 | $ | (20.4) | $ | 140.4 | $ | 154.6 | $ | 18.6 | $ | 173.2 | ||
| Current portion of long-term debt | $ | 299.9 | $ | 0.1 | $ | 300.0 | ||||||||
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NOTE 2. STOCK-BASED COMPENSATION
Presented below is a summary of the stock-based compensation cost and associated tax benefit included in the accompanying consolidated statements of operations:
| Three Months Ended | Nine Months Ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||
| Stock-based compensation cost | $ | 23.9 | $ | 22.1 | $ | 72.8 | $ | 66.5 | |||
| Tax benefit | $ | 7.8 | $ | 7.2 | $ | 23.7 | $ | 21.8 | |||
During the first nine months of 2016, the Company granted 0.5 million employee stock options, which had a weighted average grant date fair value of $22.98 per share based on the Black-Scholes option-pricing model. The Company also granted 1.2 million shares of restricted stock in the first nine months of 2016, which had a weighted average grant date fair value of $80.90 per share. Both the employee stock options and restricted stock generally vest ratably over a four-year period. Additionally, the Company granted approximately 0.2 million shares of performance-based awards whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company over a three-year period. The weighted average grant date fair value of these awards was $76.66 per share.
The following weighted average assumptions were used in determining the fair value for options granted in 2016:
| Expected dividend yield | 1.83% |
| Expected stock volatility | 32.3% |
| Risk-free interest rate | 1.60% |
| Expected holding period | 6.8 yrs |
| Grant date fair value | $22.98 |
Unrecognized compensation expense at September 30, 2016 was $10.4 million and $129.6 million for stock options and unvested restricted stock, respectively, which is expected to be recognized over a weighted average period of 1.3 years and 1.7 years, respectively. Additionally, there was $14.6 million of unrecognized compensation expense relating to the aforementioned non-market based performance-based awards, which is expected to be recognized over a weighted average period of 1.0 years.
The following tables summarize information relating to stock option exercises and restricted stock vesting:
| Nine Months Ended | ||||||
| September 30, | ||||||
| Exercise of stock options: | 2016 | 2015 | ||||
| Proceeds from stock option exercises | $ | 67.7 | $ | 68.0 | ||
| Aggregate intrinsic value | $ | 67.8 | $ | 64.7 | ||
| Tax benefit realized upon exercise | $ | 23.1 | $ | 23.0 | ||
| Number of shares exercised | 1.4 | 1.3 | ||||
| Nine Months Ended | ||||||
| September 30, | ||||||
| Vesting of restricted stock: | 2016 | 2015 | ||||
| Fair value of shares vested | $ | 92.8 | $ | 111.3 | ||
| Tax benefit realized upon vesting | $ | 29.5 | $ | 35.7 | ||
| Number of shares vested | 1.0 | 1.1 | ||||
| Nine Months Ended | ||||||
| September 30, | ||||||
| Vesting of performance-based restricted stock: | 2016 | 2015 | ||||
| Fair value of shares vested | $ | 23.6 | $ | 43.1 | ||
| Tax benefit realized upon vesting | $ | 8.4 | $ | 15.6 | ||
| Number of shares vested | 0.2 | 0.5 | ||||
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| Three Months Ended | Nine Months Ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||
| Stock-based compensation cost | $ | 23.9 | $ | 22.1 | $ | 72.8 | $ | 66.5 | |||
| Tax benefit | $ | 7.8 | $ | 7.2 | $ | 23.7 | $ | 21.8 | |||
| Expected dividend yield | 1.83% |
| Expected stock volatility | 32.3% |
| Risk-free interest rate | 1.60% |
| Expected holding period | 6.8 yrs |
| Grant date fair value | $22.98 |
| Nine Months Ended | ||||||
| September 30, | ||||||
| Exercise of stock options: | 2016 | 2015 | ||||
| Proceeds from stock option exercises | $ | 67.7 | $ | 68.0 | ||
| Aggregate intrinsic value | $ | 67.8 | $ | 64.7 | ||
| Tax benefit realized upon exercise | $ | 23.1 | $ | 23.0 | ||
| Number of shares exercised | 1.4 | 1.3 | ||||
| Nine Months Ended | ||||||
| September 30, | ||||||
| Vesting of restricted stock: | 2016 | 2015 | ||||
| Fair value of shares vested | $ | 92.8 | $ | 111.3 | ||
| Tax benefit realized upon vesting | $ | 29.5 | $ | 35.7 | ||
| Number of shares vested | 1.0 | 1.1 | ||||
| Nine Months Ended | ||||||
| September 30, | ||||||
| Vesting of performance-based restricted stock: | 2016 | 2015 | ||||
| Fair value of shares vested | $ | 23.6 | $ | 43.1 | ||
| Tax benefit realized upon vesting | $ | 8.4 | $ | 15.6 | ||
| Number of shares vested | 0.2 | 0.5 | ||||
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NOTE 3. INCOME TAXES
Moody’s effective tax rate was 30.5% and 32.0% for the three months ended September 30, 2016 and 2015, respectively and 31.5% and 31.7% for the nine month periods ended September 30, 2016 and 2015, respectively. The decrease in the ETR compared to the third quarter of 2015 was primarily due to lower taxes on non-US income.
The Company classifies interest related to UTBs in interest income (expense), net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating income (expense), net. The Company had an increase in its UTBs of $2.9 million ($2.1 million net of federal tax) during the third quarter of 2016 and an overall decrease in its UTBs during the first nine months of 2016 of $2.3 million (increase of $0.6 million net of federal tax). Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions.
The Company’s U.S. federal income tax returns for the years 2011 and 2012 are under examination and its returns for 2013 through 2015 remain open to examination. The Company’s New York State tax returns for 2011 through 2014 are currently under examination and the Company’s New York City tax return for 2014 remains open to examination. The Company’s U.K. tax return for 2012 is currently under examination and its returns for 2013 and 2014 remain open to examination.
For ongoing audits, it is possible the balance of UTBs could decrease in the next twelve months as a result of the settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which could necessitate increases to the balance of UTBs. As the Company is unable to predict the timing or outcome of these audits, it is therefore unable to estimate the amount of changes to the balance of UTBs at this time. However, the Company believes that it has adequately provided for its financial exposure relating to all open tax years by tax jurisdiction in accordance with the applicable provisions of Topic 740 of the ASC regarding UTBs.
The following table shows the amount the Company paid for income taxes:
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2016 | 2015 | ||||||||||
| Income taxes paid | $ | 242.8 | $ | 299.9 | |||||||
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| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2016 | 2015 | ||||||||||
| Income taxes paid | $ | 242.8 | $ | 299.9 | |||||||
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NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic to diluted shares outstanding:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Basic | 191.7 | 199.4 | 193.3 | 201.1 | ||||||||
| Dilutive effect of shares issuable under stock-based compensation plans | 2.6 | 3.1 | 2.7 | 3.4 | ||||||||
| Diluted | 194.3 | 202.5 | 196.0 | 204.5 | ||||||||
| Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 0.5 | 0.6 | 0.9 | 0.8 | ||||||||
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of September 30, 2016 and 2015. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.
The decrease in the diluted shares outstanding primarily reflects treasury share repurchases under the Company’s Board authorized share repurchase program.
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| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Basic | 191.7 | 199.4 | 193.3 | 201.1 | ||||||||
| Dilutive effect of shares issuable under stock-based compensation plans | 2.6 | 3.1 | 2.7 | 3.4 | ||||||||
| Diluted | 194.3 | 202.5 | 196.0 | 204.5 | ||||||||
| Anti-dilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 0.5 | 0.6 | 0.9 | 0.8 | ||||||||
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NOTE 5. CASH EQUIVALENTS AND INVESTMENTS
The table below provides additional information on the Company’s cash equivalents and investments:
| As of September 30, 2016 | |||||||||||||
| Balance sheet location | |||||||||||||
| Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||
| Money market mutual funds | $ | 38.9 | $ | - | $ | 38.9 | $ | 38.9 | $ | - | $ | - | |
| Certificates of deposit and money market deposit accounts (1) | $ | 798.0 | $ | - | $ | 798.0 | $ | 458.1 | $ | 311.8 | $ | 28.1 | |
| Fixed maturity and open ended mutual funds (2) | $ | 27.9 | $ | 5.0 | $ | 32.9 | $ | - | $ | - | $ | 32.9 | |
| As of December 31, 2015 | |||||||||||||
| Balance sheet location | |||||||||||||
| Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||
| Money market mutual funds | $ | 188.3 | $ | - | $ | 188.3 | $ | 188.3 | $ | - | $ | - | |
| Certificates of deposit and money market deposit accounts (1) | $ | 1,307.3 | $ | - | $ | 1,307.3 | $ | 809.4 | $ | 474.8 | $ | 23.1 | |
| Fixed maturity and open ended mutual funds (2) | $ | 28.7 | $ | 3.2 | $ | 31.9 | $ | - | $ | - | $ | 31.9 | |
| (1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one month to 12 months at both September 30, 2016 and December 31, 2015. The remaining contractual maturities for the certificates of deposits classified in other assets are one month to 18 months at September 30, 2016 and one month to 27 months at December 31, 2015. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents. | |||||||||||||
| (2) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from two months to 22 months and 11 months to 31 months at September 30, 2016 and December 31, 2015 respectively. | |||||||||||||
The money market mutual funds as well as the fixed maturity and open ended mutual funds in the table above are deemed to be “available for sale” under ASC Topic 320 and the fair value of these instruments is determined using Level 1 inputs as defined in the ASC.
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| As of September 30, 2016 | |||||||||||||
| Balance sheet location | |||||||||||||
| Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||
| Money market mutual funds | $ | 38.9 | $ | - | $ | 38.9 | $ | 38.9 | $ | - | $ | - | |
| Certificates of deposit and money market deposit accounts (1) | $ | 798.0 | $ | - | $ | 798.0 | $ | 458.1 | $ | 311.8 | $ | 28.1 | |
| Fixed maturity and open ended mutual funds (2) | $ | 27.9 | $ | 5.0 | $ | 32.9 | $ | - | $ | - | $ | 32.9 | |
| As of December 31, 2015 | |||||||||||||
| Balance sheet location | |||||||||||||
| Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||
| Money market mutual funds | $ | 188.3 | $ | - | $ | 188.3 | $ | 188.3 | $ | - | $ | - | |
| Certificates of deposit and money market deposit accounts (1) | $ | 1,307.3 | $ | - | $ | 1,307.3 | $ | 809.4 | $ | 474.8 | $ | 23.1 | |
| Fixed maturity and open ended mutual funds (2) | $ | 28.7 | $ | 3.2 | $ | 31.9 | $ | - | $ | - | $ | 31.9 | |
| (1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one month to 12 months at both September 30, 2016 and December 31, 2015. The remaining contractual maturities for the certificates of deposits classified in other assets are one month to 18 months at September 30, 2016 and one month to 27 months at December 31, 2015. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents. | |||||||||||||
| (2) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from two months to 22 months and 11 months to 31 months at September 30, 2016 and December 31, 2015 respectively. | |||||||||||||
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NOTE 6. ACQUISITIONS
The GGY business combination described below is accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. The Company has not presented proforma combined results because the impact on previously reported statements of operations would not have been material. Additionally, the near term impact to the Company’s operations and cash flows is not material.
Korea Investor Service (KIS)
In July 2016, a subsidiary of the Company acquired the non-controlling interest of KIS and additional shares of KIS Pricing. The aggregate purchase price was not material and the near term impact to operation and cash flow is not expected to be material. KIS and KIS Pricing are a part of the MIS segment.
Gilliland Gold Young (GGY)
On March 1, 2016, subsidiaries of the Company acquired 100% of GGY, a leading provider of advanced actuarial software for the life insurance industry. The cash payments noted in the table below were funded with cash on hand. The acquisition of GGY will allow MA to provide an industry-leading enterprise risk offering for global life insurers and reinsurers.
The table below details the total consideration relating to the acquisition:
| Cash paid at closing | $ | 83.4 | |||||
| Additional consideration paid to sellers in the third quarter 2016(1) | 3.1 | ||||||
| Total consideration | $ | 86.5 | |||||
| (1) Represents additional consideration paid to the sellers for amounts withheld at closing pending the completion of certain administrative matters | |||||||
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:
| Current assets | $ | 11.7 | ||||
| Property and equipment, net | 2.0 | |||||
| Indemnification assets | 1.5 | |||||
| Intangible assets: | ||||||
| Trade name (19 year weighted average life) | $ | 3.7 | ||||
| Client relationships (21 year weighted average life) | 13.8 | |||||
| Software (7 year weighted average life) | 16.6 | |||||
| Total intangible assets (14 year weighted average life) | 34.1 | |||||
| Goodwill | 59.4 | |||||
| Liabilities | (22.2) | |||||
| Net assets acquired | $ | 86.5 | ||||
Current assets in the table above include acquired cash of $7.5 million. Additionally, current assets include accounts receivable of $2.9 million. Goodwill, which has been assigned to the MA segment, is not deductible for tax.
In connection with the acquisition, the Company assumed liabilities relating to UTPs and certain other tax exposures which are included in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these amounts. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at September 30, 2016.
The Company incurred $0.9 million of costs directly related to the GGY acquisition of which $0.6 million was incurred in 2015 and $0.3 million was incurred in the first quarter of 2016. These costs are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.
GGY is part of the ERS reporting unit for purposes of the Company’s annual goodwill impairment assessment.
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| Cash paid at closing | $ | 83.4 | |||||
| Additional consideration paid to sellers in the third quarter 2016(1) | 3.1 | ||||||
| Total consideration | $ | 86.5 | |||||
| (1) Represents additional consideration paid to the sellers for amounts withheld at closing pending the completion of certain administrative matters | |||||||
| Current assets | $ | 11.7 | ||||
| Property and equipment, net | 2.0 | |||||
| Indemnification assets | 1.5 | |||||
| Intangible assets: | ||||||
| Trade name (19 year weighted average life) | $ | 3.7 | ||||
| Client relationships (21 year weighted average life) | 13.8 | |||||
| Software (7 year weighted average life) | 16.6 | |||||
| Total intangible assets (14 year weighted average life) | 34.1 | |||||
| Goodwill | 59.4 | |||||
| Liabilities | (22.2) | |||||
| Net assets acquired | $ | 86.5 | ||||
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NOTE 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Derivatives and non-derivative instruments designated as accounting hedges:
Interest Rate Swaps
In the second quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. In the third quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the remaining balance of the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the 2010 Senior Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2010 Senior Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.
In the third quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on a portion of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. In the first quarter of 2015, the Company entered into interest rate swaps with a total notional amount of $200 million to convert the fixed interest rate on the remaining balance of the 2014 Senior Notes (5-year) to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the 2014 Senior Notes (5-year), thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2014 Senior Notes (5-year). The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.
The following table summarizes the impact to the statement of operations of the Company’s interest rate swaps designated as fair value hedges:
| Amount of income recognized in the consolidated statements of operations | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| Derivatives designated as fair value accounting hedges | Location on Statement of Operations | 2016 | 2015 | 2016 | 2015 | ||||||||||
| Interest rate swaps | Interest income (expense), net | $ | 2.7 | $ | 3.9 | $ | 8.8 | $ | 11.5 | ||||||
Cross-currency swaps
In conjunction with the issuance of the 2015 Senior Notes, the Company entered into a cross-currency swap to exchange €100 million for U.S. dollars on the date of the settlement of the notes. The purpose of this cross-currency swap is to mitigate FX risk on the remaining principal balance on the 2015 Senior Notes that was not designated as a net investment hedge as more fully discussed below. Under the terms of the swap, the Company will pay the counterparty interest on the $110.5 million received at 3.945% per annum and the counterparty will pay the Company interest on the €100 million paid at 1.75% per annum. These interest payments will be settled in March of each year, beginning in 2016, until either the maturity of the cross-currency swap in 2027 or upon early termination at the discretion of the Company. The principal payments on this cross currency swap will be settled in 2027, concurrent with the repayment of the 2015 Senior Notes at maturity or upon early termination at the discretion of the Company. In March 2016, the Company designated these cross-currency swaps as cash flow hedges. Accordingly, changes in fair value subsequent to the date the swaps were designated as cash flow hedges will initially be recognized in OCI. Gains and losses on the swaps initially recognized in OCI will be reclassified to the statement of operations in the period in which changes in the underlying hedged item affects net income. Ineffectiveness, if any, will be recognized in other non-operating (expense) income, net in the Company’s consolidated statement of operations.
Net investment hedges
The Company enters into foreign currency forward contracts which are designated as net investment hedges and has designated €400 million of the 2015 Senior Notes as a net investment hedge. These hedges are intended to mitigate FX exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. These net investment hedges are designated as accounting hedges under the applicable sections of Topic 815 of the ASC.
Hedge effectiveness is assessed based on the overall changes in the fair value of the hedge. For hedges that meet the effectiveness requirements, changes in the fair value are recorded in AOCI in the foreign currency translation account. Any change in the fair value of these hedges that is the result of ineffectiveness is recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statement of operations.
The following table summarizes the notional amounts of the Company’s outstanding net investment hedges:
| September 30, | December 31, | ||||
| 2016 | 2015 | ||||
| Notional amount of net investment hedges: | |||||
| Long-term debt designated as net investment hedge | € | 400.0 | € | 400.0 | |
| Contracts to sell GBP for euros | £ | 22.1 | £ | 21.2 | |
| Contracts to sell Japanese yen for USD | ￥ | 19,400 | ￥ | 19,400 | |
The outstanding contracts to sell Japanese yen for USD expire in November 2016. The outstanding contracts to sell GBP for euros expire in December 2016. The hedge relating to the portion of the 2015 Senior Notes that was designated as a net investment hedge will end upon the repayment of the notes in 2027 unless terminated earlier at the discretion of the Company.
The following table provides information on the gains/(losses) on the Company’s net investment and cash flow hedges:
| Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion) | Location of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion) | |||||||||||||||
| Derivatives and non-derivative instruments in Net Investment Hedging Relationships | Three Months Ended | Three Months Ended | |||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| FX forwards | $ | (0.2) | $ | (0.7) | N/A | $ | - | $ | - | ||||||||
| Long-term debt | (3.2) | (0.6) | N/A | - | - | ||||||||||||
| Total net investment hedges | $ | (3.4) | $ | (1.3) | N/A | $ | - | $ | - | ||||||||
| Three Months Ended | Three Months Ended | ||||||||||||||||
| Derivatives in cash flow hedging relationships | September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| Cross currency swap | $ | 3.2 | $ | - | Other non-operating income, net | $ | 0.9 | $ | - | ||||||||
| Total | $ | (0.2) | $ | (1.3) | Total | $ | 0.9 | $ | - | ||||||||
| 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) | |||||||||||||||
| Derivatives and non-derivative instruments in Net Investment Hedging Relationships | Nine Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| FX forwards | $ | (13.4) | $ | 12.7 | N/A | $ | - | $ | - | ||||||||
| Long-term debt | (9.2) | (2.7) | N/A | - | - | ||||||||||||
| Total net investment hedges | $ | (22.6) | $ | 10.0 | N/A | $ | - | $ | - | ||||||||
| Nine Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| Derivatives in cash flow hedging relationships | 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Cross currency swap | $ | 1.5 | $ | - | Other non-operating income, net | $ | 0.6 | $ | - | ||||||||
| Total | $ | (21.1) | $ | 10.0 | Total | $ | 0.6 | $ | - | ||||||||
The cumulative amount of realized and unrecognized net investment hedge and cash flow hedge gains (losses) recorded in AOCI is as follows:
| Cumulative | ||||||
| Gains/(Losses), net of tax | ||||||
| September 30, | December 31, | |||||
| Net investment hedges | 2016 | 2015 | ||||
| FX forwards | $ | 20.9 | $ | 34.3 | ||
| Long-term debt | (4.5) | 4.7 | ||||
| Total gains on net investment hedges | $ | 16.4 | $ | 39.0 | ||
| Cash flow hedges | ||||||
| Treasury rate lock | $ | (1.1) | $ | (1.1) | ||
| Cross currency swap | 0.9 | - | ||||
| Total losses on cash flow hedges | (0.2) | (1.1) | ||||
| Total net gains in AOCI | $ | 16.2 | $ | 37.9 | ||
Derivatives not designated as accounting hedges:
Foreign exchange forwards
The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense), income net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through December 2016.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:
| September 30, | December 31, | ||||
| 2016 | 2015 | ||||
| Notional amount of currency pair: | |||||
| Contracts to purchase USD with euros | $ | 263.1 | $ | - | |
| Contracts to sell USD for euros | $ | 298.6 | $ | 70.1 | |
| Contracts to purchase euros with other foreign currencies | € | 36.3 | € | 35.5 | |
| Contracts to sell euros for other foreign currencies | € | - | € | 1.4 | |
| Contracts to sell euros for GBP | € | 22.7 | € | 23.1 | |
The following table summarizes the impact to the consolidated statements of operations relating to the net gain (loss) on the Company’s derivatives which are not designated as hedging instruments:
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| Derivatives not designated as accounting hedges | Location on Statement of Operations | 2016 | 2015 | 2016 | 2015 | ||||||||||
| Foreign exchange forwards | Other non-operating income (expense), net | $ | (0.7) | $ | 0.6 | $ | (5.9) | $ | (1.3) | ||||||
The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instrument as well as the carrying value of its nonderivative debt instruments designated and qualifying as net investment hedges:
| Derivative and Non-derivative Instruments | ||||||||
| Balance Sheet Location | September 30, 2016 | December 31, 2015 | ||||||
| Assets: | ||||||||
| Derivatives not designated as accounting hedges: | ||||||||
| FX forwards on certain assets and liabilities | Other current assets | $ | 1.3 | $ | 0.1 | |||
| Derivatives designated as accounting hedges: | ||||||||
| Cross-currency swap | Other assets | 0.1 | ||||||
| FX forwards on net investment in certain foreign subsidiaries | Other current assets | 2.5 | 0.4 | |||||
| Interest rate swaps | Other assets | 28.0 | 12.1 | |||||
| Total assets | $ | 31.9 | $ | 12.6 | ||||
| Liabilities: | ||||||||
| Derivatives designated as accounting hedges: | ||||||||
| FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | $ | 30.0 | $ | 1.2 | |||
| Interest rate swaps | Other liabilities | - | 0.3 | |||||
| Non-derivative instrument designated as accounting hedge: | ||||||||
| Long-term debt designated as net investment hedge | Long-term debt | 449.5 | 434.5 | |||||
| Derivatives not designated as accounting hedges: | ||||||||
| Cross-currency swap | Other liabilities | - | 7.0 | |||||
| FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.6 | 1.9 | |||||
| Total liabilities | $ | 480.1 | $ | 444.9 | ||||
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| Amount of income recognized in the consolidated statements of operations | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| Derivatives designated as fair value accounting hedges | Location on Statement of Operations | 2016 | 2015 | 2016 | 2015 | ||||||||||
| Interest rate swaps | Interest income (expense), net | $ | 2.7 | $ | 3.9 | $ | 8.8 | $ | 11.5 | ||||||
| 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) | |||||||||||||||
| Derivatives and non-derivative instruments in Net Investment Hedging Relationships | Three Months Ended | Three Months Ended | |||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| FX forwards | $ | (0.2) | $ | (0.7) | N/A | $ | - | $ | - | ||||||||
| Long-term debt | (3.2) | (0.6) | N/A | - | - | ||||||||||||
| Total net investment hedges | $ | (3.4) | $ | (1.3) | N/A | $ | - | $ | - | ||||||||
| Three Months Ended | Three Months Ended | ||||||||||||||||
| Derivatives in cash flow hedging relationships | September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| Cross currency swap | $ | 3.2 | $ | - | Other non-operating income, net | $ | 0.9 | $ | - | ||||||||
| Total | $ | (0.2) | $ | (1.3) | Total | $ | 0.9 | $ | - | ||||||||
| 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) | |||||||||||||||
| Derivatives and non-derivative instruments in Net Investment Hedging Relationships | Nine Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| FX forwards | $ | (13.4) | $ | 12.7 | N/A | $ | - | $ | - | ||||||||
| Long-term debt | (9.2) | (2.7) | N/A | - | - | ||||||||||||
| Total net investment hedges | $ | (22.6) | $ | 10.0 | N/A | $ | - | $ | - | ||||||||
| Nine Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| Derivatives in cash flow hedging relationships | 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Cross currency swap | $ | 1.5 | $ | - | Other non-operating income, net | $ | 0.6 | $ | - | ||||||||
| Total | $ | (21.1) | $ | 10.0 | Total | $ | 0.6 | $ | - | ||||||||
| Cumulative | ||||||
| Gains/(Losses), net of tax | ||||||
| September 30, | December 31, | |||||
| Net investment hedges | 2016 | 2015 | ||||
| FX forwards | $ | 20.9 | $ | 34.3 | ||
| Long-term debt | (4.5) | 4.7 | ||||
| Total gains on net investment hedges | $ | 16.4 | $ | 39.0 | ||
| Cash flow hedges | ||||||
| Treasury rate lock | $ | (1.1) | $ | (1.1) | ||
| Cross currency swap | 0.9 | - | ||||
| Total losses on cash flow hedges | (0.2) | (1.1) | ||||
| Total net gains in AOCI | $ | 16.2 | $ | 37.9 | ||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| Derivatives not designated as accounting hedges | Location on Statement of Operations | 2016 | 2015 | 2016 | 2015 | ||||||||||
| Foreign exchange forwards | Other non-operating income (expense), net | $ | (0.7) | $ | 0.6 | $ | (5.9) | $ | (1.3) | ||||||
| Derivative and Non-derivative Instruments | ||||||||
| Balance Sheet Location | September 30, 2016 | December 31, 2015 | ||||||
| Assets: | ||||||||
| Derivatives not designated as accounting hedges: | ||||||||
| FX forwards on certain assets and liabilities | Other current assets | $ | 1.3 | $ | 0.1 | |||
| Derivatives designated as accounting hedges: | ||||||||
| Cross-currency swap | Other assets | 0.1 | ||||||
| FX forwards on net investment in certain foreign subsidiaries | Other current assets | 2.5 | 0.4 | |||||
| Interest rate swaps | Other assets | 28.0 | 12.1 | |||||
| Total assets | $ | 31.9 | $ | 12.6 | ||||
| Liabilities: | ||||||||
| Derivatives designated as accounting hedges: | ||||||||
| FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | $ | 30.0 | $ | 1.2 | |||
| Interest rate swaps | Other liabilities | - | 0.3 | |||||
| Non-derivative instrument designated as accounting hedge: | ||||||||
| Long-term debt designated as net investment hedge | Long-term debt | 449.5 | 434.5 | |||||
| Derivatives not designated as accounting hedges: | ||||||||
| Cross-currency swap | Other liabilities | - | 7.0 | |||||
| FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.6 | 1.9 | |||||
| Total liabilities | $ | 480.1 | $ | 444.9 | ||||
| September 30, | December 31, | ||||
| 2016 | 2015 | ||||
| Notional amount of net investment hedges: | |||||
| Long-term debt designated as net investment hedge | € | 400.0 | € | 400.0 | |
| Contracts to sell GBP for euros | £ | 22.1 | £ | 21.2 | |
| Contracts to sell Japanese yen for USD | ￥ | 19,400 | ￥ | 19,400 | |
| September 30, | December 31, | ||||
| 2016 | 2015 | ||||
| Notional amount of currency pair: | |||||
| Contracts to purchase USD with euros | $ | 263.1 | $ | - | |
| Contracts to sell USD for euros | $ | 298.6 | $ | 70.1 | |
| Contracts to purchase euros with other foreign currencies | € | 36.3 | € | 35.5 | |
| Contracts to sell euros for other foreign currencies | € | - | € | 1.4 | |
| Contracts to sell euros for GBP | € | 22.7 | € | 23.1 | |
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NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
The following table summarizes the activity in goodwill for the periods indicated:
| Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||
| MIS | MA | Consolidated | |||||||||||||||||||||||||
| Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
| Balance at beginning of year | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 | |||||||||
| Additions/adjustments | - | - | - | 60.9 | - | 60.9 | 60.9 | - | 60.9 | ||||||||||||||||||
| Foreign currency translation adjustments | (5.1) | - | (5.1) | 8.7 | - | 8.7 | 3.6 | - | 3.6 | ||||||||||||||||||
| Ending balance | $ | 279.3 | $ | - | $ | 279.3 | $ | 773.7 | $ | (12.2) | $ | 761.5 | $ | 1,053.0 | $ | (12.2) | $ | 1,040.8 | |||||||||
| Year ended December 31, 2015 | |||||||||||||||||||||||||||
| MIS | MA | Consolidated | |||||||||||||||||||||||||
| Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
| Balance at beginning of year | $ | 298.7 | $ | - | $ | 298.7 | $ | 734.6 | $ | (12.2) | $ | 722.4 | $ | 1,033.3 | $ | (12.2) | $ | 1,021.1 | |||||||||
| Additions/adjustments | 3.7 | - | 3.7 | 5.0 | - | 5.0 | 8.7 | - | 8.7 | ||||||||||||||||||
| Foreign currency translation adjustments | (18.0) | - | (18.0) | (35.5) | - | (35.5) | (53.5) | - | (53.5) | ||||||||||||||||||
| Ending balance | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 | |||||||||
The 2016 additions/adjustments for the MA segment in the table above primarily relate to the acquisition of GGY. The 2015 additions/adjustments for the MIS segment in the table above relate to the acquisition of Equilibrium. The 2015 additions/adjustments for the MA segment primarily reflect an adjustment to an indemnification asset recognized as part of the Copal acquisition, goodwill acquired from the acquisition of a business from BlackBox Logic and adjustments to deferred revenue balances and deferred tax assets recognized as part of the Lewtan acquisition.
The accumulated impairment charge in the table above reflects an impairment charge recognized in 2012 relating to the FSTC reporting unit within MA. This impairment charge reflected a contraction in spending for training and certification services for many individuals and global financial institutions in 2012 due to macroeconomic uncertainties at the time. The fair value of the FSTC reporting unit utilized in this impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples.
Acquired intangible assets and related amortization consisted of:
| September 30, | December 31, | ||||||
| 2016 | 2015 | ||||||
| Customer relationships | $ | 313.9 | $ | 298.4 | |||
| Accumulated amortization | (121.9) | (110.0) | |||||
| Net customer relationships | 192.0 | 188.4 | |||||
| Trade secrets | 30.0 | 29.7 | |||||
| Accumulated amortization | (25.0) | (23.1) | |||||
| Net trade secrets | 5.0 | 6.6 | |||||
| Software | 91.3 | 74.7 | |||||
| Accumulated amortization | (55.3) | (47.7) | |||||
| Net software | 36.0 | 27.0 | |||||
| Trade names | 75.3 | 72.4 | |||||
| Accumulated amortization | (19.0) | (16.2) | |||||
| Net trade names | 56.3 | 56.2 | |||||
| Other (1) | 43.5 | 44.3 | |||||
| Accumulated amortization | (25.0) | (23.4) | |||||
| Net other | 18.5 | 20.9 | |||||
| Total acquired intangible assets, net | $ | 307.8 | $ | 299.1 | |||
| (1) Other intangible assets primarily consist of databases, covenants not to compete, and acquired ratings methodologies and models. | |||||||
Amortization expense relating to acquired intangible assets is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||
| Amortization expense | $ | 8.9 | $ | 7.6 | $ | 25.5 | $ | 24.1 | |||
Estimated future amortization expense for acquired intangible assets subject to amortization is as follows:
| Year Ending December 31, | ||
| 2016 (after September 30) | $ | 8.7 |
| 2017 | 31.9 | |
| 2018 | 26.2 | |
| 2019 | 23.1 | |
| 2020 | 21.4 | |
| Thereafter | 196.5 | |
| Total estimated future amortization | $ | 307.8 |
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| Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||
| MIS | MA | Consolidated | |||||||||||||||||||||||||
| Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
| Balance at beginning of year | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 | |||||||||
| Additions/adjustments | - | - | - | 60.9 | - | 60.9 | 60.9 | - | 60.9 | ||||||||||||||||||
| Foreign currency translation adjustments | (5.1) | - | (5.1) | 8.7 | - | 8.7 | 3.6 | - | 3.6 | ||||||||||||||||||
| Ending balance | $ | 279.3 | $ | - | $ | 279.3 | $ | 773.7 | $ | (12.2) | $ | 761.5 | $ | 1,053.0 | $ | (12.2) | $ | 1,040.8 | |||||||||
| Year ended December 31, 2015 | |||||||||||||||||||||||||||
| MIS | MA | Consolidated | |||||||||||||||||||||||||
| Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
| Balance at beginning of year | $ | 298.7 | $ | - | $ | 298.7 | $ | 734.6 | $ | (12.2) | $ | 722.4 | $ | 1,033.3 | $ | (12.2) | $ | 1,021.1 | |||||||||
| Additions/adjustments | 3.7 | - | 3.7 | 5.0 | - | 5.0 | 8.7 | - | 8.7 | ||||||||||||||||||
| Foreign currency translation adjustments | (18.0) | - | (18.0) | (35.5) | - | (35.5) | (53.5) | - | (53.5) | ||||||||||||||||||
| Ending balance | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 | |||||||||
| September 30, | December 31, | ||||||
| 2016 | 2015 | ||||||
| Customer relationships | $ | 313.9 | $ | 298.4 | |||
| Accumulated amortization | (121.9) | (110.0) | |||||
| Net customer relationships | 192.0 | 188.4 | |||||
| Trade secrets | 30.0 | 29.7 | |||||
| Accumulated amortization | (25.0) | (23.1) | |||||
| Net trade secrets | 5.0 | 6.6 | |||||
| Software | 91.3 | 74.7 | |||||
| Accumulated amortization | (55.3) | (47.7) | |||||
| Net software | 36.0 | 27.0 | |||||
| Trade names | 75.3 | 72.4 | |||||
| Accumulated amortization | (19.0) | (16.2) | |||||
| Net trade names | 56.3 | 56.2 | |||||
| Other (1) | 43.5 | 44.3 | |||||
| Accumulated amortization | (25.0) | (23.4) | |||||
| Net other | 18.5 | 20.9 | |||||
| Total acquired intangible assets, net | $ | 307.8 | $ | 299.1 | |||
| (1) Other intangible assets primarily consist of databases, covenants not to compete, and acquired ratings methodologies and models. | |||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||
| Amortization expense | $ | 8.9 | $ | 7.6 | $ | 25.5 | $ | 24.1 | |||
| Year Ending December 31, | ||
| 2016 (after September 30) | $ | 8.7 |
| 2017 | 31.9 | |
| 2018 | 26.2 | |
| 2019 | 23.1 | |
| 2020 | 21.4 | |
| Thereafter | 196.5 | |
| Total estimated future amortization | $ | 307.8 |
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NOTE 9. RESTRUCTURING
In September 2016, the Company approved a restructuring plan relating to cost management initiatives in the MIS segment as well as in certain corporate overhead functions.This restructuring plan consists solely of headcount reductions, which when combined with an immaterial restructuring in the first half of 2016, represented approximately 1% of the Company’s workforce. The entire charge for these actions will result in cash outlays that will be paid out over the next twelve months. The cumulative amount of expense incurred from inception through September 30, 2016 for these actions was $12.0 million. Actions under these plans were substantially complete at September 30, 2016.
Total expenses included in the accompanying consolidated statements of operations are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Restructuring | $ | 8.4 | $ | - | $ | 12.0 | $ | - | |||||
Changes to the restructuring liability during the first nine months of 2016 were as follows:
| Employee Termination Costs | |||||
| Severance | |||||
| Balance at January 1, 2016 | $ | - | |||
| Cost incurred and adjustments | 12.0 | ||||
| Cash payments | (2.4) | ||||
| Balance at September 30, 2016 | $ | 9.6 | |||
As of September 30, 2016, the remaining restructuring liability of $9.6 million relating to severance is expected to be paid out during the years ending December 31, 2016 and 2017. This liability is recorded within accounts payable and accrued liabilities in the Company’s consolidated balance sheet at September 30, 2016.
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Restructuring | $ | 8.4 | $ | - | $ | 12.0 | $ | - | |||||
| Employee Termination Costs | |||||
| Severance | |||||
| Balance at January 1, 2016 | $ | - | |||
| Cost incurred and adjustments | 12.0 | ||||
| Cash payments | (2.4) | ||||
| Balance at September 30, 2016 | $ | 9.6 | |||
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NOTE 10. FAIR VALUE
The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:
Level 1: quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;
Level 2: inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.
The table below presents information about items that are carried at fair value at September 30, 2016 and December 31, 2015:
| Fair Value Measurement as of September 30, 2016 | ||||||||||||
| Description | Balance | Level 1 | Level 2 | |||||||||
| Assets: | ||||||||||||
| Derivatives (a) | $ | 31.9 | $ | - | $ | 31.9 | ||||||
| Money market mutual funds | 38.9 | 38.9 | - | |||||||||
| Fixed maturity and open ended mutual funds (b) | 32.9 | 32.9 | - | |||||||||
| Total | $ | 103.7 | $ | 71.8 | $ | 31.9 | ||||||
| Liabilities: | ||||||||||||
| Derivatives (a) | $ | 30.6 | $ | - | $ | 30.6 | ||||||
| Total | $ | 30.6 | $ | - | $ | 30.6 | ||||||
| Fair Value Measurement as of December 31, 2015 | ||||||||||||
| Description | Balance | Level 1 | Level 2 | |||||||||
| Assets: | ||||||||||||
| Derivatives (a) | $ | 12.6 | $ | - | $ | 12.6 | ||||||
| Money market mutual funds | 188.3 | 188.3 | - | |||||||||
| Fixed maturity and open ended mutual funds (b) | 31.9 | 31.9 | - | |||||||||
| Total | $ | 232.8 | $ | 220.2 | $ | 12.6 | ||||||
| Liabilities: | ||||||||||||
| Derivatives (a) | $ | 10.4 | $ | - | $ | 10.4 | ||||||
| Total | $ | 10.4 | $ | - | $ | 10.4 | ||||||
| (a) Represents FX forwards, interest rate swaps and cross-currency swaps as more fully described in Note 7 to the financial statements. | ||||||||||||
| (b) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. | ||||||||||||
The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts, fixed maturity plans, open ended mutual funds and money market mutual funds:
Derivatives:
In determining the fair value of the derivative contracts, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
Fixed maturity and open ended mutual funds:
The fixed maturity mutual funds and open ended mutual funds primarily represent exchange traded funds in India and are classified as securities available-for-sale. Accordingly, any unrealized gains and losses are recognized through OCI until the instruments mature or are sold.
Money market mutual funds:
The money market mutual funds represent publicly traded funds with a stable $1 net asset value.
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| Fair Value Measurement as of September 30, 2016 | ||||||||||||
| Description | Balance | Level 1 | Level 2 | |||||||||
| Assets: | ||||||||||||
| Derivatives (a) | $ | 31.9 | $ | - | $ | 31.9 | ||||||
| Money market mutual funds | 38.9 | 38.9 | - | |||||||||
| Fixed maturity and open ended mutual funds (b) | 32.9 | 32.9 | - | |||||||||
| Total | $ | 103.7 | $ | 71.8 | $ | 31.9 | ||||||
| Liabilities: | ||||||||||||
| Derivatives (a) | $ | 30.6 | $ | - | $ | 30.6 | ||||||
| Total | $ | 30.6 | $ | - | $ | 30.6 | ||||||
| Fair Value Measurement as of December 31, 2015 | ||||||||||||
| Description | Balance | Level 1 | Level 2 | |||||||||
| Assets: | ||||||||||||
| Derivatives (a) | $ | 12.6 | $ | - | $ | 12.6 | ||||||
| Money market mutual funds | 188.3 | 188.3 | - | |||||||||
| Fixed maturity and open ended mutual funds (b) | 31.9 | 31.9 | - | |||||||||
| Total | $ | 232.8 | $ | 220.2 | $ | 12.6 | ||||||
| Liabilities: | ||||||||||||
| Derivatives (a) | $ | 10.4 | $ | - | $ | 10.4 | ||||||
| Total | $ | 10.4 | $ | - | $ | 10.4 | ||||||
| (a) Represents FX forwards, interest rate swaps and cross-currency swaps as more fully described in Note 7 to the financial statements. | ||||||||||||
| (b) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. | ||||||||||||
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NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION
The following tables contain additional detail related to certain balance sheet captions:
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Other current assets: | ||||||
| Prepaid taxes | $ | 46.1 | $ | 83.3 | ||
| Prepaid expenses | 57.0 | 66.9 | ||||
| Other | 24.5 | 29.4 | ||||
| Total other current assets | $ | 127.6 | $ | 179.6 | ||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Other assets: | ||||||
| Investments in joint ventures | $ | 18.6 | $ | 28.7 | ||
| Deposits for real-estate leases | 11.4 | 11.4 | ||||
| Indemnification assets related to acquisitions | 20.7 | 19.2 | ||||
| Mutual funds and fixed deposits | 61.0 | 55.0 | ||||
| Other | 42.9 | 26.1 | ||||
| Total other assets | $ | 154.6 | $ | 140.4 | ||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Accounts payable and accrued liabilities: | ||||||
| Salaries and benefits | $ | 71.4 | $ | 83.0 | ||
| Incentive compensation | 101.4 | 137.2 | ||||
| Customer credits, advanced payments and advanced billings | 27.2 | 24.6 | ||||
| Self-insurance reserves | 21.7 | 19.7 | ||||
| Dividends | 7.1 | 78.2 | ||||
| Professional service fees | 51.2 | 54.5 | ||||
| Interest accrued on debt | 23.1 | 59.4 | ||||
| Accounts payable | 28.0 | 22.2 | ||||
| Income taxes | 7.9 | 11.5 | ||||
| Restructuring | 9.6 | - | ||||
| Pension and other retirement employee benefits | 6.4 | 6.2 | ||||
| Other | 95.3 | 70.1 | ||||
| Total accounts payable and accrued liabilities | $ | 450.3 | $ | 566.6 | ||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Other liabilities: | ||||||
| Pension and other retirement employee benefits | $ | 256.1 | $ | 261.7 | ||
| Deferred rent-non-current portion | 98.9 | 98.4 | ||||
| Interest accrued on UTPs | 33.5 | 27.9 | ||||
| Legacy and other tax matters | 1.2 | 1.7 | ||||
| Other | 23.2 | 27.5 | ||||
| Total other liabilities | $ | 412.9 | $ | 417.2 | ||
Changes in the Company’s self-insurance reserves for claims insured by the Company’s wholly-owned insurance subsidiary, which primarily relate to legal defense costs for claims from prior years, are as follows:
| Nine Months Ended | Year Ended | |||||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Balance January 1, | $ | 19.7 | $ | 21.5 | ||
| Accruals | 9.7 | 22.2 | ||||
| Payments | (7.7) | (24.0) | ||||
| Balance | $ | 21.7 | $ | 19.7 | ||
Other Non-Operating Income (Expense):
The following table summarizes the components of other non-operating (expense) income:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| FX gain/(loss) | $ | 4.3 | $ | 9.7 | $ | 9.1 | $ | (2.5) | ||||
| Legacy Tax benefit | 1.6 | 6.4 | 1.6 | 6.4 | ||||||||
| Joint venture income | 2.3 | 3.5 | 7.2 | 8.8 | ||||||||
| Other | (1.3) | 0.1 | (2.4) | 1.3 | ||||||||
| Total | $ | 6.9 | $ | 19.7 | $ | 15.5 | $ | 14.0 | ||||
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| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Other current assets: | ||||||
| Prepaid taxes | $ | 46.1 | $ | 83.3 | ||
| Prepaid expenses | 57.0 | 66.9 | ||||
| Other | 24.5 | 29.4 | ||||
| Total other current assets | $ | 127.6 | $ | 179.6 | ||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Other assets: | ||||||
| Investments in joint ventures | $ | 18.6 | $ | 28.7 | ||
| Deposits for real-estate leases | 11.4 | 11.4 | ||||
| Indemnification assets related to acquisitions | 20.7 | 19.2 | ||||
| Mutual funds and fixed deposits | 61.0 | 55.0 | ||||
| Other | 42.9 | 26.1 | ||||
| Total other assets | $ | 154.6 | $ | 140.4 | ||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Accounts payable and accrued liabilities: | ||||||
| Salaries and benefits | $ | 71.4 | $ | 83.0 | ||
| Incentive compensation | 101.4 | 137.2 | ||||
| Customer credits, advanced payments and advanced billings | 27.2 | 24.6 | ||||
| Self-insurance reserves | 21.7 | 19.7 | ||||
| Dividends | 7.1 | 78.2 | ||||
| Professional service fees | 51.2 | 54.5 | ||||
| Interest accrued on debt | 23.1 | 59.4 | ||||
| Accounts payable | 28.0 | 22.2 | ||||
| Income taxes | 7.9 | 11.5 | ||||
| Restructuring | 9.6 | - | ||||
| Pension and other retirement employee benefits | 6.4 | 6.2 | ||||
| Other | 95.3 | 70.1 | ||||
| Total accounts payable and accrued liabilities | $ | 450.3 | $ | 566.6 | ||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Other liabilities: | ||||||
| Pension and other retirement employee benefits | $ | 256.1 | $ | 261.7 | ||
| Deferred rent-non-current portion | 98.9 | 98.4 | ||||
| Interest accrued on UTPs | 33.5 | 27.9 | ||||
| Legacy and other tax matters | 1.2 | 1.7 | ||||
| Other | 23.2 | 27.5 | ||||
| Total other liabilities | $ | 412.9 | $ | 417.2 | ||
| Nine Months Ended | Year Ended | |||||
| September 30, | December 31, | |||||
| 2016 | 2015 | |||||
| Balance January 1, | $ | 19.7 | $ | 21.5 | ||
| Accruals | 9.7 | 22.2 | ||||
| Payments | (7.7) | (24.0) | ||||
| Balance | $ | 21.7 | $ | 19.7 | ||
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| FX gain/(loss) | $ | 4.3 | $ | 9.7 | $ | 9.1 | $ | (2.5) | ||||
| Legacy Tax benefit | 1.6 | 6.4 | 1.6 | 6.4 | ||||||||
| Joint venture income | 2.3 | 3.5 | 7.2 | 8.8 | ||||||||
| Other | (1.3) | 0.1 | (2.4) | 1.3 | ||||||||
| Total | $ | 6.9 | $ | 19.7 | $ | 15.5 | $ | 14.0 | ||||
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NOTE 11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table provides details about the reclassifications out of AOCI:
| Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | Affected line in the consolidated statement of operations | |||||||||||
| Gains on cash flow hedges | |||||||||||||
| Cross-currency swap | 1.3 | 0.9 | Other non-operating income (expense), net | ||||||||||
| Income tax effect of item above | (0.4) | (0.3) | Provision for income taxes | ||||||||||
| Total gains on cash flow hedges | 0.9 | 0.6 | |||||||||||
| Pension and other retirement benefits | |||||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (1.5) | (4.6) | Operating expense | ||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (0.9) | (2.7) | SG&A expense | ||||||||||
| Total before income taxes | (2.4) | (7.3) | |||||||||||
| Income tax effect of item above | 0.9 | 2.8 | Provision for income taxes | ||||||||||
| Total pension and other retirement benefits | (1.5) | (4.5) | |||||||||||
| Total losses included in Net Income attributable to reclassifications out of AOCI | $ | (0.6) | $ | (3.9) | |||||||||
| Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 | Affected line in the consolidated statement of operations | |||||||||||
| Gains on foreign currency translation adjustments | |||||||||||||
| Liquidation of foreign subsidiary | $ | - | $ | 0.1 | Other non-operating income (expense), net | ||||||||
| Total gains on foreign translation adjustments | - | 0.1 | |||||||||||
| Gains on available for sale securities: | |||||||||||||
| Gains on available for sale securities | 0.6 | 0.8 | Other non-operating income (expense), net | ||||||||||
| Total gains on available for sale securities | 0.6 | 0.8 | |||||||||||
| Pension and other retirement benefits | |||||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (2.1) | (6.4) | Operating expense | ||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (1.3) | (3.9) | SG&A expense | ||||||||||
| Total before income taxes | (3.4) | (10.3) | |||||||||||
| Income tax effect of item above | 1.3 | 3.9 | Provision for income taxes | ||||||||||
| Total pension and other retirement benefits | (2.1) | (6.4) | |||||||||||
| Total losses included in Net Income attributable to reclassifications out of AOCI | $ | (1.5) | $ | (5.5) | |||||||||
The following table shows changes in AOCI by component (net of tax):
| Three Months Ended | |||||||||||||||||||||||||||
| September 30, 2016 | September 30, 2015 | ||||||||||||||||||||||||||
| Gains/(Losses) | Cash Flow Hedges | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | ||||||||||||||||||
| Balance June 30, | $ | (2.5) | $ | (79.4) | $ | (239.4) | $ | 4.5 | $ | (316.8) | (94.4) | $ | (189.2) | $ | 2.8 | $ | (280.8) | ||||||||||
| Other comprehensive income/(loss) before reclassifications | 3.2 | - | 9.2 | (1.9) | 10.5 | - | (41.7) | 0.7 | (41.0) | ||||||||||||||||||
| Amounts reclassified from AOCI | (0.9) | 1.5 | - | - | 0.6 | 2.1 | - | (0.6) | 1.5 | ||||||||||||||||||
| Other comprehensive income/(loss) | 2.3 | 1.5 | 9.2 | (1.9) | 11.1 | 2.1 | (41.7) | 0.1 | (39.5) | ||||||||||||||||||
| Balance September 30, | $ | (0.2) | $ | (77.9) | $ | (230.2) | $ | 2.6 | $ | (305.7) | $ | (92.3) | $ | (230.9) | $ | 2.9 | $ | (320.3) | |||||||||
| Nine Months Ended | |||||||||||||||||||||||||||
| September 30, 2016 | September 30, 2015 | ||||||||||||||||||||||||||
| Gains/(Losses) | Cash Flow Hedges | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | ||||||||||||||||||
| Balance December 31, | $ | (1.1) | $ | (85.7) | $ | (256.0) | $ | 3.3 | $ | (339.5) | $ | (105.4) | $ | (130.7) | $ | 0.9 | $ | (235.2) | |||||||||
| Other comprehensive income/(loss) before reclassifications | 1.5 | 3.3 | 25.8 | (0.7) | 29.9 | 6.7 | (100.1) | 2.8 | (90.6) | ||||||||||||||||||
| Amounts reclassified from AOCI | (0.6) | 4.5 | - | - | 3.9 | 6.4 | (0.1) | (0.8) | 5.5 | ||||||||||||||||||
| Other comprehensive income/(loss) | 0.9 | 7.8 | 25.8 | (0.7) | 33.8 | 13.1 | (100.2) | 2.0 | (85.1) | ||||||||||||||||||
| Balance September 30, | $ | (0.2) | (77.9) | (230.2) | 2.6 | $ | (305.7) | $ | (92.3) | $ | (230.9) | $ | 2.9 | $ | (320.3) | ||||||||||||
|
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| Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | Affected line in the consolidated statement of operations | |||||||||||
| Gains on cash flow hedges | |||||||||||||
| Cross-currency swap | 1.3 | 0.9 | Other non-operating income (expense), net | ||||||||||
| Income tax effect of item above | (0.4) | (0.3) | Provision for income taxes | ||||||||||
| Total gains on cash flow hedges | 0.9 | 0.6 | |||||||||||
| Pension and other retirement benefits | |||||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (1.5) | (4.6) | Operating expense | ||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (0.9) | (2.7) | SG&A expense | ||||||||||
| Total before income taxes | (2.4) | (7.3) | |||||||||||
| Income tax effect of item above | 0.9 | 2.8 | Provision for income taxes | ||||||||||
| Total pension and other retirement benefits | (1.5) | (4.5) | |||||||||||
| Total losses included in Net Income attributable to reclassifications out of AOCI | $ | (0.6) | $ | (3.9) | |||||||||
| Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 | Affected line in the consolidated statement of operations | |||||||||||
| Gains on foreign currency translation adjustments | |||||||||||||
| Liquidation of foreign subsidiary | $ | - | $ | 0.1 | Other non-operating income (expense), net | ||||||||
| Total gains on foreign translation adjustments | - | 0.1 | |||||||||||
| Gains on available for sale securities: | |||||||||||||
| Gains on available for sale securities | 0.6 | 0.8 | Other non-operating income (expense), net | ||||||||||
| Total gains on available for sale securities | 0.6 | 0.8 | |||||||||||
| Pension and other retirement benefits | |||||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (2.1) | (6.4) | Operating expense | ||||||||||
| Amortization of actuarial losses and prior service costs included in net income | (1.3) | (3.9) | SG&A expense | ||||||||||
| Total before income taxes | (3.4) | (10.3) | |||||||||||
| Income tax effect of item above | 1.3 | 3.9 | Provision for income taxes | ||||||||||
| Total pension and other retirement benefits | (2.1) | (6.4) | |||||||||||
| Total losses included in Net Income attributable to reclassifications out of AOCI | $ | (1.5) | $ | (5.5) | |||||||||
| Three Months Ended | |||||||||||||||||||||||||||
| September 30, 2016 | September 30, 2015 | ||||||||||||||||||||||||||
| Gains/(Losses) | Cash Flow Hedges | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | ||||||||||||||||||
| Balance June 30, | $ | (2.5) | $ | (79.4) | $ | (239.4) | $ | 4.5 | $ | (316.8) | (94.4) | $ | (189.2) | $ | 2.8 | $ | (280.8) | ||||||||||
| Other comprehensive income/(loss) before reclassifications | 3.2 | - | 9.2 | (1.9) | 10.5 | - | (41.7) | 0.7 | (41.0) | ||||||||||||||||||
| Amounts reclassified from AOCI | (0.9) | 1.5 | - | - | 0.6 | 2.1 | - | (0.6) | 1.5 | ||||||||||||||||||
| Other comprehensive income/(loss) | 2.3 | 1.5 | 9.2 | (1.9) | 11.1 | 2.1 | (41.7) | 0.1 | (39.5) | ||||||||||||||||||
| Balance September 30, | $ | (0.2) | $ | (77.9) | $ | (230.2) | $ | 2.6 | $ | (305.7) | $ | (92.3) | $ | (230.9) | $ | 2.9 | $ | (320.3) | |||||||||
| Nine Months Ended | |||||||||||||||||||||||||||
| September 30, 2016 | September 30, 2015 | ||||||||||||||||||||||||||
| Gains/(Losses) | Cash Flow Hedges | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | Pension and Other Retirement Benefits | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | ||||||||||||||||||
| Balance December 31, | $ | (1.1) | $ | (85.7) | $ | (256.0) | $ | 3.3 | $ | (339.5) | $ | (105.4) | $ | (130.7) | $ | 0.9 | $ | (235.2) | |||||||||
| Other comprehensive income/(loss) before reclassifications | 1.5 | 3.3 | 25.8 | (0.7) | 29.9 | 6.7 | (100.1) | 2.8 | (90.6) | ||||||||||||||||||
| Amounts reclassified from AOCI | (0.6) | 4.5 | - | - | 3.9 | 6.4 | (0.1) | (0.8) | 5.5 | ||||||||||||||||||
| Other comprehensive income/(loss) | 0.9 | 7.8 | 25.8 | (0.7) | 33.8 | 13.1 | (100.2) | 2.0 | (85.1) | ||||||||||||||||||
| Balance September 30, | $ | (0.2) | (77.9) | (230.2) | 2.6 | $ | (305.7) | $ | (92.3) | $ | (230.9) | $ | 2.9 | $ | (320.3) | ||||||||||||
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NOTE 12. PENSION AND OTHER RETIREMENT BENEFITS
Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary for its employees or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody’s funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”.
Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008. New U.S. employees will instead receive a retirement contribution of similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s DBPPs continue to accrue benefits based on existing plan formulas.
The components of net periodic benefit expense related to the Retirement Plans are as follows:
| Three Months Ended September 30, | ||||||||||||
| Pension Plans | Other Retirement Plans | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Components of net periodic expense | ||||||||||||
| Service cost | $ | 5.0 | $ | 5.5 | $ | 0.6 | $ | 0.5 | ||||
| Interest cost | 4.5 | 4.2 | 0.3 | 0.2 | ||||||||
| Expected return on plan assets | (4.3) | (3.6) | - | - | ||||||||
| Amortization of net actuarial loss from earlier periods | 2.5 | 3.1 | 0.1 | 0.1 | ||||||||
| Amortization of net prior service costs from earlier periods | 0.1 | 0.1 | (0.1) | - | ||||||||
| Net periodic expense | $ | 7.8 | $ | 9.3 | $ | 0.9 | $ | 0.8 | ||||
| Nine Months Ended September 30, | ||||||||||||
| Pension Plans | Other Retirement Plans | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Components of net periodic expense | ||||||||||||
| Service cost | $ | 15.1 | $ | 16.3 | $ | 1.7 | $ | 1.6 | ||||
| Interest cost | 13.6 | 12.7 | 0.8 | 0.7 | ||||||||
| Expected return on plan assets | (12.8) | (10.8) | - | - | ||||||||
| Amortization of net actuarial loss from earlier periods | 7.4 | 9.3 | 0.1 | 0.3 | ||||||||
| Amortization of net prior service costs from earlier periods | 0.1 | 0.5 | (0.2) | - | ||||||||
| Net periodic expense | $ | 23.4 | $ | 28.0 | $ | 2.4 | $ | 2.6 | ||||
The Company made a contribution of $22.4 million to its funded pension plan as well as 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 nine months ended September 30, 2016. The Company anticipates making payments of $2.8 million related to its unfunded U.S. DBPPs and $0.4 million to its U.S. other retirement plans, respectively, during the remainder of 2016.
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| Three Months Ended September 30, | ||||||||||||
| Pension Plans | Other Retirement Plans | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Components of net periodic expense | ||||||||||||
| Service cost | $ | 5.0 | $ | 5.5 | $ | 0.6 | $ | 0.5 | ||||
| Interest cost | 4.5 | 4.2 | 0.3 | 0.2 | ||||||||
| Expected return on plan assets | (4.3) | (3.6) | - | - | ||||||||
| Amortization of net actuarial loss from earlier periods | 2.5 | 3.1 | 0.1 | 0.1 | ||||||||
| Amortization of net prior service costs from earlier periods | 0.1 | 0.1 | (0.1) | - | ||||||||
| Net periodic expense | $ | 7.8 | $ | 9.3 | $ | 0.9 | $ | 0.8 | ||||
| Nine Months Ended September 30, | ||||||||||||
| Pension Plans | Other Retirement Plans | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Components of net periodic expense | ||||||||||||
| Service cost | $ | 15.1 | $ | 16.3 | $ | 1.7 | $ | 1.6 | ||||
| Interest cost | 13.6 | 12.7 | 0.8 | 0.7 | ||||||||
| Expected return on plan assets | (12.8) | (10.8) | - | - | ||||||||
| Amortization of net actuarial loss from earlier periods | 7.4 | 9.3 | 0.1 | 0.3 | ||||||||
| Amortization of net prior service costs from earlier periods | 0.1 | 0.5 | (0.2) | - | ||||||||
| Net periodic expense | $ | 23.4 | $ | 28.0 | $ | 2.4 | $ | 2.6 | ||||
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NOTE 14. INDEBTEDNESS
The following table summarizes total indebtedness:
| September 30, 2016 | ||||||||||||||
| Principal Amount | Fair Value of Interest Rate Swap (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | ||||||||||
| Notes Payable: | ||||||||||||||
| 6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | (0.1) | $ | 299.9 | ||||
| 5.50% 2010 Senior Notes, due 2020 | 500.0 | 20.0 | (1.4) | (1.7) | 516.9 | |||||||||
| 4.50% 2012 Senior Notes, due 2022 | 500.0 | - | (2.5) | (2.2) | 495.3 | |||||||||
| 4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.1) | (2.8) | 495.1 | |||||||||
| 2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 8.0 | (0.5) | (1.9) | 455.6 | |||||||||
| 5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.3 | (6.0) | 597.3 | |||||||||
| 1.75% 2015 Senior Notes, due 2027 | 561.9 | - | - | (3.9) | 558.0 | |||||||||
| Total debt | $ | 3,411.9 | $ | 28.0 | $ | (3.2) | $ | (18.6) | $ | 3,418.1 | ||||
| Current portion | (299.9) | |||||||||||||
| Total long-term debt | $ | 3,118.2 | ||||||||||||
| December 31, 2015 | ||||||||||||||
| Principal Amount | Fair Value of Interest Rate Swap (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | ||||||||||
| Notes Payable: | ||||||||||||||
| 6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | (0.2) | $ | 299.8 | ||||
| 5.50% 2010 Senior Notes, due 2020 | 500.0 | 9.4 | (1.6) | (2.0) | 505.8 | |||||||||
| 4.50% 2012 Senior Notes, due 2022 | 500.0 | - | (2.8) | (2.5) | 494.7 | |||||||||
| 4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.3) | (3.1) | 494.6 | |||||||||
| 2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 2.3 | (0.5) | (2.4) | 449.4 | |||||||||
| 5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.4 | (6.2) | 597.2 | |||||||||
| 1.75% 2015 Senior Notes, due 2027 | 543.1 | - | - | (4.0) | 539.1 | |||||||||
| Total long-term debt | $ | 3,393.1 | $ | 11.7 | $ | (3.8) | $ | (20.4) | $ | 3,380.6 | ||||
| (1) The Company has entered into interest rate swaps on the 2010 Senior Notes and the 2014 Senior Notes (5-Year) which are more fully discussed in Note 7 above. | ||||||||||||||
| (2) Pursuant to ASU No. 2015-03, unamortized debt issuance costs are presented as a reduction to the carrying value of the notes payable. See Note 1 for additional discussion. | ||||||||||||||
On August 3, 2016, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Borrowings under the CP Program are backstopped by the 2015 Facility. Amounts under the CP Program may be re-borrowed. The maturity of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par, or alternatively, sold at par and bear interest at rates that will vary based upon market conditions. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods. The Company has not borrowed under this program through September 30, 2016.
At September 30, 2016, the Company was in compliance with all covenants contained within all of the debt agreements. The 2015 Facility, the 2015 Senior Notes, the 2014 Senior Notes (5-year), the 2014 Senior Notes (30-year), the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes all contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of September 30, 2016, 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 | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Income | $ | 2.5 | $ | 2.8 | $ | 8.2 | $ | 7.0 | ||||
| Expense on borrowings | (35.6) | (29.8) | (105.6) | (88.8) | ||||||||
| Expense on UTPs and other tax related liabilities (1) | (2.5) | 0.4 | (7.0) | (6.3) | ||||||||
| Legacy Tax | 0.2 | 0.7 | 0.2 | 0.7 | ||||||||
| Capitalized | - | 0.1 | 0.4 | 0.4 | ||||||||
| Total | $ | (35.4) | $ | (25.8) | $ | (103.8) | $ | (87.0) | ||||
| (1) The three and nine months ended September 30, 2015 include approximately $2 million in interest income on a tax refund. | ||||||||||||
The following table shows the cash paid for interest:
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2016 | 2015 | ||||||||||
| Interest paid | $ | 129.3 | $ | 101.0 | |||||||
The fair value and carrying value of the Company’s debt as of September 30, 2016 and December 31, 2015 are as follows:
| September 30, 2016 | December 31, 2015 | ||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||
| Series 2007-1 Notes | $ | 299.9 | $ | 312.9 | $ | 299.8 | $ | 320.6 | |||
| 2010 Senior Notes | 516.9 | 563.9 | 505.8 | 551.2 | |||||||
| 2012 Senior Notes | 495.3 | 557.8 | 494.7 | 530.0 | |||||||
| 2013 Senior Notes | 495.1 | 568.8 | 494.6 | 533.8 | |||||||
| 2014 Senior Notes (5-Year) | 455.6 | 463.4 | 449.4 | 454.3 | |||||||
| 2014 Senior Notes (30-Year) | 597.3 | 743.7 | 597.2 | 617.7 | |||||||
| 2015 Senior Notes | 558.0 | 600.0 | 539.1 | 520.2 | |||||||
| Total | $ | 3,418.1 | $ | 3,810.5 | $ | 3,380.6 | $ | 3,527.8 | |||
The fair value of the Company’s debt is estimated based on quoted market prices for similar instruments. Accordingly, the inputs used to estimate the fair value of the Company’s long-term debt are classified as Level 2 inputs within the fair value hierarchy.
|
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| September 30, 2016 | ||||||||||||||
| Principal Amount | Fair Value of Interest Rate Swap (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | ||||||||||
| Notes Payable: | ||||||||||||||
| 6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | (0.1) | $ | 299.9 | ||||
| 5.50% 2010 Senior Notes, due 2020 | 500.0 | 20.0 | (1.4) | (1.7) | 516.9 | |||||||||
| 4.50% 2012 Senior Notes, due 2022 | 500.0 | - | (2.5) | (2.2) | 495.3 | |||||||||
| 4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.1) | (2.8) | 495.1 | |||||||||
| 2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 8.0 | (0.5) | (1.9) | 455.6 | |||||||||
| 5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.3 | (6.0) | 597.3 | |||||||||
| 1.75% 2015 Senior Notes, due 2027 | 561.9 | - | - | (3.9) | 558.0 | |||||||||
| Total debt | $ | 3,411.9 | $ | 28.0 | $ | (3.2) | $ | (18.6) | $ | 3,418.1 | ||||
| Current portion | (299.9) | |||||||||||||
| Total long-term debt | $ | 3,118.2 | ||||||||||||
| December 31, 2015 | ||||||||||||||
| Principal Amount | Fair Value of Interest Rate Swap (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | ||||||||||
| Notes Payable: | ||||||||||||||
| 6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | (0.2) | $ | 299.8 | ||||
| 5.50% 2010 Senior Notes, due 2020 | 500.0 | 9.4 | (1.6) | (2.0) | 505.8 | |||||||||
| 4.50% 2012 Senior Notes, due 2022 | 500.0 | - | (2.8) | (2.5) | 494.7 | |||||||||
| 4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.3) | (3.1) | 494.6 | |||||||||
| 2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 2.3 | (0.5) | (2.4) | 449.4 | |||||||||
| 5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.4 | (6.2) | 597.2 | |||||||||
| 1.75% 2015 Senior Notes, due 2027 | 543.1 | - | - | (4.0) | 539.1 | |||||||||
| Total long-term debt | $ | 3,393.1 | $ | 11.7 | $ | (3.8) | $ | (20.4) | $ | 3,380.6 | ||||
| (1) The Company has entered into interest rate swaps on the 2010 Senior Notes and the 2014 Senior Notes (5-Year) which are more fully discussed in Note 7 above. | ||||||||||||||
| (2) Pursuant to ASU No. 2015-03, unamortized debt issuance costs are presented as a reduction to the carrying value of the notes payable. See Note 1 for additional discussion. | ||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| Income | $ | 2.5 | $ | 2.8 | $ | 8.2 | $ | 7.0 | ||||
| Expense on borrowings | (35.6) | (29.8) | (105.6) | (88.8) | ||||||||
| Expense on UTPs and other tax related liabilities (1) | (2.5) | 0.4 | (7.0) | (6.3) | ||||||||
| Legacy Tax | 0.2 | 0.7 | 0.2 | 0.7 | ||||||||
| Capitalized | - | 0.1 | 0.4 | 0.4 | ||||||||
| Total | $ | (35.4) | $ | (25.8) | $ | (103.8) | $ | (87.0) | ||||
| (1) The three and nine months ended September 30, 2015 include approximately $2 million in interest income on a tax refund. | ||||||||||||
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2016 | 2015 | ||||||||||
| Interest paid | $ | 129.3 | $ | 101.0 | |||||||
| September 30, 2016 | December 31, 2015 | ||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||
| Series 2007-1 Notes | $ | 299.9 | $ | 312.9 | $ | 299.8 | $ | 320.6 | |||
| 2010 Senior Notes | 516.9 | 563.9 | 505.8 | 551.2 | |||||||
| 2012 Senior Notes | 495.3 | 557.8 | 494.7 | 530.0 | |||||||
| 2013 Senior Notes | 495.1 | 568.8 | 494.6 | 533.8 | |||||||
| 2014 Senior Notes (5-Year) | 455.6 | 463.4 | 449.4 | 454.3 | |||||||
| 2014 Senior Notes (30-Year) | 597.3 | 743.7 | 597.2 | 617.7 | |||||||
| 2015 Senior Notes | 558.0 | 600.0 | 539.1 | 520.2 | |||||||
| Total | $ | 3,418.1 | $ | 3,810.5 | $ | 3,380.6 | $ | 3,527.8 | |||
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NOTE 14. CONTINGENCIES
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 the global credit crisis of 2008, MIS and other credit rating agencies have been the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with regulatory standards. Moody’s periodically receives and is continuing to address subpoenas and inquiries from various governmental authorities, including the U.S. Department of Justice and state attorneys general, and is responding to such investigations and inquiries.
In a letter dated September 29, 2016, the DOJ stated that it is preparing a civil complaint to be filed against Moody’s and MIS in the U.S. District Court for the District of New Jersey alleging certain violations of the Financial Institutions Reform, Recovery, and Enforcement Act in connection with the ratings MIS assigned to residential mortgage-backed securities and collateralized debt obligations in the period leading up to the 2008 financial crisis. The DOJ also stated that its investigation remains ongoing and may expand to include additional theories. A number of state attorneys general have indicated that they also expect to pursue similar claims under state law, which claims may include additional periods, theories, asset classes or activities. The Company is continuing to respond to the DOJ’s and states’ subpoenas 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.
For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some such matters, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
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NOTE 15. SEGMENT INFORMATION
The Company is organized into three operating segments: (i) MIS, (ii) MA and (iii) Copal Amba. The Copal Amba operating segment has been aggregated with the MA operating segment based on the fact that it has similar economic characteristics to MA. Accordingly, the Company reports in two reportable segments: MIS and MA.
The MIS segment consists of five LOBs. The CFG, SFG, FIG and PPIF LOBs generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other LOB primarily consists of the distribution of research and financial instruments pricing services in the Asia-Pacific region as well as ICRA non-ratings revenue.
The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three LOBs - 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. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products and is generally based on comparable market transactions. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services. Additionally, overhead costs and corporate expenses of the Company that exclusively benefit only one segment are fully charged to that segment. Overhead costs and corporate expenses of the Company that benefit both segments are allocated to each segment based on a revenue-split methodology. Accordingly, a reportable segment’s share of these costs will increase as its proportion of revenue relative to Moody’s total revenue increases. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. “Eliminations” in the table below represent intersegment revenue/expense. Moody’s does not report the Company’s assets by reportable segment, as this metric is not used by the chief operating decision maker to allocate resources to the segments. Consequently, it is not practical to show assets by reportable segment.
Financial Information by Segment
The table below shows revenue, Adjusted Operating Income and operating income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment.
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||
| Revenue | $ | 637.6 | $ | 309.0 | $ | (29.5) | $ | 917.1 | $ | 571.6 | $ | 290.1 | $ | (26.8) | $ | 834.9 | ||||||||||
| Operating, SG&A | 272.8 | 235.2 | (29.5) | 478.5 | 268.1 | 215.6 | (26.8) | 456.9 | ||||||||||||||||||
| Adjusted Operating Income | 364.8 | 73.8 | - | 438.6 | 303.5 | 74.5 | - | 378.0 | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Restructuring | 7.6 | 0.8 | - | 8.4 | - | - | - | - | ||||||||||||||||||
| Depreciation and amortization | 19.1 | 13.6 | - | 32.7 | 16.9 | 11.4 | - | 28.3 | ||||||||||||||||||
| Operating income | $ | 338.1 | $ | 59.4 | $ | - | $ | 397.5 | $ | 286.6 | $ | 63.1 | $ | - | $ | 349.7 | ||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||
| Revenue | $ | 1,836.9 | $ | 908.9 | $ | (83.7) | $ | 2,662.1 | $ | 1,859.1 | $ | 838.7 | $ | (79.2) | $ | 2,618.6 | ||||||||||
| Operating, SG&A | 830.1 | 698.1 | (83.7) | 1,444.5 | 836.4 | 636.3 | (79.2) | 1,393.5 | ||||||||||||||||||
| Adjusted Operating Income | 1,006.8 | 210.8 | - | 1,217.6 | 1,022.7 | 202.4 | - | 1,225.1 | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Restructuring | 10.2 | 1.8 | - | 12.0 | - | - | - | - | ||||||||||||||||||
| Depreciation and amortization | 54.8 | 39.0 | - | 93.8 | 48.7 | 36.1 | - | 84.8 | ||||||||||||||||||
| Operating income | $ | 941.8 | $ | 170.0 | $ | - | $ | 1,111.8 | $ | 974.0 | $ | 166.3 | $ | - | $ | 1,140.3 | ||||||||||
The cumulative restructuring charges incurred since January 1, 2016 through September 30, 2016 for the MIS and MA operating segments are $10.2 million and $1.8 million, respectively. The charge in MA reflects cost management initiatives in certain corporate overhead functions of which a portion is allocated to MA based on a revenue-split methodology.
MIS and MA Revenue by Line of Business
The table below presents revenue by LOB within each reportable segment:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| MIS: | ||||||||||||
| Corporate finance (CFG) | $ | 299.6 | $ | 248.3 | $ | 844.7 | $ | 866.6 | ||||
| Structured finance (SFG) | 104.2 | 112.5 | 306.3 | 335.0 | ||||||||
| Financial institutions (FIG) | 95.8 | 89.5 | 280.4 | 273.7 | ||||||||
| Public, project and infrastructure finance (PPIF) | 105.2 | 90.6 | 309.0 | 291.2 | ||||||||
| Total ratings revenue | 604.8 | 540.9 | 1,740.4 | 1,766.5 | ||||||||
| MIS Other | 7.5 | 7.2 | 22.6 | 23.1 | ||||||||
| Total external revenue | 612.3 | 548.1 | 1,763.0 | 1,789.6 | ||||||||
| Intersegment royalty | 25.3 | 23.5 | 73.9 | 69.5 | ||||||||
| Total | 637.6 | 571.6 | 1,836.9 | 1,859.1 | ||||||||
| MA: | ||||||||||||
| Research, data and analytics (RD&A) | 167.7 | 157.9 | 500.9 | 465.0 | ||||||||
| Enterprise risk solutions (ERS) | 101.5 | 92.2 | 288.5 | 252.5 | ||||||||
| Professional services (PS) | 35.6 | 36.7 | 109.7 | 111.5 | ||||||||
| Total external revenue | 304.8 | 286.8 | 899.1 | 829.0 | ||||||||
| Intersegment revenue | 4.2 | 3.3 | 9.8 | 9.7 | ||||||||
| Total | 309.0 | 290.1 | 908.9 | 838.7 | ||||||||
| Eliminations | (29.5) | (26.8) | (83.7) | (79.2) | ||||||||
| Total MCO | $ | 917.1 | $ | 834.9 | $ | 2,662.1 | $ | 2,618.6 | ||||
| Consolidated Revenue Information by Geographic Area: | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| United States | $ | 545.7 | $ | 482.1 | $ | 1,571.6 | $ | 1,527.8 | ||||
| International: | ||||||||||||
| EMEA | 225.9 | 215.4 | 665.4 | 660.4 | ||||||||
| Asia-Pacific | 92.5 | 85.5 | 272.0 | 270.8 | ||||||||
| Americas | 53.0 | 51.9 | 153.1 | 159.6 | ||||||||
| Total International | 371.4 | 352.8 | 1,090.5 | 1,090.8 | ||||||||
| Total | $ | 917.1 | $ | 834.9 | $ | 2,662.1 | $ | 2,618.6 | ||||
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| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||
| Revenue | $ | 637.6 | $ | 309.0 | $ | (29.5) | $ | 917.1 | $ | 571.6 | $ | 290.1 | $ | (26.8) | $ | 834.9 | ||||||||||
| Operating, SG&A | 272.8 | 235.2 | (29.5) | 478.5 | 268.1 | 215.6 | (26.8) | 456.9 | ||||||||||||||||||
| Adjusted Operating Income | 364.8 | 73.8 | - | 438.6 | 303.5 | 74.5 | - | 378.0 | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Restructuring | 7.6 | 0.8 | - | 8.4 | - | - | - | - | ||||||||||||||||||
| Depreciation and amortization | 19.1 | 13.6 | - | 32.7 | 16.9 | 11.4 | - | 28.3 | ||||||||||||||||||
| Operating income | $ | 338.1 | $ | 59.4 | $ | - | $ | 397.5 | $ | 286.6 | $ | 63.1 | $ | - | $ | 349.7 | ||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||||
| MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||
| Revenue | $ | 1,836.9 | $ | 908.9 | $ | (83.7) | $ | 2,662.1 | $ | 1,859.1 | $ | 838.7 | $ | (79.2) | $ | 2,618.6 | ||||||||||
| Operating, SG&A | 830.1 | 698.1 | (83.7) | 1,444.5 | 836.4 | 636.3 | (79.2) | 1,393.5 | ||||||||||||||||||
| Adjusted Operating Income | 1,006.8 | 210.8 | - | 1,217.6 | 1,022.7 | 202.4 | - | 1,225.1 | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Restructuring | 10.2 | 1.8 | - | 12.0 | - | - | - | - | ||||||||||||||||||
| Depreciation and amortization | 54.8 | 39.0 | - | 93.8 | 48.7 | 36.1 | - | 84.8 | ||||||||||||||||||
| Operating income | $ | 941.8 | $ | 170.0 | $ | - | $ | 1,111.8 | $ | 974.0 | $ | 166.3 | $ | - | $ | 1,140.3 | ||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| MIS: | ||||||||||||
| Corporate finance (CFG) | $ | 299.6 | $ | 248.3 | $ | 844.7 | $ | 866.6 | ||||
| Structured finance (SFG) | 104.2 | 112.5 | 306.3 | 335.0 | ||||||||
| Financial institutions (FIG) | 95.8 | 89.5 | 280.4 | 273.7 | ||||||||
| Public, project and infrastructure finance (PPIF) | 105.2 | 90.6 | 309.0 | 291.2 | ||||||||
| Total ratings revenue | 604.8 | 540.9 | 1,740.4 | 1,766.5 | ||||||||
| MIS Other | 7.5 | 7.2 | 22.6 | 23.1 | ||||||||
| Total external revenue | 612.3 | 548.1 | 1,763.0 | 1,789.6 | ||||||||
| Intersegment royalty | 25.3 | 23.5 | 73.9 | 69.5 | ||||||||
| Total | 637.6 | 571.6 | 1,836.9 | 1,859.1 | ||||||||
| MA: | ||||||||||||
| Research, data and analytics (RD&A) | 167.7 | 157.9 | 500.9 | 465.0 | ||||||||
| Enterprise risk solutions (ERS) | 101.5 | 92.2 | 288.5 | 252.5 | ||||||||
| Professional services (PS) | 35.6 | 36.7 | 109.7 | 111.5 | ||||||||
| Total external revenue | 304.8 | 286.8 | 899.1 | 829.0 | ||||||||
| Intersegment revenue | 4.2 | 3.3 | 9.8 | 9.7 | ||||||||
| Total | 309.0 | 290.1 | 908.9 | 838.7 | ||||||||
| Eliminations | (29.5) | (26.8) | (83.7) | (79.2) | ||||||||
| Total MCO | $ | 917.1 | $ | 834.9 | $ | 2,662.1 | $ | 2,618.6 | ||||
| Consolidated Revenue Information by Geographic Area: | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||
| United States | $ | 545.7 | $ | 482.1 | $ | 1,571.6 | $ | 1,527.8 | ||||
| International: | ||||||||||||
| EMEA | 225.9 | 215.4 | 665.4 | 660.4 | ||||||||
| Asia-Pacific | 92.5 | 85.5 | 272.0 | 270.8 | ||||||||
| Americas | 53.0 | 51.9 | 153.1 | 159.6 | ||||||||
| Total International | 371.4 | 352.8 | 1,090.5 | 1,090.8 | ||||||||
| Total | $ | 917.1 | $ | 834.9 | $ | 2,662.1 | $ | 2,618.6 | ||||
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NOTE 17. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date” which defers the effective date of the ASU for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted up to the original effective date of December 15, 2016. In addition, in the first and second quarter of 2016, the FASB issued additional updates clarifying the implementation guidance for the new revenue recognition standard.
The Company intends to adopt the new revenue guidance as of January 1, 2018 and is currently evaluating the application of a transition method and the impact that adoption of these updates will have on its consolidated financial statements. Currently, the Company believes this ASU will have an impact on: i) the accounting for certain software subscription revenue in MA whereby the license rights within the arrangement would be recognized at the inception of the contract based on estimated stand-alone selling price with the remainder recognized over the subscription period; ii) the accounting for certain ERS revenue arrangements where VSOE is not available should result in the acceleration of revenue recognition and iii) the capitalization of certain contract implementation costs for its ERS business which will be expensed as incurred under the new standard.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10).” The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of this ASU on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows will depend on classification as either a finance or operating lease. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. This standard must be adopted using a modified retrospective approach whereby leases will be presented in accordance with the new standard as of the earliest period presented. The Company is currently evaluating the impact of this ASU on the Company’s financial statements.
In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting.” This ASU amends the accounting for an investment not previously accounted for under the equity method that subsequently qualifies for the equity method of accounting. It requires a company to add the cost of the additional interest acquired to its current basis and the commencement of the equity method of accounting when the criteria are met. In addition, the unrealized gains or losses in accumulated other comprehensive related to an available for sale equity security should be recognized through earnings if the investment subsequently qualifies for the equity method of accounting. The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of this ASU will only impact the Company if an investment not previously accounted for under the equity method qualifies for accounting under the equity method.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This ASU changes various aspects related to the accounting for share-based payments including: i) accounting for Excess Tax Benefits and shortfalls; ii) the accounting for forfeitures; iii) restrictions on the value of shares retained by an entity to fund the employee’s portion of payroll taxes; and iv) classification of Excess Tax Benefits in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted if all amendments are adopted in the same period. The Company is evaluating the impact of this ASU on its financial statements but currently expects that the most significant effect of this ASU will be the impact on its reported Net Income and Diluted EPS as Excess Tax Benefits and shortfalls will be recorded to the provision for income taxes under this ASU as compared to a charge to capital surplus under current GAAP. The Company intends to adopt this ASU in the first quarter of 2017.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU require the use of an “expected credit loss” impairment model for most financial assets reported at amortized cost which will require entities to estimate expected credit losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of this ASU on its financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its statements of cash flows.
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NOTE 18. SUBSEQUENT EVENT
On October 18, 2016, the Board approved the declaration of a quarterly dividend of $0.37 per share of Moody’s common stock, payable on December 12, 2016 to shareholders of record at the close of business on November 21, 2016.
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