Edgar Filing: MOODYS CORP /DE/

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2015

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

For the transition period from to

Commission file number 1-14037

Moody’s Corporation

(Exact name of registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code:

(212) 553-0300

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

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

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

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

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


Title of Each Class		Shares Outstanding at June 30, 2015
Common Stock, par value $0.01 per share		200.3 million

MOODY’S CORPORATION

INDEX TO FORM 10-Q


		Page(s)
	Glossary of Terms and Abbreviations		3-6

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		7
	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2015 and 2014		7
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2015 and 2014		8
	Consolidated Balance Sheets (Unaudited) at June 30, 2015 and December 31, 2014		9
	Consolidated Statements of Cash Flows (Unaudited) for the Six months ended June 30, 2015 and 2014		10
	Notes to Condensed Consolidated Financial Statements (Unaudited)		11-34
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
	The Company		35
	Critical Accounting Estimates		35
	Reportable Segments		35-36
	Results of Operations		36-48
	Liquidity and Capital Resources		48-53
	2015 Outlook		54
	Recently Issued Accounting Pronouncements		54-55
	Contingencies		55
	Regulation		55-56
	Forward-Looking Statements		56-57
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		57
Item 4.	Controls and Procedures		57

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		58
Item 1A.	Risk Factors		58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		58
Item 5.	Other Information		58
Item 6.	Exhibits		59

SIGNATURES			60
Exhibits Filed Herewith
10.1	First Amendment to the Moody’s Corporation Retirement Account
31.1	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.DEF	XBRL Definitions Linkbase Document
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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 depreciation and amortization

Adjusted Operating Margin		Operating margin excluding depreciation and amortization

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

Board		The board of directors of the Company

Bps		Basis points

Canary Wharf Lease		Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009

CDO		Collateralized debt obligation

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

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 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

CRAs		Credit rating agencies

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

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

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

D&B Business		Old D&B’s Dun & Bradstreet operating company

DBPP		Defined benefit pension plans

Debt/EBITDA		Ratio of Total Debt to EBITDA

EBITDA		Earnings before interest, taxes, depreciation and amortization

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


TERM		DEFINITION

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

ESMA		European Securities and Markets Authority

ETR		Effective tax rate

EU		European Union

EUR		Euros

European Ratings Platform		Central credit ratings website administered by ESMA

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

FX		Foreign exchange

GAAP		U.S. Generally Accepted Accounting Principles

GBP		British pounds

ICRA		ICRA Limited.; a leading provider of credit ratings and research in India. The Company previously held 28.51% equity ownership and in June 2014, increased that ownership stake to 50.06% through the acquisition of additional shares

ICRA Acquisition		The June 2014 purchase of an additional 21.55% ownership interest in ICRA resulting in majority ownership and consolidation if ICRAs financial statements; ICRAs results are consolidated into Moody’s financial statements on a three-month lag and accordingly the Company began including the results of operations for ICRA in its consolidated financial statements beginning in the fourth quarter of 2014

ICRA Gain		Gain relating to the step-acquisition of ICRA; U.S. GAAP requires the remeasurement to fair value of the previously held non-controlling shares held upon obtaining a controlling interest in a step-acquisition. This remeasurement of the Company’s equity investment in ICRA to fair value resulted in a pre-tax gain of $102.8 million ($78.5 million after tax) in the second quarter of 2014.

IRS		Internal Revenue Service

IT		Information technology

KIS		Korea Investors Service, Inc; a leading Korean rating agency and consolidated subsidiary of the Company

KIS Pricing		Korea Investors Service Pricing, Inc; a leading Korean provider of fixed income securities pricing and consolidated subsidiary of the Company

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

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


TERM		DEFINITION

Make Whole Amount		The prepayment penalty amount relating to the Series 2007-1 Notes, 2010 Senior Notes, 2012 Senior Notes, 2013 Senior Notes, 2014 Senior Notes (5-year) and 2014 Senior Notes (30-year) which is a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal

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

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

MIS		Moody’s Investors Service – a reportable segment of MCO; consists of 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 managed by MIS; MIS Other is an LOB of MIS

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

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

New D&B		The New D&B Corporation – which is comprised of the D&B Business

NM		Percentage change is not meaningful

NRSRO		Nationally Recognized Statistical Rating Organization

OCI		Other comprehensive income (loss); includes gains and losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments

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

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

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

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

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

Redeemable Noncontrolling Interest		Represents minority shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is in the control of the minority shareholders

Reform Act		Credit Rating Agency Reform Act of 2006

REIT		Real Estate Investment Trust

Relationship Revenue		In MIS, excluding MIS Other, relationship revenue represents the recurring 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. In MIS Other, relationship revenue represents subscription-based revenue. For MA, relationship revenue represents subscription-based revenue and maintenance revenue

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

SEC		U.S. Securities and Exchange Commission

Securities Act		Securities Act of 1933

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


TERM		DEFINITION

Transaction Revenue		For MIS, excluding MIS Other, revenue representing the initial rating of a new debt issuance as well as other one-time fees. In MIS Other, transaction revenue represents revenue from professional services and outsourcing engagements. For MA, revenue 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

U.S. Shared National Credit Program		Interagency program designed to evaluate large and complex syndicated credits. The program is administered by the three federal banking regulatory agencies which include the Federal Reserve System, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC).

USD		U.S. dollar

UTBs		Unrecognized tax benefits

UTPs		Uncertain tax positions

VSOE		Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority

WebEquity		WebEquity Solutions LLC; a leading provider of cloud-based loan origination solutions for financial institutions; part of the ERS LOB within MA; an acquisition completed in July 2014

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

2000 Distribution Agreement		Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS rulings on certain tax matters and certain other potential tax liabilities

2007 Agreement		Note purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes

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

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

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

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

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)		Principal amount of $300 million, 5.25% senior unsecured notes due in July 2044

2015 Facility		Five-year unsecured revolving credit facility, with capacity to borrow up to $1 billion; 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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in millions, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Revenue	$	918.1		$	873.5		$	1,783.7		$	1,640.7


Expenses
Operating		243.9			222.1			488.3			438.1
Selling, general and administrative		227.0			217.4			448.3			412.5
Depreciation and amortization		27.9			22.3			56.5			45.4


Total expenses		498.8			461.8			993.1			896.0


Operating income		419.3			411.7			790.6			744.7


Non-operating (expense) income, net
Interest income (expense), net		(31.9	)		(26.0	)		(61.2	)		(49.8	)
Other non-operating income (expense), net		(8.2	)		(3.3	)		(5.7	)		(0.9	)
ICRA Gain		—			102.8			—			102.8


Total non-operating (expense) income, net		(40.1	)		73.5			(66.9	)		52.1


Income before provisions for income taxes		379.2			485.2			723.7			796.8
Provision for income taxes		115.1			160.8			228.3			250.7


Net income		264.1			324.4			495.4			546.1
Less: Net income attributable to noncontrolling interests		2.4			5.2			3.6			8.9

Net income attributable to Moody’s	$	261.7		$	319.2		$	491.8		$	537.2


Earnings per share attributable to Moody’s common shareholders
Basic	$	1.30		$	1.51		$	2.43		$	2.52

Diluted	$	1.28		$	1.48		$	2.39		$	2.47


Weighted average number of shares outstanding
Basic		201.3			212.0			202.0			213.0

Diluted		204.4			215.7			205.4			217.1


Dividends declared per share attributable to Moody’s common shareholders	$	0.34		$	0.28		$	0.34		$	0.28

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

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in millions)


	Three Months Ended June 30, 2015									Three Months Ended June 30, 2014
	Pre-tax amounts			Tax amounts			After-tax amounts			Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	264.1								$	324.4


Other comprehensive income (loss):
Foreign currency translation:
Foreign currency translation adjustments	$	39.8		$	—			39.8		$	14.1		$	—			14.1
Foreign currency translation adjustments - reclassification of losses included in net income		—			—			—			4.4			—			4.4
Net investment hedges:
Net realized and unrealized gain (loss) on net investment hedges		(13.1	)		5.4			(7.7	)		(2.7	)		1.1			(1.6	)
Available for sale securities:
Net unrealized gains on available for sale securities		1.0			—			1.0			—			—			—
Reclassification of gains included in net income		(0.2	)		—			(0.2	)		—			—			—
Pension and Other Retirement Benefits:
Amortization of actuarial losses and prior service costs included in net income		3.1			(1.1	)		2.0			2.0			(0.8	)		1.2
Net actuarial losses and prior service costs		10.9			(4.2	)		6.7			(6.9	)		2.8			(4.1	)

Total other comprehensive income	$	41.5			$ 0.1			41.6		$	10.9		$	3.1			14.0

Comprehensive income								305.7									338.4
Less: comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest								2.4									5.2

Comprehensive income attributable to Moody’s							$	303.3									$ 333.2


	Six Months Ended June 30, 2015									Six Months Ended June 30, 2014
	Pre-tax amounts			Tax amounts			After-tax amounts			Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	495.4								$	546.1


Other comprehensive income (loss):
Foreign currency translation:
Foreign currency translation adjustments	$	(69.6)		$	—			(69.6	)	$	9.3		$	—			9.3
Foreign currency translation adjustments - reclassification of losses included in net income		(0.1	)		—			(0.1	)		4.4			—			4.4
Net investment hedges:
Net realized and unrealized gain (loss) on net investment hedges		18.5			(7.3	)		11.2			(6.3	)		2.6			(3.7	)
Available for sale securities:
Net unrealized gains on available for sale securities		2.1			—			2.1			—			—			—
Reclassification of gains included in net income		(0.2	)		—			(0.2	)		—			—			—
Pension and Other Retirement Benefits:
Amortization of actuarial losses and prior service costs included in net income		6.9			(2.6	)		4.3			3.7			(2.3	)		1.4
Net actuarial gains (losses) and prior service costs		10.9			(4.2	)		6.7			(6.9	)		2.8			(4.1	)

Total other comprehensive income (loss)	$	(31.5	)		$ (14.1)			(45.6	)	$	4.2		$	3.1			7.3

Comprehensive income								449.8									553.4
Less: comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest								3.6									8.9

Comprehensive income attributable to Moody’s							$	446.2									$ 544.5

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

MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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


	June 30, 2015			December 31, 2014
ASSETS

Current assets:
Cash and cash equivalents	$	1,538.6		$	1,219.5
Short-term investments		508.9			458.1
Accounts receivable, net of allowances of $29.1 in 2015 and $29.4 in 2014		801.3			792.4
Deferred tax assets, net		39.6			43.9
Other current assets		175.6			172.5

Total current assets		3,064.0			2,686.4
Property and equipment, net of accumulated depreciation of $489.4 in 2015 and $451.5 in 2014		304.6			302.3
Goodwill		1,006.8			1,021.1
Intangible assets, net		322.6			345.5
Deferred tax assets, net		145.7			167.8
Other assets		155.8			145.9

Total assets	$	4,999.5		$	4,669.0


LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	422.1		$	557.6
Deferred tax liabilities, net		17.6			17.5
Deferred revenue		685.1			624.6

Total current liabilities		1,124.8			1,199.7
Non-current portion of deferred revenue		132.4			132.2
Long-term debt		3,106.1			2,547.3
Deferred tax liabilities, net		90.1			95.7
Unrecognized tax benefits		208.2			220.3
Other liabilities		441.3			430.9

Total liabilities		5,102.9			4,626.1
Contingencies (Note 14)
Shareholders’ (deficit) equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding		—			—
Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at June 30, 2015 and December 31, 2014, respectively.		3.4			3.4
Capital surplus		396.7			383.9
Retained earnings		6,468.4			6,044.3
Treasury stock, at cost; 142,552,956 and 138,539,128 shares of common stock at June 30, 2015 and December 31, 2014, respectively		(6,918.9	)		(6,384.2	)
Accumulated other comprehensive loss		(280.8	)		(235.2	)

Total Moody’s shareholders’ deficit		(331.2	)		(187.8	)
Noncontrolling interests		227.8			230.7

Total shareholders’ (deficit) equity		(103.4	)		42.9

Total liabilities and shareholders’ (deficit) equity	$	4,999.5		$	4,669.0

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

MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in millions)


	Six months ended June 30,
	2015			2014
Cash flows from operating activities
Net income	$	495.4		$	546.1
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization		56.5			45.4
Stock-based compensation expense		44.4			40.6
Deferred income taxes		10.6			46.2
Excess tax benefits from stock-based compensation plans		(41.1	)		(45.2	)
ICRA Gain		—			(102.8	)
Changes in assets and liabilities:
Accounts receivable		(11.8	)		(45.8	)
Other current assets		(3.3	)		(56.1	)
Other assets		(3.5	)		3.3
Accounts payable and accrued liabilities		(35.0	)		(26.6	)
Deferred revenue		63.0			62.2
Unrecognized tax benefits and other non-current tax liabilities		(12.1	)		5.8
Other liabilities		31.3			(15.1	)


Net cash provided by operating activities		594.4			458.0


Cash flows from investing activities
Capital additions		(40.7	)		(38.8	)
Purchases of short-term investments		(289.2	)		(39.8	)
Sales and maturities of short-term investments		221.9			45.7
Cash paid for acquisitions, net of cash required		(4.6	)		(80.5	)
Receipts for settlement of net investment hedges		20.8			—


Net cash used in investing activities		(91.8	)		(113.4	)


Cash flows from financing activities
Issuance of notes		552.8			—
Repayments of notes		—			—
Proceeds from stock-based compensation plans		55.0			91.3
Repurchase of shares for payroll tax withholdings related to stock-based compensation		(59.1	)		(51.1	)
Cost of treasury shares repurchased		(600.7	)		(459.7	)
Excess tax benefits from settlement of stock-based compensation plans		41.1			45.2
Payment of dividends		(137.2	)		(119.2	)
Payment of dividends to noncontrolling interests		(3.7	)		(7.7	)
Debt issuance costs and related fees		(5.8	)		—


Net cash used in financing activities		(157.6	)		(501.2	)
Effect of exchange rate changes on cash and cash equivalents		(25.9	)		14.4


Net increase (decrease) in cash and cash equivalents		319.1			(142.2	)
Cash and cash equivalents, beginning of the period		1,219.5			1,919.5


Cash and cash equivalents, end of the period	$	1,538.6		$	1,777.3

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

MOODY’S CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings, (ii) credit, capital markets and economic research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services. 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 outsourced services. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its Enterprise Risk Solutions business, MA provides software solutions as well as related risk management services. The Professional Services business provides outsourced research and analytical services along with financial training and certification programs.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2014 annual report on Form 10-K filed with the SEC on February 25, 2015. 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.

NOTE 2. STOCK-BASED COMPENSATION

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Stock-based compensation cost	$	21.7	$	20.3	$	44.4	$	40.6
Tax benefit	$	6.7	$	6.5	$	14.6	$	12.8

During the first six months of 2015, the Company granted 0.3 million employee stock options, which had a weighted average grant date fair value of $36.08 per share based on the Black-Scholes option-pricing model. The Company also granted 0.9 million shares of restricted stock in the first six months of 2015, which had a weighted average grant date fair value of $98.03 per share and 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 $94.08 per share.

The following weighted average assumptions were used in determining the fair value for options granted in 2015:


Expected dividend yield		1.39	%
Expected stock volatility		39.4	%
Risk-free interest rate		1.88	%
Expected holding period		6.9 years
Grant date fair value	$	36.08

Unrecognized compensation expense at June 30, 2015 was $12.6 million and $132.0 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 1.8 years, respectively. Additionally, there was $20.6 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 1.1 years.

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


	Six Months Ended June 30,
Exercise of stock options:	2015		2014
Proceeds from stock option exercises	$	51.9	$	89.0
Aggregate intrinsic value	$	49.9	$	69.2
Tax benefit realized upon exercise	$	17.9	$	25.3
Number of shares exercised		1.0		2.0

	Six Months Ended June 30,
Vesting of restricted stock:	2015		2014
Fair value of shares vested	$	110.8	$	91.9
Tax benefit realized upon vesting	$	35.6	$	32.0
Number of shares vested		1.1		1.2

	Six Months Ended June 30,
Vesting of performance-based restricted stock:	2015		2014
Fair value of shares vested	$	43.1	$	38.0
Tax benefit realized upon vesting	$	15.6	$	14.8
Number of shares vested		0.5		0.5

NOTE 3. INCOME TAXES

Moody’s effective tax rate was 30.4% and 33.1% for the three months ended June 30, 2015 and 2014, respectively, and 31.5% for both the six month periods ended June 30, 2015 and 2014. The decrease in the quarterly ETR was the result of a state tax ruling and a change in New York City tax law, both relating to income apportionment, which were the principal reasons for the $14.3 million ($8.5 million net of federal tax) decrease in UTPs during the second quarter of 2015. For the first six months of 2015 UTPs decreased $12.1 million ($7.6 million net of federal tax). The Company classifies interest related to UTPs in interest expense, net in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating (expense) income, net.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2010 are under examination and its returns for 2011 through 2013 remain open to examination. The Company’s New York State tax returns for 2011 through 2013 are currently under examination and the Company’s New York City tax return for 2013 is currently under examination. The Company’s U.K. tax return for 2012 is currently under examination and its tax return for 2013 remains open to examination.

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

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


	Six Months Ended June 30,
	2015		2014
Income taxes paid	$	191.1	$	216.7

NOTE 4. WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

Three Months Ended
June 30,

Six Months Ended
June 30,

2015

2014

2015

2014

Basic

201.3

212.0

202.0

213.0

Dilutive effect of shares issuable under stock-based compensation plans

3.1

3.7

3.4

4.1

Diluted

204.4

215.7

205.4

217.1

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

0.8

0.7

0.8

0.7

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of June 30, 2015 and 2014. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation of the awards.

NOTE 5. CASH EQUIVALENTS AND INVESTMENTS

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


	As of June 30, 2015
	Cost		Gross Unrealized Gains		Fair Value		Balance sheet location
	Cost		Gross Unrealized Gains		Fair Value		Cash and cash equivalents		Short-term investments		Other assets
Money market mutual funds	$	135.2	$	—	$	135.2	$	135.2	$	—	$	—
Certificates of deposit and money market deposit accounts ⁽¹⁾	$	1,203.7	$	—	$	1,203.7	$	679.3	$	508.9	$	15.5
Fixed maturity and open ended mutual funds ⁽²⁾	$	42.3	$	2.8	$	45.1	$	—	$	—	$	45.1


	As of December 31, 2014
	Cost		Gross Unrealized Gains		Fair Value		Balance sheet location
	Cost		Gross Unrealized Gains		Fair Value		Cash and cash equivalents		Short-term investments		Other assets
Money market mutual funds	$	149.7	$	—	$	149.7	$	149.7	$	—	$	—
Certificates of deposit and money market deposit accounts ⁽¹⁾	$	842.5	$	—	$	842.5	$	380.1	$	458.1	$	4.3
Fixed maturity and open ended mutual funds ⁽²⁾	$	47.1	$	0.9	$	48.0	$	—	$	—	$	48.0

⁽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 eight months and one month to ten months at June 30, 2015 and December 31, 2014, respectively. 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 one month to 25 months and two months to 23 months at June 30, 2015 and December 31, 2014, 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.

The total proceeds received in the six months ended June 30, 2015 for maturities of fixed maturity mutual funds was $3.6 million. The gross realized gains on these maturities were immaterial.

NOTE 6. ACQUISITIONS

The business combinations described below are accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. The Company has not presented proforma combined results because the impact on previously reported statements of operations would not have been material. These acquisitions are discussed below in more detail.

Equilibrium

On May 21, 2015, a subsidiary of the Company acquired 100% of Equilibrium, a provider of credit rating and research services in Peru and Panama. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flows is not expected to be material. Equilibrium operates in the MIS reportable segment and goodwill related to this acquisition has been allocated to the MIS reporting unit.

Lewtan Technologies

On October 27, 2014, a subsidiary of the Company acquired 100% of Lewtan Technologies, a leading provider of analytical tools and data for the global structured finance market. The acquisition of Lewtan will bolster MA’s Structured Analytics and Valuations (SAV) business within its RD&A LOB, which provides an extensive data and analytics library for securitized assets. The aggregate purchase price and the near term impact to the Company’s operations and cash flows is not material. Lewtan operates in the RD&A LOB of MA and goodwill related to this acquisition was allocated to the RD&A reporting unit.

WebEquity Solutions, LLC

On July 17, 2014, a subsidiary of the Company acquired 100% of WebEquity Solutions, LLC, a leading provider of cloud-based loan origination solutions for financial institutions. The cash payment of $130.5 million was funded with cash. This acquisition will enhance MA’s risk management product portfolio.

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


Current assets			$	3.0
Property and equipment, net				2.3
Intangible assets:
Client relationships (18 year weighted average life)	$	42.8
Software (15 year weighted average life)		11.5
Trade name (4 year weighted average life)		0.5

Total intangible assets (17 year weighted average life)				54.8
Goodwill				77.6
Liabilities assumed				(7.2	)

Net assets acquired			$	130.5

The acquired goodwill, which has been assigned to the MA segment, is tax deductible.

As of the date of the acquisition, WebEquity is part of the ERS reporting unit.

ICRA Limited

On June 26, 2014, a subsidiary of the Company acquired 2,154,722 additional shares of ICRA Limited, a publicly traded company in India. ICRA is a leading provider of credit ratings and research in India and will extend MIS’s reach in the growing domestic debt market in India as well as other emerging markets in the region. The acquisition of the additional shares increased Moody’s ownership stake in ICRA from 28.5% to 50.06%, resulting in a controlling interest in ICRA. Accordingly, the Company consolidated ICRA’s financial statements. Moody’s consolidates ICRA’s financial statements on a three month lag.

Prior to the acquisition of the additional shares, Moody’s accounted for its investment in ICRA on an equity basis whereby the Company recorded its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net. The acquisition of the additional shares has resulted in the Company consolidating ICRA into its financial statements. As a result of this consolidation and in accordance with ASC 805, the carrying value of the Company’s equity investment in ICRA was remeasured to fair value as of the acquisition date resulting in a pre-tax gain of $102.8 million ($78.5 million after-tax) in second quarter of 2014. The fair value of the Company’s equity investment was based on ICRA’s quoted market price on the date of acquisition.

The table below details the total consideration relating to the ICRA step-acquisition:


Cash paid	$	86.0
Fair value of equity interest in ICRA prior to obtaining a controlling interest		124.9

Total consideration	$	210.9

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			$	25.4
Property and equipment, net				15.1
Intangible assets:
Trade name (36 year weighted average life)	$	46.8
Client relationships (19 year weighted average life)		33.8
Other (17 year weighted average life)*		18.3

Total intangible assets (26 year weighted average life)				98.9
Goodwill				296.7
Other assets				56.3
Liabilities				(62.7	)
Fair value of non-controlling interest assumed				(218.8	)

Net assets acquired			$	210.9

*	Primarily consists of acquired technical know-how and ratings methodologies

Current assets in the table above include acquired cash of approximately $5 million. Additionally, current assets includes gross accounts receivable of approximately $14 million, of which an immaterial amount is not expected to be collectible. Goodwill, which has been assigned to the MIS segment, is not deductible for tax.

The fair value of the non-controlling interest was determined based on the quoted market price per share of ICRA on the date that the Company acquired the controlling stake.

ICRA operates as its own reporting unit for purposes of the Company’s annual goodwill impairment assessment.

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/(expense) recognized in the consolidated statements
of operations

Three Months Ended
June 30,

Six Months Ended
June 30,

Derivatives designated as
fair value accounting hedges

Location on Statement of
Operations

2015

2014

2015

2014

Interest rate swaps

Interest income(expense), net

4.1

2.0

7.6

0.5

Net investment hedges

The Company entered into foreign currency forward contracts that are designated as net investment hedges and additionally 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 on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in the fair value for the hedge is recorded in AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness is recognized immediately in other non-operating (expense) income in the Company’s consolidated statement of operations.

The following table summarizes the notional amounts of the Company’s outstanding net investment hedges:


	June 30, 2015		December 31, 2014
Notional amount of net investment hedges:
Long-term debt designated as net investment hedge	€	400.0	€	—
Contracts to sell euros for USD	€	—	€	50.0
Contracts to sell Japanese yen for USD	¥	19,400	¥	19,400

The outstanding contracts to sell Japanese yen for USD expire in November 2015. 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 hedges:


Derivatives in Net Investment Hedging Relationships	Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion)
	Three Months Ended June 30,
	2015			2014
FX forwards	$	2.1		$	(1.6	)
Long-term debt		(9.7	)		—

Total	$	(7.6	)	$	(1.6	)


	Six Months Ended June 30,
	2015			2014
FX forwards	$	13.4		$	(3.7	)
Long-term debt		(2.1	)		—

Total	$	11.3		$	(3.7	)


The cumulative amount of realized and unrecognized net investment hedge gains recorded in AOCI is as follows:

	Gains/(Losses), net of tax
	June 30, 2015			December 31, 2014
FX forwards	$	34.3		$	20.9
Long-term debt		(2.1	)		—

Total gains on net investment hedges	$	32.2		$	20.9

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 October 2015.

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


	June 30, 2015		December 31, 2014
Notional amount of currency pair:
Contracts to purchase USD with euros	$	—	$	38.5
Contracts to sell USD for euros	$	47.3	$	51.5
Contracts to purchase USD with GBP	$	—	$	0.2
Contracts to purchase USD with other foreign currencies	$	—	$	1.2
Contracts to purchase euros with other foreign currencies	€	36.4	€	34.0
Contracts to purchase euros with GBP	€	28.4	€	25.0
Contracts to sell euros for GBP	€	26.4	€	38.2

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 above. The Company has not designated these cross-currency swaps as accounting hedges. Accordingly, changes in fair value on these swaps is 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 €100 million principal of the 2015 Senior Notes that was not designated as a net investment hedge. 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.

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 June 30,
Derivatives not designated as accounting hedges	Location on Statement of Operations	2015			2014
Cross-currency swap	Other non-operating income (expense), net	$	(0.3	)	$	—
Foreign exchange forwards	Other non-operating income (expense), net		2.5			1.3

Total		$	2.2		$	1.3


		Six Months Ended June 30,
Derivatives not designated as accounting hedges	Location on Statement of Operations	2015			2014
Cross-currency swap	Other non-operating income (expense), net	$	(5.3	)	$	—
Foreign exchange forwards	Other non-operating income (expense), net		(1.9	)		0.9

Total		$	(7.2	)	$	0.9

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 Instruments
	Balance Sheet Location	June 30, 2015		December 31, 2014
Assets:
Derivatives designated as accounting hedges:
FX forwards on net investment in certain foreign subsidiaries	Other current assets	$	20.0	$	18.8
Interest rate swaps	Other assets		9.0		17.4

Total derivatives designated as accounting hedges			29.0		36.2
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilities	Other current assets		0.5		5.6

Total assets		$	29.5	$	41.8


Liabilities:
Derivatives and non-derivative instruments designated as accounting hedges:
Interest rate swaps	Other non-current liabilities	$	0.6	$	—
Long-term debt designated as net investment hedge	Long-term debt		445.7		—
Derivatives not designated as accounting hedges:
Cross-currency swap	Other non-current liabilities		4.5		—
FX forwards on certain assets and liabilities	Accounts payable and accrued liabilities		1.2		2.1

Total liabilities		$	452.0	$	2.1

NOTE 8. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

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


	Six Months Ended June 30, 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		4.9			—		4.9			2.9			—			2.9			7.8			—			7.8
Foreign currency translation adjustments		(4.0	)		—		(4.0	)		(18.1	)		—			(18.1	)		(22.1	)		—			(22.1	)

Ending balance	$	299.6		$	—	$	299.6		$	719.4		$	(12.2	)	$	707.2		$	1,019.0		$	(12.2	)	$	1,006.8


	Year ended December 31, 2014
	MIS								MA									Consolidated
	Gross goodwill			Accumulated impairment charge		Net goodwill			Gross goodwill			Accumulated impairment charge			Net goodwill			Gross goodwill			Accumulated impairment charge			Net goodwill
Balance at beginning of year	$	11.4		$	—	$	11.4		$	666.0		$	(12.2	)	$	653.8		$	677.4		$	(12.2	)	$	665.2
Additions/adjustments		296.7			—		296.7			101.1			—			101.1			397.8			—			397.8
Foreign currency translation adjustments		(9.4	)		—		(9.4	)		(32.5	)		—			(32.5	)		(41.9	)		—			(41.9	)

Ending balance	$	298.7		$	—	$	298.7		$	734.6		$	(12.2	)	$	722.4		$	1,033.3		$	(12.2	)	$	1,021.1

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 reflect an adjustment to an indemnification asset recognized as part of the Copal acquisition and an adjustment of deferred revenue balances recognized as part of the Lewtan acquisition.

The 2014 additions/adjustments for the MIS segment in the table above relate to the ICRA Acquisition in the second quarter of 2014 as further discussed in Note 6. The 2014 additions/adjustments for the MA segment in the table above relate to the acquisition of WebEquity in the third quarter of 2014 and Lewtan in the fourth quarter of 2014 as well as adjustments for Amba which was acquired in the fourth quarter of 2013.

Acquired intangible assets and related amortization consisted of:


	June 30, 2015			December 31, 2014
Customer relationships	$	305.2		$	310.4
Accumulated amortization		(104.9	)		(98.1	)

Net customer relationships		200.3			212.3


Trade secrets		30.2			30.6
Accumulated amortization		(22.0	)		(20.9	)

Net trade secrets		8.2			9.7


Software		77.2			79.8
Accumulated amortization		(45.3	)		(43.0	)

Net software		31.9			36.8


Trade names		75.2			76.5
Accumulated amortization		(14.9	)		(13.3	)

Net trade names		60.3			63.2


Other		44.6			44.8
Accumulated amortization		(22.7	)		(21.3	)

Net other		21.9			23.5


Total acquired intangible assets, net	$	322.6		$	345.5

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 June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Amortization expense	$	8.0	$	6.3	$	16.5	$	13.6

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


Year Ending December 31,
2015 (after June 30)	$	15.5
2016		30.3
2017		26.4
2018		20.9
2019		19.1
Thereafter		210.4

Total estimated future amortization	$	322.6

NOTE 9. 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;

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 which are carried at fair value at June 30, 2015 and December 31, 2014:

Fair Value Measurement as of June 30, 2015

Description

Balance

Level 1

Level 2

Level 3

Assets:

Derivatives ^(a)

29.5

—

29.5

—

Money market mutual funds

135.2

—

Fixed maturity and open ended mutual funds ^(b)

45.1

—

Total

209.8

180.3

29.5

—

Liabilities:

Derivatives ^(a)

6.3

—

6.3

—

Contingent consideration arising from acquisitions ^(c)

2.0

—

2.0

Total

8.3

—

6.3

2.0

Fair Value Measurement as of December 31, 2014

Description

Balance

Level 1

Level 2

Level 3

Assets:

Derivatives ^(a)

41.8

—

41.8

—

Money market mutual funds

149.7

—

Fixed maturity and open ended mutual funds ^(b)

48.0

—

Total

239.5

197.7

41.8

—

Liabilities:

Derivatives ^(a)

2.1

—

2.1

—

Contingent consideration arising from acquisitions ^(c)

2.1

—

2.1

Total

4.2

—

2.1

^(a)	Represents interest rate swaps, FX forwards on certain assets and liabilities as well as cross-currency swaps as more fully described in Note 7 to the financial statements.

^(b)	Represents investments in fixed maturity mutual funds and open ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from one month to 25 months and two months to 23 months at June 30, 2015 and December 31, 2014, respectively.

^(c)	Represents contingent consideration liabilities pursuant to the agreements for the CSI acquisition.

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


	Contingent Consideration Six Months Ended June 30,
	2015			2014
Balance as of January 1	$	2.1		$	17.5
Total losses (realized and unrealized):
Included in earnings		—			(0.2	)
Foreign currency translation adjustments		(0.1	)		(0.1	)

Balance as of June 30	$	2.0		$	17.2

The $2.0 million of contingent consideration is classified in accounts payable and accrued liabilities within the Company’s consolidated balance sheet.

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

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.

Contingent consideration:

At June 30, 2015, the Company has a contingent consideration obligation related to the acquisition of CSI which is carried at estimated fair value, and is based on certain non-financial metrics set forth in the acquisition agreement. At June 30, 2014, the Company also had contingent consideration obligations related to the acquisitions of Copal and Amba. These obligations were measured using Level 3 inputs as defined in the ASC. The Company records the obligations for these contingent consideration arrangements on the date of each respective acquisition based on management’s best estimates of the achievement of the metrics and the value of the obligations are adjusted quarterly.

The contingent consideration obligation for CSI is based on the achievement of a contractual milestone by January 2016. The Company utilizes a discounted cash flow methodology to value this obligation. The future expected cash flow for this obligation is discounted using an interest rate available to borrowers with similar credit risk profiles to that of the Company. The most significant unobservable input involved in the measurement of this obligation is the probability that the milestone will be reached by January 2016. At June 30, 2015, the Company expects that this milestone will be reached by the aforementioned date.

For certain of the contingent consideration obligations relating to the acquisition of Copal, a portion of the contingent cash payments were based on revenue and EBITDA growth for certain of the Copal entities. This growth was calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the put/call option to acquire the remaining 33% ownership interest of Copal Partners Limited, to revenue and EBITDA in Copal’s fiscal year ended March 31, 2011. Payments of $12.2 million under this arrangement were made in the fourth quarter of 2014 pursuant to the Company exercising its call option to acquire the remaining shares of Copal Amba. The Company had utilized discounted cash flow methodologies to value these obligations prior to their settlement in 2014. The expected future cash flows for these obligations were discounted using a risk-free interest rate plus a credit spread based on the option adjusted spread of the Company’s publicly traded debt as of the valuation date plus sovereign and size risk premiums. The most significant unobservable input involved in the measurement of these obligations was the projected future financial results of the applicable Copal Amba entities.

For the contingent consideration obligations relating to the acquisition of Amba, the payment was based on the acquired entity achieving a revenue target for its fiscal year ended March 31, 2014 which was met resulting in a $4.3 million payment in the third quarter of 2014.

NOTE 10. OTHER BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

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


	June 30, 2015		December 31, 2014
Other current assets:
Prepaid taxes	$	70.3	$	65.4
Prepaid expenses		56.6		59.9
Other		48.7		47.2


Total other current assets	$	175.6	$	172.5


	June 30, 2015		December 31, 2014
Other assets:
Investments in joint ventures	$	22.2	$	21.6
Deposits for real-estate leases		12.6		11.3
Indemnification assets related to acquisitions		19.8		23.5
Fixed maturity and open ended mutual funds		45.1		48.0
Other		56.1		41.5


Total other assets	$	155.8	$	145.9


	June 30, 2015		December 31, 2014
Accounts payable and accrued liabilities:
Salaries and benefits	$	65.5	$	86.5
Incentive compensation		74.8		155.2
Profit sharing contribution		—		9.3
Customer credits, advanced payments and advanced billings		24.3		17.0
Self-insurance reserves for wholly-owned insurance subsidiary		28.9		21.5
Dividends		6.3		75.0
Professional service fees		51.4		47.0
Interest accrued on debt		48.2		45.0
Accounts payable		16.6		19.4
Income taxes		23.5		16.1
Pension and other retirement employee benefits		5.1		5.1
Other		77.5		60.5


Total accounts payable and accrued liabilities	$	422.1	$	557.6


	June 30, 2015		December 31, 2014
Other liabilities:
Pension and other retirement employee benefits	$	245.5	$	244.8
Deferred rent-non-current portion		101.5		104.2
Interest accrued on UTPs		27.3		20.8
Legacy and other tax matters		8.8		8.6
Other		58.2		52.5


Total other liabilities	$	441.3	$	430.9

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:


	Six Months Ended June 30, 2015			Year Ended December 31, 2014

Balance January 1,	$	21.5		$	27.6
Accruals (reversals), net		11.4			5.8
Payments		(4.0	)		(11.9	)

Balance	$	28.9		$	21.5

Noncontrolling Interests:

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


	Six Months Ended June 30, 2015			Year Ended December 31, 2014
	Noncontrolling Interests

Balance January 1,	$	230.7		$	10.9
Net earnings		3.6			7.9
Dividends		(6.5	)		(6.9	)
ICRA noncontrolling interest*		—			218.8

Balance	$	227.8		$	230.7

*	Represents the fair value of the ICRA noncontrolling interest as of the day majority control was acquired.

Other Non-Operating (Expense) Income:

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
FX loss	$	(12.2	)	$	(7.1	)	$	(12.2	)	$	(6.1	)
Joint venture income		3.4			3.5			5.3			5.3
Other		0.6			0.3			1.2			(0.1	)

Total	$	(8.2	)	$	(3.3	)	$	(5.7	)	$	(0.9	)

NOTE 11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

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


	Three Months Ended June 30, 2015			Six Months Ended June 30, 2015			Affected line in the consolidated statement of operations
Gains/(losses) on foreign currency translation adjustments
Liquidation of foreign subsidiary	$	—		$	0.1		Other non-operating income (expense), net

Total gains/(losses) on foreign currency translation adjustments		—			0.1

Gains/(losses) on available for sale securities:
Gains on available for sale securities		0.2			0.2		Other income

Total gains on available for sale securities		0.2			0.2

Pension and other retirement benefits
Amortization of actuarial losses and prior service costs included in net income		(2.0	)		(4.3	)	Operating expense
Amortization of actuarial losses and prior service costs included in net income		(1.1	)		(2.6	)	SG&A expense

Total before income taxes		(3.1	)		(6.9	)
Income tax effect of item above		1.1			2.6		Provision for income taxes

Total pension and other retirement benefits		(2.0	)		(4.3	)

Total losses included in Net Income attributable to reclassifications out of AOCI	$	(1.8	)	$	(4.0	)


	Three Months Ended June 30, 2014			Six Months Ended June 30, 2014			Affected line in the consolidated statement of operations
Gains/(losses) on foreign translation adjustments
Loss on foreign currency translation adjustment pursuant to ICRA step-acquisition	$	(4.4	)	$	(4.4	)	ICRA gain

Total gains/(losses) on foreign translation adjustments		(4.4	)		(4.4	)

Pension and other retirement benefits
Amortization of actuarial losses and prior service costs included in net income		(1.2	)		(2.5	)	Operating expense
Amortization of actuarial losses and prior service costs included in net income		(0.8	)		(1.2	)	SG&A expense

Total before income taxes		(2.0	)		(3.7	)
Income tax effect of item above		0.8			2.3		Provision for income taxes

Total pension and other retirement benefits		(1.2	)		(1.4	)

Total losses included in Net Income attributable to reclassifications out of AOCI	$	(5.6	)	$	(5.8	)

The following table shows changes in AOCI by component (net of tax):


	Three Months Ended
	June 30, 2015															June 30, 2014
	Gains/(Losses) on Net Investment Hedges			Pension and Other Retirement Benefits			Foreign Currency Translation Adjustments			Gains on Available for Sale Securities			Total			Gains/(Losses) on Net Investment Hedges			Pension and Other Retirement Benefits			Foreign Currency Translation Adjustments			Gains on Available for Sale Securities		Total
Balance March 31,	$	39.8		$	(103.1	)	$	(261.1	)	$	2.0		$	(322.4	)	$	(0.6	)	$	(53.0	)	$	(7.7	)	$	—	$	(61.3	)
Other comprehensive income/(loss) before reclassifications		(7.7	)		6.7			39.8			1.0			39.8			(1.6	)		(4.1	)		14.1			—		8.4
Amounts reclassified from AOCI		—			2.0			—			(0.2	)		1.8			—			1.2			4.4			—		5.6

Other comprehensive income/(loss)		(7.7	)		8.7			39.8			0.8			41.6			(1.6	)		(2.9	)		18.5			—		14.0

Balance June 30,	$	32.1		$	(94.4	)	$	(221.3	)	$	2.8		$	(280.8	)	$	(2.2	)	$	(55.9	)	$	10.8		$	—	$	(47.3	)


	Six Months Ended
	June 30, 2015															June 30, 2014
	Gains/(Losses) on Net Investment Hedges			Pension and Other Retirement Benefits			Foreign Currency Translation Adjustments			Gains on Available for Sale Securities			Total			Gains/(Losses) on Net Investment Hedges			Pension and Other Retirement Benefits			Foreign Currency Translation Adjustments			Gains on Available for Sale Securities		Total
Balance December 31,	$	20.9		$	(105.4	)	$	(151.6	)	$	0.9		$	(235.2	)	$	1.5		$	(53.2	)	$	(2.9	)	$	—	$	(54.6	)
Other comprehensive income/(loss) before reclassifications		11.2			6.7			(69.6	)		2.1			(49.6	)		(3.7	)		(4.1	)		9.3			—		1.5
Amounts reclassified from AOCI		—			4.3			(0.1	)		(0.2	)		4.0			—			1.4			4.4			—		5.8

Other comprehensive income/(loss)		11.2			11.0			(69.7	)		1.9			(45.6	)		(3.7	)		(2.7	)		13.7			—		7.3

Balance June 30,	$	32.1		$	(94.4	)	$	(221.3	)	$	2.8		$	(280.8	)	$	(2.2	)	$	(55.9	)	$	10.8		$	—	$	(47.3	)

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 June 30,
	Pension Plans						Other Retirement Plans
	2015			2014			2015		2014
Components of net periodic expense
Service cost	$	5.0		$	4.6		$	0.6	$	0.4
Interest cost		4.2			4.2			0.3		0.3
Expected return on plan assets		(3.6	)		(3.5	)		—		—
Amortization of net actuarial loss from earlier periods		2.8			1.8			0.1		—
Amortization of net prior service costs from earlier periods		0.2			0.1			—		—

Net periodic expense	$	8.6		$	7.2		$	1.0	$	0.7


	Six Months Ended June 30,
	Pension Plans						Other Retirement Plans
	2015			2014			2015		2014
Components of net periodic expense
Service cost	$	10.8		$	9.2		$	1.1	$	0.8
Interest cost		8.5			8.2			0.5		0.5
Expected return on plan assets		(7.2	)		(7.0	)		—		—
Amortization of net actuarial loss from earlier periods		6.2			3.3			0.2		—
Amortization of net prior service costs from earlier periods		0.4			0.3			—		—

Net periodic expense	$	18.7		$	14.0		$	1.8	$	1.3

The Company made payments of $0.9 million related to its unfunded U.S. DBPPs and made $0.6 million to its U.S. other retirement plans during the six months ended June 30, 2015. The Company made a contribution in July 2015 of $21.7 million to its funded pension plan and anticipates making payments of $3.2 million related to its unfunded U.S. DBPPs and $0.2 million to its U.S. other retirement plans, respectively, during the remainder of 2015.

NOTE 13. INDEBTEDNESS

The following table summarizes total indebtedness:


	June 30, 2015		December 31, 2014
Notes Payable:
6.06% Series 2007-1 Notes due 2017	$	300.0	$	300.0
5.50% 2010 Senior Notes, due 2020, net of unamortized discount of $1.8 million in 2015 and $2.0 million in 2014; also includes a fair value adjustment on an interest rate hedge of $6.5 million in 2015 and $5.8 million in 2014		504.7		503.8
4.50% 2012 Senior Notes, due 2022, net of unamortized discount of $3.0 million in 2015 and $3.1 million in 2014		497.0		496.9
4.875% 2013 Senior Notes, due 2024, net of unamortized discount of $2.4 million in 2015 and 2.5 million in 2014		497.6		497.5
2.75% 2014 Senior Notes (5-Year), due 2019, net of unamortized discount of $0.6 million in 2015 and $0.7 million in 2014; also includes a fair value adjustment on an interest rate hedge of $1.9 million in 2015 and $1.4 million in 2014		451.3		450.7
5.25% 2014 Senior Notes (30-Year), due 2044, net of unamortized discount of $1.6 million in 2015 and 2014		298.4		298.4
1.75% 2015 Senior Notes, due 2027		557.1		—


Total long-term debt	$	3,106.1	$	2,547.3

On May 11, 2015, the Company entered into a five-year senior, unsecured revolving credit facility with the capacity to borrow up to $1 billion. This replaces the $1 billion five-year 2012 Facility that was scheduled to expire in April 2017. Interest on borrowings under the facility is payable at rates that are based on the LIBOR plus a premium that can range from 79.5 basis points to 120 basis points per annum depending on the Company’s ratio of total debt to EBITDA. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2015 Facility. The quarterly fees for the 2015 Facility can range from 8 basis points of the facility amount to 17.5 basis points, depending on the Company’s Debt/ EBITDA ratio. The 2015 Facility contains covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates, sale and leaseback transactions or to incur liens, as set forth in the facility agreement. The 2015 Facility also contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events of default constituting a default under the 2015 Facility, all loans outstanding under the 2015 Facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all lending commitments under the 2015 Facility may be terminated. In addition, certain other events of default under the 2015 Facility would automatically result in amounts outstanding becoming immediately due and payable and the termination of all lending commitments.

On March 9, 2015, the Company issued €500 million aggregate principal amount of senior unsecured notes in a public offering. The 2015 Senior Notes bear interest at a fixed rate of 1.75% and mature on March 9, 2027. Interest on the 2015 Senior Notes is due annually on March 9 of each year, commencing March 9, 2016. The Company may prepay the 2015 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2015 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2015 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2015 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2015 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2015 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2015 Indenture, the 2015 Senior Notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding. The Company has designated €400 million of the 2015 Senior Notes as a net investment hedge as more fully discussed in Note 7.

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.

At June 30, 2015, the Company was in compliance with all covenants contained within all of the debt agreements. The 2015 Facility, the 2015 Senior Notes, the 2014 Senior Notes (5-year), the 2014 Senior Notes (30-year), the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes all contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2015, there were no such cross defaults.

Interest expense, net

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Income	$	2.3		$	1.7		$	4.2		$	3.3
Expense on borrowings		(30.7	)		(25.6	)		(59.0	)		(51.7	)
UTPs and other tax related liabilities ⁽¹⁾		(3.5	)		(2.1	)		(6.7	)		(1.5	)
Capitalized		—			—			0.3			0.1

Total	$	(31.9	)	$	(26.0	)	$	(61.2	)	$	(49.8	)

⁽¹⁾	The six months ended June 30, 2014 amount includes a $2.0 million reversal of an interest accrual relating to the favorable resolution of an international tax matter.

The following table shows the cash paid for interest:


	Six Months Ended June 30,
	2015		2014
Interest paid	$	53.3	$	60.5

The Company’s long-term debt is recorded at its carrying amount, which represents the issuance amount plus or minus any issuance premium or discount, except for the 2010 Senior Notes and the 2014 Senior Notes (5-Year) which are recorded at the carrying amount adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company’s long-term debt as of June 30, 2015 and December 31, 2014 are as follows:


	June 30, 2015				December 31, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Series 2007-1 Notes	$	300.0	$	328.6	$	300.0	$	334.6
2010 Senior Notes		504.7		559.4		503.8		564.4
2012 Senior Notes		497.0		531.1		496.9		537.1
2013 Senior Notes		497.6		535.5		497.5		548.4
2014 Senior Notes (5-Year)		451.3		454.6		450.7		454.3
2014 Senior Notes (30-Year)		298.4		309.1		298.4		333.9
2015 Senior Notes		557.1		518.9		—		—


Total	$	3,106.1	$	3,237.2	$	2,547.3	$	2,772.7

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

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 states attorneys general, and is responding to such investigations and inquiries.

In addition, the Company is facing litigation from market participants relating to the performance of MIS rated securities. Although Moody’s in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased following the events in the U.S. subprime residential mortgage sector and global credit markets more broadly over the last several years.

On August 25, 2008, Abu Dhabi Commercial Bank filed a purported class action in the United States District Court for the Southern District of New York asserting numerous common-law causes of action against two subsidiaries of the Company, another rating agency, and Morgan Stanley & Co. The action related to securities issued by a structured investment vehicle called Cheyne Finance (the “Cheyne SIV”) and sought, among other things, compensatory and punitive damages. The central allegation against the rating agency defendants was that the credit ratings assigned to the securities issued by the Cheyne SIV were false and misleading. In early proceedings, the court dismissed all claims against the rating agency defendants except those for fraud and aiding and abetting fraud. In June 2010, the court denied plaintiff’s motion for class certification, and additional plaintiffs were subsequently added to the complaint. In January 2012, the rating agency defendants moved for summary judgment with respect to the fraud and aiding and abetting fraud claims. Also in January 2012, in light of new New York state case law, the court permitted the plaintiffs to file an amended complaint that reasserted previously dismissed claims against all defendants for breach of fiduciary duty, negligence, negligent misrepresentation, and related aiding and abetting claims. In May 2012, the court, ruling on the rating agency defendants’ motion to dismiss, dismissed all of the reasserted claims except for the negligent misrepresentation claim, and on September 19, 2012, after further proceedings, the court also dismissed the negligent misrepresentation claim. On August 17, 2012, the court ruled on the rating agencies’ motion for summary judgment on the plaintiffs’ remaining claims for fraud and aiding and abetting fraud. The court dismissed, in whole or in part, the fraud claims of four plaintiffs as against Moody’s but allowed the fraud claims to proceed with respect to certain claims of one of those plaintiffs and the claims of the remaining 11 plaintiffs. The court also dismissed all claims against Moody’s for aiding and abetting fraud. Three of the plaintiffs whose claims were dismissed filed motions for reconsideration, and on November 7, 2012, the court granted two of these motions, reinstating the claims of two plaintiffs that were previously dismissed. On February 1, 2013, the court dismissed the claims of one additional plaintiff on jurisdictional grounds. Trial on the remaining fraud claims against the rating agencies, and on claims against Morgan Stanley for aiding and abetting fraud and for negligent misrepresentation, was scheduled for May 2013. On April 24, 2013, pursuant to confidential settlement agreements, the 14 plaintiffs with claims that had been ordered to trial stipulated to the voluntary dismissal, with prejudice, of these claims as against all defendants, and the court so ordered that stipulation on April 26, 2013. The settlement did not cover certain claims of two plaintiffs, Commonwealth of Pennsylvania Public School Employees’ Retirement System (“PSERS”) and Commerzbank AG (“Commerzbank”), that were previously dismissed by the Court. On May 23, 2013, these two plaintiffs filed a Notice of Appeal to the Second Circuit, seeking reversal of the dismissal of their claims and also seeking reversal of the trial court’s denial of class certification. According to pleadings filed by plaintiffs in earlier proceedings, PSERS and Commerzbank AG seek, respectively, $5.75 million and $69.6 million in compensatory damages in connection with the two claims at issue on the appeal. In October 2014, the Second Circuit affirmed the denial of class certification and the dismissal of PSERS’ claim but reversed a ruling of the trial court that had excluded certain evidence relevant to Commerzbank’s principal argument on appeal. The Second Circuit did not reverse the dismissal of Commerzbank’s claim but instead certified a legal question concerning Commerzbank’s argument to the New York Court of Appeals. The New York Court of Appeals subsequently agreed to hear the certified question, and on June 30, 2015, the Court of Appeals ruled in Moody’s favor. The case has now been returned to the Second Circuit for final disposition of the appeal, and a decision is expected in the near future.

On July 9, 2009, the California Public Employees’ Retirement System (“CalPERS”) filed an action in the Superior Court of California in San Francisco (the “Superior Court”) asserting two common-law causes of action, negligent misrepresentation and negligent interference with prospective economic advantage. The complaint named as defendants the Company, MIS, The McGraw-Hill Companies, Fitch, Inc., and various subsidiaries of Fitch, Inc. (CalPERS subsequently released the Fitch entities from the case). The action relates to the plaintiff’s purchase of securities issued by three structured investment vehicles (“SIVs”) known as Cheyne Finance, Sigma Finance, and Stanfield Victoria Funding. The plaintiff’s complaint seeks unspecified compensatory damages arising from alleged losses in connection with investments that purportedly totaled approximately $1.3 billion; in subsequent court filings, the plaintiff claimed to have suffered “unrealized losses” of approximately $779 million. The central allegation against the defendants is that the credit ratings assigned to the securities issued by the SIVs were inaccurate and that the methodologies used by the rating agencies had no reasonable basis. In August 2009, the defendants removed the action to federal court, but the case was remanded to state court in November 2009 based on a finding that CalPERS is an “arm of the State.” In April 2010, in response to a motion by the defendants, the Superior Court dismissed the claim for negligent interference with prospective economic advantage but declined to dismiss the claim for negligent misrepresentation. In October 2010, the defendants filed a special motion to dismiss the remaining negligent misrepresentation claim under California’s “anti-SLAPP” statute, which limits the maintenance of lawsuits based on speech on matters of public interest. In January 2012, the Superior Court denied the anti-SLAPP motion, ruling that, although the ratings qualify as protected speech activity under California law, the plaintiff had provided sufficient evidence in support of its claims to proceed. The defendants appealed this decision to the California Court of Appeal, which affirmed the Superior Court’s rulings in May 2014, and in September 2014, the Supreme Court of California declined to review the Court of Appeal’s decision. The action has been returned to the Superior Court, and discovery has begun. On March 11, 2015, pursuant to a settlement agreement in which S&P agreed to pay CalPERS $125 million, S&P was dismissed from the action.

In November 2008, Pursuit Partners, LLC and Pursuit Investment Management, LLC filed an amended complaint adding the Company as a defendant to an existing action, which was then pending in the Superior Court of Connecticut in Stamford against UBS AG, UBS Securities LLC, and a UBS employee (collectively, “UBS”). The Company was served in January 2009, and in October 2011, the Company’s rating agency subsidiary, MIS, was substituted for the Company as a defendant. The action arises out of UBS’s sale of five collateralized debt obligations (“CDOs”) to the plaintiffs, who purchased them on the secondary market in 2007 on behalf of two investment funds under their management. With respect to UBS, the plaintiffs allege, among other things, that UBS made material misrepresentations and omissions in pre-sale communications with the plaintiffs. With respect to MIS, the plaintiffs allege, among other things, that, prior to the plaintiffs’ purchases, MIS provided UBS with non-public information about potential downgrades of the ratings of the CDOs while maintaining inappropriate investment-grade ratings on the CDOs. As to all defendants, plaintiffs seek compensatory damages for alleged investment losses of approximately $44 million, as well as, among other things, attorney’s fees, costs, interest, and punitive damages. Plaintiffs’ initial complaint against the Company asserted claims for fraud, violation of the Connecticut Uniform Securities Act (“CUSA”), aiding and abetting fraud and civil theft by UBS, negligent/reckless conduct, unjust enrichment, and civil conspiracy. In March 2012, the court granted MIS’s motion to strike the claim for unjust enrichment but denied MIS’s motion to strike the other claims. In June 2012, after the close of discovery, MIS moved to dismiss all claims against it for lack of standing and also moved for summary judgment. In October 2012, the court granted the motion to dismiss, but in July 2014, the court granted the plaintiffs’ motion for reconsideration and reinstated the action. In October 2014, MIS filed a new motion to dismiss on jurisdictional grounds, which was denied on February 11, 2015. MIS’s motion for summary judgment, originally filed in June 2012, was denied on June 17, 2015. Trial is scheduled to begin on August 18, 2015, in the Superior Court of Connecticut in Waterbury.

For claims, litigation and proceedings and governmental investigations and inquires 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 of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

Legacy Tax Matters

Moody’s continues to have exposure to potential liabilities arising from Legacy Tax Matters. As of June 30, 2015, Moody’s has recorded liabilities for Legacy Tax Matters totaling $11.1 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution Agreement. It is possible that the ultimate liability for Legacy Tax Matters could be greater than the liabilities recorded by the Company, which could result in additional charges that may be material to Moody’s future reported results, financial position and cash flows.

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.

In January 2014, the Company revised its operating segments to create the new Copal Amba operating segment. The new operating segment consists of all operations from Copal and the operations of Amba which was acquired in December 2013. The Copal Amba operating segment provides offshore research and analytic services to the global financial and corporate sectors. The Company has determined that the Copal Amba and MA operating segments have similar economic characteristics as set forth in ASC 280. As such, Copal Amba has been combined with MA to form the MA reportable segment and Copal Amba’s revenue is reported in the PS LOB.

In the fourth quarter of 2014, pursuant to the acquisition of ICRA, Moody’s realigned certain components of its reportable segments to better align with the current management structure of the Company. The effect of this realignment was to combine non-ratings ICRA operations with certain immaterial research and fixed income pricing operations in the Asia-Pacific region that were previously reported in the RD&A LOB of MA. All of these operations are managed by MIS and their revenue is now reported in the new MIS Other LOB. All operating expenses from these operations are reported in the MIS reportable segment. The impact of this realignment did not have a significant impact on previously reported results for the reportable segments and all prior year comparative periods have been restated to reflect this realignment.

The MIS segment now consists of five LOBs. The corporate finance, structured finance, financial institutions and public, project and infrastructure finance 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 fixed income 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.

In July 2014, a subsidiary of the Company acquired WebEquity, a leading provider of cloud-based loan origination solutions for financial institutions. WebEquity is part of the MA reportable segment and its revenue is included in the ERS LOB. In October 2014, the Company acquired Lewtan, a leading provider of analytical tools and data for the global structured finance market. Lewtan is part of the MA reportable segment and its revenue is included in the RD&A LOB.

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 which exclusively benefit only one segment, are fully charged to that segment. Overhead costs and corporate expenses of the Company which benefit both segments are allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. “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 June 30,
	2015									2014
	MIS		MA		Eliminations			Consolidated		MIS		MA		Eliminations			Consolidated
Revenue	$	662.9	$	282.0	$	(26.8	)	$	918.1	$	646.9	$	251.8	$	(25.2	)	$	873.5
Operating, SG&A		287.0		210.7		(26.8	)		470.9		271.7		193.0		(25.2	)		439.5

Adjusted Operating Income		375.9		71.3		—			447.2		375.2		58.8		—			434.0

Less:
Depreciation and amortization		15.8		12.1		—			27.9		11.4		10.9		—			22.3

Operating income	$	360.1	$	59.2	$	—		$	419.3	$	363.8	$	47.9	$	—		$	411.7


	Six Months Ended June 30,
	2015									2014
	MIS		MA		Eliminations			Consolidated		MIS		MA		Eliminations			Consolidated
Revenue	$	1,287.5	$	548.6	$	(52.4	)	$	1,783.7	$	1,197.5	$	493.2	$	(50.0	)	$	1,640.7
Operating, SG&A		568.3		420.7		(52.4	)		936.6		520.3		380.3		(50.0	)		850.6

Adjusted Operating Income		719.2		127.9		—			847.1		677.2		112.9		—			790.1

Less:
Depreciation and amortization		31.8		24.7		—			56.5		22.8		22.6		—			45.4

Operating income	$	687.4	$	103.2	$	—		$	790.6	$	654.4	$	90.3	$	—		$	744.7

MIS and MA Revenue by Line of Business

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
MIS:
Corporate finance (CFG)	$	319.6		$	320.9		$	618.3		$	585.3
Structured finance (SFG)		121.2			110.6			222.5			205.9
Financial institutions (FIG)		90.4			92.2			184.2			177.6
Public, project and infrastructure finance (PPIF)		99.9			98.0			200.6			178.7

Total ratings revenue		631.1			621.7			1,225.6			1,147.5
MIS Other		8.1			3.3			15.9			6.6

Total external revenue		639.2			625.0			1,241.5			1,154.1

Intersegment royalty		23.7			21.9			46.0			43.4

Total		662.9			646.9			1,287.5			1,197.5

MA:
Research, data and analytics (RD&A)		157.5			141.4			307.1			279.0
Enterprise risk solutions (ERS)		83.2			67.2			160.3			127.0
Professional services (PS)		38.2			39.9			74.8			80.6

Total external revenue		278.9			248.5			542.2			486.6

Intersegment revenue		3.1			3.3			6.4			6.6

Total		282.0			251.8			548.6			493.2

Eliminations		(26.8	)		(25.2	)		(52.4	)		(50.0	)

Total MCO	$	918.1		$	873.5		$	1,783.7		$	1,640.7

Consolidated Revenue Information by Geographic Area:


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
United States	$	545.9	$	461.1	$	1,045.7	$	886.7
International:
EMEA		217.4		263.3		445.0		483.9
Asia-Pacific		99.2		88.6		185.3		158.5
Americas		55.6		60.5		107.7		111.6

Total International		372.2		412.4		738.0		754.0

Total	$	918.1	$	873.5	$	1,783.7	$	1,640.7

NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company is currently evaluating its adoption options and the impact that adoption of this update will have on its consolidated financial statements. Currently, the Company believes this ASU will have an impact on: i) the capitalization of certain contract implementation costs for its ERS business; ii) the accounting for certain ratings monitoring fees received in advance of service being rendered; iii) the accounting for certain license and maintenance revenue in MA; iv) the accounting for certain ERS revenue arrangements where VSOE is not available and v) the accounting for contract acquisition costs. In April 2015, the FASB proposed to defer 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. This proposal was subject to the FASB’s normal due process requirements which included a 30-day public comment period on the proposed ASU. In July 2015, the FASB reaffirmed its decision to defer the effective date of ASU No. 2014-09 by one year. A final ASU relating to this deferral is expected in the third quarter of 2015.

In April 2015, the FASB issued ASU No. 2015-05 “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. In accordance with the ASU, a cloud computing arrangement that contains a software license should be accounted for consistently with the acquisition of other software licenses. If no software license is present in the contract, the entity should account for the arrangement as a service contract. The Company can elect to apply this ASU either retrospectively or prospectively effective for annual and interim reporting periods beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the impact that adoption of this update will have on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU simplifies the presentation of debt issuance costs in financial statements and requires a company to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization costs will continue to be reported as interest expense. The ASU is effective retrospectively for annual and interim reporting periods beginning after December 15, 2015, and early adoption is permitted. The adoption of this ASU will impact the presentation of debt issuance costs in the Company’s consolidated balance sheets.

In May 2015, the FASB issued ASU No. 2015-07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU removes the requirement to include investments in the fair value hierarchy for which fair value is measured using the net asset value per share as a practical expedient. ASU No. 2015-07 is effective retrospectively for fiscal years beginning after December 15, 2015, with early adoption permitted. The adoption of this ASU will only impact the presentation of the Company’s pension assets invested in common/collective trust funds in the fair value hierarchy disclosures.

NOTE 17. SUBSEQUENT EVENT

On July 13, 2015, the Board approved the declaration of a quarterly dividend of $0.34 per share of Moody’s common stock, payable on September 10, 2015 to shareholders of record at the close of business on August 20, 2015.

Item 2.

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

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 56 for a discussion of uncertainties, risks and other factors associated with these statements.

The Company

Moody’s is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services. 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 primarily support financial analysis and risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its ERS business, MA provides software solutions as well as related risk management services. The PS business provides outsourced research and analytical services and financial training and certification programs.

Critical Accounting Estimates

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, restructuring, goodwill and acquired intangible assets, pension and other retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Company’s annual report on Form 10-K for the year ended December 31, 2014, includes descriptions of some of the judgments that Moody’s makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there have been no material changes to the Company’s critical accounting estimates.

Reportable Segments

The Company is organized into two reportable segments at June 30, 2015: MIS and MA.

The MIS segment is primarily comprised of all of the Company’s ratings operations. The MIS segment consists of five LOBs – CFG, SFG, FIG, PPIF and MIS Other. The ratings LOBs generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other LOB consists of certain non-ratings operations managed by MIS which consists of non-rating revenue from ICRA as well as certain research and fixed income pricing service operations in the Asia-Pacific region.

In June 2014, a subsidiary of the Company acquired a controlling stake in ICRA, a leading provider of credit ratings and research in India. ICRA is part of the MIS reportable segment and its ratings revenue is included in the respective ratings LOBs of MIS while its non-ratings revenue is included in the MIS Other LOB. ICRA’s results are reported on a three month lag. In July 2014, a subsidiary of the Company acquired WebEquity, a leading provider of cloud-based loan origination solutions for financial institutions. WebEquity is part of the MA reporting segment and its revenue is included in the ERS LOB. In October 2014, the Company acquired Lewtan, a leading provider of analytical tools and data for the global structured finance market. Lewtan is part of the MA reportable segment and its revenue is included in the RD&A LOB.

Pursuant to the ICRA Acquisition, the Company realigned certain components of its reportable segments in the fourth quarter of 2014. This realignment resulted in the creation of the MIS Other LOB which now consists of non-ratings revenue from ICRA as well as certain research and

fixed income pricing revenue in the Asia-Pacific region which was previously reported in the RD&A LOB of MA. These businesses are all managed by MIS and the expenses from these operations are included in the MIS reportable segment. All prior period results for both MIS and MA have been restated to reflect this realignment and the impact of the realignment was not significant to MIS’s or MA’s previously reported results.

The following is a discussion of the results of operations of the Company and its reportable segments. Total MIS revenue and total MA expenses include the intersegment royalty revenue for MIS and expense charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products developed by MIS. Total MA revenue and total MIS expenses include intersegment fees charged to MIS from MA for the use of certain MA products and services in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to provide these products and services. Overhead charges and corporate expenses which exclusively benefit one segment are fully charged to that segment. Additionally, overhead costs and corporate expenses of the Company which benefit both segments are generally allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology.

RESULTS OF OPERATIONS

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Executive Summary

•

Moody’s revenue in the second quarter of 2015 totaled $918.1 million, an increase of $44.6 million, or 5%, compared to 2014 and reflected growth in both MIS and MA. Excluding the impact of changes in FX translation rates, primarily due to the strengthening of the U.S. dollar to the euro and British pound, revenue grew 10% over the prior year.

•

External MIS revenue was 2% higher than the prior year. Excluding the impact of unfavorable changes in FX translation rates, MIS revenue grew 7% reflecting growth in rated issuance volumes for U.S. investment-grade corporate debt coupled with benefits from changes in the mix of fee type, new fee initiatives and certain pricing increases. Additionally, the increase reflected higher SFG revenue in the U.S., most notably in structured credit, CREF and RMBS coupled with higher U.S. public finance refunding volumes and revenue from the ICRA Acquisition. These increases were partially offset by declines in revenue from rating high-yield corporate debt and bank loans in EMEA as well as declines in investment-grade rated issuance volumes in the EMEA and Americas regions. Changes in FX translation rates had an approximate $30 million unfavorable impact on MIS revenue compared to the prior year.

•

External MA revenue was 12% higher than the prior year. Excluding the impact of unfavorable changes in FX translation rates, MA revenue grew 18% reflecting growth in ERS and RD&A. Revenue grew in all product areas of ERS, with particular strength in the Asset, Liability & Capital as well as the Credit Assessment & Origination products. In RD&A, revenue growth was primarily driven by credit research and licensing of ratings data. The 2014 acquisitions of WebEquity and Lewtan also contributed to the growth in ERS and RD&A, respectively. These results were partially offset by an approximate $13 million unfavorable impact due to changes in FX translation rates.

•

Total expenses increased $37.0 million, or 8%, compared to the second quarter of 2014. The growth in operating expenses primarily reflected:

•

higher compensation costs of $18.0 million associated with headcount growth (both from acquisitions and business growth) and annual compensation increases.

•

higher non-compensation expenses of $13.4 million primarily reflecting an increase in costs for various IT infrastructure and other operational enhancement projects as well as higher variable costs associated with business growth.

The increase in both compensation and non-compensation expense reflects operating costs from the ICRA Acquisition as well as the acquisitions of WebEquity and Lewtan.

Changes in FX translation rates had an approximate $21 million favorable impact on total expenses compared to the prior year. Excluding the favorable impact relating to changes in FX translation rates, total expenses increased 13% compared to the prior year.

•

Operating income of $419.3 million in the second quarter of 2015 increased $7.6 million compared to 2014 and resulted in an operating margin of 45.7%, compared to 47.1% in the prior year. Adjusted Operating Income of $447.2 million in the second quarter of 2015 increased $13.2 million compared to 2014, resulting in an Adjusted Operating Margin of 48.7% compared to 49.7% in the prior year period. Unfavorable changes in FX translation rates negatively impacted operating income by approximately 5%. The decrease in margins is primarily due continued investment in the Company’s operations as well as the acquisition of companies that operate at margins below Moody’s historical margins.

•

The ETR in the second quarter of 2015 was 270 BPS lower than the prior year primarily due to benefits resulting from a favorable state tax ruling and a change in local tax law relating to income apportionment.

•

The decrease in non-operating income (expense) compared to the prior year is primarily due to the ICRA Gain in 2014 partially offset by higher interest expense reflecting the issuance of the 2014 Senior Notes (5-Year) and the 2014 Senior Notes (30-Year) in July 2014 as well as and the 2015 Senior Notes in March 2015. Additionally, there was approximately $5 million in higher FX losses compared to the prior year.

•

Diluted EPS of $1.28 in the second quarter of 2015 decreased $0.20 from 2014, which included a $0.36 benefit related to the ICRA Gain. Excluding the ICRA Gain in the prior year period, Diluted EPS in the second quarter of 2015 was $0.16 higher than 2014 Non-GAAP Diluted EPS of $1.12.

Moody’s Corporation


	Three months ended June 30,						% Change Favorable (Unfavorable)
	2015			2014			% Change Favorable (Unfavorable)
Revenue:
United States	$	545.9		$	461.1			18	%
International:
EMEA		217.4			263.3			(17	%)
Asia-Pacific		99.2			88.6			12	%
Americas		55.6			60.5			(8	%)

Total International		372.2			412.4			(10	%)

Total		918.1			873.5			5	%

Expenses:
Operating		243.9			222.1			(10	%)
SG&A		227.0			217.4			(4	%)
Depreciation and amortization		27.9			22.3			(25	%)

Total		498.8			461.8			(8	%)

Operating income	$	419.3		$	411.7			2	%

Adjusted Operating Income ⁽¹⁾	$	447.2		$	434.0			3	%

Interest income (expense), net	$	(31.9	)	$	(26.0	)		(23	%)
Other non-operating income (expense), net	$	(8.2	)	$	(3.3	)		(148	%)
ICRA Gain	$	—		$	102.8			(100	%)
Net income attributable to Moody’s	$	261.7		$	319.2			(18	%)
Diluted EPS attributable to Moody’s common shareholders	$	1.28		$	1.48			(14	%)
Non-GAAP EPS attributable to Moody’s common shareholders	$	1.28

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company