UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-K


(MARK ONE)

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 20062009

OR

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

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

FOR THE TRANSITION PERIOD FROMTO.

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.)

99 CHURCH STREET,7 World Trade Center at 250 Greenwich Street, NEW YORK, NEW YORK 10007

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 553-0300.

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

TITLE OF EACH CLASS

 

NAME OF EACH EXCHANGE ON WHICH REGISTERED

COMMON STOCK, PAR VALUE $.01 PER SHARE

PREFERRED SHARE PURCHASE RIGHTS

 

NEW YORK STOCK EXCHANGE

PREFERRED SHARE PURCHASE RIGHTS

NEW YORK STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x  No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No x

Indicate by check mark whether the Registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Exchange Act Rule 12b-2).

Large Accelerated Filer x    Accelerated Filer ¨    Non-accelerated Filer ¨    Smaller reporting company ¨

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

The aggregate market value of Moody’s Corporation Common Stock held by nonaffiliates* on June 30, 20062009 (based upon its closing transaction price on the Composite Tape on such date) was approximately $15.3$6.2 billion.

As of January 31, 2007, 278.52010, 236.9 million shares of Common Stock of Moody’s Corporation were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for use in connection with its annual meeting of stockholders scheduled to be held on April 24, 2007,20, 2010, are incorporated by reference into Part III of this Form 10-K.

The Index to Exhibits is included as Part IV, Item 15(3) of this Form 10-K.


*Calculated by excluding all shares held by executive officers and directors of the Registrant without conceding that all such persons are “affiliates” of the Registrant for purposes of federal securities laws.

 


MOODY’S2009 10-K1


MOODY’S CORPORATION

INDEX TO FORM 10-K

Page(s)
Glossary of Terms and Abbreviations4-7

PART I.

Item 1.BUSINESS8
Background8
The Company8
Prospects for Growth9-10
Competition10
Moody’s Strategy11
Regulation12-14
Intellectual Property14
Employees14
Available Information14
Executive Officers of the Registrant15-16
Item 1A.RISK FACTORS17-20
Item 1B.UNRESOLVED STAFF COMMENTS20
Item 2.PROPERTIES20-21
Item 3.LEGAL PROCEEDINGS21-22
Item 4.

RESERVED

22

PART II.

Item 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES23
Moody’s Purchase of Equity Securities23
Common Stock Information and Dividends24
Equity Compensation Plan Information24
Performance Graph25
Item 6.SELECTED FINANCIAL DATA26
Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS27
The Company27
Critical Accounting Estimates27-32
Operating Segments33-34
Results of Operations34-43
Market Risk43-44
Liquidity and Capital Resources44-50
2010 Outlook50-51
Recently Issued Accounting Pronouncements51
Contingencies51-54
Forward-Looking Statements54-55
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK55
Item 8.FINANCIAL STATEMENTS56-97
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE98
Item 9A.CONTROLS AND PROCEDURES98
Item 9B.OTHER INFORMATION98

2MOODY’S2009 10-K


Page(s)

PART III.

Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE99
Item 11.EXECUTIVE COMPENSATION99
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS99
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE99
Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES99

PART IV.

Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES100
SIGNATURES101
INDEX TO EXHIBITS102-106

Exhibits
Filed Herewith

21SUBSIDIARIES OF THE REGISTRANT
23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – 2009 and 2008
23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – 2007
31.1Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

MOODY’S2009 10-K3


GLOSSARY OF TERMS AND ABBREVIATIONS

The following terms, abbreviations and acronyms are used to identify frequently used terms in this report:

TERM

DEFINITION

ACNielsenACNielsen Corporation – a former affiliate of Old D&B
AnalyticsMoody’s Analytics – reportable segment of MCO formed in January 2008 which combines MKMV, the sales of MIS research and other MCO non-rating commercial activities
AOCIAccumulated other comprehensive income (loss); a separate component of shareholders’ equity (deficit)
ASC

The FASB Accounting Standards Codification; the sole source of authoritative

GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants.

ASUThe FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC.
Basel IICapital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
BoardThe board of directors of the Company
BpsBasis points
Canary Wharf LeaseOperating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009
CDOsCollateralized debt obligations
CFGCorporate finance group; an LOB of MIS
CMBSCommercial mortgage-backed securities; part of CREF
CognizantCognizant Corporation – a former affiliate of Old D&B, which comprised the IMS Health and NMR businesses
CommissionEuropean Commission
Common Stockthe Company’s common stock
CompanyMoody’s Corporation and its subsidiaries; MCO; Moody’s
COSOCommittee of Sponsoring Organizations of the Treadway Commission
CPCommercial paper
CP NotesUnsecured CP notes
CP ProgramThe Company’s CP program entered into on October 3, 2007
CRAsCredit rating agencies
CREFCommercial real estate finance which includes REITs, commercial real estate CDOs and CMBS; part of SFG
D&B BusinessOld D&B’s Dun & Bradstreet operating company
DBPPsDefined benefit pension plans
DCFDiscounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value using a discount rate
Debt/EBITDARatio of Total Debt to EBITDA
Directors’ PlanThe 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan
Distribution DateSeptember 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B
EBITDAEarnings before interest, taxes, depreciation, amortization and extraordinary items

4MOODY’S2009 10-K


TERM

DEFINITION

ECAIsExternal Credit Assessment Institutions
ECBEuropean Central Bank
EMEARepresents countries within Europe, the Middle East and Africa
EnbEnb Consulting; an acquisition completed in December 2008; part of the MA segment; a provider of credit and capital markets training services
EPSEarnings per share
ESPPThe 1999 Moody’s Corporation Employee Stock Purchase Plan
ETREffective Tax Rate
EUEuropean Union
EUREuros
Excess Tax BenefitThe difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP
Exchange ActThe Securities Exchange Act of 1934, as amended
FASBFinancial Accounting Standards Board
FermatFermat International; an acquisition completed in October 2008; part of the MA segment; a provider of risk and performance management software to the global banking industry
FIGFinancial institutions group; an LOB of MIS
FitchFitch Ratings, a part of the Fitch Group which is a majority-owned subsidiary of Fimalac, S.A.
FSFFinancial Stability Forum
FXForeign exchange
GAAPU.S. Generally Accepted Accounting Principles
GBPBritish pounds
G-8The finance ministers and central bank governors of the group of eight countries consisting of Canada, France, Germany, Italy, Japan, Russia, U.S. and U.K.
G-20The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. The G-20 is comprised of: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K., U.S. and the EU, which is represented by the rotating Council presidency and the ECB.
HFSCHouse Financial Services Committee
IMS HealthA spin-off of Cognizant, which provides services to the pharmaceutical and healthcare industries
Intellectual PropertyThe Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials
IOSCOInternational Organization of Securities Commissions
IOSCO CodeCode of Conduct Fundamentals for CRAs issued by IOSCO
IRSInternal Revenue Service
Legacy Tax Matter(s)Exposures to certain tax matters in connection with the 2000 Distribution
LIBORLondon Interbank Offered Rate

MOODY’S2009 10-K5


TERM

DEFINITION

LOBLine of Business
MAMoody’s Analytics – a reportable segment of MCO formed in January 2008 which includes the non-rating commercial activities of MCO
Make Whole AmountThe prepayment penalty relating to the Series 2005-1 Notes and Series 2007-1 Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MCOMoody’s Corporation and its subsidiaries; the Company; Moody’s
MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
MISMoody’s Investors Service – a reportable segment of MCO
MIS CodeMoody’s Investors Service Code of Professional Conduct
MKMVMoody’s KMV – a reportable segment of MCO prior to January 2008
Moody’sMoody’s Corporation and its subsidiaries; MCO; the Company
Net IncomeNet income attributable to Moody’s Corporation, which excludes the portion of net income from consolidated entities attributable to non-controlling shareholders
New D&BThe New D&B Corporation – which comprises the D&B business
NMNot-meaningful percentage change (over 400%)
NMRNielsen Media Research, Inc.; a spin-off of Cognizant; a leading source of television audience measurement services
NoticesIRS Notices of Deficiency for 1997-2002
NRSRONationally Recognized Statistical Rating Organizations
Old D&BThe former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
Post-Retirement PlansMoody’s funded and unfunded pension plans, the post-retirement healthcare plans and the post-retirement life insurance plans
PPIFPublic, project and infrastructure finance; an LOB of MIS
PPPDefined contribution profit participation retirement plan that covers substantially all U.S. employees of the Company
RD&AResearch, Data and Analytics; a LOB within MA that distributes investor-oriented research and data, including in-depth research on major debt issuers, industry studies, commentary on topical credit events, economic research and analytical tools such as quantitative risk scores
Reform ActCredit Rating Agency Reform Act of 2006
REITsReal estate investment trusts
ReorganizationThe Company’s business reorganization announced in August 2007 which resulted in two new reportable segments (MIS and MA) beginning in January 2008
RMBSResidential mortgage-backed security; part of SFG
RMSThe Risk Management Software LOB within MA which provides both economic and regulatory capital risk management software and implementation services
S&PStandard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.
SECSecurities and Exchange Commission
Series 2005-1 NotesPrincipal amount of $300.0 million, 4.98% senior unsecured notes due in September 2015 pursuant to the 2005 Agreement
Series 2007-1 NotesPrincipal amount of $300.0 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement

6MOODY’S2009 10-K


TERM

DEFINITION

SFGStructured finance group; an LOB of MIS
SG&ASelling, general and administrative expenses
Stock PlansThe 1998 Plan and the 2001 Plan
T&ETravel and entertainment expenses
Total DebtCurrent and long-term portion of debt as reflected on the consolidated balance sheets, excluding current accounts payable incurred in the ordinary course of business
U.K.United Kingdom
U.S.United States
USDU.S. dollar
UTBsUnrecognized tax benefits
UTPsUncertain tax positions
VATValue added tax
WACCWeighted average cost of capital
1998 PlanOld D&B’s 1998 Key Employees’ Stock Incentive Plan
2000 DistributionThe distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000

2000 Distribution

Agreement

Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities
2001 PlanThe Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
2005 AgreementNote purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes
2007 AgreementNote purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes
2007 FacilityRevolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012
2007 Restructuring PlanThe Company’s 2007 restructuring plan approved December 31, 2007
2008 Term LoanFive-year $150.0 million senior unsecured term loan entered into by the Company on May 7, 2008
2009 Restructuring PlanThe Company’s 2009 restructuring plan approved March 27, 2009
7WTCThe Company’s corporate headquarters located at 7 World Trade Center
7WTC LeaseOperating lease agreement entered into on October 20, 2006

MOODY’S2009 10-K7


.

PART I

 

ITEM 1.BUSINESS

BackgroundBACKGROUND

As used in this report, except where the context indicates otherwise, the terms “Moody’s” or the “Company” refer to Moody’s Corporation, a Delaware corporation, and its subsidiaries. The Company’s executive offices are located at 99 Church7 World Trade Center at 250 Greenwich Street, New York, NY 10007 and its telephone number is (212) 553-0300.

Prior to September 30, 2000, the Company operated as part of The Dun & Bradstreet Corporation (“OldCorporation.

THE COMPANY

Moody’s is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) risk management software and (iv) quantitative credit risk measures, credit portfolio management solutions and training services. In 2007 and prior years, Moody’s operated in two reportable segments: Moody’s Investors Service and Moody’s KMV. Beginning in January 2008, Moody’s segments were changed to reflect the Reorganization announced in August 2007 and Moody’s now reports in two new reportable segments: MIS and Moody’s Analytics. As a result of the Reorganization, the rating agency remains in the MIS operating segment and several ratings business lines have been realigned. All of Moody’s other non-rating commercial activities are included within the new MA segment. Financial information and operating results of these segments, including revenue, expenses, operating income and total assets, are included in Part II, Item 8. Financial Statements of this annual report, and are herein incorporated by reference.

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide, including various corporate and governmental obligations, structured finance securities and commercial paper programs. Revenue is derived from the originators and issuers of such transactions who use MIS ratings to support the distribution of their debt issues to investors. MIS provides ratings in more than 110 countries. Ratings are disseminated via press releases to the public through a variety of print and electronic media, including the Internet and real-time information systems widely used by securities traders and investors. As of December 31, 2009, MIS had ratings relationships with approximately 12,000 corporate issuers and approximately 25,000 public finance issuers. Additionally, the Company has rated and currently monitors ratings on approximately 106,000 structured finance obligations (representing approximately 16,000 transactions).

The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. Within its Research, Data and Analytics business, MA distributes investor-oriented research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies, commentary on topical credit related events and also provides economic research and credit data and analytical tools such as quantitative credit risk scores. Within its Risk Management Software business, MA provides both economic and regulatory capital risk management software and implementation services. Within its professional services business it provides quantitative credit risk measures, credit portfolio management solutions and training services. MA customers represent more than 4,800 institutions worldwide operating in approximately 115 countries. Throughout 2009, Moody's research web site was accessed by 174,000 individuals and by users representing 29,000 client relationships.

The Company operated as part of “Old D&B”). On until September 8,30, 2000, the Board of Directors ofwhen Old D&B approved a plan to separateseparated into two publicly traded companies – the CompanyMoody’s Corporation and The New D&B Corporation (“New D&B”). On September 30, 2000 (“the Distribution Date”),&B. At that time, Old D&B distributed to its shareholders all of the outstanding shares of New D&B common stock (the “2000 Distribution”).stock. New D&B comprised the business of Old D&B’s Dun & Bradstreet operating company (the “D&B Business”).company. The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services (the “Moody’s Business”) and was renamed “Moody’s Corporation”.

New D&B is the accounting successor to Old D&B, which was incorporated under the laws of the State of Delaware on April 8, 1998. Old D&B began operating as an independent publicly-owned corporation on July 1, 1998 as a result of its June 30, 1998 spin-off (the “1998 Distribution”) from the corporation now known as “R.H. Donnelley Corporation” and previously known as “The Dun & Bradstreet Corporation” (“Donnelley”). Old D&B became the accounting successor to Donnelley at the time of the 1998 Distribution.

Prior to the 1998 Distribution, Donnelley was the parent holding company for subsidiaries then engaged in the businesses currently conducted by New D&B, Moody’s and Donnelley. Prior to November 1, 1996, it also was the parent holding company of subsidiaries conducting business under the names Cognizant Corporation (“Cognizant”) and ACNielsen Corporation (“ACNielsen”). On that date Donnelley effected a spin-off of the capital stock of Cognizant and ACNielsen to its stockholders (the “1996 Distribution”). Cognizant subsequently changed its name to Nielsen Media Research, Inc. in connection with its 1998 spin-off of the capital stock of IMS Health Incorporated (“IMS Health”).

Corporation. For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement, Shared Transaction Services Agreement, Insurancedistribution agreement, tax allocation agreement and Risk Management Services Agreement, Data Services Agreement and Transition Services Agreement.

Detailed descriptions of the 1996, 1998 and 2000 Distributions are contained in the Company’s 2000 annual report on Form 10-K, filed on March 15, 2001.

The Company

Moody’s is a provider of (i) credit ratings, research and analysis covering fixed-income securities, other debt instruments and the entities that issue such instruments in the global capital markets, and credit training services and (ii) quantitative credit risk assessment products and services and credit processing software for banks, corporations and investors in credit-sensitive assets. Founded in 1900, Moody’s employs approximately 3,400 people worldwide. Moody’s maintains offices in 22 countries and has expanded into developing markets through joint ventures or affiliation agreements with local rating agencies. Moody’s customers include a wide range of corporate and governmental issuers of securities as well as institutional investors, depositors, creditors, investment banks, commercial banks and other financial intermediaries. Moody’s is not dependent on a single customer or a few customers, such that a loss of any one would have a material adverse effect on its business.

Moody’s operates in two reportable segments: Moody’s Investors Service and Moody’s KMV. For additional financial information on these segments, see Part II, Item 8. “Financial Statements – Note 17 – Segment Information”.

Moody’s Investors Service publishes rating opinions on a broad range of credit obligors and credit obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs. It also publishes investor-oriented credit information, research and economic commentary, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks. Moody’s credit ratings and research help investors analyze the credit risks associated with fixed-income securities. Such independent credit ratings and research also contribute to efficiencies in markets for other obligations, such as insurance policies and derivative transactions, by providing credible and independent assessments of credit risk. Moody’s provides ratings andemployee benefits agreement.

 

2

8MOODY’S2009 10-K


credit research on governmental and commercial entities in more than 100 countries. Moody’s global and increasingly diverse services are designed to increase market efficiency and may reduce transaction costs. As of December 31, 2006, Moody’s had ratings relationships with more than 12,000 corporate issuers and approximately 29,000 public finance issuers. Additionally, the Company has rated more than 96,000 structured finance obligations. Ratings are disseminated via press releases to the public through a variety of print and electronic media, including the Internet and real-time information systems widely used by securities traders and investors.

Beyond credit rating services for issuers, Moody’s Investors Service provides research services, data and analytic tools that are utilized by institutional investors and other credit and capital markets professionals. These services cover various segments of the loan and debt capital markets, and are sold to more than 9,300 customer accounts worldwide. Within these accounts, more than 29,000 users accessed Moody’s research website (www.moodys.com) during calendar year 2006. In addition to these clients, more than 148,000 other individuals visited Moody’s website to retrieve current ratings and other information made freely available to the public.

The Moody’s KMV business develops and distributes quantitative credit risk assessment products and services and credit processing software for banks, corporations and investors in credit-sensitive assets. Moody’s KMV serves more than 1,700 clients operating in approximately 85 countries, including most of the world’s largest financial institutions. Moody’s KMV’s quantitative credit analysis tools include models that estimate the probability of default for approximately 29,000 publicly traded firms globally, updated daily. In addition, Moody’s KMV’s RiskCalc models extend the availability of these probabilities to privately held firms in many of the world’s economies. Moody’s KMV also offers services to value and improve the performance of credit-sensitive portfolios.

Prospects for GrowthPROSPECTS FOR GROWTH

Over recent decades, global public and private fixed-income markets have grown significantly in terms of outstanding principal amount and types of securities. Whilesecurities or other obligations. Beginning in mid-2007 there is potentialwas a severe market disruption and decline in issuance activity for periodic cyclicalsome significant asset classes of securities in the U.S. and internationally. Despite the recent market disruption, in these developments, Moody’s believes that the overall trend andlong-term outlook remainremains favorable for continued secular growth of fixed-income markets worldwide. Moody’s business prospects correspond closely to the health of the world’s major economies and capital markets. Throughout 2009 there has been gradual improvement in global capital market and economic conditions. The sustainability of these improvements will influence the Company’s growth over the near term. Moody’s is well positioned to benefit from a long-term recovery in global credit market activity worldwide. In addition, the securities being issuedand a more informed use of credit ratings, research and related analytical products in the global fixed-income markets are becoming more complex.an environment of renewed attention to risk analysis and risk management. Restoring investor confidence in structured products may require further enhancements to MIS’s rating processes and may be facilitated by greater transparency from issuers of structured (or securitized) debt. Moody’s expects that these trendsinitiatives will providesupport continued long-term demand for high-quality, independent credit opinions. These phenomena are especially apparent internationally, where economic expansionAn expectation of recovery-driven growth in capital market activity, supported by initiatives to increase market share, leverage pricing opportunities, and integration are driving increased use of publicdevelop additional data, research and rating products, represent key growth drivers for Moody’s.

Growth in global fixed-income markets for corporate financing activities,is attributable to a number of forces and factors such as enabling regulation and increased acceptance of new financial technologies by debt issuers and investors have driven growthtrends. Advances in structured finance issuance.

Communicationinformation technology such as the Internet, makesmake information about investment alternatives widely available throughout the world. This technologyTechnology facilitates issuers’ ability to place securities outside their national markets and investors’ capacity to obtain information about securities issued outside their national markets. IssuersTechnology allows issuers and investors are alsothe ability to more readily able to obtain information about new financing techniques and new types of securities that they may wish to purchase or sell, manywhich in the absence of whichthe appropriate technology may not be unfamiliar to them.easily obtainable. This availability of information promotes the ongoing integration and development of worldwide financial markets and a greater need for credible, and globally comparable opinions about credit risk. As a result, existing capital markets have expanded and a number of new capital markets have emerged. In addition, more issuers and investors are accessing developed capital markets. Information technology also provides opportunities to further build a global platform to support Moody’s continued expansion in developing markets.

Another trend that is increasing the size ofin the world’s capital markets is the ongoing disintermediation of financial systems. Issuers are increasingly financingraise capital in the global public capital markets, in addition to, or in substitution for, traditional financial intermediaries. Moreover, financial intermediaries are sellinghave sold assets in the global public capital markets, in addition to or instead of retaining those assets. Structured finance securitiesRecent credit market disruptions have slowed the trend of disintermediation globally, but Moody’s believes that debt capital markets for many types of assets have developedoffer advantages in many countriescapacity and are contributingefficiency compared to these trends.the traditional banking systems. Thus, disintermediation is expected to accelerate in the longer-term, with Moody’s continuing to target investment and resources to growing international markets where disintermediation and bond issuance should remain more robust.

The complexity of capital market instruments is also growing. Consequently, assessingstrong growth trend seen in the credit risk of such instruments becomes more of a challenge for financial intermediaries and asset managers. In the credit markets, reliable third-party ratings and research increasingly supplement or substitute for traditional in-house research as the scale, geographic scope and complexity of financial markets grow.

Growth in issuance of structured finance securities has generally been stronger than growthreversed dramatically in straight corporate and financial institutions debt issuance, and2008 due to market turmoil, with continued declines seen in 2009. The market disruptions that escalated in 2008 are expected to continue in the immediate term, however Moody’s expects that trend to continue. Growthsee some revenue stabilization from this market in 2010. Despite significant declines from peak market levels, Moody’s believes that structured finance has reflected increased acceptancesecurities will continue to play a role in global credit markets, and provide opportunities for longer term growth. Moody’s will continue to monitor and support the progress of structured finance as a financingthis market and refinancing mechanism, regulatory changes that facilitateadapt to meet the usechanging needs of structured finance, and increases in the scope of asset types, including for example consumer debt, that form the underlying asset pools for structured finance securities.its participants.

Rating fees paid by debt issuers account for most of the revenue of Moody’s Investors Service.MIS. Therefore, a substantial portion of Moody’sMIS’s revenue is dependent upon the volume and number of ratable debt securities issued in the global capital markets thatmarkets. Moody’s rates. Moody’s is thereforeresults can be affected by factors such as the performance, of, and the prospects for growth, of the major world economies,

3


and by the fiscal and monetary policies pursued by their governments.governments, and the decisions of issuers to request MIS ratings to aid investors in their investment decision process. However, annual fee arrangements with frequent debt issuers, annual debt monitoring fees and annual fees from commercial paper and medium-term note programs, bank and insurance company financial strength ratings, mutual fund ratings, subscription-based research and other areas are less dependentpartially mitigate Moody’s dependence on or independent of, the volume or number of debt securities issued in the global capital markets.

Moody’s operations are also subject to various risks inherent in carrying onconducting business internationally. Such risks include currency fluctuations and possible nationalization, expropriation, exchange and price controls, changes in the availability of data from public sector sources, limits on providing information across borders and other restrictive governmental actions. Management believes that the risks of nationalization or expropriation are reduced because the Company’s basic service is the creation and dissemination of information, rather than the production of products that require manufacturing facilities or the use of natural resources. However, the formation of, for example, a new government-sponsored regional or global rating agency would pose a risk to Moody’s growth prospects. Management believes that this risk, compared to other regulatory changes under consideration for the credit rating industry, is relatively low because of the likelihood that substantial investments over a sustained period would be required, with uncertainty about the likelihood of financial success.success for the entity.

MOODY’S2009 10-K9


Legislative bodies and regulators in both the United StatesU.S., Europe and Europeselective other jurisdictions continue to conduct regulatory reviews of credit rating agencies,CRAs, which may result in, for example, an increased number of competitors, changes to the business model or restrictions on certain business expansion activities by Moody’s Investors Serviceof MIS, or increased costs of doing business for Moody’s. Therefore, in order to broaden the potential for expansion of non-ratings services, Moody’s reorganized in January 2008 into two distinct businesses: MIS, consisting solely of the ratings business, and MA. MA conducts all non-ratings activities including the sale of credit research produced by MIS and the production and sale of other economic and credit-related products and services. The reorganization broadens the opportunities for expansion by MA into activities which may have otherwise been restricted for MIS, due to the potential for conflicts of interest with the ratings business. At present, Moody’s is unable to assess the nature and effect that any regulatory changes may have on future growth opportunities. See “Regulation” below.

MA expects to benefit from the growing demand among credit market participants for information that enables them to make sound investment and risk management decisions. These customers require advanced qualitative and quantitative tools to support their management of increasingly complex capital market instruments. Such complexity creates analytical challenges for market participants, including financial intermediaries, asset managers and other investors. In recent years, reliable third-party ratings and research served to supplement or substitute for traditional in-house research as the scale, geographic scope and complexity of financial markets grew. Moody’s remains focused on driving improvements in customer retention, product placements and new customer acquisition in this area.

Recent disruptions in credit markets have resulted in higher than normal customer attrition in MA. Moody’s remains focused on driving improvements in customer retention, product placements and new customer acquisition and expects to sustain reliance on its offerings as enhancements to credit rating methodologies and other changes in securities origination processes restore investor confidence and more orderly market operations.

Growth in Moody’s KMVMA is also expected from increased awareness and adoption byas financial institutions ofadopt active credit portfolio management practices and the estimation of economic capital, for which MKMV provides products and services. In addition, Moody’s KMV will continue to see revenue growth from the implementation ofimplement internal ratingcredit assessment tools for compliance with Basel II compliance and credit analysis best practices.regulations. MA offers products that respond to these needs. This growth will be realized by, for example, the development of new private firm default probability models for specific countries and by expanding analysis capabilities of new asset classes.

CompetitionCOMPETITION

The Moody’s Investors ServiceMIS business competes with other credit rating agenciesCRAs and with investment banks and brokerage firms that offer credit opinions and research. Institutional investorsMany of Moody’s customers also have in-house credit research capabilities. Moody’s largest competitor in the global credit rating business is Standard & Poor’s Ratings Services, (“S&P”), a division of The McGraw-Hill Companies, Inc. There are some rating markets, based on industry, geography and/or instrument type, in which Moody’s has made investments and obtained market positions superior to S&P’s. In&P’s while in other markets, the reverse is true.

In addition to S&P, Moody’s competitors include Fitch, a subsidiary of Fimalac S.A., Dominion Bond Rating Service Ltd. of Canada, (“DBRS”) and A.M. Best Company Inc, Japan Credit Rating Agency Ltd., Rating and Investment Information Inc. One orof Japan and Egan-Jones Ratings Company. In 2008 two more significantfirms were granted the Nationally Recognized Statistical Rating Organizations status in the U.S: LACE Financial Corp. and Realpoint LLC. Additional rating agencies may emerge in the United StatesU.S. as the Securities and Exchange Commission (“SEC”) maySEC continues to expand the number of Nationally Recognized Statistical Rating Organizations (“NRSRO”).NRSROs. Other competition may arise in the U.S. from credit opinion providers who do not operate as NRSRO’s, such as Morningstar or Coface. Competition may also emergeincrease in developed or developing markets outside the United StatesU.S. over the next few years as the number of rating agencies increase.increases, although a more regulated credit ratings industry, both domestic and internationally, may provide for a less appealing expansion territory.

Financial regulators are reviewing their approach to supervision and have sought or are seeking comments on changes to the global regulatory framework that could affect Moody’s. Bank regulators, under the oversight of the Basel Committee on Banking Supervision, have proposed using refined risk assessments as the basis for minimum capital requirements. The proposed Standardized Approach relies on rating agency opinions, while the proposed Internal Ratings Based Approach relies on systems and processes maintained by the regulated bank. The increased regulatory focus on credit risk presents both opportunities and challenges for Moody’s. Global demand for credit ratings and risk management services may rise, but regulatory actions may result in a greater number of rating agencies and/or additional regulation of Moody’s and its competitors. Alternatively, banking or securities market regulators could seek to reduce the use of ratings in regulations, thereby reducing certain elements of demand for ratings, or otherwise seek to control the analysis or business of rating agencies.

Credit rating agencies such as Moody’sMIS also compete with other means of managing credit risk, such as credit insurance. Competitors that develop quantitative methodologies for assessing credit risk also may pose a competitive threat to Moody’s.

Moody’s KMV’sMA competes broadly in the financial information space against diversified competitors such as Thomson-Reuters, Bloomberg, RiskMetrics, S&P, Fitch, Dun & Bradstreet, and Markit Group among others. MA’s main competitors for quantitative measures of default riskwithin RD&A include the RiskMetrics Group, S&P, CreditSights, R&I’s Financial Technology Institute (in Japan), Fitch Algorithmics, Dun and Bradstreet, models developed internally by customersCreditSights, Thomson-Reuters, Intex, IHS Global Insight, BlackRock Solutions and other smaller vendors. Other firms may compete in the future. Baker Hill, acquired by Experian,boutique providers of fixed income analytics, valuations, economic data and Bureau van Dijk Electronic Publishing are Moody’s KMV’s main competitors in the software market to assist banks in their commercial lending activities. Mercer Oliver Wymanresearch. In RMS, MA faces competition from Fitch Algorithmics, SunGard, SAS, Oracle and other various smaller vendors and in-house solutions. Within professional services, MA competes with the professional services group at Moody’s KMVOliver Wyman for certain credit risk consultingadvisory services, business.with Omega Performance, DC Gardner, and a host of boutique providers for financial training.

 

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10MOODY’S2009 10-K


Moody’s StrategyMOODY’S STRATEGY

Moody’s continues to follow growth strategies that adapt to market conditions and capitalize on emerging opportunities:

Given recent market turmoil, Moody’s immediate focus is on making effective business decisions to adapt to challenging economic and market conditions while positioning the Company to benefit from an eventual recovery in global credit market activity.

Given the renewed attention to risk analysis and risk management, Moody’s is committed to further encouraging the informed use of credit ratings, research and related analytics products.

Moody’s seeks to differentiate itself from incumbent and potential competitors with predictive, uniquely thoughtful and forward-looking opinions about credit and the credit industry.

Adapting to market change is a key factor in maintaining market relevance. Moody’s continuously monitors opportunities to selectively diversify its revenue base through organic growth and acquisitions, in order to replace areas of lost revenue and position the Company for new sources of business.

In support of those goals Moody’s intends to continue its focus onin the following opportunities:areas:

Expansion in Financial Centers

Moody’s serves its customers through its global network of offices and business affiliations. Moody’s currently maintains comprehensive rating and marketingcommercial operations in financial centers including Buenos Aires, Dubai, Frankfurt, Hong Kong, London, Madrid, Milan, Mexico City, Moscow, New York, Paris, Sao Paolo, Seoul, Singapore, Sydney, Tokyo and Tokyo.Toronto. Moody’s expects that its global network will position it to benefit from the expansion of worldwide capital markets and thereby increase revenue. Moody’s also expects that the growth of its Moody’s Investors ServiceMIS business as a consequence of financial market integration in Europe will continue.return. Additionally, Moody’s expects to continue its expansion into developing markets either directly or through joint ventures. This will allow Moody’s to extend its credit opinion franchise to local and regional obligors, through domestic currency ratings and national scale ratings. These developing market efforts have been supported in 2006 by the acquisition of 100% of CRA Rating Agency in the Czech Republic to form Moody’s Central Europe and the acquisition of a 49% stake in China Cheng Xin International Credit Rating Co. Ltd. in China, and in January 2007 by the acquisition of 99% of PT Kasnic Credit Rating in Indonesia to form Moody’s Indonesia. Moody’s expects to continue its expansion into developing markets either directly or through joint ventures.

New Rating Products

Moody’s is pursuing numerous initiatives to expand credit ratings, including from public fixed-income securities markets to other sectors with credit risk exposures. Within established capital markets, Moody’s continues to expand its rating coverage of bank loansrespond to investor demand for new products and project finance loansenhancements. In the recent market turmoil, attention to core strengths has been crucial and securities. In globalenhancements have and local counterparty markets, Moody’s offers distinct sets of rating productscontinue to addressbe focused on quality and transparency. Given the creditworthiness of financial firms, including bank financial strength and deposit ratings, and insurance financial strength ratings. Moody’s has also introduced issuer ratings for corporations not activeparticular disruption in the debt markets. As the structured finance markets, continueMIS has been developing enhanced structured finance offerings to grow worldwide and secondary markets continue to develop, demandmeet investor demands for more information content. Leveraging the diversity of its research data and analytics, Moody’s has introduced cross-sector analysis supporting these markets has heightened. In orderto better illustrate the broader impacts of recent market events. This is further enhanced by the incorporation of macroeconomics to frame conditions and assumptions. MIS continues to capitalize on market developments and to enhance ratings surveillance efficiency, Moody’s has created a new products group within structured finance to focusfocusing on new ratings products, such as hedge fund operations quality ratings, and to identify, design, develop and maintain value-added research, analytics and data products serving the structured finance market. The acquisition of Wall Street Analytics in December 2006 broadens Moody’s capabilities in the analysis and monitoring of complex debt securities and provides a deeper pool of dedicated analytic and product development staff to create new software analytic tools for the structured finance market.

In response to growing investor demand for expanded credit opinion in the high yield market, Moody’s has introduced a number of new products, including joint default analysis, corporate financial metrics, and both loss-given-default and probability-of-default ratings.capital markets.

Additional Opportunities in Structured Finance

The repackaging of financial assets has had a profound effect on the fixed-income markets. New patterns of securitization are expected to emerge in the next decade. Although the bulk of assets securitized in the past five years have been consumer assets owned by banks, commercial assets — principally commercial mortgages, term receivables and corporate obligations — are now increasingly being securitized. Securitization has evolved into a strategic corporate finance tool in North America, Europe and Japan, and is evolving elsewhere internationally. Ongoing global development of non-traditional financial instruments, especially credit derivatives, has accelerated in recent years. Increasingly complex collateralized debt obligations (“CDO”s) have been introduced, which should continue to support growth. Moody’s has introduced new services enabling investors to monitor the performance of their investments in structured finance, covering asset-backed finance, commercial mortgage finance, residential mortgage finance and credit derivatives.

Internet-Enhanced Products and Services

Moody’s is expanding its use of the Internet and other electronic media to enhance clientcustomer service. Moody’s website provides the public with instant access to ratings and provides the public and subscribers with credit research.research and risk assessment tools. Internet delivery also enables Moody’s to provide services to more individuals within a clientcustomer organization than were available with paper-based products and to offer higher-value services because of more timely delivery. Moody’s expects that access to these applications will increase clientcustomer use of Moody’s services. Moody’s expects to continue to invest in electronic media to capitalize on these and other opportunities.

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Expansion of Credit Research Products and Investment Analytic Tools

Moody’s plans to expand its research and analytic services through internal development and by acquisition. To respond to client demand,potentially through acquisitions. Most new product initiatives are generally more analytical and data-intensive than traditional narrative research offerings. Such services address investor interest in replicating the types of monitoring activities conducted by for example, Moody’s securitization analysts and provide the means for customers to gain access to raw data and financial statistics and ratios used by Moody’s analystsMIS in the rating process for municipalities, companies and financial institutions. These products represent important sources of growth for the research business unit.business. MA is developing products in the fixed-income valuations and pricing arena that facilitate price transparency in global fixed income markets, especially for complex structured securities and derivative instruments. Moreover, Moody’s continues to explore opportunities to extend its research relevance in new domestic or regional markets (e.g., China) as well as new functional markets (e.g., hedge funds).

New Quantitative Credit Risk Assessment Services

Moody’s will continue to provide banks and other institutions with quantitative credit risk assessment services.solutions. Moody’s believes that there will be increased demand for such services because they assist customers trading or holding credit-sensitive assets to producebetter manage risk and deliver better performance. Also, recent proposals by international bank regulatory authorities to recognizeare assessing the adequacy of banks’ internal credit risk management systems for the purpose of determining regulatory capital are expected tocapital. The acquisition of Fermat accelerates Moody’s capabilities in this area. Such regulatory initiatives create demand for, and encourage adoption of, suchrelated services by banks from third-party providers. Moody’s also expects to provide extensions to existing services and new services, such as valuations of credit-sensitive assets.

MOODY’S2009 10-K11


RegulationREGULATION

In the United States, Moody’s Investors ServiceU.S., since 1975, MIS has been designated as aan NRSRO by the SEC. The SEC first applied the NRSRO designation in 1975that year to companies whose credit ratings could be used by broker-dealers for purposes of determining their net capital requirements. Since that time, Congress, (including in certain mortgage-related legislation), the SEC (including in certain of its regulations under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended and the Investment Company Act of 1940, as amended) and other governmental and private bodies have used the ratings of NRSROs to distinguish between “investment-grade” and “non-investment-grade” securities, among other things, “investment grade” and “non-investment grade” securities. Moody’s Investors Service has also voluntarily registered with the SEC as a NRSRO under the Investment Advisers Act of 1940, as amended. Once SEC rules underpurposes.

In September 2006, the Credit Rating Agency Reform Act of 2006 discussed below, are promulgated and become effective, approved NRSROs will be required to register pursuant to the Securities Exchange Act of 1934.

Over the past several years, U.S. regulatory and congressional authorities have reviewed the suitability of continuing to use ratings in federal securities laws and, if such use is continued, the potential needwas passed, which created a voluntary registration process for altering the regulatory framework under which rating agencies operate. This review ultimately resulted in the passage of the Credit Rating Agencywishing to be designated as NRSROs. The Reform Act of 2006 (“Reform Act”) in September 2006. The stated objectives of the Reform Act are to foster competition, transparency and accountability in the credit rating industry. It makes changes to the SEC’s processes for designating rating agencies as NRSROs, and formalizes the framework through whichprovides the SEC oversees them. However, the legislation provides thatwith authority to oversee NRSROs, while prohibiting the SEC shall not regulatefrom regulating the substance of credit ratings or the procedures and methodologies by which any NRSRO determines credit ratings. The Reform Act requires the SEC to issue final implementing rules byIn June 26, 2007. On February 5, 2007, the SEC published for comment its proposedfirst set of rules addressingunder the Reform Act. These rules address the NRSRO application and registration process, as well as oversight rules related to recordkeeping, financial reporting, policies for handlingprevention of misuse of material non-public information, conflicts of interest, and prohibited acts and practices. In June 2007, MIS filed its application for registration as an NRSRO with the SEC. In September 2007, the SEC registered MIS as an NRSRO under the Securities Exchange Act of 1934, and as of that time MIS has been subject to the SEC’s oversight rules described above. As required by the rules, MIS has made its Form NRSRO Initial Application, its Annual Certification of Form NRSRO, and any associated updates publicly available by posting it on the Regulatory Affairs page of the Company’s website.

In July 2008, the SEC released a report on its examination of CRAs. The SEC began its review of the ratings processes and procedures of the three leading rating agencies – MIS, S&P and Fitch – in August 2007, focusing on subprime RMBS and CDOs. While the Commission’s Staff noted that most of the period under review pre-dated the implementation of SEC rules for the industry, the report identified areas that were either of concern to the SEC or that the SEC believed could be enhanced going-forward. The concerns identified by the Commission’s Staff generally fall into three categories: policies addressing potential conflicts of interest; resources and resource allocation; documentation around policies and procedures and enhancing transparency. The SEC also summarized the various steps that are already being put in place by the rating agencies, as well as those that are under consideration in the SEC’s current rule-making process.

In February 2009, the SEC published a second set of rules applicable to NRSROs, the majority of which provide requirements for managing conflicts of interest, enhancing record keeping requirements, and certain prohibitions against unfair, coercive or abusive practices. Interested parties have until March 12, 2007improving transparency of ratings performance and methodologies. Several of these rules became operative in April 2009.

In April 2009, MIS participated in a roundtable held by the SEC on the oversight of credit rating agencies. The SEC’s stated objective was to elicit the views of a broad cross-section of market participants. The roundtable was a full-day event and consisted of four panels: Current NRSRO Perspectives; Competition Issues; Users’ Perspectives; and Approaches to Improve Credit Rating Agency Oversight. In preparation for the roundtable, participants were asked to submit statements and MIS’s statement is available on the Regulatory Affairs page of the Company’s website.

In November 2009, the SEC published a third set of final rules for NRSROs. These rules, which will come into force in June 2010, require additional disclosure of rating histories and prohibit NRSROs from rating structured finance products unless the issuer makes the same information accessible to all NRSROs that it provides to an NRSRO hired to determine the rating. In 2009, the SEC also determined to eliminate references to NRSRO ratings in certain regulations, retain some references and seek additional comments on other references. In December 2009, the comment period closed on an SEC proposal to require disclosure about credit ratings when ratings are used in connection with the sale of registered securities and a concept release on the treatment of NRSROs as experts under the Securities Act of 1933. In February 2010, the comment period closed on proposed SEC rules for NRSROs regarding the compliance function and disclosure about revenues received for credit rating services. MIS’s comments to the SEC. Moody’s isSEC can be found on the Regulatory Affairs webpage of the Company’s website.

Both chambers of Congress, as well as the Administration, are reviewing the broader U.S. regulatory infrastructure and as part of this review, the role and function of CRAs will continue to be studied. For example, as part of a series of hearings focusing on the existing market turmoil, on October 22, 2008, the House Committee on Oversight and Government Reform (“House Oversight Committee”) held a hearing on the Role of Credit Rating Agencies in which MIS participated.

On June 17, 2009, the U.S. Department of the Treasury (“Treasury”) published its proposal on “Financial Regulatory Reform: A New Foundation” (“Administration’s Proposal”). As it pertains to CRAs, the Administration’s Proposal asked the SEC to continue its efforts to strengthen the regulation of CRAs, including measures to require that firms have robust policies and procedures that manage and disclose conflicts of interest, differentiate between structured and other products, and otherwise promote the integrity of the rating process. The Administration’s Proposal also recommended that regulators should reduce their use of credit ratings in regulations and supervisory practices, wherever possible.

Subsequently, the Treasury produced and sent to Congress a series of proposed rules and intendsbills that seek to submit commentsimplement the various aspects of the Administration’s Proposal. With respect to the SEC.CRA industry, the Treasury’s proposed bill was sent to the Congress on July 21st. It is

12MOODY’S2009 10-K


entitled “Improvements to the Regulation of Credit Rating Agencies” and is organized in order to address the following areas: mandatory registration of credit rating agencies; enhanced regulation of nationally recognized statistical rating organizations; strengthening credit rating agency independence; and issuer disclosure of preliminary ratings.

As part of the ongoing debate in Congress, MIS participated in two hearings on September 30, 2009. One hearing was held by the House Oversight Committee and the other by the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. Following these hearings, the House Financial Services Committee approved a bill entitled “Accountability and Transparency in Rating Agencies Act”. The rating agency bill was later incorporated into the larger financial reform draft legislation, which was approved by the full House in December 2009. Presently, the Senate is considering its version of a bill that would enhance oversight of CRAs. Both the House and Senate bills currently contain provisions that could potentially increase the costs associated with the operation of a CRA and increase the legal risk associated with the issuance of credit ratings. As the legislative process is still ongoing, it is as yet too early to assess the potential impact of additional legislation.

Internationally, several regulatory developments have occurred:

The Group of 8 and the Group of 20—In November 2008, the Heads of State of the G-20 reached agreement on a wide-ranging set of proposals to better regulate financial systems. Among other things, the G-20 committed to implement oversight of the CRAs, consistent with the strengthened International Organization of Securities Commissions’ Code of Conduct (see below) and agreed that, in the medium term, the countries should implement a registration system for CRAs. The G-20 also committed to formulate their regulations and other measures in a consistent manner and recommended that IOSCO review CRAs’ adoption of the standards and mechanisms for monitoring compliance.

On April 2, 2009, the G-20 Heads of State meeting was held in London, where the G-20 provided a six-part action plan to address the financial crisis: (1) to restore confidence, growth, and jobs; (2) to repair the financial system to restore lending; (3) to strengthen financial regulation and rebuild trust; (4) to fund and reform international financial institutions to overcome the current crisis and prevent future ones; (5) to promote global trade and investment and reject protectionism; and (6) to build an inclusive, green, and sustainable recovery. The G-20’s plan also contains a number of provisions that are specific to CRAs. In particular, the G-20 member states agreed to extend regulatory oversight to and require registration of CRAs in order to ensure that they adhere to the international code of good practice. On July 10, 2009, the G-8 restated its commitment to implement the G-20’s statement.

In September 2009, the G-20 met in Pittsburgh and developed a progress report on actions to promote global financial regulatory reform. With respect to CRAs, the G-20 acknowledged that stronger oversight regimes for CRAs have been developed in the EU, the U.S. and Japan, and recognized that the development of good practices for due diligence by asset managers investing in structured finance products will result in reduced reliance on credit ratings. The G-20 also expressed concern about the creation of globally inconsistent regulations.

IOSCO—In December 2004, the Technical Committee of the International Organization of Securities Commissions (“IOSCO”)IOSCO published theits Code of Conduct Fundamentals for Credit Rating Agencies (the “IOSCO Code”).Agencies. In May 2008, IOSCO published the revised IOSCO Code. The IOSCO Code is the product of approximately two years of collaboration among IOSCO, rating agencies and market participants, and incorporates provisions that address three broad areas:

the quality and integrity of the rating process;

credit rating agency independence and the avoidance of conflicts of interest; and

credit rating agency responsibilitieschanges made to the investing public and issuers.

The IOSCO Code is not binding on credit rating agencies. It relies on voluntary compliance and public disclosure of areas of non-compliance by credit rating agencies so that users of credit ratings can better assess rating agency behavior and performance.

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Moody’s Investors Service endorsed the IOSCO Code broadly address greater transparency of methodologies and processes by CRAs. In July 2008, IOSCO also announced that it will monitor the CRAs implementation of the IOSCO Code changes and it will explore the means by which IOSCO members might work together to verify the proper and complete disclosure by CRAs of information required by the IOSCO Code.

On March 12, 2009, IOSCO published its second review of the CRAs implementation of the IOSCO Code. The report noted that seven out of the 21 CRAs reviewed had implemented the IOSCO Code in June 2005their own codes of conduct. In particular, MIS was found to have substantially implemented the 2008 revisions to the IOSCO Code. IOSCO also published and sent a note to the G-20 and Financial Stability Forum regarding the use of the IOSCO Code as the basis for international oversight of CRAs and mechanisms by which regulators can help assure adequate cross-border supervision of globally active CRAs. In addition, IOSCO announced the establishment of a new standing committee that will address global issues regarding the CRA industry.

MIS initially published its Code of Professional Conduct (the “Moody’s Code”) pursuant to the IOSCO Code in June 2005 and published an updated version in October 2007. In November 2008, MIS revised its Code to reflect the changes made to the IOSCO Code. In AprilBeginning in 2006, Moody’s Investors ServiceMIS has annually published its first annuala report on thethat describes its implementation of Moody’sthe Code. The report discusses policies, procedures and processes that implement the Moody’s Code. The report also describes differences between the Moody’sMIS Code and the IOSCO Code and how Moody’s believesthree annual reports that the objectives of the IOSCO Code are otherwise addressed. Both Moody’s Code and the reporthave been published thus far can be found on theRegulatory Affairspage of the Company’s website.

European Union—The European Commission (“Commission”) issued a Communication on rating agencies in January 2006. The Commission noted that recent European Union (“EU”) financial services legislative measures that are relevant to credit rating agencies, combined with a self-regulatory framework for rating agencies based onFinally, IOSCO is exploring the IOSCO Code, provided a suitable frameworkpossibility of supervisory colleges and/or bilateral cooperation arrangements for the oversight of rating agenciesCRAs to address concerns relating to globally fragmented regulations and in order to promote greater interaction between CRAs and regulators, as well as greater coordination among regulators overseeing international CRAs.

EU—In late April 2009, the European Parliament voted and passed on a new regulation (“EU Regulation”) that no legislative actions were required atestablishes an oversight regime for the time.CRA industry in the European Union. The Commission indicatedCompany expects that it would monitor developments relatedCRAs will need to rating agencies and asked the Committee of European Securities Regulators (“CESR”) to monitor rating agencies’be in compliance with the IOSCO CodeEU Regulation of CRAs in the second half of 2010. The framework for the EU Regulation requires the registration, formal regulation and report back regularly.

CESR completed

MOODY’S2009 10-K13


periodic inspection of CRAs operating in the EU. The EU Regulation also sets out specific requirements for the use of ratings that are produced outside of the EU and used for regulatory purposes in the EU. Among these is a processrequirement for the relevant competent authority in the EU and the competent authority of the non-EU jurisdiction where that rating has been produced to enter into a cooperation agreement containing provisions related to the exchange of information and the coordination of supervisory activities. The details of how these and other requirements will be implemented have yet to be decided, and it is therefore too early to assess such compliance and published a report in January 2007. The CESR process focused on four internationally active rating agencies that operate in the European Union, including Moody’s, and involved discussions with the individual rating agencies as well as a survey of market participants. CESR concluded that the four rating agencies are largely compliant with the IOSCO Code and identified a few areas where it believed rating agencies could improve their processes and disclosures and where the IOSCO Code could be improved. CESR indicated that for its 2007 report, it will look into these areas in particular as well as the impact of the Reform Act and the SEC’s implementing rulesEU Regulation on the rating business in the European Union. As a result of the CESR report, in January 2007 the Commission reiterated its stance that the self-regulatory approach was, at present, the appropriate regulatory framework for rating agencies in Europe.MIS’s operations or financial results.

The Basel CommitteeCommittee—In June 2004, the Basel Committee on Banking Supervision published a new bank capital adequacy framework, (“called Basel II”)II, to replace its initial 1988 framework. Under Basel II, ratings assigned by recognized credit rating agencies (called External Credit Assessment Institutions,CRAs or “ECAIs”) couldECAIs, can be used by banks in determining credit risk weights for many of their institutional credit exposures. National authorities will begin implementing these aspects of Basel II during 2007. Recognized ECAIs could be subject to a broader range of oversight.

In the EU, Basel II has been adopted through the Capital Requirements Directive (“CRD”), which, among other things, sets out criteria for recognizing ECAIs within the EU. The Commission created the Committee of European Banking Supervisors (“CEBS”), comprised of European banking regulators, to advise it on banking policy issues that include implementing the CRD. In January 2006, CEBS published guidelines that provide the basis for a consistent approach by EU Member States to the implementation of the CRD’s ECAI recognition and supervision criteria. Moody’s completed an application process pursuant to the CEBS guidelines and in August 2006, CEBS announced a shared view among EU banking National authorities that Moody’s should be recognized as an ECAI. However, as each Member State must formally recognize ECAIs for use in its jurisdiction, the recognition process is ongoing.

Bank regulators in other jurisdictions globally have begun the ECAI recognition process, and Moody’sprocess. MIS has been recognized as an ECAI in several jurisdictions. At this time Moody’s cannot predictjurisdictions and the long-term impact of Basel II on the mannerrecognition process is ongoing in which the Company conducts its business. However, Moody’smany others. MIS does not currently believe that Basel II will materially affect its financial position or results of operations. As a result of the recent regulatory activity, the banking authorities of the Basel Committee are reconsidering the overall Basel II framework. It is as yet too early to assess the form and content of this re-evaluation.

Other legislation and regulation relating to credit rating and research services has beenis being considered from time to time by local, national and multinational bodies and this type of activity is likely to be consideredcontinue in the future. In addition, in certain countries, governments may provide financial or other support to locally-based rating agencies. In addition,For example, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. If enacted, any such legislation and regulation could significantly change the competitive landscape in which Moody’sMIS operates. In addition, theThe legal status of rating agencies has been addressed by courts in various decisions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of Moody’sMIS cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or regulatory or legislative actions, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of Moody’s.

Finally, the G-20 has announced that by the end of 2009, the Basel Committee will review the role of external ratings in regulation and determine whether any adverse incentives need to be addressed. It is our understanding that this work has begun.

Intellectual PropertyINTELLECTUAL PROPERTY

Moody’s and its affiliates own and control a variety of trade secrets, confidentialintellectual property, including by not limited to proprietary information, trademarks, traderesearch, software tools and applications, models and methodologies, databases, domain names, copyrights, patents, databases and other intellectual property rightsproprietary materials (“Intellectual Property”) that, in the aggregate, are of material importance to Moody’s business. Management of Moody’s believes that each of the “Moody’s”, “Moody’s KMV” and the “M Circle Logo” trademarks and related corporate names, marks and logos containing the term “Moody’s” are of material importance to Moody’s.the Company. The Company, primarily through Moody’s Analytics, licenses certain of its databases, software applications, research and other publications and services that contain Intellectual Property to its customers. These licenses are provided pursuant to standard fee-bearing agreements containing customary restrictions and intellectual property protections. In addition, Moody’s is licensed to use certain technology and other intellectual property rights owned and controlled by others,third parties. Specifically, Moody’s licenses financial information (including market and similarly, other companies are licensed to use certainindex data, financial statement data, third-party research, default data, and security identifiers), as well as software applications. The Company obtains such technology and other intellectual property rights owned and controlled by Moody’s. Moody’sfrom a variety of sources. The Company considers its trademarks, service marks, databases, software and other intellectual propertyIntellectual Property to be proprietary, and Moody’s relies on a combination of copyright, trademark, trade secret, patent, non-disclosure and contractual safeguards for protection.

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In 2002, Moody’s formed two subsidiaries that hold somealso pursues instances of third-party infringement of its intellectual property. The first, MIS Quality Management Corp., was formedIntellectual Property in order to own, manage, protect enforce and license the trademarks of Moody’s and its affiliates. The second, Moody’s Assurance Company, Inc., is a New York State “captive” insurance company that self-insures Moody’s against certain risks and owns Moody’s ratings databases, methodologies and related software and processes in addition to other assets in support of its insurance program.Company’s rights.

The names of Moody’s products and services referred to herein are trademarks, service marks or registered trademarks or service marks owned by or licensed to Moody’s or one or more of its subsidiaries.

EmployeesEMPLOYEES

As of December 31, 2006,2009, the number of full-time equivalent employees of Moody’s was approximately 3,400.4,000.

Available InformationAVAILABLE INFORMATION

Moody’s investor relations Internet website is http://ir.moodys.com/. Under the “SEC Filings” tab at this website, the Company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are filed with, or furnished to, the SEC.

EXECUTIVE OFFICERS OF THE REGISTRANTThe SEC maintains an internet site that contains annual, quarterly and current reports, proxy and other information statements that the Company files electronically with the SEC. The SEC’s internet site is http://www.sec.gov/.

 

Name, Age and Position14

 MOODY’S2009 10-K


EXECUTIVE OFFICERS OF THE REGISTRANT

Biographical DataNAME, AGE AND POSITION

BIOGRAPHICAL DATA

Jeanne M. Dering, 51

Executive Vice President, Global Regulatory Affairs and ComplianceMark E. Almeida, 50President—Moody’s Analytics

Ms. DeringMr. Almeida has served as the Company’s Executive Vice President Global Regulatory Affairs and Complianceof Moody’s Analytics since May 2005. Previously, she had served as the Company’sJanuary 2008. Prior to this position, Mr. Almeida was Senior Vice President and Chief Financial Officer since October 1, 2000 and in February 2005 was named Executive Vice President and Chief Financial Officer. In addition, she had senior management responsibility forof Moody’s Information Technology groupCorporation from August 2007 to January 2008, Senior Managing Director of the Investor Services Group (ISG) at Moody’s Investors Service, Inc. from December 2004 to January 2008 and was Group Managing Director of ISG from June 2000 to December 2006. Ms. Dering2004. Mr. Almeida joined Moody’s Investors Service, Inc., in April 1997 as Managing Director, Finance Officer,1988 and became its Chief Financial Officerhas held a variety of positions with the company in 1998. Prior thereto, she spent more than 10 years at Old D&B in a number of financial management positions, including Director of Budgets & Financial Analysisboth the U.S. and Director of Financial Planning — Acquisitions and New Business Development.overseas.

Jennifer Elliott, 41

Vice President and Richard Cantor, 52Chief Human ResourcesRisk Officer

Ms. ElliottMr. Cantor has served as the Company’s Vice PresidentChief Risk Officer of Moody’s Corporation since December 2008 and as Chief Human ResourcesCredit Officer since February 2005. Previously, she had served as Managing Director for Moody’s Australia since 1999 and was also a director of Moody’s Investors Service, Pty Limited. SheInc. since November 2008. Mr. Cantor has also served as the Chairman of the Credit Policy Committee since November 2008. From July 2008 to November 2008, Mr. Cantor served as Acting Chief Credit Officer and Acting Chairman of the Credit Policy Committee. Prior thereto, Mr. Cantor was Managing Director of Moody’s Credit Policy Research Group from June 2001 to July 2008 and Senior Vice President in the Financial Guarantors Rating Group. Mr. Cantor joined Moody’s in 1997 from the Federal Reserve Bank of New York, where he served as Assistant Vice President in the Research Group and was Staff Director at the Discount Window. Prior to the Federal Reserve, Mr. Cantor taught Economics at UCLA and Ohio State and has taught on an adjunct basis at the business schools of Columbia University and New York University.

Robert Fauber, 39Senior Vice President—Corporate Development

Mr. Fauber has served as Senior Vice President—Corporate Development of Moody's Corporation since April 2009 and as Vice President-Corporate Development since he joined Moody’s in September 2005 to April 2009. Prior to joining Moody's, Mr. Fauber served in several roles at Citigroup from 1999 to 2005, including most recently, Director of Planning and Business Development for Citigroup's Alternative Investments division. Prior to that, Mr. Fauber worked as a Director in Corporate Strategy & Business Development for Citigroup and a Vice President and Senior AnalystAssociate in Moody’s Structuredthe Financial Sponsor and Telecom investment banking groups at the firm's Salomon Smith Barney subsidiary. From 1992-1996, Mr. Fauber worked at NationsBank (now Bank of America), working in the middle market commercial banking group and also ran the firm's Global Finance Group from 1996 until 1999 and an Analystcollege recruiting program in that group from 1993 until 1996. Prior thereto, she was a banking and finance lawyer in Sydney, Australia.1997.

John J. Goggins, 46

49Senior Vice President and General Counsel

Mr. Goggins has served as the Company’s Senior Vice President and General Counsel since October 1, 2000. Mr. Goggins joined Moody’s Investors Service, Inc. in February 1999 as Vice President and Associate General CounselCounsel. Prior thereto, he served as counsel at Dow Jones & Company from 1995 to 1999, where he was responsible for securities, acquisitions and became General Counselgeneral corporate matters. Prior to Dow Jones, he was an associate at Cadwalader, Wickersham & Taft from 1985 to 1995, where he specialized in 2000.mergers and acquisitions.

 

8


Linda S. Huber, 48

51Executive Vice President and Chief Financial Officer

Ms. Huber has served as the Company’s Executive Vice President and Chief Financial Officer since May 2005. Prior thereto, she served as Executive Vice President and Chief Financial Officer at U.S. Trust Company, a subsidiary of Charles Schwab & Company, Inc., from 2003 to 2005. Prior to U.S. Trust, she was Managing Director at Freeman & Co. from 1998 through 2002. She served PepsiCo as Vice President of Corporate Strategy and Development from 1997 until 1998 and as Vice President and Assistant Treasurer from 1994 until 1997. She served as Vice President in the Energy Investment Banking Group at Bankers Trust Company from 1991 until 1994 and as an Associate in the Energy Group at First Boston Corporation from 1986 through 1990. She also held the rank of Captain in the U.S. Army where she served from 1980 to 1984.

MOODY’S2009 10-K15


NAME, AGE AND POSITION

BIOGRAPHICAL DATA

Michel Madelain, 54Chief Operating Officer —Moody’s Investors Service

Mr. Madelain has served as Chief Operating Officer of Moody’s Investors Service Inc., since May 2008. Prior to this position, Mr. Madelain served as Executive Vice President, Fundamental Ratings from September 2007 to May 2008, with responsibility for all Global Fundamental Ratings, including Corporate Finance, Financial Institutions, Public Finance and Infrastructure Finance. He managed the Financial Institutions group from March 2007 until September 2007. Mr. Madelain served as Group Managing Director, EMEA Corporate Ratings from November 2000 to March 2007 and prior thereto held several Managing Director positions in the U.S. and U.K. Fundamental Rating Groups. Prior to joining Moody’s in 1994, Mr. Madelain served as a Partner of Ernst & Young, Auditing Practice. Mr. Madelain is qualified as a Chartered Accountant in France.

Joseph (Jay) McCabe, 56

59Senior Vice President—Corporate Controller

Mr. McCabe has served as the Company’s Senior Vice PresidentCorporate Controller since December 2005. Mr. McCabe joined Moody’s in July 2004 as Vice President and Corporate Controller. Prior thereto,Before joining the Company, he served as Vice President — President—Corporate Controller at PPL Corporation, an energy and utility holding company, from 1994 to 2003. Prior to PPL Corporation, he served Deloitte & Touche as Partner from 1984 to 1993 and as a member of the firm’s audit practice from 1973 to 1984.

Raymond W. McDaniel, Jr., 4952Chairman and Chief Executive Officer

Raymond W. McDaniel, Jr., has served as the Chairman and Chief Executive Officer Moody’s Corporation and President, Moody’s Investors Service, Inc.

Mr. McDaniel has served asof the Company’s Chairman and Chief Executive OfficerCompany since April 2005.2005 and serves on the International Business Development Committee of the Board of Directors. Mr. McDaniel served as the Company’s President from October 2004 tountil April 2005 and asthe Company’s Chief Operating Officer from January 2004 tountil April 2005. He has served as a member of the Board of Directors since April 2003 and President of Moody’s Investors Service, Inc. since, a subsidiary of the Company, from November 2001.2001 to August 2007. Mr. McDaniel also served as the Company’s Executive Vice President of the Company from April 2003 to January 2004, and as Senior Vice President, Global Ratings and Research from October 1,November 2000 until April 2003. He served as Senior Managing Director, Global Ratings and Research, of Moody’s Investors Service Inc., from November 2000 until November 2001. Prior thereto, he had served2001 and as Managing Director, International sincefrom 1996 and served as Managing Director, Europe, from 1993 until 1996. He also served as Associate Director in Moody’s Structured Finance Group from 1989 until 1993, and as Senior Analyst in the Mortgage Securitization Group from 1988 to 1989.November 2000. Mr. McDaniel is also a directorDirector of John Wiley & Sons, Inc.

Perry Rotella, 43

Lisa S. Westlake, 48Senior Vice President and Chief InformationHuman Resource Officer

Mr. RotellaMs. Westlake has served as the Company’s Senior Vice President and Chief InformationHuman Resources Officer since November 2008. Prior to this position, Ms. Westlake served as Vice President—Investor Relations from December 2006 to December 2008 and Managing Director—Finance from September 2004 to December 2006. Prior thereto, he served as Chief Information Officer for American International Group’s (“AIG”) Domestic Brokerage groupto joining the Company, Ms. Westlake was a senior consultant with the Schiff Consulting Group from 2003 to 2006, Operations2004. From 1996 to 2003 Ms. Westlake worked at American Express Company where she held several different positions such as Vice President and Systems Executive in 2006Chief Financial Officer for the OPEN Business Network, Vice President and Global Chief TechnologyFinancial Officer from 2000for Establishment Services and Vice President and Chief Financial Officer for Relationship Services. From 1989 to 2003. Prior to AIG, from 1985 to 1999, Mr. Rotella was with American Management Systems (“AMS”), a technology consulting firm, where he1995 Ms. Westlake held a varietyrange of financial management positions including Chief Technology Officer for AMS’s Insurance Technology Group.at Dun & Bradstreet Corporation and it subsidiary at the time, IMS International. From 1984 to 1987 Ms. Westlake served at Lehman Brothers in both the investment banking and municipal trading areas.

 

9

16MOODY’S2009 10-K


ITEM 1A.RISK FACTORS

The following risk factors and other information included in this annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company’s management currently deems minor or insignificant also may impair its business operations. If any of the following risks occur, Moody’s business, financial condition, operating results and cash flows could be materially adversely affected.

Changes in the Volume of Debt Securities Issued in Domestic and/or Global Capital Markets and Changes in Interest Rates and Other Volatility in the Financial Markets

Approximately 80%50% of Moody’sMIS’ revenue for 2009 was transaction-based, compared to 49% of MIS’ revenue in 2006 was derived2008 and 68% of MIS' revenue in 2007. Revenue from ratings, a significant portion of which was related to the issuance of credit-sensitive securitiesrating transactions, in the global capital markets. The Company anticipates that a substantial part of its business will continue to beturn, is dependent on the number and dollar volume of debt securities issued in the capital markets. Therefore, the Company’s results could be adversely affected by a reduction in the level of debt issuance.

Unfavorable financial or economicAccordingly, any conditions that either reduce investor demand for debt securities or reduce issuers’ willingness or ability to issue such securities could reduce the number and dollar volume of debt issuanceissuances for which Moody’s provides ratings services. In addition,services and thereby have an adverse effect on the fees derived from the issuance of ratings.

A significant disruption in world financial markets, particularly in the credit markets, began in mid-2007, when many credit markets experienced a severe lack of liquidity. This disruption continues to be felt. These credit market disruptions together with the current economic slowdown have negatively impacted the volume of debt securities issued in global capital markets and the demand for credit ratings. Notwithstanding a recent increase in investment-grade and speculative-grade debt issuances in 2009, future issuance could be negatively affected by a sharp increase in long-term interest rates or factors which cause instability or volatility in the global capital markets. New debt issuances in the structured finance market are likely to continue to be significantly below peak levels reached in the middle of the past decade. Consequently, the Company has experienced a substantial reduction in the overall demand for rating newly issued debt securities. Changes in the markets and the role, regulation and structure of rating agencies may have material adverse effects on the Company even if the markets recover.

The timing and nature of any recovery in the credit and other financial markets remains uncertain, and there can be no assurance that market conditions will improve in the future or that financial results will not continue to be adversely affected. A sustained period of market decline or weakness, especially if it relates to credit sensitive securities, for which there was historically a high level of demand for ratings, could continue to have a material adverse effect on Moody’s business and financial results. Initiatives that the Company has undertaken to reduce costs may not be sufficient to offset the results of a continued or more severe downturn, and further cost reductions may be difficult or impossible to obtain in the near term, due in part to rent, technology and other fixed costs associated with some of the Company’s operations as well as the need to monitor outstanding ratings. Further, the cost-reduction initiatives undertaken to date could result in strains in the Company’s operations if the credit markets and demand for ratings return to levels that prevailed prior to mid-2007 or otherwise unexpectedly surge.

Other factors that could further reduce investor demand for debt securities or reduce issuers’ willingness or ability to issue such securities include increases in interest rates or credit spreads, continued volatility in financial markets or the interest rate environment, significant regulatory, political or economic events, the use of alternative sources of credit including financial institutions and government sources, defaults of significant issuers and other unfavorable market and economic factors may negatively impact the general levelconditions.

Furthermore, issuers of debt issuance,securities may elect to issue securities without ratings or which are rated or evaluated by non-traditional parties such as financial advisors, rather than traditional credit rating agencies, such as Moody's. The SEC and other regulatory and governmental authorities globally have also been proposing and implementing changes in existing rules to decrease the reliance on ratings for regulatory purposes. Decreases in the use of ratings in debt issuance plans of certain categories of borrowers, and/issuances or the types of credit-sensitive products being offered. A sustained period of market decline or weaknessreliance upon non-CRA risk evaluations could also have a material adverse effect on Moody’s businessresult in reduced revenues and financialadversely impact Moody's results.

Possible Loss of Market Share or Revenue Through Competition or Regulation

TheFinally, given the changing regulatory and market environment, even if credit markets revive, there is no assurance that the demand for credit ratings researchwould follow prior patterns. As such, no assurance can be given as to the amount of revenues that would be derived there from.

Regulation as a Nationally Recognized Statistical Rating Organization and Potential for New Domestic and Overseas Legislation and Regulations

Credit rating agencies are regulated in both the U.S. and in other countries (including by state and local authorities). Currently, Moody’s is designated as an NRSRO pursuant to SEC regulations enacted in response to the adoption of the Reform Act. One of the central promises of the Reform Act was to encourage competition among rating agencies. Given its comparatively recent adoption and the number of additional reforms being proposed and considered, Moody’s is unable accurately to assess the future impact of any regulatory changes that may result from the SEC’s regulations or the impact on Moody’s competitive position or its current practices. Possible consequences of these new regulations include issues that may affect all entities engaged in the rating agency business, such as expected increased costs, or issues that may affect Moody’s in a disproportionate manner. Any of these changes could negatively

MOODY’S2009 10-K17


impact Moody’s operations or profitability, the Company’s ability to compete, or the markets for its products and services in ways that Moody’s presently is unable to predict.

Further, over the past year, both the G-8 and the G-20 Finance Ministers and Central Bank Governors have sought to analyze and arrive at a consistent approach for addressing the various areas of the financial market and have made a variety of recommendations as to regulation of rating agencies and the markets for ratings. Finance ministers have also agreed to register rating agencies in their home jurisdiction. As a result, of the internationally coordinated activity, individual countries have begun implementing registration regimes for the oversight of CRAs in the coming years. In particular, the European Union adopted a new regulatory framework for rating agencies operating in the E.U. The regulation seeks to introduce a common EU regulatory approach to the oversight of CRAs. Its primary objective is to enhance the integrity, transparency, responsibility, governance and reliability of credit risk management services are increasingly competitive. Moody’s competesrating activities, by laying down conditions for the issuance of credit ratings and rules on the basisorganization and conduct of credit rating agencies. The regulation will likely become fully implemented by the second quarter of 2010. As with the recent regulatory initiatives in the U.S., these initiatives may affect all entities engaged in the rating agency business or may affect Moody’s in a disproportionate manner, and could negatively impact Moody’s operations or profitability, the Company’s ability to compete, or the markets for its products and services in ways that Moody’s presently is unable to predict.

In addition to the foregoing, in the wake of the credit crisis, many legislative and regulatory agencies, both in the U.S. and in other countries, have been studying or pursuing new laws and regulations addressing CRAs and the use of credit ratings, particularly in the area of structured finance securities, and the role of CRAs in leading up to such disruptions. Given the G-20 statement, it is likely that such initiatives will lead to additional laws or regulations affecting Moody’s operations or profitability, the Company’s ability to compete, or the markets for its products and services. This could include adopting regulations that affect the need for debt securities to be rated, establish criteria for credit ratings or authorize only certain entities to provide credit ratings, which could negatively affect competition among rating agencies, the level of demand for ratings or the Company’s ability to provide objective assessments of creditworthiness. Additional regulations are likely to increase the costs associated with the operation of a CRA, alter the rating agencies’ communications with the issuers as part of the rating assignment process, increase the legal risk associated with the issuance of credit ratings, change the regulatory framework to which CRAs are subject and affect the competitive environment in which CRAs operate.

As existing laws and regulations applicable to credit ratings and rating agencies continue to evolve and new laws or regulations are adopted, the costs of compliance can be expected to increase, and Moody’s may not be able to pass these costs through the pricing of its products. In addition, increased regulatory uncertainty over the scope, interpretation and administration of laws and regulations may increase costs, decrease demand or affect the manner in which Moody’s or its customers or users of credit ratings operate, or alter the economics of the credit ratings business by restricting or mandating the business models under which a CRA is permitted to operate.

Moody's stock price may also be affected by speculation regarding legislative and regulatory initiatives and their potential impact on Moody's business.

A description of several of the more recent regulatory initiatives in the U.S. and other countries is described above under the section entitled “Regulation” in Item 1. “Business”, of this Form 10-K.

Legal, Economic and Regulatory Risks of Operating in Foreign Jurisdictions

Moody’s maintains offices outside the U.S. and derives a significant portion of its revenue from sources outside the U.S. In addition to the regulatory risks discussed above, operations in different countries expose Moody’s to a number of factors,legal, economic and regulatory risks such as restrictions on the ability to convert local currency into U.S. dollars and currency fluctuations; U.S. laws affecting overseas operations including qualityregulations applicable under the Office of ratings, customer service, research, reputation, regulatory qualification,Foreign Asset Control and the Foreign Corrupt Practices Act; domestic and foreign export and import restrictions, tariffs and other trade barriers; political and economic instability; the possibility of nationalization, expropriation, price geographic scope, range of productscontrols and technological innovation. For example, a large investment grade default could impact the Company’s reputationother restrictive governmental actions; longer payment cycles and possible problems in collecting receivables; and potentially leadadverse tax consequences.

In addition to greater regulatory oversight. Moody’s faces competition from among others, S&P, Fitch, DBRS, localother rating agencies that operate in a number of international jurisdictions and nichespecialized companies that provide ratings for particular types of financial products or issuers (such as A.M. Best Company, Inc., with respect to the insurance industry). Since, in many foreign countries Moody’s believes that some of its most significant challenges and opportunities will arise outside the U.S., it will have to compete with rating agencies that may have a stronger local presence and greater familiarity or a longer operating history in those markets. These local providers or comparable competitors that may emerge in the future may receive support from local governments or other institutions that Moody’s does not receive.receive, putting Moody’s at a competitive disadvantage.

Currently, Moody’s, S&P, Fitch, DBRSUncertain Impact of Government Actions to Stabilize Financial Institutions and A.M. Best Company, Inc. are designated as NRSROsMarkets

The U.S. government announced several programs in 2008, including the Emergency Economic Stabilization Act, the October 14, 2008 joint statement by the SEC.U.S. Treasury, Federal Reserve and FDIC announcing the Troubled Asset Relief Program through which the government is authorized to purchase up to $700 billion in whole loans and mortgage-related securities as well as to invest directly in financial institutions, the Treasury Department’s money market mutual fund guaranty program, the Federal Reserve’s commercial paper

18MOODY’S2009 10-K


funding facility and payment of interest on reserve balances, the FDIC’s temporary liquidity guarantee program and the February 10, 2009 statement by the U.S. Treasury. Additionally, the governments of many nations and international organizations such as the International Monetary Fund have announced similar measures for institutions and countries around the world. There is no assurance that these programs individually or collectively will have beneficial effects in the credit markets, will address credit or liquidity issues of companies that participate in the programs, will reduce volatility or uncertainty in the financial markets or will reverse or moderate the slowdown and downturn of world economies. The failure of these programs to have their intended effects could have a material adverse effect on the financial markets, which in turn could materially and adversely affect the Company’s business, financial condition and results of operations. In September 2006,addition, these and similar initiatives could reduce the United States Congress passed into lawdemand for ratings of credit securities or other financial products, could result in increased government regulation of such markets and could have other unanticipated adverse effects on the Credit Rating Agency Reform Actmarkets for and demand for debt securities and/or for ratings of 2006. As a direct result,such instruments.

Increased Pricing Pressure from Competitors and/or Customers

In the SEC is mandatedcredit rating, research and credit risk management markets, competition for customers and market share has spurred more aggressive tactics by some competitors in areas such as pricing and service, as well as increased competition from non-NRSROs that evaluate debt risk for issuers or investors. At the same time, bankruptcies and consolidation of customers, particularly those involved in structured finance products, and other factors affecting demand may enhance the market power of customers. While Moody’s seeks to complete a rule-making process which implementscompete primarily on the legislation (see “Regulation”, above, for further information) by June 2007. At present,basis of the quality of its products and service, if its pricing and services are not sufficiently competitive with its current and future competitors, Moody’s is unable to assess the impact of any regulatory changes that may result from the SEC’s rule-making process.lose market share.

Introduction of Competing Products or Technologies by Other Companies

The markets for credit ratings, research and credit risk management services are highly competitive. The ability to provide innovative products and technologies that anticipate customers’ changing requirements and to utilize emerging technological trends is a key factor in maintaining market share. Competitors may develop quantitative methodologies or related services for assessing credit risk that customers and market participants may deem preferable, more cost-effective or more valuable than the credit risk assessment methods currently employed by Moody’s.Moody’s, or may price or market their products in manners that differ from those utilized by the Company. Customers or others may develop alternative, proprietary systems for assessing credit risk. Such developments could affect demand for Moody’s products and the Company’s growth prospects. In addition, Moody’s growth prospects also could also be adversely affected by limitations of its information technologies that fail to provide adequate capacity and capabilities to meet increased demands of producing quality ratings and research products.products at levels achieved by competitors.

Increased Pricing Pressure from Competitors and/or CustomersSignificant Amount of Intangible Assets

Moody's has a significant amount of intangible assets on its balance sheet consisting of $349.2 million of goodwill and $104.9 of amortizable intangible assets. Approximately 97% of these intangibles reside in the MA business and are allocated to the three reporting units within MA: RD&A; RMS; and Training. Failure to achieve business objectives and financial projections in one or all of these reporting units could result in an asset impairment charge which would reduce net income in the period the impairment is recorded. Impairment of goodwill or intangibles would result in a non-cash charge to operating expenses. An impairment would result if the fair value of a reporting unit or asset group which holds goodwill or any intangible assets is less than the carrying amount of its net assets. A significant factor in the determination of the fair value of a reporting unit or asset group is its projected cash flows. Future cash flows of MA are dependent on a variety of factors such as, but not limited to, general economic growth, capital market activity, product innovation, pricing, market share and competition. The breakdown in or the failure to achieve success in managing one or a combination of these factors could lead to reduced cash flows resulting in an asset impairment charge.

Exposure to Litigation Related to Moody’s Rating Opinions

Currently, Moody’s has received subpoenas and inquiries from states attorneys general and governmental authorities, as part of ongoing investigations, and is responding to those inquiries. In addition, Moody’s faces litigation from parties claiming damages relating to ratings actions, as well as other related business practices. In these difficult economic times and turbulent markets, when the value of credit-dependent instruments has declined and defaults have increased, the number of investigations and legal proceedings Moody’s is facing has increased significantly. These proceedings impose additional expenses on the Company, which may increase over time as these matters progress procedurally, require the attention of senior management to an extent that may significantly reduce their ability to devote time addressing other business issues, and, given the number of these proceedings and lawsuits, present a greater risk that Moody's may be subject to fines or damages, which would be the case if we are deemed to have violated any laws or regulations. As Moody’s international business expands, these types of claims may increase or become more costly because foreign jurisdictions may not have legal protections or liability standards comparable to those that currently exist in the U.S. (such as protections for the expression of credit opinions as provided by the First Amendment) and may pose criminal rather than civil penalties for non-compliance. These risks often are and may continue to be difficult to assess or quantify and we may not have adequate insurance or reserves to cover them, and their existence and magnitude often remains unknown for substantial periods of time.

MOODY’S2009 10-K19


In addition, to the extent that any of the recent legislative initiatives are successful in modifying, in a manner adverse to CRAs, the rules governing the potential liability of CRAs in connection with the issuance of ratings, the number of legal proceedings, especially as related to future ratings, may increase materially and the potential exposure of CRAs thereunder may also increase.

Exposure to Reputational and Credibility Concerns

Moody’s reputation is one of the key bases on which the Company competes. To the extent that the rating agency business as a whole or Moody’s, relative to its competitors, has suffered a loss in credibility in the course of the credit crisis, or, in the future, suffers a loss in credibility, Moody’s business could be adversely affected. Factors that may have already affected credibility and could potentially continue to have an impact in this regard include the appearance of a conflict of interest, the performance of securities relative to the rating researchassigned to such securities by a particular rating agency, the timing and credit risk management markets, competition for customersnature of changes in ratings, adverse publicity as to the ratings process, a major compliance failure, and market share has spurred more aggressive tacticsincreased criticism by some competitors in areas such as pricingusers of ratings, regulators and service. While Moody’s seeks to compete primarily on the basis of the quality of its products and service, if its pricing and services are not sufficiently competitive with its current and future competitors, Moody’s may lose market share.legislative bodies.

10


Possible Loss of Key Employees to Investment or Commercial Banks or Elsewhere and Related Compensation Cost Pressures

Moody’s success depends in part upon recruiting and retaining highly skilled, experienced financial analysts and other professionals. Competition for qualified staff in the financial services industry is intense, and Moody’s ability to attract staff could be impaired if it is unable to offer competitive compensation and other incentives.incentives or if the regulatory environment mandates restrictions on or disclosures about individual employees that would not be necessary in competing analytical industries. Investment banks, investors and other competitors formay seek to attract analyst talent may be able to offerby or providing more favorable working conditions or, within the limits of today's market constraints, offering higher compensation than Moody’s.Moody's. Moody’s also may not be able to identify and hire employees in some markets outside the U.S. with the required experience or skills to perform sophisticated credit analysis. Moody’s may also lose key employees due to other factors, such as catastrophes, that could lead to disruption of business operations. Moody’s ability to compete effectively will continue to depend, among other things, on its ability to attract new employees and to retain and motivate existing employees.

ExposureThe Trading Price of Our Stock Could be Affected by Third Party Actions

Ownership of our stock is highly concentrated with a majority of our shares held by a few institutional stockholders. Due to Litigation Relatedthis concentrated stockholder base, the trading price of our stock could be affected considerably by decisions of significant stockholders to increase or decrease their positions, including any actions taken to implement such a decision.

Moody’s Rating OpinionsOperations and Infrastructure may Malfunction or Fail

Moody’s faces litigation from timeability to time fromconduct business may be adversely impacted by a disruption in the infrastructure that supports its businesses and the communities in which Moody’s is located, including having its headquarters in New York City and offices in major cities worldwide. This may include a disruption involving electrical, communications or other services used by the Company or third parties claiming damages relatingwith or through whom Moody’s conducts business, whether due to ratings actions. In addition, ashuman error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism, acts of terrorism or war or otherwise. Moody’s international business expands, these typesefforts to secure and plan for potential disruptions of claims may increase because foreign jurisdictionsmajor operating systems may not be successful. The Company does not have legal protectionsfully redundant systems for most of its smaller office locations and low-risk systems, and its disaster recovery plan does not include restoration of non-essential services. If a disruption occurs in one of Moody’s locations or liability standards comparablesystems and its personnel in those locations or those who rely on such systems are unable to thoseutilize other systems or communicate with or travel to other locations, their ability to service and interact with Moody’s clients and customers may suffer.

The Company’s operations also rely on the secure processing, storage and transmission of confidential and other information in its computer systems and networks. The business relies upon and processes a great deal of data through its systems, the U.S. (such as protectionsquality of which must be maintained in order for the expression of credit opinionsbusiness units to perform. Although Moody’s takes protective measures and endeavor to modify them as is provided by the First Amendment). These risks oftencircumstances warrant, its computer systems, software and networks may be difficultvulnerable to assess or quantify and their existence and magnitude often remains unknown for substantial periods of time.

Potential Emergence of Government-Sponsored Credit Rating Agencies

When governments adopt regulations that require debt securities to be rated, establish criteria for credit ratings or authorize only certain entities to provide credit ratings, the competitive balance among rating agencies and the level of demand for ratings may be positively or negatively affected. Government-mandated ratings criteria may also have the effect of displacing objective assessments of creditworthiness. In these circumstances, debt issuers may be less likely to base their choice of rating agencies on criteria such as independence and credibility, and more likely to base their choice on their assumption as to which credit rating agency might provide a higher rating, which may negatively affect the Company.

Potential for New U.S., Foreign, State and Local Legislation and Regulations, Including Those Relating to Nationally Recognized Statistical Rating Organizations

In the United States and other countries, the laws and regulations applicable to credit ratings and rating agencies continue to evolve and are presently subject to review by a number of legislative or regulatory bodies, including the SEC in the United States and the CESR on behalf of the European Union. It is possible that such reviews could lead to greater oversight or regulation concerning the issuance of credit ratings or the activities of credit rating agencies. Such additional regulations could, potentially, increase the costs associated with the operation of a credit rating agency, alter the rating agencies’ communications with the issuers as part of the rating assignment process, increase the legal risk associated with the issuance of credit ratings, change the regulatory framework to which credit rating agencies are subject and/or affect the competitive environment in which credit rating agencies operate. A description of certain of the more recent regulatory initiatives in the United States and other countries is described above under the section entitled “Regulation” in Item 1. “Business”, of this Form 10-K. At present, Moody’s is unable to predict the regulatory changes that may result from ongoing reviews by the SECunauthorized access, computer viruses or other regulatory bodies or the effectmalicious events that any such changes may have on its business.

Exposure to Increased Risk from Multinational Operations

Moody’s maintains offices outside the U.S. and derives a significant portion of its revenue from sources outside the U.S. Operations in different countries expose Moody’s to a number of legal, economic and regulatory risks such as:

changes in legal and regulatory requirements affecting either Moody’s operations or its customers’ use of ratings

possible nationalization, expropriation, price controls and other restrictive governmental actions

restrictions on the ability to convert local currency into U.S. dollars

currency fluctuations

export and import restrictions, tariffs and other trade barriers

difficulty in staffing and managing offices as a result of, among other things, distance, travel, cultural differences and intense competition for trained personnel

longer payment cycles and problems in collecting receivables

11


political and economic instability

potentially adverse tax consequences

Any of these factors could have a material adverse effect onsecurity impact. If one or more of such events occur, this could jeopardize Moody’s or its clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, its computer systems and networks, or otherwise cause interruptions or malfunctions in the business, financial conditionCompany’s, its clients’, its counterparties’ or third parties’ operations. Moody’s may be required to expend significant additional resources to modify its protective measures or to investigate and results of operations ofremediate vulnerabilities or other exposures, and the Company in the future.may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by Moody’s.

 

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.PROPERTIES

Moody’s corporate headquarters is located at 99 Church Street, New York, New York, with approximately 441,000 square-feet. During the fourth quarter of 2006, the Company completed the sale of its corporate headquarters and is leasing back the building until the headquarters relocation is completed. On October 20, 2006, the Company entered into an operating lease agreement with 7 World Trade Center, LLC for 589,945 square-feet of an office building located at 7 World Trade Center at 250 Greenwich Street, New York, New York which will serve as Moody’s new10007, with approximately 668,513 square feet of leased space. During the fourth quarter of 2006, the Company completed the sale of its former

20MOODY’S2009 10-K


corporate headquarters beginning in mid- to late 2007.building at 99 Church Street, New York, New York. As of December 31, 2006,2009, Moody’s operations were conducted from 15 U.S. offices and 3244 non-U.S. office locations, all of which are leased. These properties are geographically distributed to meet operating and sales requirements worldwide. These properties are generally considered to be both suitable and adequate to meet current operating requirements and virtually all space is being utilized.requirements.

 

ITEM 3.LEGAL PROCEEDINGS

From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by Moody’s.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 other than routine litigation incidentalpursuant to Moody’s business, material proceedings known to be contemplated by governmental authorities,SEC rules and other pending matters thatas it may determine to be appropriate.

Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last two years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries. Moody’s is cooperating with a review by the SEC relating to errors in the model used by MIS to rate certain constant-proportion debt obligations. In addition, the Company is facing market participant litigation 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 in the current economic environment.

On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Company’s securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants’ oversight of MIS’s ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Company’s securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Company’s securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint too asserts various causes of action relating to the Company’s ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants’ participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Company’s processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.

Two purported class action complaints have been filed by purported purchasers of the Company’s securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S. District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the

MOODY’S2009 10-K21


period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others.

For those mattersclaims, litigation and proceedings not related to income taxes, where it is both probable that a liability has beenis expected to be incurred and the amount of loss can be reasonably estimated, the Company has recorded reservesrecords liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilitiesmatters accordingly. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

The discussionCompany cannot predict the ultimate impact that any of the legallegislative, regulatory, enforcement or litigation matters under Part II, Item 7. “Management’s Discussionmay have on how its business is conducted and Analysisthus its competitive position, financial position or results of Financial Condition and Results of Operations—Contingencies”, commencing on page 28 of this annual report on Form 10-K, is incorporated into this Item 3 by reference.

operations. Based on its review of the latest information available, in the opinion of management, the ultimate monetary liability of the Company in connection withfor the pending legal and tax proceedings, claims and litigation will not have a material adverse effect on Moody’s financial position, results of operations or cash flows, subjectmatters referred to above (other than the contingencies describedLegacy Tax Matters that are discussed under the section entitled “Contingencies” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contingencies”.Operations” of this Form 10-K ) is not likely to have a material adverse effect on the Company’s consolidated financial position, although it is possible that the effect could be material to the Company’s consolidated results of operations for an individual reporting period.

 

ITEM 4.RESERVED

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS22MOODY’S2009 10-K

During the fourth quarter of the fiscal year covered by this annual report on Form 10-K, no matter was submitted to a vote of security holders.


 

12


PART II

 

ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.SECURITIES

Information in response to this Item is set forth under the captions “Common Stock Information” and “Dividends” in Item 7 of this annual report on Form 10-K, and under the caption “Equity Compensation Plan Information” in the Company’s definitive proxy statement for use in connection with its annual meeting of stockholders scheduled to be held on April 24, 2007, and is incorporated herein by reference.below.

MOODY’S PURCHASES OF EQUITY SECURITIES

For the Three Months Ended December 31, 20062009

 

Period

  

Total Number of

Shares Purchased

  

Average Price

Paid per Share

  

Total Number of Shares

Purchased as Part of

Publicly Announced

Program

  

Approximate Dollar Value of

Shares That May yet be

Purchased Under the

Program (2)

October 1 – 31

  971,702(1) $63.44  971,479  $ 1,850.3 million

November 1 – 30

  722,982(1)  67.23  722,016   1,801.8 million

December 1 – 31

  562,500   69.99  562,500   1,762.4 million
          

Total

  2,257,184    2,255,995  

Period

Total Number
of Shares Purchased (1)
Average Price
Paid per Share
Total Number of
Shares Purchased as

Part of Publicly
Announced Program
Approximate Dollar
Value of Shares That May
yet be Purchased Under

the Program (2)
October 1 – 31$                    —$1,431.2 million
November 1 – 30182$$1,431.2 million
December 1 – 31$$1,431.2 million
Total182$

(1)IncludesRepresents the surrender of common stock to the Company of 223 and 966 shares in October and November, respectively, of common stockorder to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

(2)As of the last day of each of the months. On June 5, 2006,July 30, 2007, the Company’s Board of Directors authorized a $2$2.0 billion share repurchase program.program which the Company began utilizing in January 2008 upon completion of the June 2006 authorization. There is no established expiration date for thisthe remaining authorization. During August 2006, the Company had completed its previous $1 billion share repurchase program, which had been authorized by the Board of Directors in October 2005.

During the fourth quarter of 2006,2009, Moody’s repurchased 2.3issued 0.4 million shares at an aggregate cost of $149.6 million and issued 1.1 million shares of stock under employee stock-based compensation plans. Since becomingplans and did not repurchase any shares of its common stock.

MOODY’S2009 10-K23


COMMON STOCK INFORMATION AND DIVIDENDS

The Company’s common stock trades on the New York Stock Exchange under the symbol “MCO”. The table below indicates the high and low sales price of the Company’s common stock and the dividends declared and paid for the periods shown. The number of registered shareholders of record at January 31, 2010 was 3,194. A substantially greater number of the Company’s common stock is held by beneficial holders whose shares are held of record by banks, brokers and other financial institutions.

   Price Per Share  Dividends Per Share
   High  Low  Declared  Paid
2009:        
First quarter  $26.38  $15.57  $  $0.10
Second quarter   31.79   21.21   0.10   0.10
Third quarter   29.53   18.50   0.10   0.10
Fourth quarter   27.81   19.44   0.205   0.10
            
Year ended December 31, 2009      $0.405  $0.40
            
2008:        
First quarter  $42.89  $31.14  $  $0.10
Second quarter   46.36   33.14   0.10   0.10
Third quarter   43.07   29.45   0.10   0.10
Fourth quarter   33.96   15.41   0.20   0.10
            
Year ended December 31, 2008      $0.40  $0.40
            

During 2007, the Company paid a public companyquarterly dividend of $0.08 per share of Moody’s common stock in October 2000 and througheach of the quarters, resulting in dividends paid per share during the year ended December 31, 2006,2007 of $0.32.

On December 15, 2009, the Board of the Company approved the declaration of a quarterly dividend of $0.105 per share of Moody’s has repurchased 84.4 million sharescommon stock, payable on March 10, 2010 to shareholders of record at a total costthe close of $2.9 billion, including 38.6 million sharesbusiness on February  20, 2010. The continued payment of dividends at the rate noted above, or at all, is subject to offset issuances under employee stock-basedthe discretion of the Board.

EQUITY COMPENSATION PLAN INFORMATION

The table below sets forth, as of December 31, 2009, certain information regarding the Company’s equity compensation plans.

Plan Category

  Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
   Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
  Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (excluding
Securities Reflected
in Column (a))
 
   (a)   (b)  (c) 
Equity compensation plans approved by security holders  20,140,004(1)   $37.26  12,503,577(2) 
Equity compensation plans not approved by security holders      $    
            

Total

  20,140,004    $37.26  12,503,577  
            

(1)Includes 13,517,699 options outstanding under the Company’s 2001 Stock Incentive Plan, 6,492,705 options outstanding under the Company’s 1998 Key Employees’ Stock Incentive Plan, and 129,600 options outstanding under the 1998 Non-Employee Directors’ Stock Incentive Plan.

(2)Includes 8,950,298 shares available for issuance as options, stock appreciation rights or other stock-based awards under the 2001 Stock Incentive Plan and 199,725 shares available for issuance as options, shares of restricted stock or performance shares under the 1998 Directors Plan, and 3,353,554 shares available for issuance under the Company’s Employee Stock Purchase Plan. No new grants may be made under the 1998 Stock Incentive Plan, which expired by its terms in June 2008.

24MOODY’S2009 10-K


PERFORMANCE GRAPH

The following graph compares the total cumulative shareholder return of the Company to the performance of Standard & Poor’s Stock 500 Composite Index (the “S&P 500”) and an index of performance peer group companies (the “Performance Peer Group”).

The Company does not believe there are any publicly traded companies that represent strict peers. However, eachthe Russell 3000 Financial Services Index. Both of the companiesaforementioned indexes are easily accessible to the Company’s shareholders in newspapers, the Performance Peer Group offers business information products in one or more segmentsinternet and other readily available sources for purposes of its business. The Performance Peer Group consists of Dow Jones & Company, Inc., The McGraw-Hill Companies, Pearson PLC, Reuters Group PLC, Thomson Corporation and Wolters Kluwer nv.the following graph.

The comparison assumes that $100.00 was invested in the Company’s common stock (the “Common Stock”) and in each of the foregoing indices on December 31, 2001.2004. The comparison also assumes the reinvestment of dividends, if any. The total return for the Common Stockcommon stock was 254%(36%) during the performance period as compared with a total return during the same period of 35%(45%) for the Russell 3000 Financial Services Index and 2% for the S&P 500 Composite Index.

Comparison of Cumulative Total Return

Moody’s Corporation, Russell 3000 Financial Services Index and 27% for the Performance Peer Group.

S&P 500 Composite Index

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG MOODY’S CORPORATION,

SINCE DECEMBER 31, 2001S&P 500 COMPOSITE AND RUSSELL FINANCIAL SERVICES

MOODY’S CORPORATION, S&P COMPOSITE INDEX AND PEER GROUP INDEX

 

   PERIOD ENDING
  12/31/2001  12/31/2002  12/31/2003  12/31/2004  12/30/2005  12/29/2006

Moody's Corporation

  100.00  104.01  153.07  220.51  313.63  354.23

Peer Group Index

  100.00  61.80  81.57  96.18  100.97  127.43

S&P Composite Index

  100.00  77.90  100.25  111.15  116.61  135.03
   Year Ended December 31,
   2004  2005  2006  2007  2008  2009
Moody’s Corporation  $100.00  $141.94  $160.33  $83.40  $47.52  $64.48
S&P 500 Composite Index   100.00   104.91   121.48   128.16   80.74   102.11
Russell 3000 – Financial Services Index   100.00   102.97   118.98   96.10   47.11   55.41

The comparisons in the graph above are provided in response to disclosure requirements of the SEC and are not intended to forecast or be indicative of future performance of the Common Stock.Company’s common stock.

 

13

MOODY’S2009 10-K25


ITEM 6.SELECTED FINANCIAL DATA

The Company’s selected consolidated financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”“MD&A” and the Moody’s Corporation consolidated financial statements and notes thereto.

 

   Year Ended December 31, 

amounts in millions, except per share data

  2006  2005  2004  2003  2002 (1) 

Results of operations

      

Revenue

  $2,037.1  $1,731.6  $1,438.3  $1,246.6  $1,023.3 

Expenses, excluding gain on sale of building

   938.2   792.0   651.9   583.5   485.2 

Gain on sale of building (2)

   (160.6)  —     —     —     —   
                     

Operating income

   1,259.5   939.6   786.4   663.1   538.1 

Non-operating income (expense), net (3)

   1.0   (4.9)  (15.1)  (6.7)  (20.7)
                     

Income before provision for income taxes

   1,260.5   934.7   771.3   656.4   517.4 

Provision for income taxes

   506.6   373.9   346.2   292.5   228.5 
                     

Net income

  $753.9  $560.8  $425.1  $363.9  $288.9 
                     

Earnings per share (4)

      

Basic

  $2.65  $1.88  $1.43  $1.22  $0.94 

Diluted

  $2.58  $1.84  $1.40  $1.19  $0.92 

Weighted average shares outstanding (4)

      

Basic

   284.2   297.7   297.0   297.8   307.8 

Diluted

   291.9   305.6   304.7   304.6   315.0 

Dividends declared per share

  $0.29  $0.24  $0.15  $0.11  $0.09 
   Year Ended December 31, 
   2006  2005  2004  2003  2002 

Balance sheet data

      

Total assets

  $1,497.7  $1,457.2  $1,389.3  $959.9  $633.7 

Long-term debt (5)

  $300.0  $300.0  $—    $300.0  $300.0 

Shareholders’ equity (deficit)

  $167.4  $309.4  $317.5  $(32.1) $(327.0)

   Year Ended December 31, 

amounts in millions, except per share data

  2009  2008  2007  2006  2005 
Results of operations      

Revenue

  $1,797.2   $1,755.4   $2,259.0   $2,037.1   $1,731.6  

Operating and SG&A expenses

   1,028.1    934.6    1,035.1    898.7    756.8  

Depreciation and amortization

   64.1    75.1    42.9    39.5    35.2  

Restructuring

   17.5    (2.5  50.0          

Gain on sale of building

               (160.6    
                     
Operating income   687.5    748.2    1,131.0    1,259.5    939.6  

Non-operating (expense) income, net(1)

   (41.3  (18.4  (9.0  4.4    (2.0
                     
Income before provision for income taxes   646.2    729.8    1,122.0    1,263.9    937.6  

Provision for income taxes(2)

   239.1    268.2    415.2    506.6    373.9  
                     
Net income   407.1    461.6    706.8    757.3    563.7  

Less: Net income attributable to noncontrolling interests(3)

   5.1    4.0    5.3    3.4    2.9  
                     
Net income attributable to Moody’s  $402.0   $457.6   $701.5   $753.9   $560.8  
                     
Earnings per share      

Basic

  $1.70   $1.89   $2.63   $2.65   $1.88  

Diluted

  $1.69   $1.87   $2.58   $2.58   $1.84  
Weighted average shares outstanding      

Basic

   236.1    242.4    266.4    284.2    297.7  

Diluted

   237.8    245.3    272.2    291.9    305.6  
Dividends declared per share  $0.405   $0.40   $0.34   $0.29   $0.24  
   December 31, 
   2009  2008  2007  2006  2005 
Balance sheet data      
Total assets  $2,003.3   $1,773.4   $1,714.6   $1,497.7   $1,457.2  
Long-term debt  $746.2   $750.0   $600.0   $300.0   $300.0  
Total Moody’s shareholders’ (deficit) equity  $(602.2 $(994.4 $(783.6 $167.4   $309.4  

(1)The 2002 results2009, 2008 and 2007 amounts include a benefit of operations include revenue of $42.1$6.5 million, expenses of $42.8$13.3 million and an operating loss of $0.7$31.9 million, respectively, related to KMV, which was acquired in April 2002.the favorable resolution of certain Legacy Tax Matters.

(2)During the fourth quarterThe 2009, 2007, 2006 and 2005 amounts include net benefits of 2006, the Company completed the sale of its corporate headquarters located at 99 Church Street, New York, New York. The sale resulted in a gain of $160.6 million.$4.3 million, $20.4 million, $2.4 million and $8.8 million, respectively, relating to certain Legacy Tax Matters.

(3)The 2003 amount includes a gain of $13.6 million on an insurance recovery relatedAmounts relate to new disclosure requirement for ownership interests in consolidated subsidiaries held by parties other than the September 11th tragedy.
(4)Prior period earnings per share and weighted average shares outstanding have been adjusted to reflect the May 2005 2-for-1 stock split.
(5)At December 31, 2004, the notes payable scheduled to mature in September 2005 were classified as a current liability.Company (noncontrolling interests)

 

14

26MOODY’S2009 10-K


ITEM 7.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 consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K.

This Management’s Discussion and Analysis of Financial Condition and Results of OperationsMD&A contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 3154 and Item 1A. “Risk Factors” commencing on page 1017 for a discussion of uncertainties, risks and other factors associated with these statements.

The CompanyTHE COMPANY

Except where otherwise indicated, the terms “Moody’s” and the “Company” refer to Moody’s Corporation and its subsidiaries. Moody’s is a provider of (i) credit ratings, (ii) credit and economic related research, data and analysis covering fixed-income securities, otheranalytical tools, (iii) risk management software and (iv) quantitative credit risk measures, credit portfolio management solutions and training services. Moody’s operates in two reportable segments: MIS and MA.

MIS, the credit rating agency, publishes credit ratings on a wide range of debt instrumentsobligations and the entities that issue such instrumentsobligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS ratings in the global capital markets, and credit training services, and (ii) quantitative credit risk assessmentdistribution of their debt issues to investors.

The MA segment develops a wide range of products and services and credit processing software for banks, corporations and investorsthat support the risk management activities of institutional participants in credit-sensitive assets. Moody’s operates in two reportable segments: Moody’s Investors Service and Moody’s KMV.

Moody’s Investors Service publishes rating opinions on a broad range of credit obligors and credit obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs. It also publishesglobal financial markets. Within its RD&A business, MA distributes investor-oriented credit information, research and economic commentary,data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies special commentsand commentary on topical credit related events. The RD&A business also provides economic research and credit opinion handbooks.

The Moody’s KMV business developsdata and distributesanalytical tools such as quantitative credit risk assessment productsscores. Within its RMS business, MA provides both economic and regulatory capital risk management software solutions. Within its professional services business it provides quantitative credit risk measures, credit portfolio management solutions and credit processing software for banks, corporationstraining services.

Beginning in January 2008, Moody’s segments were changed to reflect the Reorganization announced in August 2007. As a result of the Reorganization, the rating agency is reported in the MIS segment and investorsseveral ratings business lines were realigned. All of Moody’s other non-rating commercial activities are represented in credit-sensitive assets.the MA segment.

The Company operated asAs part of The Dun & Bradstreet Corporation (“Old D&B”) until September 30, 2000 (the “Distribution Date”), when Old D&B separated into two publicly traded companies — Moody’s Corporationthe Reorganization there were several realignments within the MIS LOBs. Sovereign and The New D&B Corporation (“New D&B”). At that time, Old D&B distributedsub-sovereign ratings, which were previously part of financial institutions; infrastructure/utilities ratings, which were previously part of corporate finance; and project finance, which was previously part of structured finance, were combined with the public finance business to its shareholders shares of New D&B stock. New D&B comprisedform a new LOB called public, project and infrastructure finance. In addition, real estate investment trust ratings were moved from financial institutions and corporate finance to the business of Old D&B’s Dun & Bradstreet operating company (the “D&B Business”). The remaining business of Old D&B consisted solelystructured finance business. Furthermore, in August 2008 the global managed investments ratings group, previously part of the structured finance business, was combined with the financial institutions business.

In 2008 within MA, various aspects of providing ratingsthe legacy MIS research business and relatedMKMV business were combined to form the subscriptions, software and professional services businesses. The subscriptions business included credit and economic research, data and analytical models that are sold on a subscription basis; the software business included license and maintenance fees for credit risk, managementsecurities pricing and valuation software products; and the professional services (the “Moody’s Business”)business included advisory services associated with risk modeling, credit scorecard development, and other specialized analytical projects, as well as credit training and other professional development education services that are typically sold on a per-engagement basis. Subscription services are typically sold for an initial 12-month term, with renewal features for subsequent annual periods.

In 2009, the aforementioned MA businesses were realigned and renamed to reflect the reporting unit structure for the MA segment at December 31, 2009. Pursuant to this realignment the subscriptions business was renamed “Moody’s Corporation”.Research Data and Analytics and the software business was renamed Risk Management Software. The method by which Old D&B distributedrevised groupings classify certain subscription-based risk management software revenue and advisory services relating to its shareholders its shares of New D&B stock is hereinafter referredsoftware sales to as the “2000 Distribution”.redefined RMS business.

Critical Accounting EstimatesCRITICAL 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.GAAP. 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, goodwill and intangible assets, restructuring liabilities, pension and other post-retirement benefits, UTBs and stock-based compensation. Actual

MOODY’S2009 10-K27


results may differ from these estimates under different assumptions or conditions. The following accounting estimates are considered critical because they are particularly dependent on management’s judgment about matters that are uncertain at the time the accounting estimates are made and changes to those estimates could have a material impact on the Company’s consolidated results of operations or financial condition.

Revenue Recognition

In recognizing revenue related to ratings, Moody’sMIS uses judgments to allocate billed revenue between the initial assignment of ratings and the future monitoring of ratings in cases where the CompanyMIS does not charge ongoing monitoring fees for a particular issuer. These judgments are not dependent on the outcome of future uncertainties, but rather relate to allocating revenue across accounting periods. In such cases, the CompanyMIS defers portions of rating fees that it estimates will be attributed to future monitoring activities and recognizes the deferred revenue ratably over the estimated monitoring periods.

The portion of the revenue to be deferred is based upon a number of factors, including the estimated fair market value of the monitoring services charged for similar securities or issuers. The estimated monitoring period over which the deferred revenue will be recognized is determined based on factors such as the estimated lives of the rated securities. Currently, the estimated monitoring periods range from one year to ten years. At December 31, 2006, 20052009, 2008 and 2004,2007, deferred revenue included approximately $47$45 million, $36$48 million and $30$54 million, respectively, related to such deferred monitoring fees.

15


Additionally, in the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periodperiods, ranging from three to 51 years, which is determinedare based on the expected lives of the rated securities. Currently, the monitoring periods range from five to 46 years.securities at December 31, 2009. At December 31, 2006, 20052009, 2008 and 2004,2007, deferred revenue related to commercial mortgage-backedthese securities was approximately $62$78 million, $50$82 million and $37$86 million, respectively.

Moody’sMIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Related revenueRevenue is accrued each quarter based on estimated amounts outstanding and is billed subsequently when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2006, 20052009, 2008 and 2004,2007, accounts receivable included approximately $27 million, $34 million $31 million and $29$38 million, respectively, related to accrued commercial paper revenue. Historically, the CompanyMIS has not had material differences between the estimated revenue and the actual billings.

Revenue earned within the MA segment is recognized as follows: subscription-based revenue is recognized ratably over the subscription period which is typically for an initial 12-month term with renewal features for subsequent annual periods, beginning upon delivery of the initial product; software revenue is recognized at time of delivery which is considered to have occurred upon transfer of the product master or first copy. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs; professional service revenue is generally recognized at the time services are performed.

Certain revenue arrangements within the MA segment include multiple elements such as software licenses, maintenance, subscription fees and professional services. In these types of arrangements, the fee is allocated to the various products or services based on objective measurements of fair value; that is, generally the price charged when sold separately—or vendor-specific objective evidence.

Accounts Receivable Allowance

Moody’s records as reductions of revenue provisions for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such provisions are reflected as additions to the accounts receivable allowance. AdjustmentsAdditionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to and write-offs ofthe accounts receivable allowance. Billing adjustments and uncollectible account write-offs are charged against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current aging status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its reviews,analysis, Moody’s establishes or adjusts allowances,its allowance as considered appropriate.appropriate in the circumstances. This process involves a high degree of judgment and estimation and could involve significant dollar amounts. Accordingly, Moody’s results of operations can be affected by adjustments to the allowance. Management believes that the allowance for uncollectible accounts is adequate to cover anticipated adjustments and write-offs under current conditions. However, significant changes in any of the above-notedabove factors, or actual write-offs or adjustments that differ from the estimated amounts could result in revenue adjustmentsamounts that are greater or less than Moody’s estimates. In each of 2006, 2005 and 2004,Each quarter, the Company adjustedrevises its provision rates for billing adjustments and its allowancesuncollectible accounts to reflect its current estimate of the appropriate level of accounts receivable allowance.

Contingencies

Accounting for contingencies, including those matters described in the “Contingencies” section of this “Management’s Discussion and Analysis”“MD&A”, commencing on page 2851 is highly subjective and requires the use of judgments and estimates in assessing their magnitude and likely outcome. In many cases, the outcomes of such matters will be determined by third parties, including governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent management’s best estimates of the then current status of such matters and their potential outcome based on a review of the facts and in consultation with outside legal counsel where

28MOODY’S2009 10-K


deemed appropriate.appropriate. The Company regularly reviews contingencies and as additionalnew information becomes available may, in the future, adjust its associated liabilities. Based on its review of the provisions madelatest information available, and subject to the contingencies described in respect thereof. SinceItem 7. “MD&A—Contingencies”, the potential exposure on manyultimate monetary liability of these matters is material, and it is possible that these matters could be resolved in amounts that are greater than the Company has reserved, their resolution couldin connection with pending legal and tax proceedings, claims and litigation is not likely to have a material adverse effect on Moody’s future reported results andconsolidated financial position. In addition, potential cash outlays relatedposition, although it is possible that the effect could be material to the resolutionCompany’s consolidated results of these exposures could be material.operations for an individual reporting period.

For the years ended December 31, 2006, 20052009, 2008 and 2004,2007, the provision for income taxes reflected credits of $2.4$4.3 million, $8.8$8.7 million and charges of $30$27.3 million, respectively, due to changes in the Company’s reservesliabilities for legacy income taxLegacy Tax exposures that were assumed by Moody’s in connection with its separation from Old D&B in October 2000. These tax matters are discussedmore fully described under the caption “Legacy Tax Matters” below.within Item 7, “MD&A”.

Goodwill and Other Acquired Intangible Assets

Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of November 30th or more frequently if impairment indicators arise in accordance with StatementASC Topic 350. These impairment indicators could include significant events or circumstances that would reduce the fair value of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilla reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. During 2009 there was a change in the reporting unit structure of MA to reflect the realignment under which the MA segment is currently managed. Accordingly, it was determined that MA had three reporting units within its segment: RD&A; RMS and Other Intangible Assets”training. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The RMS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for implementation and maintenance. The training reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training. As such, at the date of the impairment test, the Company had four primary reporting units: MIS, which encompasses the Company’s ratings operations and the aforementioned three reporting units within MA.

The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level by ASC Topic 350, "Intangibles—Goodwill and Other". The evaluationIn the first step, the fair value of the reporting unit is compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill requires thatis not impaired and the Company make importantis not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company must perform a second step of the impairment test to determine the implied fair value of the reporting unit's goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.

Determining the fair value of a reporting unit or an indefinite-lived acquired intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and appropriate market comparables. The Company bases its fair value estimates on assumptions believed to be reasonable. However, as these estimates and assumptions are unpredictable and inherently uncertain, actual future results may differ from these estimates. In addition, the Company also makes certain judgments aboutand assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units.

As a result of the reporting structure realignment in the MA segment described above, the company reassigned the assets and liabilities of the MA segment to each of its reporting units. Goodwill is reassigned to the reporting units using a relative fair value allocation approach; other assets and liabilities, including applicable corporate assets, are allocated to the extent they are related to the operation of respective reporting units.

Based on the result of the above test, the Company does not believe any of its reporting units are at risk of failing Step 1 of the impairment test as the fair value for all reporting units is well in excess of the respective reporting unit’s carrying value.

MOODY’S2009 10-K29


The following table identifies the amount of goodwill allocated to each reporting unit as well as the amount by which the net assets of each reporting unit would exceed the fair value under Step 1 of the goodwill impairment test as prescribed in ASC Topic 350, assuming hypothetical reductions in their fair values as of November 30, 2009:

      Step One Sensitivity Analysis 
      Deficit Caused by a Hypothetical Reduction to Fair Value 
   Goodwill  10%  15%  20%  25% 
MIS  $11.6  $  $  $  $  
RD&A   158.7              
RMS   165.2            (5.3
Training   18.5              
                     

Totals

  $354.0  $  $  $  $(5.3
                     

The fair value of each reporting unit is estimated using a discounted cash flow methodology. The results of the DCF are evaluated against comparable public company and precedent transaction multiples in order to assess the reasonableness of the DCF fair values. The DCF analysis requires significant judgments regarding the derivation of fair value, including estimation of future operating results and cash flows as well as terminal values and discount rates. In estimating future operating results and cash flows, Moody’s considersof each reporting unit, which is based on internal budgets and strategic plans, expected long-term growth rates, terminal values, weighted average cost of capital and the effects of external factors and market conditions. If actual future operating resultsChanges in these estimates and cash flows or external conditions differ fromassumptions could materially affect the Company’s judgments, or if changesdetermination of the fair value and goodwill impairment for each reporting unit which could result in assumed terminal values or discount rates are made, an impairment charge may be necessary to reduce the carrying value of goodwill, which charge could be material to the Company’s financial position and results of operations. Moody’s allocates newly acquired goodwill to reporting units based on the reporting unit expected to benefit from the acquisition. The Company evaluates its reporting units on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments.

The following discusses the key assumptions utilized in the discounted cash flow valuation methodology which requires significant management judgment:

WACC—The WACC is the rate to discount each reporting unit’s estimated future cash flows. The WACC is calculated based on the proportionate weighting of the cost of debt and equity. The cost of equity is based on a risk-free interest rate, an equity risk factor which is derived from public companies similar to the reporting unit and which captures the perceived risks and uncertainties associated with the reporting unit’s cash flows. The cost of debt component is calculated as the weighted average cost associated with all of the Company’s outstanding borrowings as of the date of the impairment test and was immaterial to the computation of the WACC. The cost of debt and equity is weighted based on the debt to market capitalization ratio of publicly traded companies with similarities to the reporting unit being tested. The WACC for all reporting units ranged from 10% to 12% in 2009. Differences in the WACC used between reporting units is due primarily to distinct risks and uncertainties regarding the cash flows of the different reporting units. A sensitivity analysis of the WACC was performed on all reporting units. An increase in the WACC of 1% for each of the reporting units would not have resulted in the carrying value of the reporting unit exceeding its respective estimated fair value under step one of the goodwill impairment test as prescribed in ASC Topic 350.

Future cash flow assumptions—The projections for future cash flows utilized in the models are derived from historical experience and assumptions regarding future growth and profitability of each reporting unit. Cash flows for each of the next five years beginning in 2010 were estimated based on annual revenue growth rates ranging from 1% to 16%. The growth rates assumed a gradual increase in revenue from financial service customers based on a continued improvement in the global economy and capital markets which began in the second half of 2009. Beyond five years a terminal value was determined using a perpetuity growth rate based on inflation and real GDP growth rates. A sensitivity analysis of the growth rates was performed on all reporting units. A decrease in the growth rates used in the discounted cash flow calculation of 10% for each of the reporting units would not have resulted in the carrying value of the reporting unit exceeding its respective estimated fair value under step one of the goodwill impairment test as prescribed in ASC Topic 350. However, there is a greater probability of potential goodwill impairment in the RMS and training reporting units if estimated growth rates are not met due to the lower percentage by which the fair value of these reporting units exceeds the carrying value.

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The difficult market and economic conditions in 2009 resulted in lower than anticipated revenue for the RMS and training reporting units compared to forecasted results causing the Company to test the intangible assets within these reporting units for impairment at November 30, 2009. This test was performed by comparing the undiscounted cash flows of each asset group that contained the aforementioned intangible assets to the carrying amount of the asset group. The undiscounted cash flows were sufficient to cover the carrying value of the asset group and resulted in an excess of 39% and 48% for the RMS and training reporting units, respectively.

 

16

30MOODY’S2009 10-K


Restructuring

The Company has engaged in restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee benefit costs, contract termination costs and asset impairments. If the actual amounts differ from these estimates, the amount of the restructuring charge could be impacted. For both the 2007 Restructuring Plan and the 2009 Restructuring Plan, there have not been any significant differences between original estimates and actual amounts recorded upon completion of both plans. For a full description of Moody’s restructuring actions, refer to the “Results of Operations” section below and Note 10 to the consolidated financial statements.

Pension and Other Post-Retirement Benefits

The expenses, assets liabilities and obligationsliabilities that Moody’s reports for its pension and other post-retirement benefitsbenefit plans are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions include the following:

 

future compensation increases, based on the Company’s long-term actual experience and future outlook

 

long-term return on pension plan assets, based on historical portfolio results and the expected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised of equity and fixed-income investments)

 

future healthcare cost trends, based on historical market data, near-term outlooks and assessments of likely long-term trends

 

discount rates, based on current yields on high-grade corporate long-term bonds

The discount rate selected to measure the present value of the Company’s benefit obligations as of December 31, 20062009 was derived using a cash flow matching method whereby the Company compares the plans’ projected payment obligations by year with the corresponding yield on the Citibank Pension Discount Curve.pension discount curve. The cash flows are then discounted back to their present value and an overall discount rate is determined.

Moody’s major assumptions vary by plan and assumptions used are set forth in Note 1011 to the consolidated financial statements. In determining these assumptions, the Company consults with outside actuaries and other advisors as deemed appropriate. While the Company believes that the assumptions used in its calculations are reasonable, differences in actual experience or changes in assumptions could have a significant effect on the expenses, assets and liabilities related to the Company’s pension and other post-retirement benefits.Post-Retirement Plans.

When actual plan experience differs from the assumptions used, actuarial gains or losses arise. To the extent theThe Company amortizes, as a component of annual pension expense, total outstanding gain or loss exceeds a corridor threshold as defined in SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”), the excess is subject to amortization in annual expense over the estimated average future working lifetime of active plan participants.participants to the extent that the gain/loss exceeds 10% of the greater of the beginning-of-year projected benefit obligation or the market-related value of plan assets. For Moody’s pension and other post-retirement benefit plans,Post-Retirement Plans, the total losses as of December 31, 2006 which2009 that have not been recognized in annual expense are $ 41.0$55.0 million, and Moody’s expects to recognize $2.2net periodic pension expense of $3.3 million in 2010 for the amortization of actuarial losses in 2007 annual net periodic benefit expense.losses.

For Moody’s funded pension plan, the differences between the expected long-term rate of return assumption and actual experience could also affect the net periodic pension expense. As permitted under SFAS No. 87, theThe Company spreads the impact of asset experience over a five-year period for purposes of calculating the market relatedmarket-related value of assets whichthat is used in determining the expected return on assetsassets’ component of annual expense and in calculating the total unrecognized gain or loss subject to amortization. As of December 31, 2006,2009, the Company has an unrecognized asset gainloss of $7.8$20.7 million, of which $3.3$6.3 million will be recognized in the market relatedmarket-related value of assets whichthat is used to calculate the expected return on assetsassets’ component in 2008of 2011 expense.

The table below shows the estimated effect that a one percentage-point decrease in each of these assumptions will have on Moody’s 20072010 operating income (dollars in millions).income. These effects have been calculated using the Company’s current projections of 20072010 expenses, assets liabilities, obligations and expensesliabilities related to pension and other post-retirement plans,Moody’s Post-Retirement Plans, which could change as updated data becomes available.

 

   

Assumption Used for

2007

 

Estimated Impact on

2007 Operating Income

(Decrease)/Increase

 

Discount Rate*

  5.90% / 5.80% $(5.3)

Weighted Average Assumed Compensation Growth Rate

  4.00% $1.8 

Assumed Long-Term Rate of Return on Pension Assets

  8.35% $(1.1)

   Assumption Used for 2010  Estimated Impact on
2010 Operating Income
(Decrease)/Increase
 
Discount Rate*  5.95% / 5.75%  $(6.9
Weighted Average Assumed Compensation Growth Rate  4.00%  $1.5  
Assumed Long-Term Rate of Return on Pension Assets  8.35%  $(1.3

*Discount rates of 5.90%5.95% and 5.80%5.75% are used for pension plans and other post-retirement plans, respectively.

A one percentage-point increase in assumed healthcare cost trend rates will not affect 20072010 projected expenses. Based on current projections, the Company estimates that expenses related to pension and post-retirement plansPost-Retirement Plans will be approximately

17


$14.4$21.6 million in 20072010 compared with $14.9$14.5 million in 2006.2009. The expected expense decreaseincrease in 20072010 reflects the effects of higher benefit obligations primarily due to assumption changes, such as higher cash balance interest crediting rate and lower discount rates, as well as higher plan asset gains and lower amortization of actuarial losses, which are partially offset by normal growth in plan liabilities.losses.

MOODY’S2009 10-K31


Stock-Based Compensation

On January 1, 2006, theThe Company adopted, under the modified prospective application method, the fair value method of accounting for stock-based compensation under Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). Under this pronouncement, companies are required to recordrecords compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Previously, on January 1, 2003, the Company adopted, on a prospective basis, the fair value method of accounting for stock-based compensation under SFAS No. 123, “Accounting for Stock-Based Compensation”. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions and estimates that the Company believes are reasonable. Some of the assumptions and estimates, such as share price volatility and expected option holding period, are based in part on Moody’s experience during the period since becoming a public company, which is limited. The use of different assumptions and estimates in the Black-Scholes option pricing model could produce materially different estimated fair values for option awards and related expense.

An increase in the following assumptions would have had the following estimated effect on operating income in 20062009 (dollars in millions):

 

  Assumption Used 

Increase in

Assumption

 

Estimated Impact on

Operating Income in 2006

Increase/(Decrease)

   

Assumption Used for
2004-2009 grants

  

Increase in Assumption

  Estimated Impact on
Operating Income in 2009
Increase/(Decrease)
 

Average Expected Dividend Yield

  2002 -2006 grants  0.41% -0.52% 0.10% $0.6   0.1% - 2%  0.10%  $0.7  

Average Expected Share Price Volatility

  2002 -2006 grants  23% -30% 5% $(4.9)  23% -  43.7%  5%  $(3.9

Expected Option Holding Period

  2002 -2006 grants  4.5 –6.0 years 1.0 year $(4.2)  5.0 - 6.0 years  1.0 year  $(3.1

Income Taxes

The Company is subject to income taxes in the U.S. and various foreign jurisdictions. The Company’s tax assets and liabilities are affected by the amounts charged for service provided and expenses incurred as well as other tax matters such as inter-company transactions. The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes, and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.

Moody’s is subject to tax audits in various jurisdictions which involve Legacy Tax and other tax matters. The Company regularly assesses the likely outcomes of such audits in order to determine the appropriateness of liabilities for UTPs. The Company classifies interest related to income taxes as a component of interest expense in the Company’s consolidated financial statements and associated penalties, if any, as part of other non-operating expenses.

For UTP’s, ASC Topic 740 requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. As the determination of liabilities related to UTPs and associated interest and penalties requires significant estimates to be made by the Company, there can be no assurance that the Company will accurately predict the outcomes of these audits, and thus the eventual outcomes could have a material impact on the Company’s operating results or financial condition.

For certain of its foreign subsidiaries, the Company has deemed a portion of the undistributed earnings relating to these subsidiaries to be permanently reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution by the foreign subsidiaries of these earnings could result in additional tax liability for the Company which may be material to Moody’s future reported results, financial position and cash flows.

Other Estimates

In addition, there are other accounting estimates within Moody’s consolidated financial statements, including recoverability of deferred tax assets, anticipated dividend distributions from non-U.S. subsidiaries and valuation of investments in affiliates. Management believes the current assumptions and other considerations used to estimate amounts reflected in Moody’s consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in Moody’s consolidated financial statements, the resulting changes could have a material adverse effect on Moody’s consolidated results of operations or financial condition.

See Note 2 to the consolidated financial statements for further information on keysignificant accounting policies that impact Moody’s.

32MOODY’S2009 10-K


Operating SegmentsOPERATING SEGMENTS

Beginning in January 2008, Moody’s Investors Servicesegments were changed to reflect the Reorganization announced in August 2007. As a result of the Reorganization, the rating agency is reported in the MIS segment and several ratings business lines have been realigned. All of Moody’s other non-rating commercial activities are represented in the MA segment.

As part of the Reorganization there were several realignments within the MIS LOBs. Sovereign and sub-sovereign ratings, which were previously part of financial institutions; infrastructure/utilities ratings, which were previously part of corporate finance; and project finance, which was previously part of structured finance, were combined with the public finance business to form a new LOB called public, project and infrastructure finance. In addition, real estate investment trust ratings were moved from financial institutions and corporate finance to the structured finance business. Furthermore, in August 2008 the global managed investments ratings group, previously part of the structured finance business, was combined with the financial institutions business.

The MIS segment now consists of four rating groups — lines of business—structured finance, corporate finance, financial institutions and sovereign risk,public, project and public finance — infrastructure finance—that generate revenue principally from fees for the assignment and ongoing monitoring of (i) credit ratings on issuersdebt obligations and issues of fixed-incomethe entities that issue such obligations in markets worldwide.

As part of the debt markets,Reorganization, various aspects of the legacy MIS research business and (ii) research, which primarily generates revenue fromMKMV business were combined to form the sale of investor-orientedsubscriptions, software and professional services businesses within MA. The subscriptions business included credit information, and research, principally produced by the rating groups, and economic commentary. For presentation purposes, Europe represents Europe,research, data and analytical models that are sold on a subscription basis for an initial 12-month term, with renewal features for subsequent annual periods; the Middle Eastsoftware business included license and Africamaintenance fees for credit risk, securities pricing and public finance represents U.S. public finance. Givenvaluation software products; and the dominanceprofessional services business included credit training associated with risk modeling, credit scorecard development, and other specialized analytical projects, as well as credit and other professional development education services that are typically sold on a per-engagement basis.

In 2009, the aforementioned MA businesses were realigned and renamed to reflect the reporting unit structure for the MA segment at December 31, 2009. Pursuant to this realignment the subscriptions business was renamed Research, Data and Analytics and the software business was renamed Risk Management Software. The revised groupings classify license software sales, certain subscription-based risk management software revenue, maintenance and advisory services relating to software sales to the redefined RMS business. The following tables are reconciliations of Moody’s Investors Servicethe revenue groupings previously disclosed to Moody’s overallthe new groupings for each of the years ended December 31, 2008 and 2007:

      Year Ended December 31, 

Revenue reported as per filings in prior years:

     2008  2007 
Subscriptions    $475.9   $421.5  
Software     49.2    39.5  
Professional Services     25.6    18.1  
           
  Total MA  $550.7   $479.1  
           
      Year Ended December 31, 

Reclass for 2009 realignment:

     2008  2007 
Subscriptions    $(57.2 $(51.2
Software     59.6    52.9  
Professional Services     (2.4  (1.7
           
  Total MA  $   $  
           
      Year Ended December 31, 

2009 revenue reported:

     2008  2007 
RD&A    $418.7   $370.3  
RMS     108.8    92.4  
Professional Services     23.2    16.4  
           
  Total MA  $550.7   $479.1  
           

MOODY’S2009 10-K33


The following is a discussion of the results of operations of these segments, excluding 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. Additionally, overhead costs and corporate expenses of the Company does not separately measure or report corporateare allocated to each segment based on a revenue-split methodology. Overhead expenses nor areinclude costs such expenses allocated betweenas rent and occupancy, information technology and support staff such as finance, human resource, information technology and legal.

In addition to its reported results, Moody’s has included in this MD&A certain adjusted results that the SEC defines as “non-GAAP financial measures.” Management believes that such non-GAAP financial measures, when read in conjunction with the Company’s business segments. Accordingly, all corporate expenses are included in operating income of the Moody’s Investors Service segment and none have been allocatedreported results, can provide useful supplemental information for investors analyzing period to the Moody’s KMV segment.

The Moody’s KMV business develops and distributes quantitative credit risk assessment products and services and credit processing software for banks, corporations and investors in credit-sensitive assets.

In February 2005, Moody’s Board of Directors declared a two-for-one stock split to be effected as a special stock distribution of one share of common stock for each shareperiod comparisons of the Company’s common stock outstanding, subjectperformance. These non-GAAP financial measures relate to stockholder approval of a charter amendmentLegacy Tax Matters and expenses and adjustments made to increaseboth the Company’s authorized common shares from 400 million shares2007 and 2009 Restructuring Plans, further described in Note 17 and Note 10, respectively, to 1 billion shares. At the Company’s Annual Meeting on April 26, 2005, Moody’s stockholders approved the charter amendment. As a result,

18


stockholders of record as of the close of business on May 4, 2005 received one additional share of common stock for each share of the Company’s common stock held on that date (the “Stock Split”). Such additional shares were distributed on May 18, 2005. All prior period share and per share information has been restated to reflect the Stock Split.consolidated financial statements.

Certain prior year amounts have been reclassified to conform to the current presentation.

Results of OperationsRESULTS OF OPERATIONS

Year Ended December 31, 2006 Compared With2009 compared with Year Ended December 31, 20052008

Total Company ResultsExecutive summary

Moody’s revenue in 2006 was $2,037.1 million, an increase of $305.5 million or 17.6% from $1,731.6 million for the same period of 2005. Moody’s achieved strong revenue growth above the rate of the overall corporation in global structured finance, corporate finance and research, and below the corporate rate in financial institutions and MKMV, with a decline in revenue from public finance.

Revenue in the United States was $1,277.8 million in 2006, an increase of $192.4 million or 17.7% from $1,085.4 million in 2005. Approximately 80% of the U.S. growth was driven by structured finance and corporate finance, reflecting strong issuance across most structured asset classes as well as corporate bonds and bank loans. Research, financial institutions and MKMV contributed to year-over-year growth as well.

Moody’s international revenue was $759.3 million in 2006, an increase of $113.1 million or 17.5% from $646.2 million in 2005. International ratings revenue grew approximately $91 million versus the prior year, with about 84% of the growth in Europe where credit derivatives, corporate finance, commercial mortgage-backed and residential mortgage-backed sectors were primary drivers of growth. European research and MKMV contributed to growth as well. Foreign currency translation positively impacted international revenue growth by approximately $1 million.

Moody’s operating, selling, general and administrative expenses of $898.7 million in 2006 were $141.9 million or 18.8% more than $756.8 million in 2005. Compensation and benefits continue to be Moody’s largest expense, accounting for approximately $103 million in growth from prior year. Moody’s average global staffing of more than 3,100 employees during the year ended December 31, 2006 was approximately 15% higher than during2009 totaled $1,797.2 million, an increase of $41.8 million from 2008. Excluding the negative impact from changes in FX translation rates, revenue in 2009 increased $76.6 million compared to the same period in 2008. Total expenses for 2009 were $1,109.7 million, an increase of $102.5 million from 2008, and included approximately $32 million in favorable changes from FX translation rates. Operating income of $687.5 million in 2009 decreased $60.7 million compared to 2008. Excluding the impact of restructuring in both years, operating income was $705.0 million, a decrease of $40.7 million from the prior year. Diluted EPS of $1.69 in 2009 included a $0.05 unfavorable impact from restructuring actions and a $0.04 favorable impact relating to the resolution of a Legacy Tax Matter. Excluding the aforementioned items in 2009, diluted EPS of $1.70 decreased $0.12, or 7%, from $1.82 in 2008, which excludes the prior year period. This increase includes hiring to support business growth mainly infavorable per-share impacts of $0.01 and $0.04 for restructuring and the U.S.resolution of Legacy Tax Matters, respectively.

Moody’s Corporation

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

   Year Ended December 31,  % Change 
  2009  2008  
Revenue:    

United States

  $920.8   $910.1   1.2
          

International:

    

EMEA

   624.7    603.1   3.6

Other

   251.7    242.2   3.9
          

Total International

   876.4    845.3   3.7
          

Total

   1,797.2    1,755.4   2.4
          
Expenses:    

Operating

   532.4    493.3   7.9

SG&A

   495.7    441.3   12.3

Restructuring

   17.5    (2.5 NM  

Depreciation and amortization

   64.1    75.1   (14.6)% 
          

Total

   1,109.7    1,007.2   10.2
          
Operating income  $687.5   $748.2   (8.1)% 
          
Interest (expense) income, net  $(33.4 $(52.2 (36.0)% 
Other non-operating (expense) income, net  $(7.9 $33.8   (123.4)% 
Net income attributable to Moody’s  $402.0   $457.6   (12.2)% 

34MOODY’S2009 10-K


The table below shows Moody’s global staffing at year-end 2006 compared with year-end 2005.by geographic area:

 

   December 31, 2006  December 31, 2005
   United States  International  Total  United States  International  Total

Moody’s Investors Service

  1,843  1,106  2,949  1,600  919  2,519

Moody’s KMV

  304  97  401  303  74  377
                  

Total

  2,147  1,203  3,350  1,903  993  2,896
                  
   December 31,    
  2009  2008  % Change 
United States  2,139  2,130  0.4
International  1,825  1,817  0.4
        
Total  3,964  3,947  0.4
        

Global revenue of $1,797.2 million in 2009 increased $41.8 million compared to 2008 with modest growth in both MIS and MA. The MIS growth is reflective of gradual improvement in the credit markets throughout 2009 which resulted in increased issuance volumes for fundamental ratings, particularly for investment-grade and high-yield corporate debt, partially offset by continued declines in structured finance issuance. The MA growth is primarily due to higher international RMS revenue which resulted from the Fermat acquisition made in the fourth quarter of 2008. Excluding the negative impact from changes in FX translation rates, Moody’s revenue in 2009 increased $76.6 million compared to 2008. Transaction revenue accounted for 37% of global MCO revenue in 2009 compared to 36% in the prior year. Transaction revenue in the MIS segment represents the initial rating of a new debt issuance as well as other one-time fees while 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 the MA segment, relationship revenue represents subscription-based revenues and software maintenance revenue. Transaction revenue in MA represents software license fees and revenue from the professional services line of business which offers credit risk management advisory and training services, which are typically sold on a per-engagement basis.

In the U.S., revenue increased $10.7 million with modest growth in MIS being partially offset by declines in MA. The increase in ratings revenue primarily reflects the aforementioned recovery in the investment-grade and high-yield corporate bond markets partially offset by declines in structured finance ratings. Revenue declined for all LOBs within MA.

International revenue of $876.4 million for 2009 was $31.1 million higher than 2008 and reflected growth in investment-grade and high-yield rated issuance within CFG as well as MA revenue which benefited from acquisitions made in the fourth quarter of 2008. These increases were partially offset by significant declines in SFG revenue within MIS as well as approximately $35 million in unfavorable impact from changes in FX translation rates.

Total expenses for 2009 were $1,109.7 million, an increase of $102.5 million from 2008. The increase primarily reflects the impact of acquisitions made in the fourth quarter of 2008, costs associated with the 2009 Restructuring Plan and higher incentive compensation reflecting greater achievement against 2009 targeted results. Additionally, there were higher rent and occupancy costs in 2009 related to the Canary Wharf lease in London, higher professional services costs which include legal and IT consulting as well as a charge for an international VAT matter. The aforementioned increases were partially offset by an approximate $32 million favorable impact from changes in FX translation rates.

Operating expenses were $539.4$532.4 million, in 2006, an increase of $86.5$39.1 million or 19.1% from $452.9the prior year, resulting primarily from higher compensation costs of approximately $28 million compared to the same period in 2008. Compensation costs were $445.1 million, an increase of 7% from prior year, primarily reflecting higher incentive compensation costs due to greater achievement against 2009 targeted results. Non-compensation expenses in 2009 were $87.3 million, an increase of approximately $11 million compared to the same period in 2008. The increase is due to higher professional service costs which include technology consulting costs associated with an investment in IT infrastructure. The increase in both compensation and non-compensation expenses were partially offset by favorable changes in FX translation rates.

SG&A expenses of $495.7 million were $54.4 million higher than prior year. The increase is primarily due to higher non-compensation costs, which reflect higher rent expense relating to the Canary Wharf lease in London, additional bad debt expense due to the deterioration of liquidity caused by general economic conditions, higher professional services costs which include consulting as well as higher costs associated with investment in technology infrastructure. Compensation costs of $250.1 million increased 7% over the same period in 2008 primarily reflecting higher incentive compensation costs due to greater achievement against 2009 targeted results.

Restructuring expenses of $17.5 million in 2005.2009 reflect costs associated with headcount reductions, the divestiture of non-strategic assets and contract terminations in accordance with the 2009 Restructuring Plan, as well as adjustments to previous estimates for the 2007 Restructuring Plan. The largest contributorrestructuring benefit of $2.5 million in 2008 reflects adjustments to this increaseprevious estimates for severance and contract termination costs associated with the 2007 Restructuring Plan.

MOODY’S2009 10-K35


Depreciation and amortization of $64.1 million decreased $11.0 million from 2008 primarily due to the following items in 2008: an approximate $11 million impairment of certain software and database intangible assets within the MA segment, a $4.5 million write-off of acquired in-process technology related to the acquisition of Fermat and approximately $4 million of accelerated depreciation related to the closure of the Company’s New Jersey office. The absence of these items in 2009 was growthpartially offset by higher amortization of intangible assets in compensation and benefits expense of $76 million, reflecting compensation increases, increased staffing and higher stock-based compensation expense. Moody’s global staffing reflected hiring primarily2009 associated with business acquisitions made in the U.S. and European ratings businesses to support business growth. Stock-based compensation expense increased $16.3fourth quarter of 2008.

Operating income of $687.5 million year-over-year due,decreased $60.7 million from prior year reflecting the 10% increase in part,operating expenses being partially offset by modest revenue increases. Excluding the impact of restructuring in both years, operating income of $705.0 million decreased $40.7 million. Changes in FX translation rates had a $3 million unfavorable impact on operating income in 2009.

Interest (expense) income, net for the year ended December 31, 2009 was ($33.4) million, a decrease of $18.8 million compared to the final yearsame period in 2008. The change is due primarily to an interest expense reduction of phasing in of expense over the current four-year equity plan vesting periodapproximately $12 million for tax and the effects of a higher share price on the value of the 2006 equity grants versus 2005, offset by additional expensetax-related liabilities recorded in the first quarter of 2005 related to the accelerated expensing of equity grants for employees at or near retirement eligibility. Expenses for 2005 included $3.22009 coupled with a $6.5 million for the settlement of certain pension obligations.

Selling, general and administrative expenses were $359.3 million in 2006, an increase of $55.4 million or 18.2% from $303.9 million in 2005. Year-over-year expense increases included growth in compensation and benefits of $27 million, reflecting compensation increases, increased staffing in technology support and finance functions and $6.0 million related to stock-based compensation as discussed above. Additional 2006 expenses included increased rent and occupancy costs of approximately $12 million to support business expansion and costs associated with Moody’s new corporate headquarters. Expenses for 2005 included a charge of $9.4 million for the settlement of sales tax matters related to Moody’s operations in Japan from 2000 through June 30, 2005, which was a resultfavorable resolution of a tax audit by Japanese taxing authorities that was completedLegacy Tax Matter in the second quarter of 2005.2009. Interest expense on borrowings decreased approximately $15 million compared to 2008 reflecting lower short-term debt balances coupled with lower interest rates on borrowings under the 2007 Facility and CP Program. During 2009, the Company has utilized its operating cash flow to reduce short-term borrowings by 38%. Additionally, interest income decreased approximately $16 million compared to the same period in 2008 reflecting lower interest rate yields on cash and cash equivalents balances.

Other non-operating income (expense), net in 2009 was $(7.9) million compared to $33.8 million in 2008. The change reflects FX losses of $9.5 million in 2009 compared to FX gains of $24.7 million in 2008 primarily reflecting the weakening of the euro to the British pound in 2009 relating to accounts receivable denominated in non-functional currencies as well as $11 million in favorable adjustments for Legacy Tax Matters in 2008.

Moody’s effective tax rate for the year ended December 31, 2009 was 37.0%, or 30 bps higher than the prior year. Excluding Legacy Tax Matters in both years, the ETR in 2009 of 37.6% increased 50 bps from 2008.

Net Income in 2009 was $402.0 million, or $1.69 per diluted share, and decreased $55.6 million, or $0.18 per diluted share, compared to 2008. Excluding the impact of restructuring and Legacy Tax Matters in both years, Net Income in 2009 decreased $40.6 million to $404.7 million, or $1.70 per diluted share, from $1.82 in the same period of 2008.

Segment Results

Moody’s Investors Service

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

 

   Year Ended December 31,    
   2009  2008  % Change 
Revenue:     

Structured finance

  $304.9  $404.7   (24.7)% 

Corporate finance

   408.2   307.0   33.0

Financial institutions

   258.5   263.0   (1.7)% 

Public, project and infrastructure finance

   246.1   230.0   7.0
          

Total

   1,217.7   1,204.7   1.1
          
Expenses:     

Operating and SG&A

   680.1   636.0   6.9

Restructuring

   9.1   (1.6 NM  

Depreciation and amortization

   31.3   33.3   (6.0)% 
          

Total

   720.5   667.7   7.9
          
Operating income  $497.2  $537.0   (7.4)% 
          

19Global MIS revenue in 2009 of $1,217.7 million increased $13.0 million, or $35.9 million excluding unfavorable changes in FX translation rates, compared to 2008. The increase from prior year reflects growth in rated issuance in the investment-grade and high-yield sectors of CFG coupled with increases in public and infrastructure ratings revenue within PPIF. These increases were partially offset by declines in new issuance in SFG and FIG. Transaction revenue for total MIS in 2009 was 50% compared to 49% in 2008.

In the U.S., revenue was $663.1 million, an increase of $18.1 million or 3% from prior year reflecting strong growth in ratings of investment and speculative-grade corporate debt partially offset by new issuance declines which were significant in SFG and modest

36MOODY’S2009 10-K


in FIG. Non-U.S. revenue was $554.6 million and decreased 1% from the same period in 2008. The decrease primarily reflects declines in all international regions within SFG partially offset by growth in CFG and PPIF in EMEA due to higher issuance volumes.

Global SFG revenue of $304.9 million decreased $99.8 million reflecting the continued slowdown of new issuance in the securitization markets due to reduced investor appetite, continued high interest rate spreads and higher credit enhancements. The continued decline in new issuance resulted in transaction revenue in 2009 representing 41% of total SFG revenue, compared to 50% in 2008. In the U.S., revenue of $142.1 million decreased $42.1 million with the most prevalent declines in the Derivatives, ABS and CMBS sectors. Non-U.S. revenue was $162.8 million and declined $57.7 million from 2008, with 41% of the decrease occurring within EMEA Derivatives. Unfavorable changes in FX translation rates had a $7 million impact on international SFG revenue for the year ended December 31, 2009.

Global CFG revenue of $408.2 million increased $101.2 million from the prior year which included approximately $6 million of unfavorable impact from changes in FX translation rates. The global increase is due primarily to higher rated issuance in the investment-grade and high-yield sectors. Transaction revenue represented 64% of total CFG revenue, an increase from 54% in the prior year. In the U.S., revenue was $251.2 million, an increase of $68.1 million compared to 2008, reflecting strong growth in both investment-grade and high-yield bond issuance. U.S. revenue accounted for 62% of global CFG compared to 60% in the prior year period. The growth in investment-grade rated issuance reflects an increase in the number of companies refinancing debt ahead of expected maturities to take advantage of favorable interest rates within the corporate finance markets and to improve liquidity. The activity in the U.S. high-yield markets increased revenue by approximately $45 million, with 68% of the growth occurring in the second half of 2009. The growth in speculative-grade rated issuance reflects increased investor confidence in the high-yield market and the continued narrowing of interest rate spreads compared to U.S. Treasuries which began in the second quarter of 2009. Internationally, revenue of $157.0 million in 2009 increased 27% compared to the same period in 2008, driven primarily by growth in investment-grade issuance within EMEA and high-yield issuance across all non-U.S. regions, reflecting early debt refinancing activities.

Global FIG revenue of $258.5 million declined $4.5 million from the prior year, with declines in the U.S. being partially offset by modest growth internationally. Transaction revenue declined to 31% of total FIG revenue, compared to 33% in the same period of 2008. In the U.S., 2009 revenue of $107.3 million decreased $10.5 million from 2008, primarily within specialty insurance which reflects continued contraction within the sector. Outside the U.S., revenue was $151.2 million, an increase of 4% from the prior year due primarily to growth in the banking sector in the Canada and Latin America regions. Unfavorable changes in FX translation rates negatively impacted international FIG revenue by approximately $6 million.

Global PPIF revenue was $246.1 million and increased $16.1 million compared to the same period in 2008 with increases in public finance and infrastructure finance being partially offset by declines in U.S. municipal structured products. Revenue generated from new transactions comprised 59% of global PPIF, unchanged from the same period of 2008. In the U.S., PPIF revenue increased $2.6 million compared to 2008 with growth in public finance reflecting higher issuance related to the Build America Bond Program which was implemented in the U.S. as part of the American Recovery and Reinvestment Act of 2009, coupled with higher project and infrastructure revenue. These increases were partially offset by declines in issuance for municipal structured products which reflects declines in bank capacity and a lower market penetration for insured transactions. Outside the U.S., PPIF revenue increased $13.5 million, or 19% over 2008, reflecting growth in infrastructure finance and public finance revenue in EMEA partially offset by declines in project finance in Asia. Excluding the $4 million unfavorable impact of changes in FX translation rates, international revenue grew $17.7 million compared to the same period in 2008.

Operating and SG&A expenses in 2009 increased $44.1 million, reflecting increases in compensation and non-compensation costs of approximately $26 million and $18 million, respectively. The increase in compensation costs compared to 2008 related to higher incentive compensation due to greater achievement against 2009 targeted results being partially offset by cost savings realized from the 2007 and 2009 Restructuring Plans, $6 million of senior executive severance costs included in 2008 and the impact of favorable changes in FX translation rates. The increase in non-compensation costs reflects higher rent and occupancy costs for the Canary Wharf Lease, higher professional services costs which include legal and IT consulting and a higher allowance for uncollectible accounts due to the deterioration of liquidity caused by general economic conditions. Additionally, there was a charge in 2009 for an international VAT matter.

Restructuring expenses reflect costs associated with the 2009 Restructuring Plan as well as adjustments made to previous estimates for the 2007 Restructuring Plan.

Depreciation and amortization of $31.3 million decreased $2.0 million from the prior year and was primarily due to the 2008 accelerated depreciation for the New Jersey office facility closure being partially offset by higher depreciation relating to costs capitalized for ongoing IT systems projects which were placed in service during 2009.

MOODY’S2009 10-K37


Operating income of $1,259.5$497.2 million was $39.8 million lower than 2008 primarily reflecting the 8% increase in 2006, whichtotal expenses. Changes in FX translation rates had an immaterial impact on operating income during in 2009.

Moody’s Analytics

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

   Year Ended December 31,    
   2009  2008  % Change 
Revenue:     

RD&A

  $413.6  $418.7   (1.2)% 

RMS

   145.1   108.8   33.4

Professional services

   20.8   23.2   (10.3)% 
          

Total

   579.5   550.7   5.2
          
Expenses:     

Operating and SG&A

   348.0   298.6   16.5

Restructuring

   8.4   (0.9 NM  

Depreciation and amortization

   32.8   41.8   (21.5)% 
          

Total

   389.2   339.5   14.6
          
Operating income  $190.3  $211.2   (9.9)% 
          

Global MA revenue increased $28.8 million, with all of the growth generated internationally, and included a 160.6negative $12 million gain onimpact from changes in FX translation. Recurring revenue comprised 89% of total revenue in 2009, slightly lower than the sale91% in 2008 reflecting higher RMS license and service revenue which is primarily transaction-based.

In the U.S., revenue of Moody’s corporate headquarters building$257.7 million decreased 3%, reflecting declines across all LOB’s. International revenue of $321.8 million was $36.2 million higher than in 2008, primarily reflecting strong growth in RMS resulting from the Fermat acquisition in the fourth quarter of 2006, rose $319.9 million or 34.0% from $939.6 million2008.

Global RD&A revenue, which comprises 71% of total MA in 2005. Excluding the gain on sale, operating income increased 17%. The effects of foreign currency translation reduced year-over-year growth in operating income by approximately $3 million. Moody’s operating margin for 20062009, was 61.8%down slightly compared to 54.3% in 2005. The gain on2008 reflecting modestly higher attrition due to contraction among capital markets customers offset by demand for products that support analysis for investment and commercial credit applications. U.S. revenue was $212.5 million, a decrease of $3.7 million from 2008. Internationally, revenue totaled $201.1 million, a decrease of $1.4 million from the sale of the buildingprior year.

Global RMS revenue increased the 2006 margin by approximately 790 basis points.

Moody’s reported $1.0$36.3 million of interest and other non-operating income (expense), net in 2006 compared with ($4.9) million in 2005. Interest expense was $15.2 million in 2006 and $21.0 million in 2005. The amounts included $14.9 million and $20.9 million of interest expense on Moody’s $300 million of notes payable for 2006 and 2005, respectively. Interest income was $18.2 million in 2006 compared to $26.0 million in 2005. The decrease was attributed to the liquidation of investment portfolios to finance share repurchases. Foreign exchange losses were immaterial in 2006 compared to $8.2 million in 2005. The year-over-year change2008, and was primarily due to the British pound and euro appreciating to the U.S. dollar.

Moody’s effective tax rate was 40.2% in 2006 compared to 40.0% in 2005. The 2006 and 2005 effective tax rates were reduced by benefits of $2.4 million and $8.8 million, respectively, related to legacy income tax matters, see “Contingencies – Legacy Tax Matters” below for further information. Additionally, Moody’s recognized a tax benefit of approximately $3 million related to additional foreign tax creditsFermat acquisition made in the fourth quarter of 2006 and a tax benefit2008. U.S. revenue of $3.6$42.1 million in 2005 related towas down $1.7 million compared prior year, while international revenue of $103.0 million increased $38.0 million reflecting the repatriation of foreign earnings under the American Jobs Creation Act of 2004. The 2006 rate was also favorably impacted by approximately 30 basis points due to the settlement of state tax audits.

Net income was $753.9 million in 2006, an increase of $193.1 million or 34.4% from $560.8 million in 2005. Basic and diluted earnings per share for 2006 were $2.65 and $2.58, respectively, compared to basic and diluted earnings per share of $1.88 and $1.84, respectively, for 2005. Excluding the gain on sale, 2006 net income was $659.8 million, an increase of $99.0 million or 17.7%. Additionally, the gain contributed $0.33 and $0.32 relating to full year basic and diluted earnings per share, respectively.

Segment Results

Moody’s Investors Service

Revenue at Moody’s Investors Service in 2006 was $1,894.3 million, up $294.0 million or 18.4% from $1,600.3 million in 2005. Ratings revenue accounted for $250.6 million of growth with increased revenue in global structured finance, corporate finance and financial institutions and sovereign risk offsetting a decline in public finance. Double-digit growth in research also contributed to the increase in revenue. Foreign currency translation positively impacted revenue growth by approximately $1 million. Price increases also contributed to year-over-year growth in revenue.

Structured finance revenue was $886.7 million in 2006, an increase of $171.3 million or 23.9% from $715.4 millionaforementioned acquisition made in the same periodfourth quarter of 2005. Approximately $109 million of the increase was in the U.S., with the collateralized debt and commercial mortgage-backed sectors contributing about 96% of the U.S. increase. Year-over-year issuance of collateralized loan obligations and cash flow resecuritizations grew, in part, to the increased “repackaging” of securitized assets such as consumer asset-backed and mortgage-backed securities, as well as bank loans in collateralized debt obligations. Strong growth in commercial real estate collateralized debt obligation issuance was a key driver of overall commercial mortgage-backed issuance. International structured finance2008.

Global professional services revenue grew approximately $62 million year-over-year, with Europe contributing about $58 million, where credit derivatives, commercial mortgage-backed and residential mortgage-backed sectors totaled 92% of the European growth. Foreign currency translation for structured finance positively impacted international revenue growth by approximately $2 million.

Corporate finance revenue was $396.2 million in 2006, up $73.0 million or 22.6% from $323.2 million in 2005. Revenue in the U.S. increased approximately 22% principally due to issuance related growth in bank loan and corporate bond ratings revenue. Investment grade bond issuance increased approximately 17% and high yield bond issuance increased approximately 43%, primarily due to significant mergers and acquisitions, leveraged buyouts and second lien loan activity. International corporate finance revenue increased approximately $28 million or about 24% due largely to increased corporate bond issuance and non-issuance related ratings fees in Europe. Price increases also contributed to year-over-year growth in global corporate finance revenue.

Revenue in the financial institutions and sovereign risk group was $266.8 million in 2006, an increase of $12.2 million or 4.8% from $254.6 million in 2005. In the U.S., revenue grew approximately $11 million, principally due to strength in insurance and real estate sectors. Internationally, revenue increased $1.5decreased $2.4 million compared to the prior year period.

Public finance revenue was $85.9 millionprimarily reflecting declines in 2006, a decrease of $5.9 million or 6.4% from $91.8 million in 2005. Dollar volume issuance in the municipal bond market declined compared to 2005, primarily due to lower refinancing activity.

20


Research revenue of $258.7 million in 2006 was $43.4 million or 20.2% higher than $215.3 million in 2005. Revenue grew by approximately $28 milliontraining services in the U.S. and about $15EMEA as companies reduced their spending on these services due to the poor capital markets and economic conditions during 2009.

Operating and SG&A expenses of $348.0 million internationally, with Europe accounting for approximately 41% of international growth. Research and analytics services accounted for approximately $17increased $49.4 million of global revenue growth primarily from credit research on the corporate finance, financial institutions and the structured finance related businesses. Revenue from the licensingprior year, reflecting higher compensation and non-compensation costs. Compensation costs of Moody’s information to financial customers for internal use$229.1 million increased $18.2 million from the prior year and redistribution was approximately $57reflected additional headcount from acquisitions made in the fourth quarter of 2008 partially offset by lower incentive compensation resulting from lower achievement against 2009 targeted results. Non-compensation expenses were $118.9 million, in 2006, an increase of approximately $8$31.2 million or about 17%compared to 2008, primarily due to higher than the prior year.

Moody’s Investors Service operating, selling, general and administrative expenses, including corporate expenses, were $789.1 million in 2006, an increase of $143.7 million or 22.3% from $645.4 million in 2005. The largest contributor to 2006 expenses was growth in compensation and benefits of approximately $110 million reflecting compensation increases, increased staffing primarily in the U.S. and European ratings businesses and higher stock-based compensation expense of $21.4 million. Furthermore, expenses in 2006 included increased rent and occupancy costs for the Canary Wharf Lease and higher expenses related to acquisitions made in the fourth quarter of approximately $112008. The aforementioned increases for both compensation and non-compensation costs were partially offset by favorable changes in FX translation rates.

Restructuring expenses of $8.4 million to support business expansionreflect severance and contract termination costs associated with Moody’s new corporate headquarters. Additional increases werethe divestiture of non-strategic assets as well as adjustments made to previous estimates for the 2009 and 2007 Restructuring Plans.

Depreciation and amortization expenses decreased $9.0 million from prior year, primarily due to increased informationadjustments recorded in 2008 relating to an approximate $11 million impairment of certain software and database intangible assets and a $4.5 million write-off of acquired in-process technology investment spendingrelated to the acquisition of approximately $8Fermat. The absence of these items in 2009 was partially offset by higher amortization of intangible assets during 2009 associated with business acquisitions made in the fourth quarter of 2008.

38MOODY’S2009 10-K


Operating income of $190.3 million offset bydecreased $20.9 million compared to 2008, due to the 15% increase in expenses outpacing the 5% increase in revenue. Excluding restructuring in both years, operating income in 2009 was $198.7 million, a decrease of $11.6 million from the same period in 2008.

Year Ended December 31, 2008 compared with December 31, 2007

Executive summary

Moody’s revenue for 2008 totaled $1,755.4 million, a decrease of 22% from $2,259.0 million in 2007. Operating income was $748.2 million, down $382.8 million or 34% from $1,131.0 million in 2007. Excluding the positive impact from FX translation, global revenue and operating income declined 23% and 36%, respectively. Diluted EPS of $1.87 for 2008 included a benefit of $0.05 related to the resolution of certain Legacy Tax Matters and minor adjustments to the 2007 restructuring. Excluding the Legacy Tax Matters and impact of restructuring in both years, diluted EPS of $1.82 for 2008 decreased 27% from $2.50 for 2007.

Revenue at MIS totaled $1,204.7 million for 2008, a decrease of $575.2 million, or 32% from 2007. Excluding the positive impact from FX translation, revenue declined $591.7 million, or 33% from prior year. U.S. revenue of $645.0 million decreased $474.0 million or 42%, while non-U.S. revenue of $559.7 million decreased $101.2 million or 15% from the prior year. The public, project and infrastructure business line achieved modest growth. Due to the credit market crisis that began in mid-2007 all other MIS business lines recorded declines from the prior year, led by structured finance.

MA revenue rose to $550.7 million for 2008, up 15% from 2007 with all lines of business growing. U.S. revenue of $265.1 million for 2008 increased 9% from 2007. Non-U.S. revenue of $285.6 million increased 21% from 2007 and represented 52% of global revenue, compared to 49% a year earlier.

Total expenses for Moody’s Corporation of $1,007.2 million were down $120.8 million compared to the prior year. Excluding the restructuring charge in 2007 and minor adjustments to this charge in 2008, Moody’s total expenses were $68.3 million, or 6%, lower in 2008, due primarily to lower compensation costs.

Moody’s Corporation

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

   Year Ended December 31,    
   2008  2007  % Change 
Revenue:    

United States

  $910.1   $1,361.8   (33.2)% 
          

International:

    

EMEA

   603.1    659.3   (8.5)% 

Other

   242.2    237.9   1.8
          

Total International

   845.3    897.2   (5.8)% 
          

Total

   1,755.4    2,259.0   (22.3)% 
          
Expenses:    

Operating

   493.3    584.0   (15.5)% 

SG&A

   441.3    451.1   (2.2)% 

Restructuring

   (2.5  50.0   (105.0)% 

Depreciation and amortization

   75.1    42.9   75.1
          

Total

   1,007.2    1,128.0   (10.7)% 
          
Operating income  $748.2   $1,131.0   (33.8)% 
          
Interest (expense) income, net  $(52.2 $(24.3 114.8
Other non-operating (expense) income, net  $33.8   $15.3   120.9
Net income attributed to Moody’s  $457.6   $701.5   (34.8)% 

Total revenue of $1,755.4 million decreased $503.6 million from 2007, due to the significant decline in MIS partly offset by good growth in MA.

Total relationship and transaction-based revenue for Moody’s in 2008 was 64% and 36%, respectively, compared to 45% and 55%, respectively in the prior year.

MOODY’S2009 10-K39


U.S. revenue was $910.1 million, down $451.7 million from the prior year primarily reflecting significantly reduced issuance activity due to the broader downturn in global economic activity, significant financial market volatility, worsening credit market conditions and record-high interest rate spreads.

International revenue of $845.3 million decreased $51.9 million from 2007 and accounted for 48% of global revenue compared to 40% a year ago. FX translation contributed approximately $23 million to 2008 international revenue. Issuance volumes were significantly lower across most of the EMEA and Asian markets compared to 2007.

Operating expenses were $493.3 million, down $90.7 million due primarily to lower compensation costs of $70.5 million. Incentive compensation of $30.8 million decreased $27.8 million due to weak financial performance within the MIS segment and the impact of restructuring. Salaries and wages decreased approximately $21 million primarily reflecting the effects of the 2007 restructuring. Stock-based compensation of $40.6 million declined $17.3 million due to the impact of the 2007 restructuring which resulted in higher forfeitures of awards than in the previous year. Non-compensation costs of $76.6 million decreased $20.2 million due to strong cost controls, particularly in the areas of T&E and recruiting which declined approximately $9 million and $3 million, respectively.

SG&A expenses of $441.3 million decreased $9.8 million from the prior year due to declines in both compensation and non-compensation expenses. Compensation costs decreased $4.9 million, or 2%, primarily reflecting reductions of approximately $5 million and $10 million in incentive and stock-based compensation, respectively. These decreases were partially offset by an approximate $9 million increase in salaries and wages due primarily to $6 million in legal fees. Expenses for 2005 included a charge of $9.4 million for the settlement of sales tax matters related to Moody’s operations in Japan from 2000 through June 30, 2005, which was a result of a tax audit by Japanese taxing authorities that was completedsenior executive severance expense recorded in the second quarter of 2005. Additionally,2008. Non-compensation expenses of $207.4 million were down $4.9 million from prior year reflecting decreases in 2005 included $3.2T&E, rent and occupancy costs, and professional service fees of $4.6 million, $5.4 million and $6.8 million, respectively, partially offset by approximately $11 million of bad debt reflecting the increase in bankruptcies and collection issues, compared to less than $1 million in 2007.

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

   December 31,    
   2008*  2007  % Change 
United States  2,130  2,175  (2.1)% 
International  1,817  1,397  30.1
        
Total  3,947  3,572  10.5
        

*reflects approximately 350 additional headcount due to acquisitions made during the year, of which approximately 290 were added in the fourth quarter.

Restructuring in 2008 reflects adjustments of previous estimates for severance and contract termination costs associated with the 2007 Restructuring Plan.

Depreciation and amortization of $75.1 million increased $32.2 million from 2007 primarily due to: an approximate $11 million impairment of certain software and database intangible assets within the MA segment, approximately $6 million of incremental depreciation reflecting the use of 7WTC for the settlementfull year of certain pension obligations. Foreign currency2008, approximately $6 million of purchase accounting amortization associated with the acquisition of Fermat of which $4.5 million was a write-off of acquired in-process technology and approximately $4 million of accelerated depreciation related to the closure of the Company’s New Jersey office in the second quarter of 2008.

Operating income in 2008 of $748.2 million decreased $382.8 million from the prior year reflecting the significant decline in revenue resulting in an operating margin of 42.6%, which was 750 basis points lower than the 50.1% margin in 2007. Operating income in 2007 reflected a $50.0 million restructuring charge. FX translation positively impacted operating income by approximately $28 million.

Interest income (expense), net was ($52.2) million, an increase of $27.9 million from prior year primarily due to higher debt levels and the absence in 2008 of $17.5 million of income relating to the reversal of accrued interest resulting from the resolution of a Legacy Tax Matter in the second quarter of 2007 compared to $2.3 million in 2008.

Other non-operating income (expense), net was $33.8 million, up $18.5 million from the prior year, due primarily to FX gains of approximately $25 million recorded during the year reflecting the strengthening of the U.S. dollar and the euro to the British pound.

Moody’s effective tax rate of 36.7% remained essentially flat with 37.0% in 2007. Excluding the impact of restructuring and Legacy Tax items in both years, Moody’s ETR was 37.1%, down 290 bps from 40.0% in 2007, due primarily to a larger portion of consolidated taxable income being generated from outside the U.S., which is generally taxed at a lower rate than the U.S. statutory rate, and the realization of benefits available for U.S.-based manufacturing and research activities.

40MOODY’S2009 10-K


Net Income was $457.6 million, a decrease of $243.9 million from the prior year, primarily reflecting revenue declines that outpaced cost reductions. Excluding the impact of Legacy Tax Matters and restructuring, net income of $445.3 million was $235.3 million lower than 2007. Diluted EPS was $1.87, or 28% lower than in the prior year resulting from the 35% reduction in net income, partially offset by 10% fewer diluted shares outstanding.

Segment Results

Moody’s Investors Service

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

   Year Ended December 31,    
   2008  2007  % Change 
Revenue:     

Structured finance

  $404.7   $868.4  (53.4)% 

Corporate finance

   307.0    416.4  (26.3)% 

Financial institutions

   263.0    274.3  (4.1)% 

Public, project and infrastructure finance

   230.0    220.8  4.2
          

Total

   1,204.7    1,779.9  (32.3)% 
          
Expenses:     

Operating and SG&A

   636.0    759.4  (16.2)% 

Restructuring

   (1.6  41.3  (103.9)% 

Depreciation and amortization

   33.3    24.0  38.8
          

Total

  $667.7   $824.7  (19.0)% 
          
Operating income  $537.0   $955.2  (43.8)% 
          

Global MIS revenue of $1,204.7 million was down $575.2 million from 2007, reflecting the significant declines in global SFG and U.S. CFG revenue. In the U.S., revenue of $645.0 million was down $474.0 million, or 42%, due to decreases in SFG and CFG. Internationally, revenue was $559.7 million, a decline of $101.2 million, or 15%, from a year-ago, with declines in SFG and CFG, partially offset by growth in PPIF. In 2008, international revenue comprised 46% of global revenue, compared to 37% in 2007. FX contributed approximately $16 million to international revenue in 2008. The split of revenue between relationship and transaction was 51% and 49%, respectively, versus the prior year when the split was 32% relationship and 68% transaction revenue. Globally, the lower proportion of transaction revenue in 2008 was primarily due to the significant decline in new issuance due to the broader downturn in global economic activity reflected in the extreme market volatility, worsening credit market conditions and record-high interest rate spreads in the later part of the year.

Global SFG revenue decreased $463.7 million, due to declines in derivatives, CREF and RMBS of $196.0 million or 58%, $123.8 million or 69%, and $103.1 million or 58%, respectively, which together accounted for 91% of the decrease. Continued turbulence in the capital and credit markets, combined with lack of market liquidity and higher interest rate spreads, has resulted in lower loan origination and securitization which led to a significant decline in new issuance revenue. In 2008, transaction-based revenue accounted for 50% of total SFG down from 77% in the prior year. In the U.S., revenue of $184.2 million was down approximately $372 million or 67%, from a year ago, led by declines in the aforementioned asset classes due to significantly reduced issuance volume. International revenue was $220.5 million, a decrease of $91.4 million or 29% from 2007, led by declines in derivatives and CREF of $48.5 million or 42%, and $41.6 million or 66%, respectively. FX translation contributed approximately $4$8 million to year-to-yearinternational SFG revenue in 2008.

Global CFG revenue was down $109.4 million from prior year, due to low issuance volumes particularly in the U.S. Revenue from new issuance declined 42% from the prior year, due primarily to lower issuance in both investment-grade and speculative-grade securities, resulting from the broader downturn in global economic activity, reflected in the significant financial market volatility, worsening credit market conditions and record-high interest rate spreads in the later part of the year. Transaction-based revenue comprised 54% of global CFG revenue, compared to 69% in 2007. Revenue in the U.S. was $183.1 million, a decrease of $91.8 million, or 33%, from the prior year as revenue from bank loans and speculative-grade bond ratings declined $64.1 million or 66% and $30.6 million or 62%, respectively, and was slightly offset by $6.6 million, or 18%, of growth in reportedrevenue from monitoring fees. International revenue of $123.9 million was down $17.6 million, or 12%, from prior year comprised of declines in speculative-grade bond ratings, bank loan ratings, estimated ratings and investment-grade bond ratings of $10.4 million or 56%, $7.4 million or 67%, $4.4 million or 25%, and $3.7 million or 13%, respectively. These declines were offset by growth in monitoring fees of $5.3 million,

MOODY’S2009 10-K41


as well as an approximate $2 million increase in other CFG services such as national scale ratings and company credit assessment services. FX translation contributed approximately $3 million to international CFG revenue in 2008.

Global FIG revenue decreased $11.3 million from the prior year reflecting significant declines in issuance volumes primarily in the U.S. insurance and banking markets due to the on-going credit crisis. Revenue from new transactions accounted for 33% of total FIG in 2008, compared to 42% in the prior year. In the U.S., revenue of $117.8 million decreased $12.2 million, or 9%, from prior year, led by an $8.9 million decline in the insurance sector, specifically the property and casualty insurance industry which was down $5.0 million or 22% from 2007. International revenue of $145.2 million remained flat with prior year reflecting growth from the life insurance industry offset by declines from rating financial guarantors and the property and casualty insurance industry. FX translation contributed $5 million to international FIG revenue in 2008.

Global PPIF revenue increased $9.2 million from prior year due to growth in municipal structured products and in the project and infrastructure finance sectors of $10.3 million or 35%, and $2.5 million or 3%, respectively. Recurring revenue represented 41% of total in 2008 compared with 40% in 2007. In the U.S., revenue of $159.9 million grew $2.3 million, with increases in the aforementioned municipal structured products partially offset by declines of $6.4 million in other public finance issuance. Outside the U.S., revenue of $70.1 million was up $6.9 million, or 11%, from prior year, reflecting growth primarily within the EMEA region of $4.6 million and $2.1 million in the infrastructure finance and public finance sectors, respectively.

Operating and SG&A expenses of $636.0 million, including allocated corporate overhead costs, decreased $123.4 million, with declines in both compensation and non-compensation expenses of approximately $83 million and approximately $40 million, respectively. Incentive compensation decreased approximately $39 million primarily due to weak financial performance. Stock-based compensation decreased approximately $20 million primarily reflecting the impact of the 2007 Restructuring Plan which resulted in higher forfeitures of awards than in the previous year. Salary and benefits expense decreased approximately $24 million from prior year, reflecting the change in the mix of employees and timing of adding new hires during the year, partially offset by approximately $6 million in senior executive severance expense recorded in the second quarter of 2008. The decrease in non-compensation expenses from 2007 reflected continued strong cost controls, resulting in reductions within T&E, recruiting and marketing of $14.6 million, $3.1 million and $2.6 million, respectively. Offsetting these decreases in 2008 was an $8.1 million increase in bad debt expense compared to prior year, primarily related to bankruptcies and collection issues, including $2.3 million for Lehman Brothers and $1.7 million for issuers of structured investment vehicles.

The 2008 restructuring amount primarily reflects adjustments of previous estimates for severance and contract termination costs associated with the Restructuring Plan.

Depreciation and amortization expense increased $9.3 million primarily due to the accelerated depreciation recorded in the second quarter of 2008 relating to the Jersey City office closure and a full year of depreciation on 7WTC assets.

Operating income decreased $418.2 million from 2007 reflecting the 32% reduction in revenue outpacing the 19% decline in Operating and SG&A expenses.

Moody’s Investors Service Excluding the impact of the 2007 restructuring and minor adjustments made in 2008 relating to this charge, operating income of $1,242.9 million in 2006 was up $306.6declined $461.1 million or 32.7%46% from $936.3the prior year. FX translation had a positive impact of approximately $17 million on MIS operating income in 2005,2008.

Moody’s Analytics

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

   Year Ended December 31,    
   2008  2007  % Change 
Revenue:     

RD&A

  $418.7   $370.3  13.1

RMS

   108.8    92.4  17.7

Professional services

   23.2    16.4  41.5
          

Total

   550.7    479.1  14.9
          
Expenses:     

Operating and SG&A

   298.6    275.7  8.3

Restructuring

   (0.9  8.7  (110.3)% 

Depreciation and amortization

   41.8    18.9  121.2
          

Total

   339.5    303.3  11.9
          
Operating income  $211.2   $175.8  20.1
          

42MOODY’S2009 10-K


Global MA revenue increased $71.6 million, with 69% of the growth generated internationally, and accounted for 31% of global MCO revenue in 2008 compared to 21% in the prior year. Recurring revenue, which included a $160.6includes subscription and software maintenance fees, comprised 91% of the total in 2008, Compared to 92% in the prior year. In the U.S., revenue of $265.1 million gain onincreased 9%, primarily reflecting growth in RD&A revenue. International revenue of $285.6 million was $49.3 million higher than in 2007, reflecting growth in all business lines, particularly in RMS which benefited from the saleacquisition of Moody’s corporate headquarters buildingFermat. FX translation contributed approximately $7 million to international MA revenue in 2008.

Global RD&A revenue, which comprises 76% of total MA in 2008, increased $48.4 million and accounted for 68% of global MA growth, reflecting continued demand from new and existing customers for credit and economic research, structured finance analytics, credit risk assessment and other offerings. U.S. revenue was $216.2 million, an increase of $20.8 million from 2007. Internationally, revenue totaled $202.5 million, an increase of $27.6 million or 16% over the prior year, with 80% of the growth generated within the EMEA region.

Global RMS revenue increased $16.4 million, including the positive impact of the Fermat acquisition in the fourth quarter of 2006. Excluding the gain, operating income increased 15.6%. The effects of foreign currency translation reduced year-to-year growth in operating income by approximately $3 million.

Moody’s KMV

MKMV2008. U.S. revenue of $142.8$43.8 million in 2006 was $11.5remained flat with prior year, while international revenue of $65.0 million increased $16.0 million or 8.8% more than33% from the same period in 2005. MKMV’sprior year with growth generated from all regions.

Global professional services revenue growth reflected increased $6.8 million over prior year reflecting relatively higher demand internationally for credit decision-making softwareeducation, portfolio analysis, risk modeling and software related maintenancescorecard development services, which grewprimarily in the EMEA region.

Operating and SG&A expenses, including allocated corporate overhead costs, were $298.6, an increase of $22.9 million from the prior year due to increases in both compensation and non-compensation expenses of approximately 10% or $2.7$8 million comparedand approximately $15 million, respectively. The increase in compensation expense primarily reflects approximately $6 million of higher incentive compensation costs due to 2005. Growthbetter than expected financial performance, and a 30% increase in subscriptions revenue relatedaverage headcount due to credit risk assessment products grew approximately 5% or $4.9acquisitions made during the year. Non-compensation expenses of $98.0 million increased due primarily to the impact of acquisitions and a higher proportion of allocated corporate overhead expenses in 2008 compared to prior year and risk services revenue increased approximately $4 million or about 36% compared to prior year. In 2006, international MKMV revenue accounted for 56% of its global revenue.

MKMV’s operating, selling, general and administrative expenses were $109.6 millionbased on the revenue-split methodology, as well as the absence in 2006, a decrease of $1.8 million or 1.6% from $111.4 million in 2005. The 2006 expenses include a total of $3.5 million due to training and recruitment, sales and marketing expenses. Additionally, 2006 expenses include a $2.2 million charge recorded in connection with a non-income tax matter. The 2005 expenses included approximately $7 million related to severance costs, the write-off of capitalized software development and a liability for unpaid overtime due to certain employees. MKMV operating income was $16.6 million for 2006 compared with $3.3 million in 2005. Currency translation did not have a significant year-to-year impact on MKMV results.

Year Ended December 31, 2005 Compared With Year Ended December 31, 2004

Total Company Results

Moody’s revenue for 2005 was $1,731.6 million, an increase of $293.3 million or 20.4% from $1,438.3 million during 2004. Moody’s achieved strong revenue growth in several business sectors, including global structured finance, financial institutions and research, international corporate finance and U.S. public finance.

Revenue in the United States was $1,085.4 million for 2005, an increase of $174.2 million or 19.1% from $911.2 million in 2004. Approximately 85% of the U.S. growth was driven by structured finance and research, reflecting strong issuance across all structured asset classes and continued demand for core research products. U.S. financial institutions, public finance and corporate finance contributed to year-to-year growth as well.

Moody’s international revenue was $646.2 million in 2005, an increase of $119.1 million or 22.6% from $527.1 million in 2004. International ratings revenue grew approximately $86 million versus the prior year, with approximately 77% of the growth related to Europe of which financial institutions contributed approximately $31 million of revenue growth primarily due to increased issuance and new ratings relationships. European structured finance, research and corporate finance contributed to growth as well. Favorable foreign currency translation accounted for approximately $7 million of reported international revenue growth.

21


Moody’s operating, selling, general and administrative expenses of $756.8 million in 2005 were $139.0 million or 22.5% greater than $617.8 million in 2004. Compensation and benefits continue to be Moody’s largest expense, accounting for more than 70% of total expenses in 2005 and 2004. Moody’s average global staffing of approximately 2,700 employees during the year ended December 31, 2005 was approximately 12% higher than during the same prior year period. This increase includes approximately 100 people due to the acquisition of Economy.com in November 2005 and hiring to support business growth mainly in the U.S. and European ratings businesses. The table below shows Moody’s staffing at year-end 2005 compared with year-end 2004.

   December 31, 2005  December 31, 2004
   United States  International  Total  United States  International  Total

Moody’s Investors Service

  1,600  919  2,519  1,358  761  2,119

Moody’s KMV

  303  74  377  329  68  397
                  

Total

  1,903  993  2,896  1,687  829  2,516
                  

Operating expenses were $452.9 million in 2005, an increase of $77.5 million or 20.6% from $375.4 million in 2004. The largest contributor to this increase was growth in compensation and benefits expense of $62.7 million, reflecting compensation increases, increased staffing, higher stock-based compensation expense and $3.2 million for the settlement of certain pension obligations. Moody’s global staffing reflected the acquisition of Economy.com in November 2005 and hiring primarily in the U.S. and European ratings businesses to support business growth. Stock-based compensation expense increased $18.7 million year-to-year. As more fully discussed in Notes 2 and 11 to the consolidated financial statements, the Company adopted the fair value method provisions of SFAS No. 123 prospectively beginning on January 1, 2003. The year-to-year increase in expense reflects the phasing in of expense over the current four-year equity plan vesting period as annual equity grants are made, the effects2008 of a higher share price on the value of the 2005 equity grants versus 2004, and additional expense recorded in the first quarter of 2005 related to the accelerated expensing of equity grants for employees at or near retirement eligibility. Outside service fees increased by approximately $7$2.5 million of which approximately $6 million relates to information technology investment spending.

Selling, general and administrative expenses were $303.9 million in 2005, an increase of $61.5 million or 25.4% from $242.4 million in 2004. Year-to-year expense increases included growth in compensation and benefits of $29.4 million, reflecting compensation increases, increased staffing in finance and technology support functions and $8.3 million related to stock-based compensation as discussed above. Additionally, as a result of asales tax audit by Japanese taxing authorities that was completedbenefit received in the second quarter of 2005, expenses2007.

The 2008 restructuring amount primarily reflects adjustments of previous estimates for 2005 included a chargeseverance and contract termination costs associated with the Restructuring Plan.

The increase in depreciation and amortization of $9.4$22.9 million for the settlement of sales tax matters related to Moody’s operations in Japan from 2000 through June 30, 2005. Outside service fees increased by approximately $6 million of which approximately $3 million relates to information technology investment spending and about $2 million relates to legal fees.

Operating income of $939.6 million in 2005 rose $153.2 million, or 19.5% from $786.4 million in 2004. Favorable foreign currency translation contributed approximately $6 million to operating income growth. Moody’s operating margin for 2005 was 54.3% compared to 54.7% in 2004.

Moody’s reported $4.9 million of interest and other non-operating expense, net in 2005 compared with $15.1 million in 2004. Interest expense was $21.0 million in 2005 and $23.0 million in 2004. The amounts included $20.9 million and $22.8 million of interest expense on Moody’s $300 million of notes payable for 2005 and 2004, respectively. Interest income was $26.0 million in 2005 compared to $6.8 million in 2004. The increase was due to a higher average investment balance as well as an increase in the weighted average yield. Foreign exchange (losses)/gains were ($8.2) million and $1.9 million in 2005 and 2004, respectively. The year-over-year change was2007 is primarily due to the appreciationapproximate $11 million impairment of the U.S. dollar versus the British poundcertain software and the euro.

Moody’s effective tax rate was 40.0% in 2005 compared to 44.9% in 2004. The effective tax rates included $8.8database intangible assets and amortization of approximately $6 million in credits and $30.0 million in charges due to changes in reserves in 2005 and 2004, respectively, related to legacy income tax exposures that were assumed by Moody’s in connection with its separation from Old D&B in October 2000 (see “Contingencies – Legacy Tax Matters”, below). Additionally, Moody’s recognized a tax benefit of $3.6 million in 2005 related to the repatriationFermat acquisition, including a $4.5 million write-off of foreign earnings under the American Jobs Creation Act of 2004.acquired in-process technology.

NetOperating income was $560.8increased $35.4 million in 2005, an increase of $135.7 million or 31.9% from $425.1 million in 2004. Basic and diluted earnings per share for 2005 were $1.88 and $1.84, respectively, compared to basic and diluted earnings per share of $1.43 and $1.40, respectively, for 2004.

22


Segment Results

Moody’s Investors Service

Revenue at Moody’s Investors Service for 2005 was $1,600.3 million, up $282.8 million or 21.5% from $1,317.5 million in 2004. Ratings revenue accounted for $241.2 million of growth with approximately 80% of that growth coming from global structured finance and European financial institutions. Good growth was achieved in a number of other ratings sectors as well as in research. Foreign currency translation accounted for approximately $7 million of reported revenue growth. Price increases also contributed to year-to-year growth in reported revenue.

Structured finance revenue was $715.4 million for 2005, an increase of $162.3 million or 29.3% from $553.1 million in 2004. Approximately $129 million of the increase was in the U.S., with the residential mortgage, collateralized debt and commercial mortgage sectors, contributing approximately 88% of this amount. Attractive mortgage products, such as low-adjustable-rate mortgages, as well as rising home prices and continued strength in the new housing market were key drivers in providing assets for residential mortgage securitizations. Demand for collateralized debt obligations increased as an ample supply of collateralized loan obligations and cash flow resecuritizations drove issuance higher. Global commercial mortgage-backed revenue was approximately $119 million, about 47% more than prior year, as record issuance drove2007, reflecting strong revenue growth during the year. International structured finance revenue grew approximately $33and an approximate $10 million year-to-year, with Europe contributing about $23 million.

Corporate finance revenue was $323.2 million for 2005, up $23.6 million or 7.9%positive impact from $299.6 million in 2004. Revenue increased modestly in the U.S., as declines in high yield revenue largely offset higher revenue from bank loan ratings due to issuance related growth, an increase in first time rated issuers and price increases related in part to Moody’s Enhanced Analysis Initiative. High yield bond issuance declined approximately 31% as many issuers shifted to the leveraged loan markets for financing needs. Conversely, investment grade corporate debt issuance increased about 5% compared to 2004, as numerous large deals came to market in the transportation, energy and technology sectors. International corporate finance revenue increased approximately $18 million or about 19% due to new ratings mandates in Europe and Asia and increased investment grade corporate bond issuance. Price increases also contributed to year-to-year growth in global corporate finance revenue.

Revenue in the financial institutions and sovereign risk group was $254.6 million for 2005, an increase of $45.7 million or 21.9% from $208.9 million in 2004. In the U.S., revenue grew approximately $11 million, principally due to strength in issuance volume in insurance and a number of new rating assignments in the insurance, finance and securities sectors. Internationally, revenue grew approximately $35 million compared to the prior year period, primarily due to increased issuance and new ratings mandates in Europe. European issuance was particularly strong in the banking and insurance sectors. Price increases, in part, related to Moody’s Enhanced Analysis Initiative, which also contributed to year-to-year growth in global financial institutions revenue.

Public finance revenue was $91.8 million for 2005, an increase of $9.6 million or 11.7% from $82.2 million for the same period in 2004. Dollar issuance in the municipal bond market was approximately $409 billion or about 14% more than the same period in 2004, as issuers took advantage of low longer-term interest rates and narrow spreads between long and short-term rates, which favored advance refinancings. Refinancings represented approximately 45% of total dollar issuance in 2005 as compared to approximately 36% during 2004.

Research revenue of $215.3 million for 2005 was $41.6 million or 23.9% higher than the $173.7 million reported in 2004. Revenue grew by approximately $19 million in the U.S. and about $22 million internationally with Europe accounting for approximately 76% of international growth. Research and analytics services accounted for approximately $26 million of global revenue growth primarily from credit research on corporate and financial institutions and the structured finance related business. Revenue growth from the licensing of Moody’s information to institutional customers for internal use and redistribution was approximately $48 million, an increase of about $13 million, or approximately 37% from the prior year. Research revenue includes the results of Economy.com from November 17, 2005, the acquisition date. Foreign currency translation also contributed about $4 million to growth in international research revenue.

Moody’s Investors Service operating, selling, general and administrative expenses, including corporate expenses, were $645.4 million in 2005, an increase of $127.4 million or 24.6% from $518.0 million in 2004. The largest contributor to this increase was growth in compensation and benefits of $86.8 million reflecting compensation increases, increased staffing primarily in the U.S. and European ratings businesses, higher stock-based compensation expense of $25.7 million and $3.2 million for the settlement of certain pension obligations. As a result of a tax audit by Japanese taxing authorities that was completed in the second quarter of 2005, expenses for 2005 included a charge of $9.4 million for the settlement of sales tax matters related to Moody’s operations in Japan from 2000 through June 30, 2005. Outside service fees increased by approximately $13 million of which approximately $9 million relates to information technology investment spending and about $2 million relates to legal fees. Foreign currency translation contributed approximately $1 million to year-to-year growth in reported expenses.

23


Moody’s Investors Service operating income of $936.3 million in 2005 was up $154.1 million or 19.7% from $782.2 million in 2004. Foreign currency translation contributed approximately $6 million to the year-to-year growth in operating income.FX translation.

Moody’s KMV

Moody’s KMV revenue of $131.3 million for 2005 was $10.5 million or 8.7% more than the same period in 2004. MKMV’s revenue growth reflected increasing demand from risk products and credit decisioning software and software related consulting. Growth in subscriptions revenue related to credit risk assessment products grew approximately $6 million or about 6% compared to prior year, but was adversely affected by higher cancellation rates, due in part to bank consolidations. In 2005, international revenue accounted for approximately 56% of global revenue.

MKMV’s operating, selling, general and administrative expenses were $111.4 million for 2005, an increase of $11.6 million or 11.6% from $99.8 million for 2004. This increase included $1.3 million related to stock-based compensation, as discussed above. The 2005 expense also included approximately $7 million related to severance costs, the write-off of capitalized software development and a liability for unpaid overtime due to certain employees. MKMV operating income was $3.3 million for 2005 compared with $4.2 million for 2004. Currency translation did not have a significant year-to-year impact on MKMV results.

Market RiskMARKET RISK

Moody’s maintains operations in 2126 countries outside the United States. Approximately 29%U.S. In 2009, approximately 45% and 50% of the Company’s revenue was billed and expenses incurred, respectively, were in currencies other than the U.S. dollar, principally in 2006, principally the British pound and the euro. Approximately 36% of the Company’s expenses were incurred in currencies other than the U.S. dollar in 2006, principally the British poundGBP and the euro. As such, the Company is exposed to market risk from changes in foreign exchangeFX rates.

As of December 31, 2006,2009, approximately 30%45% of Moody’s assets were located outside the U.S. OfUnited States. Moody’s aggregate cash and cash equivalents of $408.1$473.9 million at December 31, 2006,2009, consisted of approximately $232$404 million, which was located outside the United States (with $121 million in the U.K.)U.S., making the Company susceptible to fluctuations in foreign exchangeFX rates. Additionally, all of Moody’s aggregate short-term investments of $75.4 million, approximately $14$10.0 million were located outside the United States. The effects of changes in the value of foreign currencies relative to the U.S. dollar on assets and liabilities of non-U.S. operations with non-U.S. functional currencies are charged or credited to the cumulative translation adjustment account in the statement of shareholders’ equity.equity (deficit).

Moody’s cash equivalents consist of investments in high quality investment gradehigh-quality investment-grade securities within and outside the United States.U.S. with maturities of three months or less when purchased. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high-grade commercial paper. Short-term investments primarily consist of certificates of deposit and high quality investment grade auction rate securities within the United States.investment-grade corporate bonds in Korea. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single issuer.

The Company continuesA portion of the Company’s future billings and related revenue is exposed to assessmarket risk associated with changes in FX rates primarily related to the need to enter into hedging transactions to limit its risk due to fluctuations in exchange rates. In 2006, the Company entered into two insignificant hedging transactions using purchased put options designated as cash flow hedges to protect against foreign currency exchange rate risks from forecasted billings denominated in euros.euro and GBP. Under the Company’s current foreign exchangeFX hedging program, the Company hedges a portion of FX currency risk exclusively for

MOODY’S2009 10-K43


the purpose of reducing volatility in the Company’s cash flows. Such hedging activities may be ineffective or may not offset more than a portion of the adverse financial impact resulting from currency variations. Gains or losses associated with hedging activities also may impactflows related to future euro and GBP billings and related revenue. The Company continuesFX options and forwards are currently utilized to assess the need to enter into future hedging transactionshedge these exposures and the Company does not have any material derivative financial instruments outstanding as of December 31, 2006.2009 have maturities between one and 11 months. As of December 2009 all FX derivative contracts were deemed to be highly effective under Topic 815 of the ASC. No credit losses are anticipated as the counterparties to these agreements are major financial institutions and the Company adheres to strict guidelines regarding the creditworthiness of its counterparties. The fair value of the Company’s outstanding FX derivative contracts was recorded within other current assets in the consolidated balance sheets and consisted of the following notional amounts:

   December 31,
   2009  2008
Notional amount of Currency Pair:    

GBP/USD

  £5.0  £7.4

EUR/USD

  9.9  12.9

EUR/GBP

  21.0  24.3
        
Fair value of derivative asset  $1.2  $4.9

Unrealized gains or losses are recorded in AOCI and, once realized, the gains or losses will be recognized as an adjustment to revenue when the billings are recognized in revenue.

A sensitivity analysis has been prepared to estimate the exposure to fluctuations in the FX rates on Moody’s FX options. A hypothetical 10% favorable change in the overall option currency portfolio would result in a gain of approximately $2.8 million as of December 31, 2009. The maximum loss related to an adverse change in the option currency portfolio would be $2.4 million.

As a result of the 2008 Term Loan completed on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150.0 million to protect against fluctuations in the LIBOR-based variable interest rate. These swaps are adjusted to fair market value based on prevailing interest rates at the end of each reporting period and fluctuations are recorded into AOCI, while net interest payments are recorded in the statement of operations. At December 31, 2009 the fair value of the interest rate swaps was $7.6 million and is recorded in other liabilities in the Company’s consolidated balance sheet. The objective of interest rate risk management is to reduce the funding cost and volatility to the Company and to alter the interest rate exposure to the desired risk profile. Moody’s uses interest rate swaps as deemed necessary to assist in accomplishing this objective.

A sensitivity analysis has been prepared to estimate the exposure to fluctuations in the short-term LIBOR on Moody’s interest expense relating to the 2008 Term Loan, assuming the interest rate swap was not in place. A hypothetical change of one percent in the LIBOR would result in an impact on annual interest expense of approximately $1.5 million.

Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The Company is currently financing its operations and capital expenditures and share repurchases through cash flow from operations. operations and from financing activities. The Company had net repayments on borrowings of $274.0 million during the year ended December 31, 2009.

The following is a summary of the change in the Company’s cash flows followed by a brief discussion of these changes:

   Year Ended December 31,     Year Ended December 31,    
   2009  2008  $ Change  2008  2007  $ Change 
Net cash provided by operating activities  $643.8   $539.7   $104.1  $539.7   $988.2   $(448.5
Net cash used in investing activities  $(93.8 $(319.3 $225.5  $(319.3 $(124.7 $(194.6
Net cash used in financing activities  $(348.8 $(349.8 $1.0  $(349.8 $(865.7 $515.9  

Net cash provided by operating activities was $752.5 million, $707.9 million and $526.2 million for the years

Year ended December 31, 2006, 20052009 compared to the year ended December 31, 2008

The following changes in non-cash and 2004.

Moody’s netother one-time items impacted cash provided by operating activities in 2006 increased2009 compared to 2008, relative to net income:

An $11.0 million decrease in depreciation and amortization expense due primarily to the following items in 2008: an approximate $11 million impairment of certain software and database intangibles within the MA segment, a $4.5 million write-off of acquired in-process technology relating to the Fermat acquisition and approximately $4 million of accelerated depreciation resulting from the closure of the Company’s New Jersey office. These decreases were partially offset by $44.6higher amortization of intangible assets in 2009 associated with business acquisitions made in the fourth quarter of 2008.

A $7.8 million compared with 2005. Growthnon-cash reduction related to the resolution of a Legacy Tax Matter in the second quarter of 2008;

44MOODY’S2009 10-K


A $33.8 million increase in deferred income tax expense primarily relating to the settlement of a tax audit for the 2001 – 2007 tax years.

The $104.1 million increase of net cash flows provided by operating activities resulted from changes in assets and liabilities discussed below and the change in the non-cash items discussed above, partially offset by a decrease in net income contributed $193.1 million to cash provided by operating activities. The 2006 cash flows include a decreaseof $54.5 million:

 

24


relatingA $168.8 million increase attributed to excess tax benefits from stock-baseda reduction in 2009 payments of accounts payable and accrued liabilities primarily reflecting lower 2008 incentive compensation plans of $103.2 million that are now classified as a cash flow from financing activities as required under SFAS No. 123R. Prior to the adoption of SFAS No. 123Rpayouts made in the first quarter of 2006, excess tax benefits2009 due to weaker financial performance compared to targets in 2008 compared to 2007 as well as lower accrued taxes resulting primarily from the decrease in pre-tax income;

A $32.4 million increase relating to stock-based compensation was presentedthe $17.5 million restructuring charge taken in 2009, of which $5 million has not been paid, coupled with lower restructuring payments in 2009 compared to 2008 attributable to the 2007 Restructuring Plan;

A $78.4 million increase due to a reduction in other current assets primarily due to a reduction in prepaid taxes which were used for 2009 estimated income tax payments;

An increase in the consolidated statementsgrowth of cash flows as an operating cash flow, alongdeferred rent of approximately $15 million due primarily to a free rent period associated with the Canary Wharf lease;

Partially offset by:

A $45.4 million decrease from other liabilities primarily reflecting a $17 million payment for interest to settle a tax cash flows. The operating cash flow includesaudit for the 2001-2007 tax years and a $12 million reduction to accrued interest for UTB’s;

A decrease of $160.6approximately $33 million from the gain on saledue to a refund of the Company’s headquarters building. The cash proceeds are reported as an investing activity in the statement of cash flows. The change in accounts receivable is attributable to increases in revenue offset by improved collection. Additionally, Moody’s deposited approximately $40 million witha deposit from the IRS in March 2008 in connection with a Legacy Tax Matter;

A $51.8 million decrease in UTBs primarily related to a payment for the first quartersettlement of 2006a tax audit for the 2001-2007 tax years;

A $41.1 million decrease relating to Amortization Expense Deductions, as discussed in Note 165% higher accounts receivable from December 31, 2008 reflecting higher billings related to the consolidated financial statements. This deposit was recordedgradual improvement in the credit markets during 2009 compared to a 5% decrease in the December 31, 2008 balance compared to the prior year reflecting lower billings in the later part of 2008 compared to 2009.

Year ended December 31, 2008 compared to the year ended December 31, 2007

The following changes in non-cash and other assets. Tax payments increased by $53 million in 2006 versus 2005 offset by increases in income taxes payable due to growth in pre-tax net income. An increase in deferred revenue increased cash flow from operations by $28 million which is due to increased volume in annual and initial fees in both the ratings and research businesses.

Moody’s netone-time items impacted cash provided by operating activities in 2005 increased by $181.72008 compared to 2007, relative to net income:

A $27.0 million compared with 2004. Contributing to this growth was the increasedecrease in net income of $135.7 million, higher non-cash stock-based compensation expense of $27.0primarily reflecting the 2007 restructuring actions;

A $32.2 million increase in depreciation and higher tax benefits from exercise of stock options of $14.3 million. Improved collection of accounts receivable also benefited cash flow from operations by approximately $40 million. In addition, timing of quarterly federal, state and international income tax payments and growth in the tax provision for 2005 compared with 2004 contributed $56.7 million to year-to-year growth in cash provided by operating activities. Partially offsetting these benefits were the payment of $46.8 million related to the settlement of legacy tax matters as well as a $38.8 million reduction in year-over-year non-cash legacy income taxamortization expense as discussed below in “Contingencies — Legacy Tax Matters”.

Net cash provided by (used in) investing activities was $116.1 million, ($150.4) million and ($31.3) million for the years ended December 31, 2006, 2005 and 2004, respectively. Capital expenditures, primarily for property and equipment and internal use software, totaled $31.1 million, $31.3 million and $21.3 million in 2006, 2005 and 2004, respectively. Net maturities (investments) in marketable securities totaled $22.5 million, ($88.9) million and ($6.5) million in 2006, 2005 and 2004, respectively. The 2006 spending on acquisitions was $39.2 million, which relateddue primarily to an approximate $11 million impairment of certain software and database intangibles within the purchase of a 49% share in China Cheng Xin International Credit Rating Co. Ltd and the acquisition of Wall Street Analytics, Inc., net of cash acquired. The 2005 spending on acquisitions primarily relatedMA segment, approximately $6 million relating to the acquisition of Economy.com, netFermat including a $4.5 million write-off of cash acquired in-process technology, approximately $6 million reflecting the use of 7WTC for the full year of 2008 and a contingent payment madeapproximately $4 million of accelerated depreciation resulting from the closure of the Company’s New Jersey office in the second quarter of 20052008;

A $44.7 million decrease in Excess Tax Benefits due to fewer stock option exercises;

A $44.5 million decrease of an accrual for Legacy Tax Matters in 2007 compared to 2008;

A $59.1 million decrease in deferred income taxes due to lower restructuring, tenant allowances, and deferred revenue in 2008.

The $448.5 million reduction of net cash flows provided by operating activities was primarily attributed to a decrease in net income of $245.2 million, adjusted for the non-cash and other one-time items discussed above, and the following changes in assets and liabilities:

A decrease in accounts payable and accrued liabilities of $172.3 million, comprised of approximately $111 million of accrued taxes relating to lower pre-tax income and the timing of payments and approximately $30 million related to Korea Investors Service. lower annual incentive compensation accruals reflecting weak financial performance;

A decrease in deferred revenue of $70.2 million as a result of lower billings reflecting the weak credit market conditions;

A decrease of $62.9 million in the restructuring liability relating to payments made during the year and other minor adjustments;

A decrease in the growth of deferred rent of $46.5 million due primarily to a tenant allowance received in 2007 relating to 7WTC;

MOODY’S2009 10-K45


An increase of approximately $33 million for a deposit returned from the IRS in March 2008 in connection with a Legacy Tax Matter.

A $61.1 million decrease in UTBs and other non-current tax liabilities due primarily to the implementation of UTP guidance in 2007;

Net cash (used in) provided by investing activities

Year ended December 31, 2009 compared to the year ended December 31, 2008

The 2004 amount$225.5 million decrease in net cash used in investing activities was primarily relatedattributed to:

A $240.5 million decrease in net cash used resulting from the 2008 acquisitions of Fermat, BQuotes, Financial Projections Limited and Enb Consulting.

Year ended December 31, 2008 compared to the year ended December 31, 2007

The $194.6 million increase in net cash used in investing activities was primarily attributed to:

A $237.0 million increase in net cash used resulting from the 2008 acquisitions of Fermat, BQuotes, Financial Projections Limited and Enb Consulting;

A $55.9 million decrease of net cash provided by short-term investments in rating agencies in Russia, Korea, Egypt and India. The net proceeds received from2008 following the saleliquidation of a majority of the Company’s headquarters building at 99 Church Street, New York, New Yorkportfolio in the fourth quarter of 2006 were $163.9 million.2007 to finance share repurchases and other operational activities,

Partially offset by:

A $97.4 million decrease in capital additions resulting from reduced 7WTC build-out activity in 2008 compared to 2007.

Net cash used in financing activities was $965.2 million, $666.5 million and $162.3 million for the years

Year ended December 31, 2006, 20052009 compared to the year ended December 31, 2008

The $1.0 million decrease in net cash flows used in financing activities was primarily attributed to:

A $592.9 million decrease in treasury shares repurchased in 2009 compared to 2008. The Company did not repurchase any shares during 2009;

Partially offset by:

Net repayments of $274.0 million on short-term borrowings resulting from the Company utilizing operating cash flow to repay outstanding borrowings in 2009 compared to net borrowings of $166.3 million in 2008;

A $150.0 million decrease relating to proceeds received in May 2008 from the 2008 Term Loan.

Year ended December 31, 2008 compared to the year ended December 31, 2007

The $515.9 million decrease in net cash flows used in financing activities was primarily attributed to:

A $1,145.5 million decrease in treasury shares repurchased in 2008 compared to 2007,

A $44.7 million decrease in Excess Tax Benefits due to fewer stock option exercises;

Partially offset by:

A $381.1 million net increase in short-term borrowings under the Company’s CP program and 2004, respectively. Spending forrevolving credit facilities, the proceeds of which were used to fund share repurchases totaled $1,093.6and other operational and investing activities;

A $150.0 million in 2006, $691.7 million in 2005 and $221.3 million in 2004. Dividends paid were $79.5 million, $60.3 million and $44.7 million in 2006, 2005 and 2004, respectively. The increase in dividends reflects a quarterly dividend paidlong-term debt resulting from the issuance of $0.07 per sharethe 2008 Term Loan compared to $300.0 million received in 2006, $0.0375 in2007 from the first quarter and $0.055 inissuance of the subsequent quarters per share in 2005 versus a quarterly dividend of $0.0375 per share in 2004. These amounts were offset in part by proceeds from exercises of stock options of $105.3 million in 2006, $89.1 million in 2005 and $105.0 million in 2004. The 2006 amount also includes $103.2 million of excess tax benefits from stock-based compensation plans that are now classified as a cash flow from financing activities under SFAS No. 123RSeries 2007-1 Notes.

Future Cash Requirements

Moody’s currently expects to fund expenditures from internally generated funds. The Company believes that it has the financial resources needed to meet its cash requirements for the next twelve months and expects to have positive operating cash flow for fiscal year 2007.the next twelve months. Cash requirements for periods beyond the next twelve months will depend, among other things, on the Company’s profitability and its ability to manage working capital requirements. The Company may also borrow from various sources.

The Company currently intendsremains committed to use a portion ofusing its strong cash flow to pay dividends. create value for shareholders in a manner consistent with maintaining sufficient liquidity by investing in growing areas of the business, reinvesting in ratings quality initiatives, making selective acquisitions in related businesses, repurchasing stock and paying a modest dividend. In the near-term, Moody’s intends to maintain its dividend and has commenced a modest share repurchase program, the continuation of which is dependent on Moody’s liquidity and

46MOODY’S2009 10-K


market conditions. As of December 31, 2009 Moody’s had $1.4 billion of share repurchase authority remaining under its current program, which does not have an established expiration.

At December 31, 2009 the Company had total borrowings outstanding from its CP Program of $443.7 million, the proceeds of which were or will be used to support the remaining build-out of Moody’s Canary Wharf location, potential acquisitions, share repurchases and other operational and investing activities. At December 31, 2009, Moody’s had $1.2 billion of outstanding debt with approximately $556 million of additional capacity available. Principal payments on the 2008 Term Loan commenced in September 2010 and will continue through its maturity in accordance with the schedule of payments outlined in Note 14 to the Company’s consolidated financial statements.

On December 12, 2006, the Board of Directors ofMarch 27, 2009 the Company approved the declaration2009 Restructuring Plan to reduce costs in response to a strategic review of its business in certain jurisdictions and weak global economic and market conditions. This resulted in a quarterly dividendrestructuring charge of $0.08 per$15.6 million, all of which was recorded during the year ended December 31, 2009. The remaining liability of $5 million will result in cash outlays that will be substantially paid out over the next twelve months.

On February 6, 2008, the Company entered into a 17.5 year operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The total base rent of the Canary Wharf Lease over its 17.5-year term is approximately 134 million GBP, and the Company will begin making base rent payments in 2011. In addition to the base rent payments the Company will be obligated to pay certain customary amounts for its share of Moody’s common stock, payableoperating expenses and tax obligation. For periods subsequent to December 31, 2009 the Company expects to incur approximately 17 million GBP of costs to build out the floors to its specifications, substantially all of which is expected to be incurred over the next twelve months.

On December 31, 2007, the Company approved the 2007 Restructuring Plan that would reduce global head count, terminate certain technology contracts and consolidate certain corporate functions in response to both the Company’s Reorganization announced on March 10,August 7, 2007 as well as a decline in the then current and anticipated issuance of rated debt securities in some market sectors. Included in the $50.0 million restructuring charge reported in 2007 is $7.0 million of non-cash settlements relating to shareholderspension curtailments and stock-based compensation award modifications for certain terminated employees. At December 31, 2009, the remaining cash payments of record atapproximately $1 million are expected to be paid over the closenext twelve months and the remaining liability of business on February 20, 2007. The continued payment of dividends at this rate, or at all, is subjectapproximately $8 million, which relates to the discretion ofCompany’s unfunded pension plans, will be paid in accordance with plan provisions. The amount to be paid over the Board of Directors.next twelve months relating to these pension liabilities is not expected to be material.

The Company also currently expects to use a significant portion of its cash flow to continue its share repurchase program. The Company implemented a systematic share repurchase program in the third quarter of 2005 through an SEC Rule 10b5-1 program. Moody’s may also purchase opportunistically when conditions warrant. On June 5,October 20, 2006, the Board of Directors authorized a $2 billion share repurchase program. There is no established expiration date for this authorization. During

25


August 2006, the Company had completed its previous $1 billion share repurchase program, which had been authorized by the Board of Directors in October 2005. The Company’s intent is to return capital to shareholders in a way that serves Moody’s long-term interests. As a result, Moody’s share repurchase activity will continue to vary from quarter to quarter.

The Company entered into an operating lease agreement (the “Lease”) commencing on October 20, 2006 with 7 World Trade Center, LLC for 589,945 square feetsquare-feet of an office building located at 7 World Trade Center7WTC at 250 Greenwich Street, New York, New York, which will serveis serving as Moody’s new headquarters. The 7WTC Lease has an initial term of approximately 21 years with a total of 20 years of renewal options. The total base rent of the lease7WTC Lease over its initial 21-year term is approximately $536 million including rent credits from the World Trade Center Rent Reduction Program promulgated by the Empire State Development Corporation. On March 28, 2007, the 7WTC lease agreement was amended for the Company to lease an additional 78,568 square feet at 7WTC. The additional base rent is approximately $106 million over a 20-year term. The total remaining lease payments as of December 31, 2009, including the aforementioned rent credits, are approximately $585 million.

The Company will incur approximately $110 millionalso intends to use a portion of costs in 2007its cash flow to fit outpay dividends. On December 15, 2009, the new headquarters.Board approved the declaration of a quarterly dividend of 10.5 cents per share of Moody’s common stock, payable on March 10, 2010 to shareholders of record at the close of business on February 20, 2010. The costs will be paid for usingcontinued payment of dividends at this rate, or at all, is subject to the proceeds from the salediscretion of the Company’s current corporate headquarters building.Board.

In addition, the Company will from time to time consider cash outlays for acquisitions of, or investments in, complementary businesses, products, services and technologies. The Company may also be required to make future cash outlays to pay to New D&B its share of potential liabilities related to the legacy tax and legal contingenciesLegacy Tax Matters that are discussed in this Management’s Discussion and Analysis of Financial Condition and Results of OperationsMD&A under “Contingencies”. These potential cash outlays could be material and might affect liquidity requirements, and they could cause the Company to pursue additional financing. There can be no assurance that financing to meet cash requirements will be available in amounts or on terms acceptable to the Company, if at all.

MOODY’S2009 10-K47


Indebtedness

The following table summarizes total indebtedness:

   December 31, 
   2009  2008 
2007 Facility  $   $613.0  
Commercial paper, net of unamortized discount of $0.1 million at 2009 and $0.3 million at 2008   443.7    104.7  
Current Portion of Long-Term Debt   3.8      
Notes payable:   

Series 2005-1 Notes

   300.0    300.0  

Series 2007-1 Notes

   300.0    300.0  
2008 Term Loan   146.2    150.0  
         
Total Debt   1,193.7    1,467.7  
Current portion   (447.5  (717.7
         
Total long-term debt  $746.2   $750.0  
         

2007 Facility

On September 30, 2005,28, 2007, the Company entered into a Note Purchase Agreement and issued and sold through a private placement transaction, $300 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes (“Notes”). The Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. The proceeds from the sale of the Notes were used to refinance $300 million aggregate principal amount of the Company’s outstanding 7.61% Senior Notes (“Old Notes”) which matured on September 30, 2005. In the event that Moody’s pays all or part of the Notes in advance of their maturity (the “Prepaid Principal”), such prepayment will be subject to a penalty calculated based on the excess, if any, of the discounted value of the remaining scheduled payments, as defined in the agreement, over the Prepaid Principal.

On September 1, 2004, Moody’s entered into a$1.0 billion five-year senior, unsecured bank revolving credit facility, (the “Facility”) in an aggregate principal amount of $160 million that expiresexpiring in September 2009. This2012. The 2007 Facility replacedwill serve, in part, to support the $80 million five-year facility that was scheduled to expire in September 2005 and the $80 million 364-day facility that expired in September 2004.Company’s CP Program described below. Interest on borrowings under the Facility is payable at rates that are based on the London InterBank Offered RateLIBOR plus a premium that can range from 1716.0 to 40.0 basis points to 47.5 basis pointsof the outstanding borrowing amount depending on the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (“Earnings Coverage Ratio”), as defined in the related agreement. At December 31, 2006, such premium was 17 basis points.Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range from 84.0 to 10.0 basis points per annum of the Facilityfacility amount, to 15 basis points, depending on the Company’s Earnings Coverage Ratio, and were 8 basis points at December 31, 2006. Under the Facility, theDebt/EBITDA ratio. The Company also pays a utilization fee of 12.55.0 basis points on borrowings outstanding when the aggregate amount outstanding under the Facility exceeds 50% of the Facility.

Management may consider pursuing additional long-term financing when it is appropriate in light of cash requirements for share repurchase and other strategic opportunities, which would result in higher financing costs.

total facility. The Notes and theweighted average interest rate on borrowings outstanding as December 31, 2008 was 1.47%. The 2007 Facility (the “Agreements”) containcontains certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain an Interest Coverage Ratio, as defined in the agreement, of not less than 3 to 1 for any period of four consecutive fiscal quarters, and an Earnings Coverage Ratio, as defined in the agreement,a Debt/EBITDA ratio of not more than 44.0 to 11.0 at the end of any fiscal quarter.

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Company’s 2007 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The weighted average interest rate on CP borrowings outstanding was 0.3% and 2.08% as of December 31, 2009 and December 31, 2008, respectively. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; violation of covenants; invalidity of any loan document; material judgments; and bankruptcy and insolvency events, subject in certain instances to cure periods.

Notes Payable

On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. Under the terms of the 2007 Agreement, the Company may, from time to time within five years, in its sole discretion, issue additional series of senior notes in an aggregate principal amount of up to $500.0 million pursuant to one or more supplements to the 2007 Agreement. The Company may prepay the Series 2007-1 Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. The 2007 Agreement contains covenants that limit the ability of the Company, and certain of its subsidiaries to, among other things: enter into transactions with affiliates, dispose of assets, incur or create liens, enter into any sale-leaseback transactions, or merge with any other corporation or convey, transfer or lease substantially all of its assets. The Company must also not permit its Debt/EBITDA ratio to exceed 4.0 to 1.0 at the end of any fiscal quarter.

48MOODY’S2009 10-K


On September 30, 2005, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes due 2015 pursuant to the 2005 Agreement. The Series 2005-1 Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. Proceeds from the sale of the Series 2005-1 Notes were used to refinance $300.0 million aggregate principal amount of the Company’s outstanding 7.61% senior notes which matured on September 30, 2005. In the event that Moody’s pays all, or part, of the Series 2005-1 Notes in advance of their maturity, such prepayment will be subject to a Make Whole Amount. The Series 2005-1 Notes are subject to certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.

2008 Term Loan

On May 7, 2008, Moody’s entered into a five-year, $150.0 million senior unsecured term loan with several lenders. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan is payable quarterly at rates that are based on LIBOR plus a margin that can range from 125 basis points to 175 basis points depending on the Company’s Debt/EBITDA ratio. The outstanding borrowings shall amortize beginning in 2010 in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.

The 2008 Term Loan contains restrictive covenants that, among other things, restrict the ability of the Company to engage or to permit its subsidiaries to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur, or permit its subsidiaries to incur, liens, in each case, subject to certain exceptions and limitations. The 2008 Term Loan also limits the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

The principal payments due on the 2008 Term Loan through its maturity are as follows:

Year Ending December 31,                

   
2010  $3.8
2011   11.3
2012   71.2
2013   63.7
    
Total  $150.0
    

Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150.0 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan as more fully discussed in Note 5 to the consolidated financial statements.

Interest (Expense) Income, Net

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

   Year Ended December 31, 
   2009  2008  2007 
Income  $2.5   $18.1   $19.3  
Expense on borrowings   (45.5  (60.0  (40.7
UTBs and other tax related interest   1.6    (13.7  (21.5
Reversal of accrued interest(a)   6.5    2.3    17.5  
Interest capitalized   1.5    1.1    1.1  
             
Total  $(33.4 $(52.2 $(24.3
             
Interest paid  $46.1   $59.5   $32.5  
             

(a)Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 17 to the consolidated financial statements.

At December 31, 2006,2009, the Company was in compliance with such covenants. Uponall covenants contained within all of the occurrence of certain financial or economic events, significant corporate events or certain other events constituting an event ofdebt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement and the 2008 Term Loan contain cross default provisions whereby default under one of the Agreements, all loansaforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under the Agreements (including accrued interest and fees payable thereunder) maythose instruments to be declared immediately due and payablepayable.

MOODY’S2009 10-K49


The Company’s long-term debt, including the current portion, is recorded at cost. The fair value and all commitments undercarrying value of the AgreementsCompany’s long-term debt as of December 31, 2009 and 2008 is as follows:

   December 31, 2009  December 31, 2008
   Carrying
Amount
  Estimated Fair
Value
  Carrying
Amount
  Estimated Fair
Value
Series 2005-1 Notes  $300.0  $291.1  $300.0  $271.9
Series 2007-1 Notes   300.0   298.6   300.0   278.1
2008 Term Loan   150.0   150.0   150.0   150.0
                
Total  $750.0  $739.7  $750.0  $700.0
                

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

Management may be terminated. In addition, certainconsider pursuing additional long-term financing when it is appropriate in light of cash requirements for operations, share repurchases and other events of default under the Agreementsstrategic opportunities, which would automatically result in amounts outstanding becoming immediately due and payable and all commitments being terminated.

In October 2006, Moody’s amended its Facility by increasing the limit on sale proceeds resulting from a sale-leaseback transaction of its corporate headquarters building at 99 Church Street from $150 million to $250 million. Additionally, the

26


restriction on liens to secure indebtedness related to the sale of 99 Church Street was also increased from $150 million to $250 million. The Company also increased the expansion feature of the credit facility from $80 million to $340 million, subject to obtaining commitments for the incremental capacity at the time of draw down from the existing lenders. This increase gives the Company potential borrowing capacity under the Facility of $500 million.higher financing costs.

Off-Balance Sheet Arrangements

At December 31, 2006 and 2005,2009, Moody’s did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose or variable interest entities where Moody’s is the primary beneficiary, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, Moody’s is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.

Contractual Obligations

The following table presents payments due under the Company’s contractual obligations as of December 31, 2006.2009:

 

      Payments Due by Period

(in millions)

  Total  

Less Than 1

Year

  1-3 Years  3-5 Years  Over 5 Years

Notes payable (1)

  $430.7  $14.9  $29.9  $29.9  $356.0

Capital lease obligations

   1.0   0.5   0.5   —     —  

Operating lease obligations (2)

   639.5   34.5   80.4   62.2   462.4

Purchase obligations (3)

   30.4   23.6   6.7   0.1   —  
                    

Total (4)

  $1,101.6  $73.5  $117.5  $92.2  $818.4
                    

      Payments Due by Period

(in millions)

  Total  Less Than 1
Year
  1-3 Years  3-5 Years  Over 5 Years
Indebtedness(1)  $1,447.1  $486.9  $159.9  $130.7  $669.6
Operating lease obligations   905.2   57.9   105.9   108.9   632.5
Purchase obligations(2)   129.0   68.9   43.4   16.7   
Pension obligations(3)   74.2   8.8   11.5   7.4   46.5
Capital lease obligations   1.3   1.3         
                    
Total(4)  $2,556.8  $623.8  $320.7  $263.7  $1,348.6
                    

(1)Includes $3.7 million of accruedReflects principal payments, related interest and applicable fees due on the 2008 Term Loan, the Series 2005-1 Notes, the Series 2007-1 Notes, borrowings under the CP Program and the 2007 Facility, as of December 31, 2006 and $127.0 million of interest that will accrue and be due from January 1, 2007 through September 30, 2015, whendescribed in Note 14 to the notes mature.consolidated financial statements.

(2)Includes amounts contractually committed to for the new operating lease agreement, which commenced on October 20, 2006, betweenfit-out of the Company and 7 World Trade Center, LLC for 589,945 square-feet located at 7 World Trade Center at 250 Greenwich Street, New York, New York, which will serve as Moody’s new corporate headquarters in mid-to late-2007. See “Future Cash Requirements” for further information.Canary Wharf Lease.

(3)Purchase obligations include contractsReflects projected benefit payments for professional services, data processing services, telecommunication services and data back-up facilities.the next ten years relating to the Company’s unfunded Post-Retirement Benefit Plans described in Note 11 to the consolidated financial statements.

(4)In early 2007,The table above does not include the Company entered into contractual obligationsCompany’s long-term tax liabilities of approximately $110$164.2 million relatedand $52.8 million relating to UTP and Legacy Tax Matters, respectively, since the buildoutexpected cash outflow of its new corporate headquarters at 7 World Trade Center. Thesesuch amounts are not included in the table above.by period cannot be reasonably estimated.

2007 Outlook2010 OUTLOOK

Moody’s outlook for 20072010 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, consumer spending, residential mortgage borrowing and refinancing activity, securitization, levels and capital markets issuance.the eventual withdrawal of government-sponsored economic stabilization initiatives. There is an important degree of uncertainty surrounding these assumptions and, if actual conditions differ from these assumptions, Moody’s results for the year may differ materially from the current outlook.

For Moody’s overall, the Company projects low double-digitexpects full-year 2010 revenue to increase in the high-single-digit percent revenue growthrange. Full-year 2010 expenses are also expected to increase in the high-single-digit percent range. Full-year 2010 operating margin is projected in the high-thirties percent range and the effective tax rate is expected in the range of 37 to 38 percent. Share repurchase is expected to resume at modest levels in 2010 subject to available cash flow and other capital allocation decisions. The Company expects diluted earnings per share for full-year 2010 in the full year 2007.range of $1.75 to $1.85. This growthoutlook assumes foreign currency translation in 2007 at current exchange rates, which would result in no material full year impact from currency translation. Excludingend-of-year 2009 rates.

50MOODY’S2009 10-K


For the gain on sale of the 99 Church Street building, Moody’s expects the operating margin to decline by approximately 150 basis points in 2007, due to investments the Company is continuing to make to sustainglobal MIS business, growth, including international expansion, improving analytical processes, pursuing ratings transparency and compliance initiatives, introducing new products, improving technology infrastructure and relocating Moody’s headquarters in New York City. Diluted earnings per share in 2007 are projected to be modestly lower compared to 2006 as a result of the after-tax gain of $94.1 million on the sale of the 99 Church Street headquarters building in the fourth quarter of 2006.

In the U.S., the Company projects low double-digit percent revenue growth for the Moody’s Investors Service ratings and research business for the full year 2007. In the U.S. structured finance business, Moody’s expects revenue for the yearfull-year 2010 is expected to rise

27


increase in the high-single to double-digitlow-double-digit percent range. Within the U.S., MIS revenue is expected to increase in the mid-teens percent range, including strong double-digit year-over-year percent growth inwhile non-U.S. revenue from credit derivatives and commercial mortgage-backed securities ratings, partially offset by anis expected decline in revenue from residential mortgage-backed securities ratings, including home equity securitization.

In the U.S. corporate finance business, Moody’s expects revenue growthto increase in the low double-digitmid-single-digit percent range for the year, including good growth from rated bonds, bank loans and new products. The Company anticipates a stronger first half of 2007 followed by a weaker second half in this sector, due in partrange. Corporate finance revenue is expected to an expected moderation in the pace of leveraged buyout transactions.

In the U.S. financial institutions sector, the Company projects revenue in 2007 to grow in the low teens percent range for the year. For the U.S. public finance sector, Moody’s expects revenue for 2007 to grow modestly. The Company forecasts growth in the U.S. research business to be about 20%.

Outside the U.S., Moody’s expects ratings revenue to growincrease in the high-teens percent range with mid- to high-teens percentanticipated growth in all major business lines, ledspeculative-grade issuance activity offset by corporatemoderation of investment-grade issuance from the high volume of 2009. Structured finance revenue is expected to increase in the mid-single-digit percent range reflecting modest growth in Europemost asset classes. Revenue from financial institution ratings is expected to increase in the low-single-digit percent range, while revenue from public, project and Asia, financial institutions growthinfrastructure finance is expected to increase in Europe and growth in international structured finance. The Company also projects about twentythe low-double-digit percent growth in international research revenue.range.

For Moody’s KMV globally,Analytics, full-year 2010 revenue is expected to increase in the mid-single-digit percent range. Revenue growth is expected in the low-single-digit percent range for RD&A, the mid-teens percent range for RMS, and the high-single to low-double-digit percent range for professional services. MA revenue is expected to increase in the low-single digit percent range in the U.S. and in the mid-single-digit percent range outside the U.S.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Adopted:

In December 2008, the FASB issued a new accounting standard that requires additional disclosures about assets held in an employer's defined benefit pension or other postretirement plan. The Company has adopted this new accounting standard as of December 31, 2009 and has presented the required disclosures in the prescribed format in Note 11 to the consolidated financial statements. This new standard only affected the notes to the Company’s consolidated financial statements and did not have any impact on the Company’s consolidated financial statements.

During the period ending September 30, 2009, the Company expects growthadopted the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles which only affected the specific references to GAAP literature in sales and revenue from credit risk assessment subscription products, credit decision processing software and professional services. This should result in low double-digit percent growth in revenue with greater growth in profitability.the notes to the Company’s consolidated financial statements.

Recently Issued Accounting PronouncementsNot yet adopted:

In July 2006,June 2009, the Financial Accounting Standards Board (“FASB”FASB issued a new accounting standard related to the consolidation of variable interest entities. This new standard eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This new standard also requires enhanced disclosures regarding an enterprise's involvement in variable interest entities. The Company will adopt this new accounting standard as of January 1, 2010 and does not expect the implementation to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence of selling price ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company has elected to early adopt ASU 2009-13 on a prospective basis for applicable transactions originating or materially modified on or after January 1, 2010. If applied in the same manner to the year ended December 31, 2009, ASU 2009-13 would not have had a material impact on net revenue reported for both its MIS and MA segments in terms of the timing and pattern of revenue recognition. The adoption of ASU 2009-13 is also not expected to have a significant effect on the Company’s net revenue in periods after the initial adoption when applied to multiple element arrangements based on its current pricing strategies.

In January 2010, the FASB issued FASB InterpretationASU No. 48, “Accounting2010-06, “Improving Disclosures about Fair Value Measurements”. The new standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The new standard also requires disclosures regarding the fair value for Uncertainty in Income Taxes—an Interpretationeach class of FASB Statement No. 109” (“FIN No. 48”),assets and liabilities, which clarifies the accounting for uncertainty in income taxes recognizedis a subset of assets or liabilities within a line item in a company’s financial statementsbalance sheet. Additionally, the standard will require further disclosures surrounding inputs and valuation techniques used in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on recognition and derecognition of tax benefits resulting from a subsequent change of judgment, classification of liabilities, interest and penalties, accounting in interim periods and disclosure. In accordance with FIN No. 48, a company is required to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date. In making this assessment, a company must assume that the taxing authority will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement with a taxing authority, without considering time values. FIN No. 48fair value measurements. The new standard is effective for fiscal years beginning after December 15, 20062010, and accordingly, is required to be adopted by the Company on January 1, 2007. Upon adoption of FIN No. 48 on January 1, 2007, the Company expects a reduction of retained earnings of between $40 million and $45 million with no impact to the statement of operations and cash flows. This is based on a preliminary assessment and could change based on final analysis which will be completed by the end of the first quarter of 2007. After the initial adoption of FIN No. 48, the financial impacts to the statement of operations and cash flows is dependent upon the ultimate resolution of legacy tax matters and other tax matters with the taxing authorities. The Company is unable to predict the final resolution of these matters. See Note 16, “Contingencies” for further discussion of legacy tax matters.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a single authoritative definition of fair value whereby fair value is based on an exit price that would result from market participants’ behavior, as well as sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is expected to increase the consistency of fair value measurements and applies only tointerim periods within those measurements that are already required or permitted by other accounting standards except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. SFAS No. 157 imposes no requirements for additional fair-value measures in financial statements and is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 and will be adopted by the Company as of January 1, 2008.years. The Company is currently assessingevaluating the impacts thatpotential impact, if any, of the adoptionimplementation of this standard will haveASU No. 2010-06 on its consolidated financial position and results of operations.statements.

ContingenciesCONTINGENCIES

From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by Moody’s.MIS. Moody’s is also subject to ongoing tax audits

28


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 other than routine litigation incidentalpursuant to Moody’s business, material proceedings known to be contemplated by governmental authoritiesSEC rules and other pending matters thatas it may determine to be appropriate.

MOODY’S2009 10-K51


Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last two years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries. Moody’s is cooperating with a review by the SEC relating to errors in the model used by MIS to rate certain constant-proportion debt obligations. In addition, the Company is facing market participant litigation 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 in the current economic environment.

On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Company’s securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants’ oversight of MIS’s ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Company’s securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Company’s securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint also asserts various causes of action relating to the Company’s ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants’ participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Company’s processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.

Two purported class action complaints have been filed by purported purchasers of the Company’s securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S. District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s ratings of structured finance products including RMBS, CDO and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others.

For those mattersclaims, litigation and proceedings not related to income taxes, where it is both probable that a liability has beenis expected to be incurred and the amount of loss can be reasonably estimated, the Company has recordedrecords liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes

52MOODY’S2009 10-K


available, the Company adjusts its assessments and estimates of such liabilitiesmatters accordingly. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

The Company cannot predict the ultimate impact that any of the legislative, regulatory, enforcement or litigation matters may have on how its business is conducted and thus its competitive position, financial position or results of operations. Based on its review of the latest information available, in the opinion of management, the ultimate monetary liability of the Company in connection withfor the pending legal and tax proceedings, claims and litigation willmatters referred to above (other than the Legacy Tax Matters that are discussed below) is not likely to have a material adverse effect on Moody’sthe Company’s consolidated financial position, although it is possible that the effect could be material to the Company’s consolidated results of operations or cash flows, subject to the contingencies described below.for an individual reporting period.

Legacy ContingenciesTax Matters

Moody’s hasMoody's continues to have exposure to certain potential liabilities assumed in connection witharising from Legacy Tax Matters. As of December 31, 2009, Moody's has recorded liabilities for Legacy Tax Matters totaling $55.8 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution. These contingencies are referredDistribution 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 by Moody’s as “Legacy Contingencies”. Moody's future reported results, financial position and cash flows.

The principal Legacy Contingencies presently outstanding relate to tax matters.

To understandfollowing summary of the Company’srelationships among Moody's, New D&B and their predecessor entities is important in understanding our exposure to the potential liabilities described below, it is important to understand the relationship between Moody’s and New D&B, and the relationship among New D&B and its predecessors and other parties who, through various corporate reorganizations and related contractual commitments, have assumed varying degrees of responsibility with respect to such matters.Legacy Tax Matters.

In November 1996, The Dun & Bradstreet Corporation through a spin-off separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”).Corporation. In June 1998, The Dun & Bradstreet Corporation through a spin-off separated into two separate public companies: The Dun & Bradstreet CorporationOld D&B and R.H. Donnelley Corporation. During 1998, Cognizant through a spin-off separated into two separate public companies: IMS Health Incorporated (“IMS Health”) and Nielsen Media Research, Inc. (“NMR”). In September 2000, Old D&B through a spin-off separated into two separate public companies: New D&B and Moody’s, as further described in Note 1 to the consolidated financial statements.

Legacy Tax MattersMoody’s.

Old D&B and its predecessors entered into global tax planning initiatives in the normal course of business, including through tax-free restructurings of both their foreign and domestic operations.business. These initiatives are subject to normal review by tax authorities.

Pursuant to Old D&B and its predecessors also entered into a series of agreements as between themselves, IMS Health and NMR are jointly and severally liable to pay one-half, and New D&B and Moody’s are jointly and severally liable to paycovering the other half,sharing of any paymentsliabilities for payment of taxes, penalties and accrued interest resulting from unfavorable Internal Revenue Service (“IRS”) rulingsIRS determinations on certain tax matters, as described in such agreements (excluding the matter described below as “Amortization Expense Deductions” for which New D&B and Moody’s are solely responsible) and certain other potential tax liabilities, alsoall as described in such agreements.

In Further, in connection with the 2000 Distribution and pursuant to the terms of the 2000 Distribution Agreement, New D&B and Moody’s have between themselves, agreed to be financially responsibleon the financial responsibility for any potential liabilities that may arise to the extent such potential liabilities are not directly attributable to their respective business operations.

Without limiting the generality of the foregoing, three specific tax matters are discussed below.

Royalty Expense Deductions

This matter related to the IRS’s stated intention to disallow certain royalty expense deductions claimed by Old D&B on its tax returns for the years 1993 through 1996 as well as the IRS’s intention to reallocate to Old D&B income and expense items that had been reported in a certain partnership tax return for 1996. These mattersthese Legacy Tax Matters.

Settlement agreements were settledexecuted with the IRS in a closing agreement executed in2005 regarding the third quarterLegacy Tax Matters for the years 1989-1990 and 1993-1996. These settlements represent substantially all of 2005 and accordingly,the total potential liability to the IRS, including penalties. As of December 31, 2009, the Company reduced its reservecontinues to carry a liability of $1.9 million for this matter by $11.5 million. However,the remaining potential exposure. In addition, with respect to these settlement agreements, Moody’s and New D&B believe that IMS Health and NMR disagreed with New D&B’s calculation of each party’sdid not pay their full share of the liability.liability to the IRS pursuant to the terms of the applicable separation agreements among the parties. Moody’s and New D&B may commencepaid these amounts to the IRS on their behalf, and attempted to resolve this dispute with IMS Health and NMR. As a result, Moody’s and New D&B commenced arbitration proceedings against IMS Health and NMR to collectin connection with the $7.3 million that1989-1990 matter. This matter was resolved during the third quarter of 2008 in favor of Moody’s and New D&B, and Moody’s each were obligated to pay to the IRS on their behalf. Based upon the current understanding of the positions that New D&B andresulting in IMS Health may take, the Company believes it is likely that New D&B will prevail, but Moody’s cannot predict with certainty the outcome.

29


and NMR having paid a total of $6.7 million to Moody’s. In the second quarter of 2006, Moody’s paid approximately $9 million for the state income tax liability connected with the terms of the October 20052009, Moody's and New D&B reached a settlement with the IRSIMS Health and reversed the remaining reserve of $1.5 million.

Additionally, the IRS reasserted its position that certain tax refund claims made by Old D&B related to 1993 and 1994 may be offset by tax liabilities relatingNMR with respect to the above mentioned partnership formed1993-1996 matter, resulting in 1993. In the fourth quarter$10.8 million of 2005, New D&B filedcash proceeds paid to Moody's of which $6.5 million represents interest and $4.3 million is a protest with the IRS Appeals Office concerning the IRS’s denialreduction of the tax refunds. In the third quarter of 2006, the IRS Appeals Office rejected New D&B’s protest. New D&B is determining whether to file suit for the refund. Moody’s share is estimated at approximately $9 million.expense.

Amortization Expense Deductions

In April 2004, New D&B received Examination Reports (the “April Examination Reports”) from the IRS with respect toThis Legacy Tax Matter, which was affected by developments in June 2007 and 2008 as further described below, involves a partnership transaction entered into in 1997 which resulted in amortization expense deductions on the tax returns of Old D&B since 1997. These deductions could continue through 2012. In the April Examination Reports, the IRS stated its intention to disallow the amortization expense deductions related to this partnership that were claimed by Old D&B on its 1997 and 1998 tax returns. The IRS also stated its intention to disallow certain royalty expense deductions claimed by Old D&B on its 1997 and 1998 tax returns with respect to the partnership transaction. In addition, the IRS stated its intention to disregard the partnership structure and to reallocate to Old D&B certain partnership income and expense items that had been reported in the partnership tax returns for 1997 and 1998. New D&B disagrees with these positions taken by the IRS. IRS audits of Old D&B’s orand New D&B’s tax returns for the years subsequent1997 through 2002 concluded in June 2007 without any disallowance of the amortization expense deductions, or any other adjustments to 1998 haveincome related to this partnership transaction. These audits resulted in the issuance of similar Examination ReportsIRS issuing the Notices for other tax issues for the 1999 through 20021997-2000 years aggregating $9.5 million in tax years. Similar Examination Reports could result for tax years subsequent to 2002.

Should any such paymentsand penalties, plus statutory interest of approximately $6 million, which should be made byapportioned among Moody’s, New D&B, related to either the April Examination Reports or any potential Examination Reports for future years, including years subsequent to the separation of Moody’s from New D&B, thenIMS Health and NMR pursuant to the terms of the 2000 Distribution Agreement,applicable separation agreements. Moody’s would haveshare of this assessment was $6.6 million including interest, net of tax. In November 2007, the IRS assessed the tax and penalties and used a portion of the deposit discussed below to paysatisfy the assessment, together with interest. The Company believes it has meritorious grounds to New D&Bchallenge the IRS’s actions and is evaluating its share. In addition, should New D&B discontinue claimingalternatives to recover these amounts. The absence of any tax deficiencies in the Notices for the amortization expense deductions onfor the years 1997 through 2002,

MOODY’S2009 10-K53


combined with the expiration of the statute of limitations for 1997 through 2002, for issues not assessed, resulted in Moody’s recording an earnings benefit of $52.3 million in the second quarter of 2007. This is comprised of two components, as follows: (i) a reversal of a tax liability of $27.3 million related to the period from 1997 through the Distribution Date, reducing the provision for income taxes; and (ii) a reduction of accrued interest expense of $17.5 million ($10.6 million, net of tax) and an increase in other non-operating income of $14.4 million, relating to amounts due to New D&B. In June 2008, the statute of limitations for New D&B relating to the 2003 tax year expired. As a result, in the second quarter of 2008, Moody’s recorded a reduction of accrued interest expense of $2.3 million ($1.4 million, net of tax) and an increase in other non-operating income of $6.4 million, relating to amounts due to New D&B. As of December 31, 2009, Moody's carries a liability of $1.1 million with respect to this matter.

On the Distribution Date, New D&B paid Moody’s $55.0 million for 50% of certain anticipated future tax returns,benefits of New D&B through 2012. It is possible that IRS audits of New D&B for tax years after 2003 could result in income adjustments with respect to the amortization expense deductions of this partnership transaction. In the event that these tax benefits are not claimed or otherwise not realized by New D&B, or there is an audit adjustment, Moody’s would be required, pursuant to the terms of the 2000 Distribution Agreement, to repay to New D&B an amount equal to the discounted value of its share of the related future tax benefits.benefits and its share of any tax liability that New D&B had paid the discounted valueincurs. As of 50% of the future tax benefits fromDecember 31, 2009, Moody’s liability with respect to this transaction in cash to Moody’s at the Distribution Date. Moody’s estimates that the Company’s potential exposures (including penalties and interest, and net of tax benefits) could be up to $120 million relating to the disallowance of amortization expense deductions and could increase by approximately $6 million to $10 million per year, depending on actions that the IRS may take and on whether New D&B continues claiming the amortization expense deductions on its tax returns. Additionally, there are potential exposures that could be up to $164 million relating to the reallocation of the partnership income and expense to Old D&B. Moody’s also could be obligated for future interest payments on its share of such liability.matter totaled $52.8 million.

New D&B is currently in discussion with the IRS on these issues. OnIn March 3, 2006, New D&B and Moody’s each deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential tax deficiencies up to or equal to that amount with respect to the 1997 through 2002 tax years.

Moody’s believes that the IRS’s proposed assessments of tax against Old In July 2007, New D&B and the proposed reallocationsMoody’s commenced procedures to recover approximately $57 million of partnership income and expense to Old D&B are inconsistent with each other. Accordingly, while it is possible that the IRS could ultimately prevail in whole or in part on one of such positions, Moody’s believes that it is unlikely that the IRS will prevail on both.

Utilization of Capital Losses

In December 2004,these deposits ($24.6 million for New D&B executed a formal settlement agreementand $31.9 million for all outstanding issuesMoody’s), which represents the excess of the original deposits over the total of the deficiencies asserted in the Notices. As noted above, in November 2007 the IRS used $7.9 million of Moody’s portion of the deposit to satisfy an assessment and related to the matter concerning utilization of certain capital losses generated by Old D&B during 1989 and 1990. New D&B received two assessments on this matter duringinterest. Additionally, in the first quarter of 2005. The third and final assessment was received2008 the IRS returned to Moody’s $33.1 million in April 2006connection with this matter, which includes $3.0 million of whichinterest. In July 2008, the IRS paid Moody’s paid $0.3 million. The amounts paid by Moody’s for the first two assessments included its share of approximately $4remaining $1.8 million that Moody’s and New D&B believe should have been paid by IMS Health and NMR, but were not paid by them due to their disagreement with various aspects of New D&B’s calculation of their respective sharesbalance of the payments. New D&B was unable to resolve this dispute with IMS Healthoriginal deposit, and NMR, and has commenced arbitration proceedings against them.in September 2008 the IRS paid Moody’s believes that New D&B should prevail in its position, but the Company cannot predict with certainty the outcome. In the first quarter of 2005, Moody’s had increased its liabilities by $2.7 million due to this disagreement.

Summary of Moody’s Exposure to Legacy Tax Related Matters

The Company considers from time to time the range and probability of potential outcomes related to its legacy tax matters and establishes liabilities that it believes are appropriate in light of the relevant facts and circumstances. In doing so, Moody’s makes estimates and judgments as to future events and conditions and evaluates its estimates and judgments on an ongoing basis.

30


For the years ended December 31, 2006, 2005 and 2004, the Company recorded $2.4 million and $8.8 million net reversals of reserves and increased reserves by $30.0 million, respectively. The Company also has recorded $3.5 million, $5.8 million and $3.4$0.2 million of net interest expense related to its legacy tax matters in the years ended December 31, 2006, 2005 and 2004, respectively. Moody’s total recorded net legacy tax related liabilities as of December 31, 2006 were $93 million and are classified as long term.

It is possibleon that the legacy tax matters could be resolved in amounts that are 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. In matters where Moody’s believes the IRS has taken inconsistent positions, Moody’s may be obligated initially to pay its share of related duplicative assessments. However, Moody’s believes that ultimately it is unlikely that the IRS would retain such duplicative payments.balance.

Dividends

During 2006, the Company paid a quarterly dividend of $0.07 per share in each of the quarters of Moody’s common stock, resulting in dividends paid per share of $0.28 during the year. During 2005, the Company paid a quarterly dividend of $0.0375 in the first quarter and $0.055 in each of the three subsequent quarters, per share of Moody’s common stock, resulting in dividends paid per share of $0.2025 during the year. During 2004, the Company paid quarterly dividends of $0.0375 per share of Moody’s common stock resulting in total dividends paid per share of $0.15.

On December 12, 2006, the Board of Directors of the Company approved the declaration of a quarterly dividend of $0.08 per share of Moody’s common stock, payable on March 10, 2007 to shareholders of record at the close of business on February 20, 2007. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board of Directors.

Common Stock Information

The Company’s common stock trades on the New York Stock Exchange under the symbol “MCO”. The table below indicates the high and low sales price of the Company’s common stock and the dividends declared for the periods shown. The number of registered shareholders of record at January 31, 2007 was 4,275.

   Price Per Share  

Dividends

Declared

Per Share

   High  Low  

2005:

      

First quarter

  $44.53  $40.29  $0.055

Second quarter

   47.04   39.55   0.055

Third quarter

   51.89   44.05   0.055

Fourth quarter

   62.50   49.28   0.070
            

Year ended December 31, 2005

  $62.50  $39.55  $0.235

2006:

      

First quarter

  $71.95  $61.09  $0.07

Second quarter

   73.29   49.77   0.07

Third quarter

   65.84   49.76   0.07

Fourth quarter

   71.70   60.60   0.08
            

Year ended December 31, 2006

  $73.29  $49.76  $0.29

Forward-Looking Statements

Certain statements contained in this annual report on Form 10-K are forward-looking statements and are based on future expectations, plans and prospects for the Company’s business and operations that involve a number of risks and uncertainties. Such statements involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements. Those statements appear at various places throughout this annual report on Form 10-K, including in the sections entitled “Outlook”“2010 Outlook” and “Contingencies” under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”“MD&A”, commencing on page 1527 of this annual report on Form 10-K, under “Legal Proceedings” in Part I, Item 3, of this Form 10-K, and elsewhere in the context of statements containing the words “believe”, “expect”, “anticipate”, “intend”, “plan”, “will”, “predict”, “potential”, “continue”, “strategy”, “aspire”, “target”, “forecast”, “project”, “estimate”,

31


“should” “should”, “could”, “may” and similar expressions or words and variations thereof relating to the Company’s views on future events, trends and contingencies. Stockholders and investors are cautioned not to place undue reliance on these forward-lookingforward- looking statements. The forward-looking statements and other information are made as of the date of this annual report on Form 10-K, and the Company undertakes no obligation (nor does it intend) to publicly supplement, update or revise such statements on a going-forward basis, whether as a result of subsequent developments, changed expectations or otherwise. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is identifying examples of factors, risks and uncertainties that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements. Those factors, risks and uncertainties include, but are not limited to, changes inthe current world-wide credit market disruptions and economic slowdown, which is affecting and could continue to affect the volume of debt and other securities issued in domestic and/or global capital markets; other matters that could affect the volume of debt and other securities issued in domestic and/or global capital markets, including credit quality concerns, changes in interest rates and other volatility in the financial markets; the uncertain effectiveness and possible collateral consequences of U.S. and foreign government initiatives to respond to the economic slowdown; concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility and integrity of independent agency ratings; possible loss of market share through competition;the introduction of competing products or technologies by other companies; pricing pressurespressure from competitors and/or customers; the impact of regulation as a nationally recognized statistical rating organization and the potential emergence of government-sponsored credit rating agencies; proposedfor new U.S., foreign, state and local legislation and regulations; regulationsthe potential for increased competition and regulation in foreign jurisdictions; exposure to litigation related to our rating opinions, as well as any other litigation to which the Company may be adoptedsubject from time to implement the federal legislation recently adopted to require registration of Nationally Recognized Statistical Rating Organizations; possible judicial decisions in various jurisdictions regarding the status of and potential liabilities of rating agencies;time; the possible loss of key employees to investmentemployees; failures or commercial banks or elsewheremalfunctions of our operations and related compensation cost pressures;infrastructure; the outcome of any review by controlling tax authorities of the Company’s global tax planning initiatives; the outcome of those taxLegacy Tax Matters and legal contingencies that relate to Old D&B,the Company, its predecessors and their affiliated companies for which the CompanyMoody’s has assumed portions of the financial responsibility; the outcome of other legal actions to which the Company, from time to time, may be named as a party; the ability of the Company to successfully integrate acquired businesses; and a decline in the demand for credit risk management tools by financial institutions. These factors, risks and uncertainties as well as other risks and uncertainties that could cause Moody’s actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements are described in greater detail under “Risk Factors” in Part I, Item 1A

54MOODY’S2009 10-K


of this annual report on Form 10-K, elsewhere in this Form 10-K and in other filings made by the Company from time to time with the Securities and Exchange CommissionSEC or in materials incorporated herein or therein. Stockholders and investors are cautioned that the occurrence of any of these factors, risks and uncertainties may cause the Company’s actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the forward-looking statements, which could have a material and adverse effect on the Company’s business, results of operations and financial condition. New factors may emerge from time to time, and it is not possible for the Company to predict new factors, nor can the Company assess the potential effect of any new factors on it.

 

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information in response to this Item is set forth under the caption “Market Risk” in Part II, Item 7 on page 43 of this annual report on Form 10-K.

 

32

MOODY’S2009 10-K55


ITEM 8.FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTSIndex to Financial Statements

 

   PAGE(S)Page(s)

Management’s Report on Internal Control Over Financial Reporting

  3457

ReportReports of Independent Registered Public Accounting Firm

Firms
  3558-59

Consolidated Financial Statements:

  

Consolidated Balance Sheets as of December 31, 20062009 and 20052008

  3761

For the years ended December 31, 2006, 20052009, 2008 and 2004:2007:

  

Consolidated Statements of Operations

  3660

Consolidated Statements of Cash Flows

  3862

Consolidated Statements of Shareholders’ Equity (Deficit)

  3963-65

Notes to Consolidated Financial Statements

  40-6466-97

Schedules are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.

 

33

56MOODY’S2009 10-K


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Moody’s Corporation (“Moody’s” or “the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission (“SEC”)SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board, of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Moody’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Moody’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management of the Company has undertaken an assessment of the design and operational effectiveness of the Company’s internal control over financial reporting as of December 31, 20062009 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Commission. The COSO framework is based upon five integrated components of control: risk assessment, control activities, control environment, information and communications and ongoing monitoring.

Based on the assessment performed, management has concluded that Moody’s maintained effective internal control over financial reporting as of December 31, 2006.2009.

Our management’s assessment of theThe effectiveness of the Company’sour internal control over financial reporting as of December 31, 20062009 has been audited by PricewaterhouseCoopersKPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr.

Chairman and Chief Executive Officer

/s/ LINDA S. HUBER

Linda S. Huber

Executive Vice President and Chief Financial Officer

February 26, 2010

 

/S/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr.
Chairman and Chief Executive Officer

/S/ LINDA S. HUBERMOODY’S2009 10-K

Linda S. Huber
Executive Vice President and Chief Financial Officer
February 27, 200757


 

34


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors and Shareholders of Moody’s Corporation:

We have completed integrated auditsaudited the accompanying consolidated balance sheets of Moody’s Corporation’sCorporation (the Company) as of December 31, 2009 and 2008 and the related consolidated financial statements of operations, cash flows and shareholders’ deficit, for each of itsthe years in the two-year period ended December 31, 2009. We also have audited Moody’s Corporation’s internal control over financial reporting as of December 31, 20062009, based on the criteria established in accordance withInternal Control – Integrated Framework issued by the standardsCommittee of Sponsoring Organizations of the Public Company Accounting Oversight Board (United States)Treadway Commission (COSO). Our opinions, based on our audits, are presented below.

ConsolidatedMoody’s Corporation’s management is responsible for these consolidated financial statements,

In our opinion, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Moody’s Corporation and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management.Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company has changed the manner in which it accounts for share-based payment, as of January 1, 2006, and the manner in which it accounts for defined benefit pension and other post-retirement plans, as of December 31, 2006.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Moody’s Corporation as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Moody’s Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission”).

KPMG LLP

New York, New York

February 26, 2010

 

/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP58MOODY’S2009 10-K


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Moody’s Corporation:

In our opinion, the consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the year ended December 31, 2007 present fairly, in all material respects, the results of operations and cash flows of Moody’s Corporation and its subsidiaries for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company has changed the manner in which it accounts for uncertainty in income taxes as of January 1, 2007. As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests in 2009.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

New York, New York

February 28, 2008, except for the effects of

the change in the composition of reportable

segments as discussed in Note 18, as to which

the date is February 27, 2009, and except for the

effects of the change in the manner of

accounting for noncontrolling interests as

discussed in Note 2, as to which the date is

February 26, 2010

New York, New York
February 28, 2007MOODY’S2009 10-K59


 

35


MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in millions, except per share data)AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)

 

  Year Ended December 31, 
  Year Ended December 31, 
  2006 2005 2004   2009 2008 2007 

Revenue

  $2,037.1  $1,731.6  $1,438.3   $1,797.2   $1,755.4   $2,259.0  
          

Expenses

        

Operating

   539.4   452.9   375.4    532.4    493.3    584.0  

Selling, general and administrative

   359.3   303.9   242.4    495.7    441.3    451.1  

Restructuring

   17.5    (2.5  50.0  

Depreciation and amortization

   39.5   35.2   34.1    64.1    75.1    42.9  

Gain on sale of building

   (160.6)  —     —   
                    

Total expenses

   777.6   792.0   651.9    1,109.7    1,007.2    1,128.0  
          
          

Operating income

   1,259.5   939.6   786.4    687.5    748.2    1,131.0  
                    

Interest income (expense), net

   3.0   5.0   (16.2)   (33.4  (52.2  (24.3

Other non-operating (expense) income, net

   (2.0)  (9.9)  1.1 

Other non-operating income (expense), net

   (7.9  33.8    15.3  
                    

Non-operating income (expense), net

   1.0   (4.9)  (15.1)   (41.3  (18.4  (9.0
                    

Income before provision for income taxes

   1,260.5   934.7   771.3    646.2    729.8    1,122.0  

Provision for income taxes

   506.6   373.9   346.2    239.1    268.2    415.2  
                    

Net income

  $753.9  $560.8  $425.1    407.1    461.6    706.8  

Less: Net income attributable to noncontrolling interests

   5.1    4.0    5.3  
                    
Net income attributable to Moody’s  $402.0   $457.6   $701.5  
          

Earnings per share

        

Basic

  $2.65  $1.88  $1.43   $1.70   $1.89   $2.63  
                    

Diluted

  $2.58  $1.84  $1.40   $1.69   $1.87   $2.58  
                    

Weighted average shares outstanding

        

Basic

   284.2   297.7   297.0    236.1    242.4    266.4  
                    

Diluted

   291.9   305.6   304.7    237.8    245.3    272.2  
                    

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

 

36

60MOODY’S2009 10-K


MOODY’S CORPORATION

CONSOLIDATED BALANCE SHEETS

(amounts in millions, except share and per share data)AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

 

  December 31, 
  December 31, 
  2006 2005   2009 2008 

Assets

      

Current assets:

      

Cash and cash equivalents

  $408.1  $486.0   $473.9   $245.9  

Short-term investments

   75.4   94.5    10.0    7.1  

Accounts receivable, net of allowances of $14.5 in 2006 and $12.7 in 2005

   475.4   421.8 

Accounts receivable, net of allowances of $24.6 in 2009 and $23.9 in 2008

   444.9    421.8  

Deferred tax assets, net

   32.3    26.5  

Other current assets

   43.0   49.5    51.8    107.8  
              

Total current assets

   1,001.9   1,051.8    1,012.9    809.1  

Property and equipment, net

   62.0   55.4    293.0    247.7  

Prepaid pension costs

   —     56.4 

Goodwill

   176.1   152.1    349.2    338.0  

Intangible assets, net

   65.7   70.8    104.9    114.0  
Deferred tax assets, net   192.6    220.1  

Other assets

   192.0   70.7    50.7    44.5  
              

Total assets

  $1,497.7  $1,457.2   $2,003.3   $1,773.4  
              

Liabilities and shareholders’ equity

   
Liabilities and shareholders’ deficit   

Current liabilities:

      

Accounts payable and accrued liabilities

  $339.7  $279.8   $317.2   $240.4  

Commercial paper

   443.7    104.7  

Revolving credit facility

       613.0  

Current portion of long-term debt

   3.8      

Deferred revenue

   360.3   299.1    471.3    435.0  
              

Total current liabilities

   700.0   578.9    1,236.0    1,393.1  

Non-current portion of deferred revenue

   102.1   75.7    103.8    114.8  

Notes payable

   300.0   300.0 
Long-term debt   746.2    750.0  
Deferred tax liabilities, net   31.4    19.0  
Unrecognized tax benefits   164.2    185.1  

Other liabilities

   228.2   193.2    317.8    297.5  
              

Total liabilities

   1,330.3   1,147.8    2,599.4    2,759.5  
              

Commitments and contingencies (Notes 15 and 16)

   

Shareholders’ equity:

   
Commitments and contingencies (Notes 16 and 17)   
Shareholders’ deficit:   

Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding

   —     —            

Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding

   —     —            

Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at December 31, 2006 and 2005

   3.4   3.4 

Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 342,902,272 shares issued at December 31, 2009 and 2008

   3.4    3.4  

Capital surplus

   345.7   240.9    391.1    392.7  

Retained earnings

   2,091.4   1,419.2    3,329.0    3,023.2  

Treasury stock, at cost; 64,296,812 and 52,604,734 shares of common stock at December 31, 2006 and 2005, respectively

   (2,264.7)  (1,353.2)

Treasury stock, at cost; 106,044,833 and 107,757,537 shares of common stock at December 31, 2009 and 2008, respectively

   (4,288.5�� (4,361.6

Accumulated other comprehensive loss

   (8.4)  (0.9)   (41.2  (52.1
              

Total shareholders’ equity

   167.4   309.4 

Total Moody’s shareholders’ deficit

   (606.2  (994.4

Noncontrolling interests

   10.1    8.3  
              

Total liabilities and shareholders’ equity

  $1,497.7  $1,457.2 

Total shareholders’ deficit

   (596.1  (986.1
              

Total liabilities and shareholders’ deficit

  $2,003.3   $1,773.4  
       

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

 

37

MOODY’S2009 10-K61


MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions)AMOUNTS IN MILLIONS)

 

  Year Ended December 31, 
  Year Ended December 31, 
  2006 2005 2004   2009 2008 2007 

Cash flows from operating activities

        

Net income

  $753.9  $560.8  $425.1   $407.1   $461.6   $706.8  

Reconciliation of net income to net cash provided by operating activities:

        

Depreciation and amortization

   39.5   35.2   34.1    64.1    75.1    42.9  

Stock-based compensation expense

   77.1   54.8   27.8    57.4    63.2    90.2  

Non-cash portion of restructuring charge

           7.0  

Deferred income taxes

   (27.2)  (20.2)  (9.6)   16.5    (17.3  (76.4

Excess tax benefits from exercise of stock options

   (103.2)  70.2   55.9    (5.0  (7.5  (52.2

Gain on sale of building

   (160.6)  —     —   

Other

   1.2   2.2   1.6 

Legacy Tax Matters

       (7.8  (52.3

Changes in assets and liabilities:

        

Accounts receivable

   (42.4)  (53.1)  (93.0)   (14.9  26.2    36.7  

Other current assets

   8.9   1.0   (11.6)   55.3    (23.1  (58.3

Other assets and prepaid pension costs

   (40.0)  (6.7)  23.4 

Other assets

   (7.4  26.0    15.5  

Accounts payable and accrued liabilities

   141.4   (16.0)  42.2    50.4    (118.4  53.9  

Restructuring liability

   2.6    (29.8  33.1  

Deferred revenue

   80.2   52.2   65.1    17.9    9.0    79.2  

Unrecognized tax benefits and other non-current tax liabilities

   (21.0  30.8    91.9  

Deferred rent

   21.1    6.6    53.1  

Other liabilities

   23.7   27.5   (34.8)   (0.3  45.1    17.1  
                    

Net cash provided by operating activities

   752.5   707.9   526.2    643.8    539.7    988.2  
                    

Cash flows from investing activities

        

Capital additions

   (31.1)  (31.3)  (21.3)   (90.7  (84.4  (181.8

Purchases of marketable securities

   (414.0)  (324.4)  (22.2)

Sales and maturities of marketable securities

   436.5   235.5   15.7 

Net proceeds from sale of building

   163.9   —     —   

Purchases of short-term investments

   (17.6  (10.3  (191.4

Sales and maturities of short-term investments

   15.4    15.9    252.9  

Cash paid for acquisitions and investment in affiliates, net of cash acquired

   (39.2)  (30.2)  (3.5)   (0.9  (241.4  (4.4

Insurance recovery

       0.9      
                    

Net cash provided by (used in) investing activities

   116.1   (150.4)  (31.3)
          

Net cash used in investing activities

   (93.8  (319.3  (124.7
          

Cash flows from financing activities

        

Repayment of notes

   —     (300.0)  —   

Issuance of notes

   —     300.0   —   

Borrowings under revolving credit facilities

   2,412.0    4,266.2    1,000.0  

Repayments of borrowings under revolving credit facilities

   (3,025.0  (3,653.2  (1,000.0

Issuance of commercial paper

   11,075.5    11,522.7    6,684.1  

Repayment of commercial paper

   (10,736.5  (11,969.4  (6,136.7

Issuance of long term debt

       150.0    300.0  

Net proceeds from stock plans

   105.3   89.1   105.0    19.8    23.5    65.9  

Excess tax benefits from exercise of stock options

   103.2   —     —      5.0    7.5    52.2  

Cost of treasury shares repurchased

   (1,093.6)  (691.7)  (221.3)       (592.9  (1,738.4

Payment of dividends

   (79.5)  (60.3)  (44.7)

Payment of dividends to MCO shareholders

   (94.5  (96.8  (85.2

Payment of dividends to noncontrolling interests

   (3.7  (5.0  (4.2

Payments under capital lease obligations

   (0.6)  (1.3)  (1.3)   (1.4  (1.7  (2.0

Debt issuance costs and related fees

   —     (2.3)  —          (0.7  (1.4
                    

Net cash used in financing activities

   (965.2)  (666.5)  (162.3)   (348.8  (349.8  (865.7
          

Effect of exchange rate changes on cash and cash equivalents

   18.7   (11.1)  4.4    26.8    (51.0  20.4  
                    

(Decrease) increase in cash and cash equivalents

   (77.9)  (120.1)  337.0 

Increase (decrease) in cash and cash equivalents

   228.0    (180.4  18.2  

Cash and cash equivalents, beginning of the period

   486.0   606.1   269.1    245.9    426.3    408.1  
                    

Cash and cash equivalents, end of the period

  $408.1  $486.0  $606.1   $473.9   $245.9   $426.3  
                    

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

 

38

62MOODY’S2009 10-K


MOODY’S CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(AMOUNTS IN MILLIONS)

  Shareholders' of Moody's Corporation        Comprehensive Income (Loss) 
  Common Stock       Treasury Stock  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Moody’s
Shareholders’
Equity
(Deficit)
  Non-Controlling
Equity
(Interests)
  Total
Shareholders’
Equity
(Deficit)
  Shareholders’
of Moody’s
Corporation
  Non-Controlling
Interests
 Total
Comprehensive
Income (Loss)
 
  
  Shares Amount Capital
Surplus
  Retained
Earnings
  Shares  Amount                     
Balance at December 31, 2006 342.9 $3.4 $345.7   $2,091.4   (64.3 $(2,264.7 $(8.4 $167.4   $10.5   $177.9      
                                               

Net Income

     701.5       701.5    5.3    706.8   $701.5   $5.3 $706.8  

Dividends

     (88.4     (88.4  (4.2  (92.6    

Amounts recognized upon adoption of accounting guidance for UTPs

     (43.4     (43.4   (43.4    

Stock-based compensation

    94.5        94.5     94.5      

Shares issued for stocked-based compensation plans, net

    (85.5  4.1    151.5     66.0     66.0      

Net excess tax benefit upon settlement of stock-based compensation awards

    33.2        33.2     33.2      

Treasury shares repurchased

     (31.3  (1,738.4   (1,738.4   (1,738.4    

Currency translation adjustment (net of tax of $5.5 million)

        12.9    12.9    0.1    13.0    12.9    0.1  13.0  

Net actuarial gains and prior service costs (net of tax of $5.9 million)

        7.8    7.8     7.8    7.8     7.8  

Amortization and recognition of prior service cost and actuarial losses (net of tax of $2.5 million)

        3.4    3.4     3.4    3.4     3.4  

Unrealized loss on cash flow hedges

        (0.1  (0.1   (0.1  (0.1   (0.1
                                               
Comprehensive income           $725.5   $5.4 $730.9  
                     
Balance at December 31, 2007 342.9 $3.4 $387.9   $2,661.1   (91.5 $(3,851.6 $15.6   $(783.6 $11.7   $(771.9           
                                       

(amounts in millions)continued on next page)

 

   Common Stock  Capital
Surplus
  Retained
Earnings
  Treasury Stock  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Shareholders’
Equity
(Deficit)
  

Comprehensive

Income

 
   Shares  Amount    Shares  Amount          

Balance at December 31, 2003

  342.9  $3.4  $74.7  $558.9  (45.6) $(677.2) $8.1  $(32.1) 

Net income

        425.1      425.1    $425.1 

Dividends

        (44.7)     (44.7)   

Proceeds from stock plans, including excess tax benefits

       161.1       161.1    

Stock-based compensation

       27.8       27.8    

Net treasury stock activity

       (121.3)  0.5   (100.0)   (221.3)   

Currency translation adjustment

           2.6   2.6     2.6 

Additional minimum pension liability (net of tax of $0.7 million)

           (1.0)  (1.0)    (1.0)
                                      

Comprehensive income

              $426.7 
                  

Balance at December 31, 2004

  342.9  $3.4  $142.3  $939.3  (45.1) $(777.2) $9.7  $317.5    

Net income

        560.8      560.8    $560.8 

Dividends

        (80.9)     (80.9)   

Proceeds from stock plans, including excess tax benefits

       159.3       159.3    

Stock-based compensation

       55.0       55.0    

Net treasury stock activity

       (115.7)  (7.5)  (576.0)   (691.7)   

Currency translation adjustment

           (7.3)  (7.3)    (7.3)

Additional minimum pension liability (net of tax of $1.8 million)

           (2.5)  (2.5)    (2.5)

Unrecognized derivative losses on cash flow hedges (net of tax of $0.5 million)

           (0.8)  (0.8)    (0.8)
                                      

Comprehensive income

              $550.2 
                  

Balance at December 31, 2005

  342.9  $3.4  $240.9  $1,419.2  (52.6) $(1,353.2) $(0.9) $309.4    

Net income

        753.9      753.9    $753.9 

Dividends

        (81.7)     (81.7)   

Proceeds from stock plans, including excess tax benefits

       209.0       209.0    

Stock-based compensation

       77.3       77.3    

Net treasury stock activity

       (181.5)  (11.7)  (911.5)   (1,093.0)   

Currency translation adjustment

           11.4   11.4     11.4 

Additional minimum pension liability (net of tax of $0.7 million)

           1.0   1.0     1.0 

Amounts eliminated related to additional minimum pension liability upon the adoption of SFAS No. 158 (net of tax of $1.8 million)

           2.5   2.5    

Actuarial losses and prior service costs recognized upon the adoption of SFAS No. 158 (net of tax of $16.3 million)

           (22.5)  (22.5)   

Unrecognized derivative losses on cash flow hedges

           0.1   0.1     0.1 
                                      

Comprehensive income

              $766.4 
                  

Balance at December 31, 2006

  342.9  $3.4  $345.7  $2,091.4  (64.3) $(2,264.7) $(8.4) $167.4  
                                  
MOODY’S2009 10-K63


Consolidated Statements of Shareholders’ Equity (Deficit)(continued)

(AMOUNTS IN MILLIONS)

  Shareholders' of Moody's Corporation        Comprehensive Income (Loss) 
  Common Stock       Treasury Stock  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Moody's
Shareholders'
Equity

(Deficit)
  Non-Controlling
Interests
  Total
Shareholders'
Equity
(Deficit)
  Shareholders'
of Moody's
Corporation
  Non-Controlling
Interests
  Total
Comprehensive
Income (Loss)
 
  
  Shares Amount Capital
Surplus
  Retained
Earnings
  Shares  Amount                      
Balance at December 31, 2007 342.9 $3.4 $387.9   $2,661.1   (91.5 $(3,851.6 $15.6   $(783.6 $11.7   $(771.9    
                                                

Net Income

     457.6       457.6    4.0    461.6   $457.6   $4.0   $461.6  

Dividends

     (95.5     (95.5  (5.0  (100.5    

Stock-based compensation

    63.5        63.5     63.5      

Shares issued for stock-based compensation plans, net

    (59.3  1.9    82.9     23.6     23.6      

Net excess tax benefit upon settlement of stock-based compensation awards

    0.6        0.6     0.6      

Treasury shares repurchased

     (18.2  (592.9   (592.9   (592.9    

Currency translation adjustment (net of tax of $12.1 million)

        (37.8  (37.8  (2.4  (40.2  (37.8  (2.4  (40.2

Net actuarial losses and prior service costs (net of tax of $18.0 million)

        (26.7  (26.7   (26.7  (26.7   (26.7

Amortization and recognition of prior service cost and actuarial losses (net of tax of $0.8 million)

        0.9    0.9     0.9    0.9     0.9  

Net unrealized loss on cash flow hedges (net of tax of $2.1 million)

        (4.1  (4.1   (4.1  (4.1   (4.1
                                                
Comprehensive income           $389.9   $1.6   $391.5  
                      
Balance at December 31, 2008 342.9 $3.4 $392.7   $3,023.2   (107.8 $(4,361.6 $(52.1 $(994.4 $8.3   $(986.1            
                                       

(continued on next page)

64MOODY’S2009 10-K


Consolidated Statements of Shareholders’ Equity (Deficit)(continued)

(AMOUNTS IN MILLIONS)

  Shareholders’ of Moody's Corporation        Comprehensive Income (Loss) 
  Common Stock       Treasury Stock  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Moody’s
Shareholders’
Equity
(Deficit)
  Non-Controlling
Interests
  Total
Shareholders’
Equity
(Deficit)
  Shareholders’
of Moody’s
Corporation
  Non-Controlling
Interests
 Total
Comprehensive
Income (Loss)
 
  
  Shares Amount Capital
Surplus
  Retained
Earnings
  Shares  Amount                     
Balance at December 31, 2008 342.9 $3.4 $392.7   $3,023.2   (107.8 $(4,361.6 $(52.1 $(994.4 $8.3   $(986.1    
                                               

Net Income

     402.0       402.0    5.1    407.1   $402.0   $5.1 $407.1  

Dividends

     (96.2     (96.2  (3.7  (99.9    

Stock-based compensation

    57.9        57.9     57.9      

Shares issued for stock-based compensation plans, net

    (53.4  1.8    73.1     19.7     19.7      

Net tax shortfalls upon settlement of stock-based compensation awards

    (6.1      (6.1   (6.1    

Currency translation adjustment, (net of tax of $18.5 million)

        22.2    22.2    0.4    22.6    22.2    0.4  22.6  

Net actuarial gains and prior service cost, (net of tax of $8.9 million)

        (10.4  (10.4   (10.4  (10.4   (10.4

Amortization and recognition of prior service cost and actuarial losses, (net of tax of $0.4 million)

        0.6    0.6     0.6    0.6     0.6  

Net unrealized loss on cash flow hedges (net of tax of $1.5 million)

        (1.5  (1.5   (1.5  (1.5   (1.5
                                               
Comprehensive income           $412.9   $5.5 $418.4  
                     
Balance at December 31, 2009 342.9 $3.4 $391.1   $3,329.0   (106.0 $(4,288.5 $(41.2 $(606.2 $10.1   $(596.1           
                                       

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

 

39

MOODY’S2009 10-K65


MOODY’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular dollar and share amounts in millions, except per share data)TABULAR DOLLAR AND SHARE AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)

Note 1 Description of Business and Basis of Presentation

NOTE 1DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s Corporation (“Moody’s” or the “Company”) is a provider of (i) credit ratings , (ii) credit and economic related research, data and analysis covering fixed-income securities, other debt instrumentsanalytical tools, (iii) risk management software and the entities that issue such instruments in the global capital markets, and credit training services and (ii)(iv) quantitative credit risk assessment productsmeasures, credit portfolio management solutions and servicestraining services. In 2007 and credit processing software for banks, corporations and investors in credit-sensitive assets.prior years, Moody’s operatesoperated in two reportable segments: Moody’s Investors Service and Moody’s KMV (“MKMV”).KMV. Beginning in January 2008, Moody’s Investors Servicesegments were changed to reflect the Reorganization announced in August 2007 and Moody’s now reports in two new reportable segments: MIS and MA. As a result of the Reorganization, the rating agency remains in the MIS operating segment and several ratings business lines have been realigned. All of Moody’s other non-rating commercial activities are included within the new Moody’s Analytics segment. The MIS segment publishes rating opinionscredit ratings on a broadwide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS’s ratings to support the distribution of their debt issues to investors. The MA segment develops a wide range of products and services that support the credit obligorsrisk management activities of institutional participants in global financial markets. These offerings include quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, and credit obligations issued in domesticspecialized advisory and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs. Ittraining services. MA also publishesdistributes investor-oriented credit information, research and economic commentary,data developed by MIS as part of its rating process, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks. The Moody’s KMV business develops and distributes quantitative credit risk assessment products and services and credit processing software for banks, corporations and investors in credit-sensitive assets.commentary on topical events.

The Company operated as part of The Dun & Bradstreet Corporation (“Old D&B”)&B until September 30, 2000, (the “Distribution Date”), when Old D&B separated into two publicly traded companies Moody’s Corporation and The New D&B Corporation (“New D&B”).&B. At that time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B comprised the business of Old D&B’s Dun & Bradstreet operating company (the “D&B Business”).company. The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services (the “Moody’s Business”) and was renamed “Moody’s Corporation”. The method by which Old D&B distributed to its shareholders its shares of New D&B stock is hereinafter referred to as the “2000 Distribution”.

Moody’s Corporation. For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a Distribution Agreement (the “2000 Distribution Agreement”), Tax Allocation Agreement, Employee Benefits Agreement, Shared Transaction Services Agreement, Insurancedistribution agreement, tax allocation agreement and Risk Management Services Agreement, Data Services Agreement and Transition Services Agreement.employee benefits agreement.

In February 2005, Moody’s Board of Directors declared a two-for-one stock split to be effected as a special stock distribution of one share of common stock for each share of the Company’s common stock outstanding, subject to stockholder approval of a charter amendment to increase the Company’s authorized common shares from 400 million shares to 1 billion shares. At the Company’s Annual Meeting on April 26, 2005, Moody’s stockholders approved the charter amendment. As a result, stockholders of record as of the close of business on May 4, 2005 received one additional share of common stock for each share of the Company’s common stock held on that date (the “Stock Split”). Such additional shares were distributed on May 18, 2005. All prior period share, per share and equity award information have been restated to reflect the Stock Split.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Note 2 Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis. Investments in companies for which the Company does not have the ability to exercise significant influence are carried on the cost basis of accounting.

The Company applies the guidelines set forth in Financial Accounting Standards Board (“FASB”) Interpretation No. 46R “ConsolidationTopic 810 of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R”)the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under FIN 46R.Topic 810 of the ASC.

Cash and Cash Equivalents

Cash equivalents principally consist of investments in money market mutual funds and high-grade commercial paper with maturities of three months or less when purchased. Interest income on cash and cash equivalents and short-term investments was $18.2$2.5 million, $26.0$12.2 million and $6.8$19.3 million for the years ended December 31, 2006, 20052009, 2008 and 2004,2007, respectively.

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Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives typicallywhich range from three to tenseven years for computer equipment, and officethree to 20 years for equipment, five to 10 years for furniture and fixtures and equipment, andthree to seven to forty years for buildings and building improvements.software. Leasehold improvements have an estimated useful life of five to 20 years and are amortized over the shorter of the term of the lease or the estimated useful life of the improvement. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred. Gains and losses on disposals of property and equipment are reflected in the consolidated statements of operations.

Computer Software

Costs for the development ofinternally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”.established. These costs primarily relate to the development or enhancement of MKMV credit processing software and quantitative credit risk assessment products sold by the MA segment, to be licensed to customers and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining

66MOODY’S2009 10-K


when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. The Company amortizes these assets based on the greater of either (i) a ratio of current product revenue to estimated total product revenue or (ii) the straight-line basis over the useful life. Amortization expense for all such software for the yearsyear ended December 31, 2006, 20052009, 2008 and 20042007 was $6.0 million, $8.0immaterial, $0.2 million and $7.7$1.7 million, respectively. The Company assesses the recoverability of these assets at each period end date.

The Company capitalizes costs related to software developed or obtained for internal use in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs of third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives generally three to five years.on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.

Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets

Goodwill is tested for impairment, at the reporting unit level, annually on November 30th or more frequently if events or circumstances indicate the assets may be impaired, in accordance with the provisions of ASC Topic 350. If the estimated fair value, which is based on a discounted cash flow methodology, is less than its carrying amount, the Company would proceed to step two of the impairment test as prescribed by Topic 350 of the ASC. Under step two, the estimated fair value of the reporting units would be allocated to the assets and liabilities of the reporting unit to derive the implied fair value of the goodwill. If the implied fair value of the goodwill determined under step two of the impairment test is less than its carrying amount, an impairment charge would be recognized for the difference. The discounted cash flow methodology used to value the reporting units is based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The significant estimates used to derive the present value of the cash flows include the reporting units WACC and future growth rates.

Finite-lived intangible assets and other long-lived assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. Goodwill and indefinite-lived intangible assets are tested for impairment annually

Rent Expense

The Company records rent expense on straight-line basis over the life of the lease. In cases where there is a free rent period or more frequently if events or circumstances indicate the assets may be impaired. If the estimated fair value is less than its carrying amount, a loss is recognized.

Stock-Based Compensation

On January 1, 2006,future fixed rent escalations the Company adopted, underwill record a deferred rent liability. Additionally, the modified prospective application method,receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the fair value methodlease term as a reduction of accounting for stock-based compensation under Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). Under this pronouncement, companies are required to recordrent expense.

Stock-Based Compensation

The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Previously, on January 1, 2003, theThe Company adopted, onhas also established a prospective basis, the fair value methodpool of accounting for stock-based compensation under SFAS No. 123, “Accounting for Stock-Based Compensation”.

In 2006, the incremental compensation expense due to the adoption of SFAS No. 123R caused operating income and income before provision for income taxes to decrease by $5.8 million, net income to decrease by $3.5 million and had a $0.02 and $0.01 impact on basic and diluted earnings per share, respectively. In addition, prior to the adoption of SFAS No. 123R, excess tax benefits relating to stock-based compensation was presented in the consolidated statements of cash flows as an operating cash flow, along with other tax cash flows, in accordance with the provisions of Emerging Issues Task Force (“EITF”) No. 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option” (“EITF 00-15”). SFAS No. 123R supersedes EITF 00-15, amends SFAS No. 95, “Statement of Cash Flows”, and requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the consolidated statements of cash flows as a financing cash flow. As a result of this change in presentation, $103.2 million of excess tax benefits from stock-based compensation was recorded as a cash flow from financing activities rather than a cash flow from operating activities for the year ended December 31, 2006.

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In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123R-3”). FSP 123R-3 provides for an alternative transition method for establishing the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation (“APIC Pool”), which is available to absorb any recognized tax deficiencies recognized subsequent to the adoption of SFAS No. 123R. The Company has elected to adopt this alternative transition method in establishing the beginning APIC pool at January 1, 2006.deficiencies.

The consolidated statements of operations include pre-tax compensation expense of $77.1 million, $54.8 million and $27.8 million for the years ended December 31, 2006, 2005 and 2004, respectively; related to stock-based compensation plans. The total income tax benefit recognized in the income statement for stock-based compensation plans was $29.7 million, $21.4 million and $11.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. There was $0.2 million of compensation expense capitalized for both the years ended December 31, 2006 and 2005 related to stock-based compensation plans. There was no compensation expense related to stock-based compensation plans capitalized for the year ended December 31, 2004. The expense for the year ended December 31, 2005 includes approximately $9.1 million relating to the accelerated expensing of equity grants for employees who were at or near retirement eligibility as defined in the related Company stock plans. The 2005 and 2004 expense is less than that which would have been recognized if the fair value method had been applied to all awards since the original effective date of SFAS No. 123 rather than being applied prospectively as of January 1, 2003. Had the Company determined stock-based compensation expense using the fair value method provisions of SFAS No. 123 since its original effective date, Moody’s net income and earnings per share for 2005 and 2004 would have been reduced to the pro forma amounts shown below. The pro forma amounts for the year ended December 31, 2005 include the effect of the $9.1 million pre-tax charge discussed above.

   2005  2004 

Net income:

   

As reported

  $560.8  $425.1 

Add: Stock-based compensation expense included in reported net income, net of tax

   33.3   16.8 

Deduct: Stock-based compensation expense determined under the fair value method, net of tax

   (38.6)  (28.2)
         

Pro forma net income

  $555.5  $413.7 
         

Basic earnings per share:

   

As reported

  $1.88  $1.43 

Pro forma

  $1.87  $1.39 

Diluted earnings per share:

   

As reported

  $1.84  $1.40 

Pro forma

  $1.82  $1.36 

Derivative Instruments and Hedging Activities

Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchangecurrencies and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. The Company accounts forAll derivative financial instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities” (“SFAS No. 133”), as amended and interpreted, which requires that all derivative financial instruments beare recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded currently into earnings. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded as other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified to earnings in the same period or periods during which the hedged transaction affects income.

Employee Benefit PlansRevenue Recognition

Moody’s maintains various noncontributory defined benefit pension plans, in which substantially all U.S. employees of the Company are eligible to participate, as well as other contributory and noncontributory retirement and post-retirement plans. The expenses, assets, liabilities and obligations that Moody’s reports for pension and other post-retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. Moody’s major assumptions vary by plan and the Company determines these assumptions based on the Company’s long-term actual experience and future outlook as well as consultation with outside actuaries and other advisors where deemed appropriate. If actual results differ from the Company’s assumptions, such differences are deferred and amortized over the estimated future working life of the plan participants. See Note 10 for a full description of these plans and the accounting and funding policies.

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Revenue Recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition”. As such, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer, fees are determinable and the collection of resulting receivables is considered probable. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs.

RevenueIn the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized over the period in which the monitoring is performed. In most areas of the ratings business, the CompanyMIS charges issuers annual monitoring fees and amortizes such fees ratably over the related one-year period. In the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees thatupfront. These fees are charged fordeferred and recognized over the future monitoring overperiods, ranging from three to 51 years, which are based on the lifeexpected lives of the relatedrated securities are amortized over such lives which range from five to 46 years as of December 31, 2006.2009.

MOODY’S2009 10-K67


In areas where the CompanyMIS does not separately charge monitoring fees, the Companyit defers portions of the rating fees that it estimates will be attributed to future monitoring activities and recognizes such fees ratably over the applicable estimated monitoring period. The portion of the revenue to be deferred is based upon a number of factors, including the estimated fair market value of the monitoring services charged for similar securities or issuers. The estimated monitoring period is determined based on factors such as the lives of the rated securities. Currently, the estimated monitoring periods range from one to ten years.

RevenueIn the MA segment, revenue from sales of research products and from credit risk management subscription products is recognized ratably over the related subscription period, which is principally one year.year, beginning upon delivery of the initial product. Revenue from licenses of credit processing software is recognized at the time the product master or first copy is shippeddelivered or transferred to customers, or at such other time as the Company’s obligations are complete.customers. Related software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from services rendered within the professional services line of business is generally recognized as the services are performed.

Certain revenue arrangements within the MA segment include multiple elements such as software licenses, maintenance, subscription fees and professional services. In these types of arrangements, the fee is allocated to the various products or services based on objective measurements of fair value; that is, generally the price charged when sold separately – or vendor-specific objective evidence. Revenue is recognized for each element based upon the conditions for revenue recognition noted above unless objective evidence of fair value is not available for an undelivered element. If the fair value is not available for an undelivered element, the revenue for all elements is deferred. The deferred revenue will be recognized when MA has delivered the elements that do not have fair value or the fair value becomes readily determinable.

Amounts billed or received in advance of providing the related products or services are reflected in revenue when earned and are classified in accounts payable and accrued liabilities in the consolidated financial statements, as are customer overpayments and reflected in revenue when earned.other credits. In addition, the consolidated balance sheets reflect as current deferred revenue amounts that are expected to be recognized within one year of the balance sheet date, and as non-current deferred revenue amounts that are expected to be recognized over periods greater than one year. The majority of the balance in non-current deferred revenue relates to fees for future monitoring of commercial mortgage-backed securities.CMBS.

In 2009, 2008 and 2007, no single customer accounted for 10% or more of total revenue.

Accounts Receivable Allowances

Moody’s records as reductions of revenue provisions for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such provisions are reflected as additions to the accounts receivable allowance. AdjustmentsAdditionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Billing adjustments and uncollectible account write-offs of receivables are chargedrecorded against the allowance. Moody’s evaluates its estimates on a regular basis and makes adjustments to its revenue provisions and the accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate.appropriate in the circumstances.

Operating Expenses

Operating expenses are charged to income as incurred. These expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities.

Restructuring

The Company’s restructuring accounting follows the provisions of: Topic 712 of the ASC for severance relating to employee terminations, Topic 715 of the ASC for pension settlements and curtailments, and Topic 420 of the ASC for contract termination costs and other exit activities.

Selling, General and Administrative Expenses

Selling, general and administrativeSG&A expenses are charged to income as incurred. These expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets.

Foreign Currency Translation

For all operations outside the United StatesU.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are accumulated in a separate component of shareholders’ equity. Transaction gains and losses are reflected in other non-operating income (expense), net. In 2006, net transaction gains and losses were immaterial. Transaction (losses) gains were ($8.2) million and $1.9 million in 2005 and 2004, respectively.

43


Comprehensive Income

Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other post-retirement plans recorded in accordance with SFAS No. 158, as more fully discussed in Note 10 to the consolidated financial statements, changes in minimum pension liability and derivative instruments. Accumulated other comprehensive (loss)

68MOODY’S2009 10-K


income is primarily comprised of currency translation adjustments of $14.8$12.1 million and $3.4$(10.1) million in 2006at December 31, 2009 and 2005,2008, respectively, net actuarial losses and net prior service costs related to the Company’s pension and other post-retirement plansPost-Retirement Plans-net of ($22.5) million in 2006, additional minimum pension liabilitiestax, of ($3.5) million in 2005 and derivative instruments of ($0.7)$(47.0) million and ($0.8)$(37.2) million in 2006at December 31, 2009 and 2005,2009, respectively and realized and unrealized losses on cash flow hedges of $(6.3) million and $(4.8) million at December 31, 2009 and 2008, respectively. The required disclosures have been included in the consolidated statements of shareholders’ equity.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes”.Topic 740 of the ASC. Therefore, income tax expense is based on reported income before income taxes, and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.

The Company classifies interest related to unrecognized tax benefits in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. On January 1, 2007, the Company adopted accounting guidance for UTPs which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

For certain of its non-U.S. subsidiaries, the Company has deemed a portion of the undistributed earnings relating to these subsidiaries to be permanently reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution by the non-U.S. subsidiaries of these earnings could result in additional tax liability for the Company which may be material to Moody’s future reported results, financial position and cash flows.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in short-term investments that are carried at cost, which approximates fair value.value due to their short-term maturities. Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets. The fair value of the Company’s notes payable,CP Notes, 2007 Facility and 2008 Term Loan approximates cost due to the floating interest rate paid on these outstanding loans. The fair value of the Company’s Series 2005-1 Notes and Series 2007-1 Notes, both of which have a fixed rate of interest, is estimated using discounted cash flow analyses based on the prevailing interest rates available to the Company for borrowings with similar maturities.

Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The carrying amountdetermination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the Company’s notes payable was $300.0 million at December 31, 2006 and 2005. Their estimatedasset.

The ASC establishes a fair value was $299.1 millionhierarchy 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 $306.3 million at December 31, 2006that are significant to the fair value measurement of the assets or liabilities.

Refer to Note 5 and 2005, respectively.Note 11 for specific valuation methodologies related to the Company’s derivative instruments and pension assets.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments and trade receivables.

Cash equivalents consist of investments in high quality investment gradeinvestment-grade securities within and outside the United States.U.S. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds and issuers of high-gradehigh- grade commercial paper. Short-term investments primarily consist of certificates of deposit and high-grade auction rate securities within the United States.corporate bonds in Korea as of December 31, 2009 and 2008. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single issuer. No customer accounted for 10% or more of accounts receivable at December 31, 20062009 or 2005.2008.

MOODY’S2009 10-K69


Earnings Perper Share of Common Stock

In accordance with SFAS No. 128, “Earnings per Share”, basic earnings per shareBasic EPS is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per shareEPS is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.

Pension and Other Post-Retirement Benefits

In September 2006,Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement and post-retirement plans. The expense and assets/liabilities that the FASB issued SFAS No. 158, “Employers’ AccountingCompany reports for Defined Benefit Pensionits pension and Other Postretirement Plans—an amendmentother post-retirement benefits are dependent on many assumptions concerning the outcome of FASB Statements No. 87, 88, 106,future events and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognizecircumstances. These assumptions represent the Company’s best estimates and may vary by plan. If actual results differ from the Company’s assumptions, the resulting actuarial gains or losses are generally deferred and amortized over the estimated average future working life of active plan participants.

The Company recognizes as an asset or liability in its statement of financial position the funded status of its defined benefit post-retirement plans, and to recognize changesmeasured on a plan-by-plan basis. Changes in thatthe funded status inare recorded as part of other comprehensive income during the year in whichperiod the changes occur through other comprehensive income. The Company adopted the provisions of SFAS No. 158 as of December 31, 2006 and the incremental effect of adoption was a decrease in other assets of $15.9 million, an increase in other liabilities of $18.6 million and a pre-tax increase in accumulated other comprehensive loss of $34.5 million ($20.0 million net of tax). See Note 10, “Pension and Other Post-Retirement Benefits” for further information.occur.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,

44


the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of investments in affiliates, long-lived and intangible assets, and goodwill, pension and other post-retirement benefits, stock-based compensation, and depreciation and amortization rates for property and equipment and computer software.

The financial market volatility and poor economic conditions beginning in the third quarter of 2007 and continuing into early 2009, both in the U.S. and in many other countries where the Company operates, have impacted and will continue to impact Moody’s business. Such conditions could have a material impact to the Company’s significant accounting estimates discussed above, in particular those around accounts receivable allowances, valuations of investments in affiliates, goodwill and other acquired intangible assets, and pension and other post-retirement benefits.

Reclassifications

Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. These reclassifications include, but are not limited to, reclassifications related to new disclosure requirements for ownership interests in consolidated subsidiaries held by parties other than the Company (noncontrolling interests) pursuant to an accounting standard issued by the FASB in December 2007, which was effective for fiscal years beginning on or after December 15, 2008.

Recently Issued Accounting Pronouncements

Adopted:

In July 2006,December 2008, the FASB issued a new accounting standard that requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. The Company has adopted this new accounting standard as of December 31, 2009 and has presented the required disclosures in the prescribed format in Note 11 to the consolidated financial statements. This new standard only affected the notes to the Company’s consolidated financial statements and did not have any impact on the Company’s consolidated financial statements.

During the period ending September 30, 2009, the Company adopted the FASB InterpretationAccounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles which only affected the specific references to GAAP literature in the notes to the Company’s consolidated financial statements.

Not yet adopted:

In June 2009, the FASB issued a new accounting standard related to the consolidation of variable interest entities. This new standard eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This new standard also requires enhanced disclosures regarding an enterprise's involvement in variable interest entities. The Company will adopt this new accounting standard as of January 1, 2010 and does not expect the implementation to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued ASU No. 48, “Accounting2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). The new standard changes the requirements for Uncertaintyestablishing separate units of accounting in Income Taxes—an Interpretationa multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence of selling price (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. The Company has elected to early adopt ASU 2009-13 on a prospective

70MOODY’S2009 10-K


basis for applicable transactions originating or materially modified on or after January 1, 2010. If applied in the same manner to the year ended December 31, 2009, ASU 2009-13 would not have had a material impact on net revenue reported for both its MIS and MA segments in terms of the timing and pattern of revenue recognition. The adoption of ASU 2009-13 is also not expected to have a significant effect on the Company’s net revenue in periods after the initial adoption when applied to multiple element arrangements based on its current pricing strategies.

In January 2010, the FASB Statementissued ASU No. 109” (“FIN No. 48”),2010-06, “Improving Disclosures about Fair Value Measurements”. The new standard requires disclosure regarding transfers in and out of Level 1 and Level 2 classifications within the fair value hierarchy as well as requiring further detail of activity within the Level 3 category of the fair value hierarchy. The new standard also requires disclosures regarding the fair value for each class of assets and liabilities, which clarifies the accounting for uncertainty in income taxes recognizedis a subset of assets or liabilities within a line item in a company’s financial statementsbalance sheet. Additionally, the standard will require further disclosures surrounding inputs and valuation techniques used in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on recognition and derecognition of tax benefits resulting from a subsequent change of judgment, classification of liabilities, interest and penalties, accounting in interim periods and disclosure. In accordance with FIN No. 48, a company is required to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date. In making this assessment, a company must assume that the taxing authority will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement with a taxing authority, without considering time values. FIN No. 48fair value measurements. The new standard is effective for fiscal years beginning after December 15, 20062010, and accordingly, is required to be adopted by the Company on January 1, 2007. Upon adoption of FIN No. 48 on January 1, 2007, the Company expects a reduction of retained earnings of between $40 million and $45 million with no impact to the statement of operations and cash flows. This is based on a preliminary assessment and could change based on final analysis which will be completed by the end of the first quarter of 2007. After the initial adoption of FIN No. 48, the financial impacts to the statement of operations and cash flows is dependent upon the ultimate resolution of legacy tax matters and other tax matters with the taxing authorities. The Company is unable to predict the final resolution of these matters. See Note 16, “Contingencies” for further discussion of legacy tax matters.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a single authoritative definition of fair value whereby fair value is based on an exit price that would result from market participants’ behavior, as well as sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is expected to increase the consistency of fair value measurements and applies only tointerim periods within those measurements that are already required or permitted by other accounting standards except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. SFAS No. 157 imposes no requirements for additional fair-value measures in financial statements and is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 and will be adopted by the Company as of January 1, 2008.years. The Company is currently assessingevaluating the impacts thatpotential impact, if any, of the adoptionimplementation of this standard will haveASU No. 2010-06 on its consolidated financial position and results of operations.statements.

Note 3 Reconciliation of Weighted Average Shares Outstanding

NOTE 3RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic shares outstanding to diluted shares outstanding:

 

   Year Ended December 31,
   2006  2005  2004

Basic

  284.2  297.7  297.0

Dilutive effect of shares issuable under stock-based compensation plans

  7.7  7.9  7.7
         

Diluted

  291.9  305.6  304.7
         

Options to purchase 2.9 million, 3.1 million and 3.3 million common shares at December 31, 2006, 2005 and 2004, respectively, were outstanding but were not included in the computation of diluted weighted average shares outstanding because they were antidilutive.

   Year Ended December 31,
   2009  2008  2007
Basic  236.1  242.4  266.4
Dilutive effect of shares issuable under stock-based compensation plans  1.7  2.9  5.8
         
Diluted  237.8  245.3  272.2
         

Antidilutive options to purchase common shares and restricted stock excluded from the table above

  15.6  11.3  5.6
         

The calculation of diluted earnings per shareEPS requires certain assumptions to be made related toregarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options. These assumed proceeds include the excess tax benefit that would be

45


received upon exerciseoptions and vesting of optionsrestricted stock outstanding as of December 31, 2006, 20052009, 2008 and 2004. Assumed2007. These assumed proceeds from excess tax benefits are basedinclude Excess Tax Benefits and any unrecognized compensation on the deferred tax assets recorded with consideration of “as if” deferred tax assets calculated under the provisions of SFAS No. 123R.awards.

Note 4 Short-Term Investments

NOTE 4SHORT-TERM INVESTMENTS

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for use in the Company’s operations in the next twelve months and primarily represent auction rate certificates.months. The short-term investments, primarily consisting of certificates of deposit, are classified as available-for-saleheld-to-maturity and therefore are carried at fair value.cost. The remaining contractual maturities of the short-term investments were one month to 39 yearsthree months and one month to 38 yearsten months as of December 31, 20062009 and 2005,2008, respectively. Unrealized holding gainsInterest and losses on available-for-sale securitiesdividends are includedrecorded into income when earned.

NOTE 5DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to global market risks, including risks from changes in accumulated other comprehensive income, net of applicable income taxesFX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the consolidated financial statements. Duringnormal course of business. The Company does not hold or issue derivatives for speculative purposes.

The Company engages in hedging activities to protect against FX risks from forecasted billings and related revenue denominated in the year ended December 31, 2006, there were immaterial realized gains/losses from sales of available-for-sale securities. Duringeuro and the years ended December 31, 2005GBP. FX options and 2004 there were no realized gains or losses from sales of available-for-sale securities.forward exchange contracts are utilized to hedge exposures related to changes in FX rates. As of December 31, 20062009, all FX options and 2005, there were no unrealized gains or losses from available-for-sale securities.forward exchange contracts had maturities between one and 11 months. The hedging program mainly utilizes FX options. The forward exchange contracts are immaterial. Both the FX options and forward exchange contracts are designated as cash flow hedges.

Note 5 Derivative Instruments and Hedging ActivitiesThe following table summarizes the notional amounts of the Company’s outstanding FX options:

On August 23, 2005,

   December 31,
   2009  2008
Notional amount of Currency Pair:    

GBP/USD

  £5.0  £7.4

EUR/USD

  9.9  12.9

EUR/GBP

  21.0  24.3

MOODY’S2009 10-K71


In May 2008, the Company entered into forward starting interest rate swap agreements (“Swaps”)swaps with a total notional amount of $300 million. These cash flow hedges effectively mitigated the interest rate risk from August 23, 2005 to September 22, 2005, the pricing date of the Company’s fixed rate ten-year $300$150.0 million Senior Unsecured Notes due 2015 (see Note 13). On September 22, 2005, the Company terminated all the Swaps resulting in a payment of $1.3 million. Under hedge accounting, this amount was deferred in other comprehensive loss and will be amortized as an adjustment to interest expense over the ten-year life of the Senior Unsecured Notes. At December 31, 2006 and 2005, the Company had no outstanding Swaps. As of December 31, 2006 and 2005, the Company has included in accumulated other comprehensive loss an unamortized Swap loss of $1.2 million ($0.7 million, net of tax) and $1.3 million ($0.8 million, net of tax), respectively, of which $0.1 million will be reclassified to interest expense in 2007.

In October 2006, the Company entered into two hedging transactions using purchased put options to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan, further described in Note 14. These interest rate swaps are designated as cash flow hedges.

The Company also enters into foreign currency exchange rate risks from forecasted revenueforwards to mitigate the change in fair value on certain intercompany loans denominated in euros. The aggregate notional amountcurrencies other than the U.S. dollar. These forward contracts are not designated as hedging instruments under the applicable sections of Topic 815 of the foreign currency option contracts outstanding at December 31, 2006 was $7.9 million andASC. Accordingly, changes in the fair value of these contracts which was recordedare recognized immediately in “other current assets”other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the intercompany loan.

The tables below show the classification between assets and liabilities on the Company’s consolidated balance sheets was less than $0.1 million. of the fair value of derivative instruments as well as information on gains/(losses) on those instruments:

   Fair Value of Derivative Instruments
   Asset  Liability
   December 31,
2009
  December 31,
2008
  December 31,
2009
  December 31,
2008
Derivatives designated as hedging instruments:        
FX options  $1.2  $4.9  $  $
Interest rate swaps         7.6   10.7
                
Total derivatives designated as hedging instruments   1.2   4.9   7.6   10.7
Derivatives not designated as hedging instruments:        
FX forwards on intercompany loans   0.3      1.0   
                
Total  $1.5  $4.9  $8.6  $10.7
                

The amountfair value of unrecognized foreign exchange hedge losses recordedFX options and interest rate swaps are included in other comprehensive losscurrent assets and other liabilities, respectively, in the consolidated balance sheets at December 31, 2009 and December 31, 2008. The fair value of the FX forwards are included in other current assets and accounts payable and accrued liabilities, respectively, in the consolidated balance sheet at December 31, 2009. All of the above derivative instruments are valued using Level 2 inputs as defined in Topic 820 of the ASC as more fully discussed in Note 2. In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models when active market quotes are not available. 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 has 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.

Derivatives in Cash Flow

Hedging Relationships

  Amount of
Gain/(Loss)
Recognized in
AOCI on
Derivative
(Effective
Portion)
  Location of
Gain/(Loss)
Reclassified from
AOCI into
Income
(Effective
Portion)
  Amount of
Gain/(Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
  Location of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
  Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion
and Amount
Excluded from
Effectiveness
Testing)
   Year Ended
December 31,
     Year Ended
December 31,
     Year Ended
December 31,
   2009  2008     2009  2008     2009  2008
FX options  $(1.5) $1.5   Revenue  $2.0   $(1.0 Revenue  $(0.1) $0.3
Interest rate swaps   (0.7)  (7.3) Interest expense   (2.6)  (0.4) N/A       
                            
Total  $(2.2) $(5.8   $(0.6) $(1.4)   $(0.1) $0.3
                            

All gains and losses on derivatives designated as hedging instruments are initially recognized through AOCI. Realized gains and losses reported in AOCI are reclassified into earnings (into revenue for the FX options and into Interest income (expense), net for the interest rate swaps) as the underlying transaction is recognized. The existing realized gains as of December 31, 2006 and2009 expected to be reclassified to earnings in the next twelve months are $0.4 million, net of tax.

72MOODY’S2009 10-K


The cumulative amount of the hedges’ ineffectiveness for 2006unrecognized hedge gains (losses) recorded within revenue in the consolidated statements of operations were immaterial.AOCI is as follows:

 

   Unrecognized Gains/
(Losses), net of tax
 
   December 31,
2009
  December 31,
2008
 
FX options  $(1.2) $2.2  
Interest rate swaps   (5.1  (7.0
         

Total

  $(6.3 $(4.8
         

46


Note 6 Property and Equipment, Net

NOTE 6PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:

 

  December 31, 
  2006 2005   December 31, 

Land, building and building improvements

  $—    $25.8 
  2009 2008 

Office and computer equipment

   63.6   53.7   $99.2   $89.3  

Office furniture and fixtures

   28.8   25.4    37.4    34.4  

Internal-use computer software

   54.8   41.4    145.9    101.2  

Leasehold improvements

   30.9   44.0    175.3    153.2  
              

Property and equipment, at cost

   178.1   190.3 

Total property and equipment, at cost

   457.8    378.1  

Less: accumulated depreciation and amortization

   (116.1)  (134.9)   (164.8  (130.4
              

Property and equipment, net

  $62.0  $55.4 
Total property and equipment, net  $293.0   $247.7  
              

The consolidated statements of operations reflect depreciationDepreciation and amortization expense related to the above assets of $23.6was $47.7 million, $20.4$46.7 million and $19.5$31.5 million for the years ended December 31, 2006, 20052009, 2008 and 2004,2007, respectively.

NOTE 7ACQUISITIONS

During the fourth quarter of 2006,2008, the Company completed the saleacquisitions of Financial Projections, BQuotes, Fermat and Enb. These acquisitions were accounted for using the purchase method of accounting whereby the purchase price is allocated first to the net assets of the acquired entity based on the fair value of its corporate headquarters located at 99 Church Street, New York, New York andnet assets. Any excess of the purchase price over the fair value of the net assets acquired is recorded a gain of $160.6 million.to goodwill. These acquisitions are discussed below in more detail.

Note 7 Acquisitions

Wall Street Analytics, Inc.Enb Consulting Ltd.

In December 2006,2008, a subsidiary of the Company acquired Wall Street Analytics, Inc.Enb Consulting Ltd., a developerprovider of structured finance analytical modelscredit and monitoring software. The acquisition has broadened Moody’s capabilities in the analysis and monitoring of complex structured debt securities while increasing the firm’s analytical and product development staff dedicated to creating new software and analytic tools for the structured finance market.capital markets training services. The purchase price was not material and the near term impact to operations and cash flowsflow is not expected to be material. Enb is part of the MA segment.

China Cheng XinFermat International Credit Rating Co. Ltd.SA

In September 2006,On October 9, 2008, a subsidiary of the Company acquired Fermat International SA, a 49% shareprovider of China Cheng Xin International Credit Rating Co. Ltd. (“CCXI”) from China Cheng Xin Credit Management Co. Ltd. (“CCXCM”)risk and an entity affiliatedperformance management software to the global banking sector, which is now part of the MA segment. The combination of MA’s credit portfolio management and economic capital tools with CCXCM. TermsFermat’s expertise in risk management software positions MA to deliver comprehensive analytical solutions for financial institutions worldwide. The results of Fermat are reflected in the MA operating segment since the acquisition date.

The aggregate purchase price of $211 million consisted of $204.5 million in cash payments to the sellers and $6.5 million in direct transaction costs, primarily professional fees. The purchase price was funded by using Moody’s cash on hand.

MOODY’S2009 10-K73


The acquisition has been accounted for as a purchase. Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired, and liabilities assumed, at the date of acquisition:

Current assets    53.9  
Property and equipment, net    1.6  
Intangible assets:    

Software (9.0 year weighted average life)

  $43.0  

Client relationships (16.0 year weighted average life)

   12.1  

Other intangibles (1.8 year weighted average life)

   2.6  
      

Total intangible assets

    57.7  
In-process technology    4.5  
Goodwill    125.0  
Liabilities assumed    (31.7
      
Net assets acquired    211.0  
      

The acquired goodwill, which has been assigned to the MA segment, will not be amortized and will not be deductible for tax. The $4.5 million allocated to acquired in-process technology was written off immediately following the acquisition because the technological feasibility had not yet been established as of the acquisition agreement will permitdate and was determined to have no future use. This write-off is included in depreciation and amortization expenses for the year ended December 31, 2008. Current assets include acquired cash of approximately $26 million.

BQuotes, Inc.

In January 2008, a subsidiary of the Company acquired BQuotes, Inc., a global provider of price discovery tools and end-of-day pricing services for a wide range of fixed income securities, which was part of the MA segment. The purchase price was not material and the impact to increase its ownership in CCXI tooperations and cash flow will not be material.

Financial Projections Ltd.

In January 2008, a majority over time as permitted by Chinese authorities.subsidiary of the Company acquired Financial Projections Ltd., a leading provider of in-house credit training services, with long-standing relationships among European banks. The purchase price was not material and the near term impact to operations and cash flowsflow is not expected to be material.

Economy.com

In November 2005, Financial Projections is part of the Company acquired Economy.com, a leading independent provider of economic research and data services. The acquisition will deepen Moody’s analytical capabilities to broader areas of economic and demographic research, expand the range of products and services offered to institutional customers and introduce new customers to Moody’s. It will provide Economy.com with access to Moody’s extensive client base, deep product marketing capabilities and other resources needed to expand its business. The purchase price was not material and the near term impact to operations and cash flows is not expected to be material.MA segment.

 

47


Note 8 Goodwill and Other Intangible Assets

NOTE 8GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

The following table summarizes the activity in goodwillgoodwill:

   Year Ended December 31, 
   2009  2008 
   MIS  MA  Consolidated  MIS  MA  Consolidated 
Beginning balance  $10.6   $327.4  $338.0  $11.4   $168.5  $179.9  
Additions/adjustments   (0.3  5.0   4.7   1.4    158.7   160.1  
Foreign currency translation adjustments   0.8    5.7   6.5   (2.2  0.2   (2.0
                         
Ending balance  $11.1   $338.1  $349.2  $10.6   $327.4  $338.0  
                         

The additions/adjustments for the periods indicated:MA segment in the table above relate primarily to adjustments made to the purchase accounting associated with the December 2008 acquisitions.

 

   

Year Ended

December 31, 2006

  

Year Ended

December 31, 2005

   

Moody’s

Investors Service

  

Moody’s

KMV

  Consolidated  

Moody’s

Investors Service

  

Moody’s

KMV

  Consolidated

Beginning balance

  $28.0  $124.1  $152.1  $7.6  $124.1  $131.7

Additions

   23.2   —     23.2   20.3   —     20.3

Foreign currency translation adjustments

   0.8   —     0.8   0.1   —     0.1
                        

Ending balance

  $52.0  $124.1  $176.1  $28.0  $124.1  $152.1
                        
74MOODY’S2009 10-K


Acquired Intangible assets consisted of:

 

  December 31,   December 31, 
  2006 2005 

Customer lists (11.2 year weighted average life)

  $62.5  $60.2 
  2009 2008 
Customer lists  $80.6   $80.5  

Accumulated amortization

   (26.8)  (21.2)   (42.8  (37.7
              

Net customer lists

   35.7   39.0    37.8    42.8  
              

MKMV trade secret (12.0 year weighted average life)

   25.5   25.5 
Trade secret   25.5    25.5  

Accumulated amortization

   (2.3)  (0.2)   (8.7  (6.6
              

Net trade secret

   23.2   25.3    16.8    18.9  
              

Other amortizable intangible assets (5.6 year weighted average life)

   15.4   12.9 
Software   55.0    55.2  

Accumulated amortization

   (8.6)  (6.4)   (14.8  (11.0
              

Net other amortizable intangible assets

   6.8   6.5 

Net software

   40.2    44.2  
              

Total intangible assets, net

  $65.7  $70.8 
Other   26.8    28.2  
Accumulated amortization   (16.7  (20.1
              

Net other

   10.1    8.1  
       

Total

  $104.9   $114.0  
       

Other intangible assets primarily consist of databases, trade-names and covenants not to compete. Amortization expense for the years ended December 31, 2006, 20052009, 2008 and 20042007 was $9.9$16.4 million, $6.8$28.2 million and $6.9$9.7 million, respectively. In December 2005, the Company began amortizing the MKMV trade secret over 12 years.

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

 

Year Ending December 31,

      

2007

  $9.6

2008

   8.4

2009

   7.5

2010

   7.5  $16.0

2011

   7.3   15.0
2012   14.3
2013   14.1
2014   10.8

Thereafter

  $25.4   34.7

Intangible assets are reviewed for recoverability whenever circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the related asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. Goodwill is tested for impairment annually or more frequently if circumstances indicate the assets may be impaired.

For the year ended December 31, 2009, there were no impairments to goodwill or to intangible assets. In 2008 an impairment of $11.1 million was recognized for certain software and database intangible assets within the MA segment, which is reflected in amortization expense. These intangible assets were determined to be impaired as a result of comparing the carrying amount to the undiscounted cash flows of the related asset group expected to result from the use and eventual disposition of the assets. The Company measured the amount of the impairment loss by comparing the carrying amount of the related assets to their fair value. The fair value was determined by utilizing the expected present value technique which uses multiple cash flow scenarios that reflect the range of possible outcomes and a risk-free rate. For the year ended December 31, 2007 there were no impairments to goodwill or other intangible assets.

 

48

MOODY’S2009 10-K75


Note 9 Accounts Payable and Accrued Liabilities

NOTE 9ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of:

 

   December 31,
   2006  2005

Accounts payable

  $8.8  $6.8

Accrued income taxes (see Note 12)

   68.6   41.9

Accrued compensation and benefits

   154.3   138.8

Accrued interest expense

   3.7   3.7

Advance payments

   10.9   10.3

Other

   93.4   78.3
        

Total

  $339.7  $279.8
        
   December 31,
   2009  2008
Salaries and benefits  $59.3  $49.7
Incentive compensation   75.6   47.1
Customer credits, advanced payments and advanced billings   14.8   23.4
Dividends   26.3   24.5
Professional service fees   35.5   23.9
Interest   9.6   10.2
Accounts payable   7.1   8.6
Income taxes (see Note 13)   20.3   3.5
Restructuring (see Note 10)   5.9   3.3
Other   62.8   46.2
        

Total

  $317.2  $240.4
        

Accrued compensation

NOTE 10RESTRUCTURING

On March 27, 2009 the Company approved the 2009 Restructuring Plan to reduce costs in response to a strategic review of its business in certain jurisdictions and benefits included accrued incentive compensationweak global economic and market conditions. The 2009 Restructuring Plan consists of headcount reductions of approximately $104150 positions representing approximately 4% of the Company’s workforce at December 31, 2008 as well as contract termination costs and the divestiture of non-strategic assets. The Company’s plan included closing offices in South Bend, Indiana; Jakarta, Indonesia and Taipei, Taiwan. There was $0.2 million in accelerated amortization for intangible assets recognized in the first quarter of 2009 relating to the closure of the Jakarta, Indonesia office. The remaining liability of $5 million at December 31, 2006 and $92 million at2009 will result in cash outlays that will be substantially paid out over the next twelve months. The cumulative amount of expense incurred from inception through December 31, 2005. Funding and related expense for Moody’s incentive compensation plans are primarily based on year-to-year growth in operating income and, to a lesser extent, earnings per share, for Moody’s senior management and annual results compared to budget2009 for the Moody’s Investors Service professional2009 Restructuring Plan was $15.6 million. The 2009 Restructuring Plan was substantially complete at September 30, 2009.

On December 31, 2007, the Company approved the 2007 Restructuring Plan that reduced global headcount by approximately 275 positions, or approximately 7.5% of the workforce, in response to the Company’s reorganization announced in August 2007 and a decline in the then current and anticipated issuance of rated debt securities in some market sectors. Included in the 2007 Restructuring Plan was a reduction of staff as a result of: (i) consolidation of certain corporate staff functions, (ii) the integration of businesses comprising MA and (iii) an anticipated decline in new securities issuance in some market sectors. The 2007 Restructuring Plan also called for Moody’s KMV.the termination of technology contracts as well as the outsourcing of certain technology functions. The cumulative amount of expense incurred from inception through December 31, 2009 for the 2007 Restructuring Plan was $49.4 million. The 2007 Restructuring Plan was substantially complete as of December 31, 2008.

Note 10 PensionTotal expenses included in the accompanying consolidated statements of operations are as follows:

   Year Ended December 31,
   2009  2008  2007
2007 Restructuring Plan  $1.9  $(2.5) $50.0
2009 Restructuring Plan   15.6       
            

Total

  $17.5  $(2.5) $50.0
            

The expense in 2009 and Other Post-Retirement Benefits2008 related to the 2007 Restructuring Plan primarily reflects adjustments to previous estimates.

76MOODY’S2009 10-K


Changes to the restructuring liability for the year ended December 31, 2009 and 2008 were as follows:

   Employee Termination Costs       
   Severance  Pension
Settlements
  Total  Contract
Termination
Costs
  Total
Restructuring
Liability
 
Balance at December 31, 2007  $29.0   $8.1  $37.1   $4.1   $41.2  
2007 Restructuring Plan:       

Costs incurred and adjustments

   (2.5     (2.5  0.3    (2.2

Cash payments

   (25.0     (25.0  (2.6  (27.6
                     
Balance at December 31, 2008  $1.5   $8.1  $9.6   $1.8   $11.4  
2007 Restructuring Plan:       

Costs incurred and adjustments

   0.4       0.4    1.5    1.9  

Cash payments

   (1.7)     (1.7)�� (2.6)  (4.3)
2009 Restructuring Plan:       

Costs incurred and adjustments

   12.0       12.0    3.3    15.3  

Cash payments

   (7.8)     (7.8  (2.5)  (10.3)
                     
Balance at December 31, 2009  $4.4   $8.1  $12.5   $1.5   $14.0  
                     

As of December 31, 2009 the remaining restructuring liability of $5.9 million relating to severance and contract termination costs million is expected to be paid out during the year ending December 31, 2010. Payments related to the $8.1 million unfunded pension liability will commence when certain of the affected employees reach retirement age and continue in accordance with plan provisions.

Severance and contract termination costs of $5.9 million and $3.3 million as of December 31, 2009 and December 31, 2008, respectively, are recorded in accounts payable and accrued liabilities in the Company’s consolidated balance sheets. Additionally, the amount for pension settlements is recorded within other liabilities as of December 31, 2009 and December 31, 2008.

NOTE 11PENSION AND OTHER POST-RETIREMENT BENEFITS

Moody’s maintains both funded and unfunded noncontributory defined benefit pension plans in which substantially all U.S. employees of the Company are eligible to participate.Defined Benefit Pension Plans. The plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The post-retirement healthcare plans are contributory with participants’ contributions adjusted annually; the life insurance plans are noncontributory. In November 2005, the Company increased its future share of the costs and as a result remeasured the healthcare plan as of the date of the plan amendment, the effects of which were not material to the results of operations.

Moody’s funded and unfunded pension plans, the post-retirement healthcare plans and the post-retirement life insurance plans are collectively referred to herein as the “Post-Retirement Plans”. Effective at the Distribution Date, Moody’s assumed responsibility for the pension and other post-retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company’s retirees and vested terminated employees as of the Distribution Date.

In September 2006, the FASB issued SFAS No. 158. SFAS No. 158 does not change how pensions and other post-retirement benefits are accounted for and reportedThrough 2007, substantially all U.S. employees were eligible to participate in the income statement nor does it changeCompany’s DBPPs. Effective January 1, 2008, the componentsCompany no longer offers DBPPs to employees hired or rehired on or after January 1, 2008 and new hires instead will receive a retirement contribution in similar benefit value under the Company’s Profit Participation Plan. Current participants of net periodicthe Company’s DBPPs continue to accrue benefits based on existing plan benefit expense. SFAS No. 158 does, however, require an employer to recognize as an asset or liability in its statement of financial position the overfunded or underfunded status, which is measured on a plan-by-plan basis as the difference between plan assets at fair value and the benefit obligation of a defined benefit post-retirement plan, and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. For a pension plan, the benefit obligation is the projected benefit obligation. For any other post-retirement benefit plan, such as a retiree healthcare plan, the benefit obligation is the accumulated post-retirement benefit obligation. The Company adopted the provisions of SFAS No. 158 as of December 31, 2006 and the incremental effect of adopting SFAS No. 158 was a decrease in other assets of $15.9 million, an increase in other liabilities of $18.6 million and a pre-tax increase in accumulated other comprehensive loss of $ 34.5 million ($20.0 million net of tax).

Following is a summary of net actuarial losses and net prior service costs recognized in accumulated other comprehensive income (“AOCI”) as of December 31, 2006 that have not yet been recognized as components of net periodic benefit expense:formulas.

 

   Pension Plans  Other Post-
Retirement Plans

Net actuarial losses (net of tax benefit of $ 13.7 million for pension plans and $0.3 million for other post-retirement plans)

  $18.9  $0.4

Net prior service costs (net of tax benefit of $2.0 million for pension plans and $ 0.3 million for other post-retirement plans)

   2.8   0.4
        

Net amount recognized in AOCI

  $21.7  $0.8
        

49

MOODY’S2009 10-K77


The amounts recognized in AOCI will subsequently be recognized as components of net periodic benefit expense over future years pursuant to the recognition and amortization provisions of SFAS No. 87 and No. 106. The Company expects to recognize in 2007, as components of net periodic benefit expense, amortization of net actuarial losses of $2.2 million for its pension plans and amortization of prior service costs of $0.6 million ($0.4 million and $0.2 million for pension plans and other post-retirement plans, respectively).

In May 2004, the FASB issued FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”). The Act provides new government subsidies for companies that provide prescription drug benefits to retirees. In January 2005, the Centers for Medicare and Medicaid Services published final regulations implementing major provisions of the Act resulting in a $0.8 million reduction to the Company’s accumulated other post-retirement benefit obligation. The adoption of FSP 106-2 and the final regulations reduced the Company’s net periodic post-retirement expense by $0.2 million in 2005.

Following is a summary of changes in benefit obligations and fair value of plan assets for the Post-Retirement Plans for the years ended December 31, 2006 and 2005,31:

 

   Pension Plans  Other Post-
Retirement Plans
 
   2006  2005  2006  2005 

Change in benefit obligation

     

Benefit obligation, beginning of the period

  $(127.3) $(109.8) $(8.8) $(7.4)

Service cost

   (11.1)  (10.1)  (0.8)  (0.6)

Interest cost

   (7.0)  (6.2)  (0.4)  (0.4)

Plan participants’ contributions

   —     —     (0.1)  (0.1)

Benefits paid*

   2.0   7.6   0.3   0.3 

Plan amendments

   (0.3)  —     —     (0.6)

Impact of Medicare Part D

   —     —     —     0.5 

Actuarial gain (loss)

   1.6   (3.6)  —     —   

Assumption changes

   7.5   (5.2)  0.4   (0.5)
                 

Benefit obligation, end of the period

  $(134.6) $(127.3) $(9.4) $(8.8)
                 

Change in plan assets

     

Fair value of plan assets, beginning of the period

  $102.1  $95.7  $—    $—   

Actual return on plan assets

   15.8   7.3   —     —   

Benefits paid*

   (2.0)  (7.6)  (0.3)  (0.3)

Employer contributions

   0.7   6.7   0.2   0.2 

Plan participants’ contributions

   —     —     0.1   0.1 
                 

Fair value of plan assets, end of the period

  $116.6  $102.1  $—    $—   
                 

Funded status of the plans

  $(18.0) $(25.2) $(9.4) $(8.8)
                 

Reconciliation of funded status to total amount recorded on balance sheet

     

Funded status of the plans

  $(18.0) $(25.2) $(9.4) $(8.8)

Unrecognized actuarial loss

   —     52.4   —     1.1 

Unrecognized prior service cost

   —     4.9   —     0.9 
                 

Net amount recognized

  $(18.0) $32.1  $(9.4) $(6.8)
                 

Amounts recorded on the consolidated balance sheets

     

Prepaid pension cost

  $—    $56.4  $—    $—   

Net post-retirement benefit asset

   36.0   —     —     —   

Pension and post-retirement benefits liability-current

   (1.0)  —     (0.4)  —   

Pension and post-retirement benefits liability-noncurrent

   (53.0)  (35.4)  (9.0)  (6.8)

Intangible asset

   —     5.1   —     —   

Additional minimum pension liability

   —     6.0   —     —   
                 

Net amount recognized

  $(18.0) $32.1  $(9.4) $(6.8)
                 

Accumulated benefit obligation, end of the period

  $104.2  $97.9   
                 

*Total benefits paid in 2005 included $6.3 million of lump sum cash settlement payments.

50


   Pension Plans  Other Post-Retirement Plans 
   2009  2008  2009  2008 
Change in Benefit Obligation:     

Benefit obligation, beginning of the period

  $(171.8 $(149.3 $(11.0 $(9.7

Service cost

   (12.1  (12.4  (0.8  (0.8

Interest cost

   (9.9  (9.7  (0.7  (0.6

Plan participants’ contributions

           (0.2  (0.1

Benefits paid

   3.9    3.3    1.1    0.4  

Plan amendments

   (2.5            

Impact of curtailment

       1.1          

Impact of special termination benefits

       (2.8        

Actuarial gain (loss)

   7.4    (0.8  (0.7  (0.2

Assumption changes

   (28.0  (1.2  (0.8    
                 
Benefit obligation, end of the period   (213.0  (171.8  (13.1  (11.0
                 
Change in Plan Assets:     

Fair value of plan assets, beginning of the period

   88.6    123.9          

Actual return on plan assets

   15.5    (33.9        

Benefits paid

   (3.9  (3.3  (1.1  (0.4

Employer contributions

   8.0    1.9    0.9    0.3  

Plan participants’ contributions

           0.2    0.1  
                 

Fair value of plan assets, end of the period

   108.2    88.6          
                 
Funded status of the plans   (104.8  (83.2  (13.1  (11.0
                 
Amounts Recorded on the Consolidated Balance Sheets:     

Pension and post-retirement benefits liability-current

   (8.2  (1.3  (0.6  (0.4

Pension and post-retirement benefits liability-non current

   (96.6  (81.9  (12.5  (10.6
                 
Net amount recognized  $(104.8 $(83.2 $(13.1 $(11.0
                 
Accumulated benefit obligation, end of the period  $(185.2 $(141.5  
           

The pension plan amendment chargeplans assumption changes in 2006 relates to the impact of the Pension Protection Act of 2006 (the “PPA 2006”) that required changes to the Company’s pension plans as well as one additional participant admitted to the Supplemental Executive Benefit Plan. In August 2006, the PPA 2006 was enacted into law. At this time, the Company does not expect it to have any significant effect on the Company’s current funding for its U.S. pension plans. The other post-retirement plans amendment charge in 2005 relates2009 are primarily attributed to the increase of the cash balance interest crediting rate due to increase of the IRS published 30-year U.S. Treasury rate. The pension plan amendment in 2009 relates to an update retroactive to 1997 to the pay credit schedule used for both the Company’s future share of healthcare plan costs effective November 2005.

SFAS No. 158 requires employers with more than one post-retirement benefittax qualified Retirement Account and non-qualified excess plan to aggregate all overfunded plans and report one non-current net asset amount and to aggregate all unfunded plans and report one net liability amount, classified as either current or non-current based on timing of expected benefit payments. Additional minimum pension liability, intangible asset and prepaid pension cost previously required were no longer reported as of December 31, 2006. During 2005,reflect a tentative determination made by the IRS in 2009 which requires the Company recorded charges to other comprehensive loss related to additional minimum pension liabilitymake certain retroactive adjustments totaling $4.3 million, ($2.5 million net of tax), resulting in accumulated other comprehensive loss due to minimum pension liability adjustments of $6.0 million at December 31, 2005 ($3.5 million net of tax).

Net amounts recognized for the Post-retirement Plans for years ended December 31:

   Pension Plans  Other Post-
Retirement Plans
   2006  2005  2004  2006  2005  2004

Components of net periodic expense

         

Service cost

  $11.2  $10.1  $8.3  $0.8  $0.6  $0.6

Interest cost

   7.0   6.2   5.1   0.5   0.4   0.4

Expected return on plan assets

   (8.5)  (8.2)  (8.0)  —     —     —  

Amortization of net actuarial loss from earlier periods

   3.3   2.6   1.4   —     —     —  

Amortization of unrecognized prior service costs

   0.4   0.5   0.2   0.2   0.1   0.1

Settlement loss

   —     3.2   —     —     —     —  
                        

Net periodic expense

  $13.4  $14.4  $7.0  $1.5  $1.1  $1.1
                        

The settlement loss in 2005 relates to the electionaccrual rules for to its tax qualified pension plan. The pension plan curtailment and the special termination benefits in 2008 relate to the termination of a lump sum paymentcertain participant of pension benefits to settle an unfunded pension obligation.the Company’s Supplemental Executive Benefit Plan.

The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:assets:

 

   December 31,
   2006  2005

Projected benefit obligation

  54.0  53.3

Accumulated benefit obligation

  37.0  34.0

Fair value of plan assets

  —    —  
   December 31,
   2009  2008
Aggregate projected benefit obligation  $213.0  $70.6
Aggregate accumulated benefit obligation  $185.2  $56.8
Aggregate fair value of plan assets  $108.2  $

78MOODY’S2009 10-K


The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company’s Post-Retirement Plans as of December 31:

   Pension Plans  Other Post-Retirement Plans 
   2009  2008  2009  2008 
Net actuarial (losses)  $(73.8 $(59.3 $(2.0 $(0.4
Net prior service costs   (6.0  (3.8      (0.1
                 

Total recognized in AOCI- pretax

  $(79.8 $(63.1 $(2.0 $(0.5
                 

For the Company’s pension plans, the Company expects to recognize in 2010 as components of net periodic expense $3.3 million for the amortization of net actuarial losses and $0.7 million for the amortization of prior service costs. Expected amortizations for other post-retirement plans in 2010 are not material.

Net periodic benefit expenses recognized for the Post-Retirement Plans for years ended December 31:

   Pension Plans  Other Post-Retirement Plans
   2009  2008  2007  2009  2008  2007
Components of net periodic expense         
Service cost  $12.1   $12.4   $12.6   $0.8  $0.8  $0.9
Interest cost   9.9    9.7    8.1    0.8   0.6   0.6
Expected return on plan assets   (10.0  (9.9  (9.0        
Amortization of net actuarial loss from earlier periods   0.6    0.2    2.5          
Amortization of net prior service costs from earlier periods   0.4    0.4    0.4          0.2
Curtailment loss       1.0    2.7          
Cost of special termination benefits       2.8    8.1          
                        
Net periodic expense  $13.0   $16.6   $25.4   $1.6  $1.4  $1.7
                        

The Company spreads the differences between the expected long-term rate of return assumption and actual asset experience over a five-year period for purposes of calculating the market-related value of assets that is used in determining the expected return on asset’s component of annual expense and in calculating the total unrecognized gain or loss subject to amortization.

The following table summarizes the pre-tax amounts recognized in AOCI related to the Company’s Post- Retirement Plans for the years ended December 31:

   Pension Plans  Other Post-Retirement Plans 
  2009  2008  2009  2008 
Amortization of net actuarial losses  $0.6   $0.2   $   $  
Amortization of prior service costs   0.4    0.4          
Accelerated recognition of prior service costs due to curtailment       1.0          
Net actuarial gain (loss) arising during the period   (15.2  (44.7  (1.5  (0.2
Net prior service cost arising during the period due to plan amendment   (2.5            
                 

Total recognized in Other Comprehensive Income – pre-tax

  $(16.7 $(43.1 $(1.5 $(0.2
                 

Additional Information:ADDITIONAL INFORMATION:

Assumptions

Weighted-average assumptions used to determine benefit obligations at December 31:

 

  Pension Plans Other Post-
Retirement Plans
   Pension Plans Other Post-Retirement Plans 
  2006 2005 2006 2005  2009 2008 2009 2008 

Discount rate

  5.90% 5.60% 5.80% 5.45%  5.95 6.00 5.75 6.25

Rate of compensation increase

  4.00% 4.00% —    —     4.00 4.00      

Cash balance accumulation/conversion rate

  4.75% 4.75% —    —   

 

51

MOODY’S2009 10-K79


Weighted-average assumptions used to determine net periodic benefit costexpense for years ended December 31:

 

  Pension Plans Other Post-Retirement Plans   Pension Plans Other Post-Retirement Plans 
  2006 2005 2004 2006 2005 2004  2009 2008 2007 2009 2008 2007 

Discount rate

  5.60% 5.90% 6.25% 5.45% 5.90% 6.25%  6.00 6.45 5.90 6.25 6.35 5.80

Expected return on plan assets

  8.35% 8.35% 8.35% —    —    —     8.35 8.35 8.35         

Rate of compensation increase

  4.00% 4.00% 3.91% —    —    —     4.00 4.00 4.00         

Cash balance accumulation/conversion rate

  4.75% 5.00% 5.00% —    —    —   

For 2006,2009, the Company continued to use an assumedexpected rate of return on assets of approximately 8.35% for Moody’s funded pension plan. The expected rate of return on plan which was determined based on explicitassets represents the Company’s best estimate of the long-term return assumptionson plan assets and is estimated by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio. Moody’s works with third-party consultants to determine assumptions for long-term rates of return forAs the asset classes that are included in the pension plan investment portfolio. These return assumptions reflectassumption reflects a long-term time horizon. They also reflecthorizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation and the assumption is generally not revised unless there is a combination of historical performance analysis and forward-looking viewssignificant change in one of the financial markets including consideration of inflation, current yields onfactors upon which it is based, such as target asset allocation or long-term bonds and price-earnings ratios of the major stockcapital market indices.conditions.

Assumed Healthcare Cost Trend Rates at December 31:

 

  2009 2008 2007 
  2006 2005 2004 
  Pre-age 65 post-age 65 Pre-age 65 post-age 65 Pre-age 65 post-age 65   Pre-age 65 Post -age 65 Pre-age 65 Post-age 65 Pre-age 65 Post-age 65 

Healthcare cost trend rate assumed for the following year

  9.0% 11.0% 10.0% 12.0% 11.0% 13.0%  8.4 9.4 9.4 10.4 10.4 11.4

Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate)

  5.0% 5.0% 5.0% 5.0% 5.0% 5.0%  

5.0%

  

 

5.0%

  

 

5.0%

  

Year that the rate reaches the ultimate trend rate

  2013  2013  2013  2013  2013  2013   

2020

  

 

2015

  

 

2015

  

The assumed health cost trend rate reflects different expectations for the medical and prescribed medication components of health care costs for pre and post-65 retirees. The Company revised its trend rates in 2009 to a slower grading period at a reduction of 0.5% per year to reach the ultimate trend rate of 5% in 2020 to reflect its current expectation as the Company believes the historical trend rate assumptions used have been decreased too quickly relative to actual trend. As the Company subsidies for retiree healthcare coverage are capped at the 2005 subsidy level, for the majority of the post-retirement health plan participants, retiree contributions are assumed to increase at the same rate as the healthcare cost trend rates. As such, a one percentage-point changeincrease or decrease in assumed healthcare cost trend rates would not have affected total service and interest cost and would have increased or decreaseda minimal impact on the post-retirement benefit obligation by $0.2 million.obligation.

Plan Assets

The assets of the funded pension plan were allocated among the following categories at December 31, 2006 and 2005:

   Percentage of
Plan Assets
at December 31,
 

Asset Category

  2006  2005 

Equity securities

  77% 75%

Debt securities

  13% 16%

Real estate

  10% 9%
       

Total

  100% 100%
       

Moody’s investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long runlong-term within a prudent level of risk. The Company’s current pension planCompany works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward –looking views of inflation and capital market returns, are for approximately seventy percentalso considered. Risk management practices include monitoring of assets to be invested in equity securities, diversifiedthe plan, diversification across U.S.asset classes and non-U.S. stocks of small, mediuminvestment styles, and large capitalization, twenty percent in investment grade bonds and the remainder in real estate funds. The use of derivatives to leverage the portfolio or otherwise is not permitted.periodic rebalancing toward asset allocation targets. The Company’s monitoring of the plan includes ongoing reviews of investment performance, annual liability measurements, periodic asset/liability studies, and investment portfolio reviews. As

In 2008, the Company’s target asset allocation was approximately 70% in diversified U.S. and non-U.S. equity securities, 20% in long-duration investment grade government and corporate bonds, and 10% in private real estate funds. In 2009, as a result of its most recent pension asset-liability study, the Company revised its target asset allocation to approximately 60% (range of 50% to 70%) in equity securities, 30% (range of 25% to 35%) in fixed income securities and 10% (range of 7% to 13%) in other investments. The revised asset allocation policy is expected to earn a return comparable to its 2008 allocation target over the long-term and thus has no impact on the Company’s 2009 expected rate of return assumption. The Company expects to implement this revised asset allocation policy in early 2010 and the Company’s actual asset allocation as of December 31, 2006,2009 did not reflect this policy change.

80MOODY’S2009 10-K


The fair value of the equity investment has advanced to represent a percentage higher than its target allocation due to asset gains and the Company plans to rebalance theCompany’ pension plan assets by asset category at December 31, 2009, determined based on the hierarchy of fair value measurements as defined in 2007Footnote 2, and at December 31, 2008 are as follows:

   Fair Value Measurement as of December 31, 
   2009  2008 

Asset Category

  Balance  Quoted Prices
in active
Markets for
Identical
Assets

(Level 1)
  Significant
observable
Inputs

(Level 2)
  Significant
Unobservable
Inputs

(Level 3)
  % of total
assets
  Balance  % of total
assets
 
Cash and cash equivalent (a)  $0.1  $  $0.1  $     $0.2    
                           
Equity securities             

U.S. large-cap (b)

   38.4      38.4     35  26.8  30

U.S. small and mid-cap

   17.1      17.1     16  11.5  13

International equities

   16.7      16.7     16  11.2  13

Emerging markets value

   7.5   7.5        7  3.2  4
                           
Total equity securities   79.7   7.5   72.2     74  52.7  60
                           

Long-term government/credit bonds(c)

   20.1      20.1     18  23.2  26
                           
Total fixed income securities   20.1      20.1     18  23.2  26
                           

Private equity- real estate investment fund(d)

   8.3         8.3  8  12.5  14
                           
Total other investments   8.3         8.3  8  12.5  14
                           
Total Assets  $108.2  $7.5  $92.4  $8.3  100 $88.6  100
                           

(a)This category represents investment primarily in money market mutual funds.

(b)This category invests in an equity index fund which invests primarily in the broadly diversified common stocks of large U.S. companies that is passively managed and tracks the S& P 500 Composite Stock Price Index.

(c)This category invests in a commingle fund which holds portfolios of fixed income securities comprised of investment grade long-term U.S. and non-U.S. Government and corporate bonds.

(d)This category invests in a private equity fund which invests primarily in commercial and residential real estate across the U.S.

In determining fair value, Level 1 investment is valued based on quoted prices from the exchange. As these securities are actively traded, valuation adjustments are not applied. For Level 2 investments, the unit value of a fund is calculated by dividing the fund’s net asset value on the calculation date by the number of units of the fund that are outstanding on the calculation date. The number of units of the fund that are outstanding on the calculation date is derived from observable purchase and redemption activity in the fund. For Level 3 investment, the valuation methodology for the real estate investment fund is based on various approaches utilized by the investment manager which are primarily based on appraisals of the properties and investments held by the fund and are based on a discounted cash flow analysis.

The table below is a summary of changes in the fair value of the Plan’s Level 3 assets:

Real estate investment fund:  
Balance as of December 31, 2008  $12.5  
Return on plan assets related to assets still held as of December 31, 2009   (4.3
Purchases   0.1  
     
Balance as of December 31, 2009  $8.3  
     

MOODY’S2009 10-K81


In accordance with the revised asset allocation policy, the funded plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity securities are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income securities are diversified principally across U.S. and non-U.S. long — duration investment grade government and corporate bonds. Approximately 6% of the actively managed debt securities may be invested in securities rated below investment grade. In addition to bringhelp reduce plan exposure to interest rate variation and to better align assets with obligations, the long-duration fixed income allocation is expected to help maintain the stability of plan contributions over the long term. The plan’s other investments are made through U.S. private equity real estate funds and convertible debts and these investments are expected to provide additional diversification benefits and absolute return enhancement to the plan. The use of derivatives to leverage the portfolio back into balance withor otherwise is not permitted. The overall allocation is expected to help protect the original target asset allocation.plan’s funded status while generating sufficiently stable returns over the long-term.

Except for the Company’s funded pension plan, all of Moody’s other Post-Retirement Plans are unfunded and therefore have no plan assets.

52


Cash Flows

The Company contributed $5.8 million to its funded pension plan during the year ended December 31, 2009 and made no contribution in 2008. The Company made payments of $0.9$2.2 million and $1.9 million related to its unfunded pension plan obligations during the yearyears ended December 31, 2006.2009 and 2008, respectively. The Company made payments of $6.7$0.9 million related to its unfunded pension plans during the year ended December 31, 2005, primarily related to a lump sum payment of pension benefits. Moody’s made no contributions to its funded pension plans during the years ended December 31, 2006 and 2005. The Company made payments of $0.2 million to its other post-retirement plans during both the years ended December 31, 2006 and 2005. The Company presently anticipates making payments of $1.0 million to its unfunded pension plans and $0.4 million to its other post-retirement plans during 2007.the years ended December 31, 2009 and 2008, respectively. The Company presently does not anticipate making contributions to its funded pension plan and anticipates making payments of $8.2 million to its unfunded pension plans and $0.6 million to its other post-retirement plans during the year ended December 31, 2010.

Estimated Future Benefits Payable

Estimated future benefits payments for the Post-Retirement Plans are as follows at December 31, 2006:2009:

 

Year ending December 31,

  Pension Plans  

Other Post-

Retirement Plans*

2007

  $3.0  $0.4

2008

   3.4   0.6

2009

   3.8   0.6

2010

   4.6   0.6

2011

   6.2   0.6

Next five years to December 31, 2016

   41.2   3.9

Year Ending December 31,

  Pension Plans  Other Post-
Retirement Plans *
2010  $10.6  $0.6
2011   10.6   0.7
2012   5.9   0.8
2013   7.0   0.8
2014   7.6   0.9
2015 – 2019  $80.0  $6.3

*The estimated future benefits payable for the Post-Retirement Plans are reflected net of the expected Medicare Part D subsidy for which the subsidy is insignificant on an annual basis for all the years presented.

Profit Participation PlanDefined Contribution Plans

Moody’s has a profit participation plan (the “Plan”)Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral contribution and the Company contributions. Employees may contribute up to 16% of their pay, subject to the federal limit. Moody’s contributes an amountmatches employee contributions with cash contributions equal to 50% of employee contributions, with Moody’s contribution limitedup to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan that are based on year-to-year growth in the Company’s earnings per share. ExpenseEPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with this plan was $15.5defined contribution plans were $9.1 million, $15.3$8.0 million and $15.0$13.3 million in 2006, 20052009, 2008, and 2004,2007, respectively.

Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $0.3 million in dividends for the Company’s common shares held by the Moody’s Stock Fund in both 2009 and 2008. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 669,000 and 703,000 shares of Moody’s common stock at December 31, 2009 and 2008, respectively.

International Plans

Certain of the Company’s international operations provide pension benefits to their employees in the form of defined contribution plans. Company contributions are primarily determined as a percentage of employees’ eligible compensation. ExpenseExpenses related to these plans for the years ended December 31, 2006, 20052009, 2008, and 2004 was $3.92007 were $5.7 million, $3.1$5.3 million and $3.4$4.8 million, respectively.

82MOODY’S2009 10-K


In addition, the Company also maintains an unfunded defined benefit pension planDBPP for its German employees, which was closed to new entrants in 2002. TheFurthermore, as a result of the acquisition of Fermat (See Note 7, Acquisitions) in October 2008, the Company has assumed Fermat’s pension liability related to a state pension plan mandated by the French Government. Total defined benefit pension liabilities recorded related to this planthese plans was $3.2$3.6 million, $2.6$3.0 million, and $2.4$2.9 million based on thea weighted average discount rate of 4.25%5.56%, 4.15%5.76%, and 5.00%5.60% at December 31, 2006, 20052009, 2008, and 2004,2007, respectively. The pension liabilityliabilities recorded as of December 31, 2006 represents2009 represent the unfunded status of this planthese plans and the entire balance waswere recognized in the statement of financial position as a non-current liability. Expense related to this planliabilities. Total pension expense recorded for the years ended December 31, 2006, 20052009, 2008 and 20042007 was approximately $0.3$0.4 million, $0.6$0.3 million and $0.4 million, respectively. These amounts are not included in the tables above. The incremental effect of adopting SFAS No. 158 and the amount of actuarial losses recognized in AOCI asAs of December 31, 20062009, the Company has included in AOCI net actuarial gains of $1.2 million ($0.8 million net of tax) that have yet to be recognized as a reduction to net periodic pension expense. The Company expects its 2010 amortization of the net actuarial gains to be immaterial.

NOTE 12STOCK-BASED COMPENSATION PLANS

Presented below is a summary of the stock compensation cost and associated tax benefit in the accompanying Consolidated Statements of Operations:

   Year Ended December 31,
   2009  2008  2007
Stock compensation cost  $57.4  $63.2  $90.2
Tax benefit  $20.9  $23.5  $34.0

The 2007 restructuring charge, as described in Note 10, includes $4.3 million relating to a stock award modification for three employees which is not included in the stock compensation cost for 2007 shown in the table above. The nature of the modification was to accelerate the vesting of certain awards for the affected employees as if they were both immaterial.

Note 11 Stock-Based Compensation Plansretirement-eligible at the date of their termination.

The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted below. The expected dividend yield is derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of historical weekly stock prices of the Company as well as implied volatility from Moody’s traded options as well as historical volatility.options. The risk-free interest rate is the rate in effect at the time of the grant based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected holding period was determined by examining historical and projected post-vesting exercise behavior activity.

The following weighted average assumptions were used for options granted during 2006, 2005 and 2004:granted:

 

   2006  2005  2004 

Expected dividend yield

  0.44% 0.52% 0.46%

Expected stock volatility

  23% 23% 30%

Risk-free interest rate

  4.59% 4.07% 3.24%

Expected holding period

  6.0 yrs  6.0 yrs  5.0 yrs 

53


Prior to the 2000 Distribution, certain employees of Moody’s received grants of Old D&B stock options under Old D&B’s 1998 Key Employees’ Stock Incentive Plan (the “1998 Plan”). At the Distribution Date, all unexercised Old D&B stock options held by Moody’s employees were converted into separately exercisable options to acquire Moody’s common stock and separately exercisable options to acquire New D&B common stock, such that each option had the same ratio of the exercise price per option to the market value per share, the same aggregate difference between market value and exercise price, and the same vesting provisions, option periods and other terms and conditions applicable prior to the 2000 Distribution. Old D&B stock options held by employees and retirees of Old D&B were converted in the same manner. Immediately after the 2000 Distribution, the 1998 Plan was amended and adopted by the Company.

   Year Ended December 31,
   2009  2008  2007
Expected dividend yield   1.59%   1.06%   0.44%
Expected stock volatility   38%   25%   23%
Risk-free interest rate   2.63%   2.96%   4.78%
Expected holding period   5.8 yrs   5.5 yrs   5.7 yrs
Grant date fair value  $8.52  $9.73  $22.65

Under the 1998 Plan, 33,000,00033.0 million shares of the Company’s common stock have been reserved for issuance. The Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan, (the “2001 Plan”), which is shareholder approved, permits the granting of up to 25,600,00028.6 million shares, of which not more than 5,000,0008.0 million shares are available for grants of awards other than stock options. Both the 1998 Plan and theThe 2001 Plan (“was amended and approved at the annual shareholders meeting on April 24, 2007, increasing the number of shares reserved for issuance by 3.0 million which are included in the aforementioned amounts. The Stock Plans”)Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board of Directors at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant. The Stock Plans also provide for the granting of restricted stock. Unlike the 1998 Plan, the 2001 Plan also provides that consultants to the Company or any of its affiliates are eligible to be granted options.

The Company maintains a stock planthe Directors’ Plan for its Board, of Directors, the 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan (the “Directors’ Plan”), which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors’ Plan provides that options are exercisable not later than ten years from the grant date. The vesting period is determined by the Board of Directors at the date of the grant and is generally one year for options and three years for restricted stock. Under the Directors’ Plan, 800,0000.8 million shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors’ Plan.

MOODY’S2009 10-K83


A summary of option activity as of December 31, 20062009 and changes during the year then ended is presented below:

 

Options

  Shares  

Weighted

Average

Exercise Price

Per Share

  

Weighted

Average

Remaining

Contractual

Term

  

Aggregate

Intrinsic

Value

Outstanding, December 31, 2005

  23.7  $23.62    

Granted

  3.0   63.32    

Exercised

  (5.8)  17.99    

Forfeited or expired

  (0.8)  41.26    
         

Outstanding, December 31, 2006

  20.1  $30.48  6.0 yrs  $777.1
         

Vested and unvested expected to vest, December 31, 2006

  19.4  $29.77  6.0 yrs  $760.3
         

Exercisable, December 31, 2006

  11.6  $20.44  4.7 yrs  $561.9
         

Options

  Shares  Weighted
Average
Exercise Price
Per Share
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic Value
Outstanding, December 31, 2008  19.4   $37.72    
Granted  2.6    25.23    
Exercised  (1.2  14.68    
Forfeited  (0.4  42.70    
Expired  (0.3  47.39    
         
Outstanding, December 31, 2009  20.1   $37.26  5.1 yrs  47.8
         
Vested and expected to vest, December 31, 2009  19.3   $37.25  5.0 yrs  47.1
         
Exercisable, December 31, 2009  14.1   $35.66  3.9 yrs  43.6
         

The weighted average grant date fair value per option of Moody’s options granted during the years ended December 31, 2006, 2005 and 2004 was $19.97, $12.62 and $10.00, respectively. The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody’s closing stock price on the last trading day of the year ended December 31, 20062009 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2006.2009. This amount changesvaries based on the fair value of Moody’s stock. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004, was $269.6 million, $179.1 million and $151.2 million, respectively. As of December 31, 2006,2009, there was $68.9$39.5 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 1.21.5 years. Proceeds received from the exercise of

The following table summarizes information relating to stock options was $105.0 million, $86.2 million and $99.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. The tax benefit realized from stock options exercised during the years ended December 31, 2006, 2005 and 2004 was $108.0 million, $72.1 million and $61.5 million, respectively.option exercises:

 

54


At December 31, 2006, options outstanding of 18.9 million and 1.2 million were held by Moody’s employees and retirees and New D&B employees and retirees, respectively.

   Year Ended December 31,
   2009  2008  2007
Proceeds from stock option exercises  $18.0  $23.2  $69.3
Aggregate intrinsic value  $13.8  $21.6  $139.4
Tax benefit realized upon exercise  $5.4  $8.5  $53.9

A summary of the status of the Company’s nonvested restricted stock as of December 31, 20062009 and changes during the year then ended is presented below:

 

Nonvested Restricted Stock

  Shares 

Weighted Average
Grant Date Fair

Value Per Share

  Shares Weighted Average Grant
Date Fair Value Per Share

Balance, December 31, 2005

  1.3  $38.59
Balance, December 31, 2008  1.5   $55.33

Granted

  0.9   63.31  0.6    25.08

Vested

  (0.4)  37.76  (0.5  55.90

Forfeited

  (0.1)  50.03  (0.1  46.50
           
Balance, December 31, 2009  1.5   $44.02
      

Balance, December 31, 2006

  1.7  $52.12
     

The total fair value of shares vested during the years ended December 31, 2006 and 2005 was $27.8 million and $9.8 million, respectively. There were no shares vested in 2004 as this was the first year the Company granted restricted stock to its employees. As of December 31, 2006,2009, there was $47.7$30.0 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 1.11.4 years.

The tax benefit realized fromfollowing table summarizes information relating to the vesting of restricted stock during the years ended December 31, 2006 and 2005 was $10.9 million and $3.9 million, respectively. There was no tax benefit realized from the vesting of restricted stock during the year ended December 31, 2004 as no shares vested during this period.awards:

   Year Ended December 31,
   2009  2008  2007
Fair value of vested shares  $8.0  $23.7  $43.2
Tax benefit realized upon vesting  $2.9  $8.8  $16.6

The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans. The Company currently expects to use a significant portion of its cash flow to continue its share repurchase program. The Company implemented a systematic share repurchase program in the third quarter of 2005 through a SEC Rule 10b5-1 program. Moody’s may also purchase opportunistically when conditions warrant. On June 5, 2006, the Board of Directors authorized an additional $2 billion share repurchase program. The Company’s intent is to return capital to shareholders in a way that serves their long-term interests. As a result, Moody’s share repurchase activity will continue to vary from quarter to quarter.

In addition, the Company also sponsors the 1999 Moody’s Corporation Employee Stock Purchase Plan (“ESPP”).ESPP. Under the ESPP, 6,000,0006.0 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at 85% ofa discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in 2009 and

84MOODY’S2009 10-K


15% in 2008 and 2007. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect at from one percent to ten percent of compensation, subject to the annual federal limit. This results inIn 2008 and 2007 the Company recorded stock-based compensation expense for the difference between the purchase price and fair market value under SFAS No. 123R as well asTopic 718 of the ASC. Beginning on January 1, 2009 the discount offered on the ESPP was reduced to 5% which will result in the ESPP qualifying for non-compensatory status under SFAS No. 123.Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2009.

Note 12 Income Taxes

NOTE 13INCOME TAXES

Components of the Company’s income tax provision are as follows:

 

   Year Ended December 31, 
   2006  2005  2004 

Current:

    

Federal

  $362.2  $234.6  $240.7 

State and local

   105.0   89.8   70.8 

Non-U.S

   66.6   69.7   44.3 
             

Total current

   533.8   394.1   355.8 
             

Deferred:

    

Federal

   (20.1)  (15.0)  (6.9)

State and local

   (5.8)  (5.4)  (2.3)

Non-U.S

   (1.3)  0.2   (0.4)
             

Total deferred

   (27.2)  (20.2)  (9.6)
             

Total provision for income taxes

  $506.6  $373.9  $346.2 
             

55


   Year Ended December 31, 
   2009  2008  2007 
Current:    

Federal

  $99.2   $147.5   $277.0  

State and Local

   53.3    49.3    89.8  

Non-U.S.

   70.1    88.7    124.8  
             

Total current

   222.6    285.5    491.6  
             
Deferred:    

Federal

   22.8    (10.9  (64.9

State and Local

   (9.3  (0.8  (10.7

Non-U.S.

   3.0    (5.6  (0.8
             

Total deferred

   16.5    (17.3  (76.4
             
Total Income Tax Provision  $239.1   $268.2   $415.2  
             

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes is as follows:

 

  Year Ended December 31, 
  Year Ended December 31, 
  2006 2005 2004   2009 2008 2007 

U.S. statutory tax rate

  35.0% 35.0% 35.0%   35.0  35.0  35.0

State and local taxes, net of federal tax benefit

  5.1  5.9  5.8    4.4    4.1    4.6  

U.S. (benefit)/taxes on foreign income

  (0.5) 0.3  0.3 
Benefit of foreign operations   (2.4  (2.6  (0.1

Legacy tax items

  0.1  (0.3) 4.3    (0.3  (0.3  (2.4

Jobs Act repatriation benefit

  —    (0.4) —   

Other

  0.5  (0.5) (0.5)   0.3    0.5    (0.1
          
          

Effective tax rate

  40.2% 40.0% 44.9%   37.0  36.7  37.0
                    
Income tax paid  $192.2   $319.9   $408.7  
          

IncomeThe source of income before provision for income taxes paid were $408.8 million, $355.6 million and $300.1 million in 2006, 2005 and 2004, respectively.is as follows:

   Year Ended December 31,
   2009  2008  2007
United States  $386.9  $437.4  $814.7
International   259.3   292.4   307.3
            
Income before provision for income taxes  $646.2  $729.8  $1,122.0
            

MOODY’S2009 10-K85


The components of deferred tax assets and liabilities are as follows:

 

  December 31,   Year Ended December 31, 
  2006 2005 

Deferred tax assets:

   
  2009 2008 
Deferred tax assets:   

Current:

      

Accounts receivable allowances

  $5.2  $4.8 

Account receivable allowances

  $7.5   $6.5  

Accrued compensation and benefits

   5.5   4.9    10.5    7.8  

Deferred revenue

   7.9    5.5  

Restructuring

   2.6    3.0  

Other

   2.6   2.4    3.9    3.4  
              

Total current

   13.3   12.1    32.4    26.2  
       
       

Non-current:

      

Accumulated depreciation and amortization

   8.8   8.3    1.3    1.9  

Stock-based compensation

   46.6   28.5    81.0    68.5  

Benefit plans

   33.6   16.6    43.8    39.1  

State taxes

   2.0   2.9 

Deferred rent and construction allowance

   28.9    27.9  

Deferred revenue

   39.2    38.6  

Foreign net operating loss(1)

   7.1    3.6  

Uncertain tax positions

   46.0    59.8  

Other

   6.4   9.6    5.2    9.9  
              

Total non-current

   97.4   65.9    252.5    249.3  
              

Total deferred tax assets

   110.7   78.0    284.9    275.5  
              

Deferred tax liabilities:

   
Deferred tax liabilities:   

Current:

      

Prepaid expenses

   (0.2)  (1.8)       (0.3

Other

   (0.1  (0.2
              

Total current

   (0.2)  (1.8)   (0.1  (0.5
              

Non-current:

      

Prepaid pension costs

   —     (23.8)

Benefit plans

   (21.5)  —   

Intangible assets and capitalized software

   (10.7)  (11.3)

Other

   —     (0.7)

Accumulated depreciation

   (19.2  (11.4

Foreign earnings to be repatriated

   (25.2    

Amortization of intangible assets and capitalized software

   (39.0  (35.8

Other liabilities

   (3.4  (0.3
              

Total non-current

   (32.2)  (35.8)   (86.8  (47.5
              

Total deferred tax liabilities

   (32.4)  (37.6)   (86.9  (48.0
              

Net deferred tax asset

  $78.3  $40.4    198.0    227.5  
Valuation allowance   (4.5  (0.7
              
Total deferred income taxes  $193.5   $226.8  
       

The current deferred tax assets, net of current deferred tax liabilities, as well as prepaid

(1)Amounts are primarily set to expire beginning in 2015, if unused.

Prepaid taxes of $3.5$18.6 million and $1.0$62.7 million for December 31, 20062009 and 20052008, respectively are included in other current assets in the consolidated balance sheets. Non-currentAs of December 31, 2009, the Company had approximately $480.1 million of undistributed earnings of foreign subsidiaries that it intends to indefinitely reinvest in foreign operations. The Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax receivableslaws and in the hypothetical calculations that would have to be made.

86MOODY’S2009 10-K


The Company had valuation allowances of $39.8$4.5 million and $2.6$0.7 million for December 31, 2006 and 2005 are included in other assets. During the year ended December 31, 2006, Moody’s deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential legacy tax deficiencies known as “Amortization Expense Deductions”, as further discussed in Note 16 to the consolidated financial statements. The net effects of non-current deferred tax assets and non-current deferred tax liabilities are included in other assets at December 31, 20062009 and 2005. For2008, respectively, related to foreign net operating losses, which are uncertain as to realizability. The change in the year ended December 31, 2005, a valuation allowance of $0.7 million was established against capital loss carryovers. In 2006, this valuation allowance was released when capital

56


gains permitted capital loss carryover utilization. No valuation allowances were established against any other deferred assets for December 31, 20062009 and 2005, as management has determined,2008 results primarily from the increase in valuation allowances in certain jurisdictions based on the Company’s historyevaluation of prior and current levelsthe realizability of operating earnings, that none should be provided.future benefits.

AtAs of December 31, 2006, undistributed earnings2009 the Company had $164.2 million of non-U.S. subsidiaries aggregated approximately $205 million. Ituncertain tax positions (UTPs) of which $130.2 million represents the amount that, if recognized, would impact the effective tax rate in future periods.

A reconciliation of the beginning and ending amount of UTPs is assumed that earnings from subsidiaries in France, Germany, Spain, Italy, Canada and Japan will be remitted to the U.S. on a regular basis. As such, incremental deferred U.S. taxesas follows:

   2009  2008  2007 
Balance as of January 1  $185.1   $156.1   $122.7  
Additions for tax positions related to the current year   31.1    34.5    41.5  
Additions for tax positions of prior years   52.5    8.2    27.7  
Reductions for tax positions of prior years   (47.0  (12.2  (4.0
Settlements with taxing authorities   (50.7  (0.7    
Lapse of statute of limitations   (6.8  (0.8  (31.8
             
Balance as of December 31  $164.2   $185.1   $156.1  
             

The Company classifies interest related to anticipated distributions have been providedUTPs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During 2009, the consolidated financial statements. For the year ended December 31, 2005, Moody’s recognized a benefitCompany accrued interest of $3.6$7.6 million related to UTPs. The company paid $16.3 million interest to settle a New York City audit of the repatriationyears 2001 through 2007. As of foreign earnings under the American Jobs Creation Act of 2004. Deferred tax liabilities have not been recognized for approximately $77 million of undistributed foreign earnings that management intends to permanently reinvest outside the U.S. If all such undistributed earnings were remitted to the U.S.,December 31, 2009 and 2008 the amount of incrementalaccrued interest recorded in the Company’s balance sheets related to UTPs was $27.7 million and $36.4 million, respectively.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state and local and foreign jurisdictions. Moody’s federal income tax returns filed for the years 2006 through 2008 remain subject to examination by the IRS. New York State income tax returns for 2004 through 2007 are currently under examination. The income tax returns for 2008 remain open to examination for both New York State and New York City. Tax filings in the U.K. for 2001 through 2006 are currently under examination by the U.K. taxing authorities and for 2007 through 2008 remain open to examination.

For current ongoing audits related to open tax years the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective settlement of these audits, which might involve the payment of additional taxes, payable, netthe adjustment of foreigncertain deferred taxes and/or the recognition of tax credits, wouldbenefits. It is also possible that new issues might be approximately $6 million.raised by tax authorities which might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time. However, the Company believes that it has adequately provided for its financial exposure for all open tax years by tax jurisdiction. Additionally, the Company is seeking tax rulings on certain tax positions which, if granted, could decrease the balance of UTPs over the next twelve months however, due to the uncertainty involved with this process, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.

NOTE14INDEBTEDNESS

The following table summarizes total indebtedness:

   December 31, 
   2009  2008 
2007 Facility  $   $613.0  
Commercial paper, net of unamortized discount of $0.1 million at 2009 and $0.3 million at 2008   443.7    104.7  
Current Portion of Long-Term Debt   3.8      
Notes payable:   

Series 2005-1 Notes

   300.0    300.0  

Series 2007-1 Notes

   300.0    300.0  
2008 Term Loan   146.2    150.0  
         
Total Debt   1,193.7    1,467.7  
Current portion   (447.5  (717.7
         
Total long-term debt  $746.2   $750.0  
         

MOODY’S2009 10-K87


Note 13 Indebtedness2007 Facility

On September 30, 2005,28, 2007, the Company entered into a Note Purchase Agreement and issued and sold through a private placement transaction, $300 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes (“Notes”). The Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. The proceeds from the sale of the Notes were used to refinance $300 million aggregate principal amount of the Company’s outstanding 7.61% Senior Notes (“Old Notes”) which matured on September 30, 2005. In the event that Moody’s pays all or part of the Notes in advance of their maturity (the “Prepaid Principal”), such prepayment will be subject to a penalty calculated based on the excess, if any, of the discounted value of the remaining scheduled payments, as defined in the agreement, over the Prepaid Principal. Interest paid under the Notes and Old Notes was $14.9 million for the year ended December 31, 2006 and $22.8 million for each of the years ended December 31, 2005 and 2004. Total interest expense was $15.2 million, $21.0 million and $23.0 million, respectively for the years ended December 31, 2006, 2005 and 2004.

On September 1, 2004, Moody’s entered into a$1.0 billion five-year senior, unsecured bank revolving credit facility, (the “Facility”) in an aggregate principal amount of $160 million that expiresexpiring in September 2009. This2012. The 2007 Facility replacedwill serve, in part, to support the $80 million five-year facility that was scheduled to expire in September 2005 and the $80 million 364-day facility that expired in September 2004.Company’s CP Program described below. Interest on borrowings under the Facility is payable at rates that are based on the London InterBank Offered RateLIBOR plus a premium that can range from 1716.0 to 40.0 basis points to 47.5 basis pointsof the outstanding borrowing amount depending on the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (“Earnings Coverage Ratio”), as defined in the related agreement. At December 31, 2006, such premium was 17 basis points.Debt/EBITDA ratio. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2007 Facility. The quarterly fees for the 2007 Facility can range from 84.0 to 10.0 basis points per annum of the Facilityfacility amount, to 15 basis points, depending on the Company’s Earnings Coverage Ratio, and were 8 basis points at December 31, 2006. Under the Facility, theDebt/EBITDA ratio. The Company also pays a utilization fee of 12.55.0 basis points on borrowings outstanding when the aggregate amount outstanding under the Facility exceeds 50% of the Facility.

Nototal facility. The weighted average interest was paid under the Company’s facilities for the years endedrate on borrowings outstanding as December 31, 2006 and 2005 as no borrowings were outstanding during those years.

2008 was 1.47%. The Notes and the2007 Facility (the “Agreements”) containcontains certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.agreement. The 2007 Facility also contains financial covenants that, among other things, require the Company to maintain an Interest Coverage Ratio, as defined in the agreement, of not less than 3 to 1 for any period of four consecutive fiscal quarters, and an Earnings Coverage Ratio, as defined in the agreement,a Debt/EBITDA ratio of not more than 44.0 to 11.0 at the end of any fiscal quarter.

Commercial Paper

On October 3, 2007, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Amounts available under the CP Program may be re-borrowed. The CP Program is supported by the Company’s 2007 Facility. The maturities of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at rates that will vary based upon market conditions at the time of issuance. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The weighted average interest rate on CP borrowings outstanding was 0.3% and 2.08% as of December 31, 2009 and December 31, 2008, respectively. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; violation of covenants; invalidity of any loan document; material judgments; and bankruptcy and insolvency events, subject in certain instances to cure periods.

Notes Payable

On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. Under the terms of the 2007 Agreement, the Company may, from time to time within five years, in its sole discretion, issue additional series of senior notes in an aggregate principal amount of up to $500.0 million pursuant to one or more supplements to the 2007 Agreement. The Company may prepay the Series 2007-1 Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. The 2007 Agreement contains covenants that limit the ability of the Company, and certain of its subsidiaries to, among other things: enter into transactions with affiliates, dispose of assets, incur or create liens, enter into any sale-leaseback transactions, or merge with any other corporation or convey, transfer or lease substantially all of its assets. The Company must also not permit its Debt/EBITDA ratio to exceed 4.0 to 1.0 at the end of any fiscal quarter.

On September 30, 2005, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its Series 2005-1 Senior Unsecured Notes due 2015 pursuant to the 2005 Agreement. The Series 2005-1 Notes have a ten-year term and bear interest at an annual rate of 4.98%, payable semi-annually on March 30 and September 30. Proceeds from the sale of the Series 2005-1 Notes were used to refinance $300.0 million aggregate principal amount of the Company’s outstanding 7.61% senior notes which matured on September 30, 2005. In the event that Moody’s pays all, or part, of the Series 2005-1 Notes in advance of their maturity, such prepayment will be subject to a Make Whole Amount. The Series 2005-1 Notes are subject to certain covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur liens, as defined in the related agreements.

2008 Term Loan

On May 7, 2008, Moody’s entered into a five-year, $150.0 million senior unsecured term loan with several lenders. Proceeds from the loan were used to pay off a portion of the CP outstanding. Interest on borrowings under the 2008 Term Loan is payable quarterly at rates that are based on LIBOR plus a margin that can range from 125 basis points to 175 basis points depending on the Company’s Debt/EBITDA ratio. The outstanding borrowings shall amortize beginning in 2010 in accordance with the schedule of payments set forth in the 2008 Term Loan outlined in the table below.

The 2008 Term Loan contains restrictive covenants that, among other things, restrict the ability of the Company to engage or to permit its subsidiaries to engage in mergers, consolidations, asset sales, transactions with affiliates and sale-leaseback transactions or to incur,

88MOODY’S2009 10-K


or permit its subsidiaries to incur, liens, in each case, subject to certain exceptions and limitations. The 2008 Term Loan also limits the amount of debt that subsidiaries of the Company may incur. In addition, the 2008 Term Loan contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4.0 to 1.0 at the end of any fiscal quarter.

The principal payments due on the 2008 Term Loan through its maturity are as follows:

Year Ending December 31,                

   
2010  $3.8
2011   11.3
2012   71.2
2013   63.7
    
Total  $150.0
    

Also, on May 7, 2008, the Company entered into interest rate swaps with a total notional amount of $150.0 million to protect against fluctuations in the LIBOR-based variable interest rate on the 2008 Term Loan as more fully discussed in Note 5.

INTEREST (EXPENSE) INCOME, NET

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

   Year Ended December 31, 
   2009  2008  2007 
Income  $2.5   $18.1   $19.3  
Expense on borrowings   (45.5  (60.0  (40.7
UTBs and other tax related interest   1.6    (13.7  (21.5
Reversal of accrued interest(a)   6.5    2.3    17.5  
Interest capitalized   1.5    1.1    1.1  
             
Total  $(33.4 $(52.2 $(24.3
             
Interest paid  $46.1   $59.5   $32.5  
             

(a)Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters, further discussed in Note 17 to the consolidated financial statements.

At December 31, 2006,2009, the Company was in compliance with such covenants. Uponall covenants contained within all of the occurrence of certain financial or economic events, significant corporate events or certain other events constituting an event ofdebt agreements. In addition to the covenants described above, the 2007 Facility, the 2005 Agreement, the 2007 Agreement and the 2008 Term Loan contain cross default provisions whereby default under one of the Agreements, all loansaforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under the Agreements (including accrued interest and fees payable thereunder) maythose instruments to be declared immediately due and payablepayable.

The Company’s long-term debt, including the current portion, is recorded at cost. The fair value and all commitments undercarrying value of the Agreements may be terminated. In addition, certain other eventsCompany’s long-term debt as of default underDecember 31, 2009 and 2008 is as follows:

   December 31, 2009  December 31, 2008
   Carrying
Amount
  Estimated Fair
Value
  Carrying
Amount
  Estimated Fair
Value
Series 2005-1 Notes  $300.0  $291.1  $300.0  $271.9
Series 2007-1 Notes   300.0   298.6   300.0   278.1
2008 Term Loan   150.0   150.0   150.0   150.0
                
Total  $750.0  $739.7  $750.0  $700.0
                

The fair value of the Agreements would automatically result in amounts outstanding becoming immediately due and payable and all commitments being terminated.

In October 2006, Moody’s amended its Facility by increasing the limitCompany’s long-term debt was estimated using discounted cash flow analyses based on sale proceeds resulting from a sale-leaseback transaction of its corporate headquarters building at 99 Church Street from $150 million to $250 million. Additionally, the restriction on liens to secure indebtedness relatedprevailing interest rates available to the sale of 99 Church Street was also increased from $150 million to $250 million. The Company also increased the expansion feature of the credit facility from $80 million to $340 million, subject to obtaining commitments for the incremental capacity at the time of draw down from the existing lenders. This increase gives the Company potential borrowing capacity under the Facility of $500 million.borrowings with similar maturities.

 

57


NOTE 15CAPITAL STOCK

Note 14 Capital Stock

Authorized Capital Stock

The total number of shares of all classes of stock that the Company has authority to issue under its Restated Certificate of Incorporation is 1,020,000,0001.02 billion shares with a par value of $0.01, of which 1,000,000,0001.0 billion are shares of common stock, 10,000,00010.0 million are shares of preferred stock and 10,000,00010.0 million are shares of series common stock. The preferred stock and series common stock can be issued with varying terms, as determined by the Board of Directors.Board.

In February 2005, Moody’s Board of Directors declared a two-for-one stock split to be effected as a special stock distribution of one share of common stock for each share of the Company’s common stock outstanding, subject to stockholder approval of a charter amendment to increase the Company’s authorized common shares from 400 million shares to 1 billion shares. At the Company’s Annual Meeting on April 26, 2005, Moody’s stockholders approved the charter amendment. As a result, stockholders of record as of the close of business on May 4, 2005 received one additional share of common stock for each share of the Company’s common stock held on that date. Such additional shares were distributed on May 18, 2005. All prior period share and per share information has been restated to reflect the Stock Split.

MOODY’S2009 10-K89


Rights Agreement

The Company hashad a Rights Agreementrights agreement, which expired as of June 30, 2008 and was not renewed. The rights agreement was designed to protect its shareholders in the event of unsolicited offers to acquire the Company and coercive takeover tactics that, in the opinion of the Board, of Directors, could impair its ability to represent shareholder interests. Under the Rights Agreement, each

Share Repurchase Program

The Company implemented a systematic share of common stock has a right that trades with the stock until the right becomes exercisable. Pursuant to the provisions of the Rights Agreement, after giving effect to the Stock Split, the number of rights associated with each share of common stock shall be adjusted so that each share of common stock will have associated with it one-half of a right. Each right entitles the registered holder to purchase 1/1000 of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a price of $100 per 1/1000 of a share, subject to adjustment. The rights will generally not be exercisable until a person or group (“Acquiring Person”) acquires beneficial ownership of, or commences a tender offer or exchange offer that would result in such person or group having beneficial ownership of, 15% or more of the outstanding common stock at such time.

In the event that any person or group becomes an Acquiring Person, each right will thereafter entitle its holder (other than the Acquiring Person) to receive, upon exercise and payment, shares of stock having a market value equal to two times the exercise pricerepurchase program in the formthird quarter of the Company’s common stock or, where appropriate, the Acquiring Person’s common stock. The rights are not currently exercisable, as no shareholder is currently2005 through an Acquiring Person. The CompanySEC Rule 10b5-1 program. Moody’s may redeem the rights, which expire in June 2008, for $0.01 per right, under certain circumstances, including for a Board-approved acquirer either before the acquirer becomes an Acquiring Person or during the window period after the triggering event as specified in the Rights Agreement.

Share Repurchase Program

also purchase opportunistically when conditions warrant. On June 5, 2006, the Board of Directors authorized a $2$2.0 billion share repurchase program.program, which the Company completed during January 2008. On July 30, 2007, the Board of the Company authorized an additional $2.0 billion share repurchase program, which the Company began utilizing in January 2008 after completing the June 2006 authorization. There is no established expiration date for thisthe remaining authorization. During August 2006, the Company had completed its previous $1 billionThe Company’s intent is to return capital to shareholders in a way that serves their long-term interests. As a result, Moody’s share repurchase program, which had been authorized by the Board of Directors in October 2005. During November 2005, the Company completed its previous $600 million program, which had been authorized by the Board of Directors in May 2004.activity will continue to vary from quarter to quarter.

During 2006,2009, Moody’s repurchased 18.0 million shares at an aggregate costdid not repurchase any of $1,093.6 millionits common stock, and issued 6.5 million1.9 millions shares of stock under employee stock-based compensation plans. Since becoming a public company in October 2000 and through December 31, 2006, Moody’s has repurchased 84.4 million shares at a total cost of $2.9 billion, including 38.6 million shares to offset issuances under employee stock-based compensation plans.

Dividends

During 2006,2009, 2008 and 2007, the Company paid a quarterly dividend of $0.07$0.10, $0.10 and $0.08 per share of Moody’s common stock in each of the quarters, of Moody’s common stock, resulting in dividends paid per share of $0.28 during the year. During 2005, the Company paid a quarterly dividendyears ended December 31, 2009, 2008 and 2007 of $0.0375 in the first quarter$0.40, $0.40 and $0.055 in each of the three subsequent quarters, per share of Moody’s common stock, resulting in dividends paid per share of $0.2025 during the year. During 2004, the Company paid quarterly dividends of $0.0375 per share of Moody’s common stock resulting in total dividends paid per share of $0.15.$0.32, respectively.

On December 12, 2006,15, 2009, the Board of Directors of the Company approved the declaration of a quarterly dividend of $0.08$0.105 per share of Moody’s common stock, payable on March 10, 20072010 to shareholders of record at the close of business on February 20, 2007.2010. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board of Directors.Board.

 

58


Note 15 Lease Commitments

NOTE16LEASE COMMITMENTS

Moody’s operates its business from various leased facilities, which are under operating leases that expire over the next 2118 years. Moody’s also leases certain computer and other equipment under operating and capital leases that expire over the next fivefour years. Rent expense, including lease incentives, is amortized on a straight-line basis over the related lease term. Rent and amortization expense under operating leases for the years ended December 31, 2006, 20052009, 2008 and 20042007 was $27.9$74.3 million, $21.5$64.4 million and $15.1$65.8 million, respectively. The amount of deferred rent that is included in other liabilities in the consolidated balance sheets is $90.8 million and $69.7 million at December 31, 2009 and 2008, respectively. The Company has approximately $2.0$4.8 million and $5.5 million of computer equipment subject to capital lease obligations. Accumulated amortizationobligations at December 31, 2006 includes $1.12009 and 2008, respectively, with accumulated amortization of $4.3 million related to capital lease obligations.and $2.9 million, respectively.

The approximate minimum rent for leases that have remaining or original noncancelable lease terms in excess of one year at December 31, 20062009 is as follows:

 

Year Ending December 31,

  

Capital

Leases

 

Operating

Leases

  Capital Leases  Operating Leases

2007

  $0.5  $34.5

2008

   0.4   41.5

2009

   0.1   38.9

2010

   —     33.2  $1.3  $57.9

2011

   —     29.0      50.6
2012      55.3
2013      54.6
2014      54.3

Thereafter

   —     462.4      632.5
            

Total minimum lease payments

  $1.0  $639.5  $1.3  $905.2
         

Less: amount representing interest

   (0.1)      
          

Present value of net minimum lease payments under capital leases

  $0.9    $1.3  
          

During the fourth quarter ofOn October 20, 2006, the Company completed the sale of its corporate headquarters located at 99 Church Street, New York, New York. As part of the sales agreement, the Company will lease back the building until the relocation to its new global headquarters at 7 World Trade Center, New York, New York (“7 WTC”), is completed in mid- to late 2007. The Company entered into ana 21-year operating lease agreement to occupy 15 floors of an office building at 7WTC which includes a total of 20 years of renewal options. On March 28, 2007 the 7WTC lease agreement was amended for 7 WTC (the “Lease”) commencing on October 20, 2006the Company to lease an additional two floors for 589,945 square feet of office space which will serve as Moody’s new corporate headquarters. The Lease has an initiala term of approximately 21 years with renewal options of 20 years. The total base rent offor the entire lease term, including rent credits, for the 7WTC lease is approximately $536$642 million.

On February 6, 2008, the Company entered into a 17.5 year operating lease agreement to occupy six floors of an office tower located in the Canary Wharf district of London, England. The total base rent of the Canary Wharf Lease over its 17.5-year term is approximately 134 million includingGBPs, and the Company will begin making base rent credits frompayments in 2011. In addition to the World Trade Center Rent Reduction Program promulgated bybase rent payments the Empire State Development Corporation.Company

Note 16 Contingencies

90MOODY’S2009 10-K


will be obligated to pay certain customary amounts for its share of operating expenses and tax obligation. The Company expects to incur approximately 41 million GBP of costs to build out the floors to its specifications of which, approximately 17 million GBPs is expected to be incurred over the next twelve months.

NOTE17CONTINGENCIES

From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by Moody’s.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 other than routine litigation incidentalpursuant to Moody’s business, material proceedings known to be contemplated by governmental authoritiesSEC rules and other pending matters thatas it may determine to be appropriate.

Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last two years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries. Moody’s is cooperating with a review by the SEC relating to errors in the model used by MIS to rate certain constant-proportion debt obligations. In addition, the Company is facing market participant litigation 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 in the current economic environment.

On June 27, 2008, the Brockton Contributory Retirement System, a purported shareholder of the Company’s securities, filed a purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York. The plaintiff asserts various causes of action relating to the named defendants’ oversight of MIS’s ratings of RMBS and constant-proportion debt obligations, and their participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. The plaintiff seeks compensatory damages, restitution, disgorgement of profits and other equitable relief. On July 2, 2008, Thomas R. Flynn, a purported shareholder of the Company’s securities, filed a similar purported shareholder derivative complaint on behalf of the Company against its directors and certain senior officers, and the Company as nominal defendant, in the Supreme Court of the State of New York, County of New York, asserting similar claims and seeking the same relief. The cases have been consolidated and plaintiffs filed an amended consolidated complaint in November 2008. The Company removed the consolidated action to the United States District Court for the Southern District of New York in December 2008. In January 2009, the plaintiffs moved to remand the case to the Supreme Court of the State of New York, which the Company opposed. On February 23, 2010, the court issued an opinion remanding the case to the Supreme Court of New York. On October 30, 2008, the Louisiana Municipal Police Employees Retirement System, a purported shareholder of the Company’s securities, also filed a shareholder derivative complaint on behalf of the Company against its directors and certain officers, and the Company as a nominal defendant, in the U.S. District Court for the Southern District of New York. This complaint also asserts various causes of action relating to the Company’s ratings of RMBS, CDO and constant-proportion debt obligations, and named defendants’ participation in the alleged public dissemination of false and misleading information about MIS’s ratings practices and/or a failure to implement internal procedures and controls to prevent the alleged wrongdoing. On December 9, 2008, Rena Nadoff, a purported shareholder of the Company, filed a shareholder derivative complaint on behalf of the Company against its directors and its CEO, and the Company as a nominal defendant, in the Supreme Court of the State of New York. The complaint asserts a claim for breach of fiduciary duty in connection with alleged overrating of asset-backed securities and underrating of municipal securities. On October 20, 2009, the Company moved to dismiss or stay the action in favor of related federal litigation. On January 26, 2010, the court entered a stipulation and order, submitted jointly by the parties, staying the Nadoff litigation pending coordination and prosecution of similar claims in the above and below described federal derivative actions. On July 6, 2009, W. A. Sokolowski, a purported shareholder of the Company, filed a purported shareholder derivative complaint on behalf of the Company against its directors and current and former officers, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York. The complaint asserts claims relating to alleged mismanagement of the Company’s processes for rating structured finance transactions, alleged insider trading and causing the Company to buy back its own stock at artificially inflated prices.

Two purported class action complaints have been filed by purported purchasers of the Company’s securities against the Company and certain of its senior officers, asserting claims under the federal securities laws. The first was filed by Raphael Nach in the U.S. District Court for the Northern District of Illinois on July 19, 2007. The second was filed by Teamsters Local 282 Pension Trust Fund in the U.S. District Court for the Southern District of New York on September 26, 2007. Both actions have been consolidated into a single proceeding entitled In re Moody’s Corporation Securities Litigation in the U.S. District Court for the Southern District of New York. On June 27, 2008, a consolidated amended complaint was filed, purportedly on behalf of all purchasers of the Company’s securities during the

MOODY’S2009 10-K91


period February 3, 2006 through October 24, 2007. Plaintiffs allege that the defendants issued false and/or misleading statements concerning the Company’s business conduct, business prospects, business conditions and financial results relating primarily to MIS’s ratings of structured finance products including RMBS, CDOs and constant-proportion debt obligations. The plaintiffs seek an unspecified amount of compensatory damages and their reasonable costs and expenses incurred in connection with the case. The Company moved for dismissal of the consolidated amended complaint in September 2008. On February 23, 2009, the court issued an opinion dismissing certain claims and sustaining others.

For those mattersclaims, litigation and proceedings not related to income taxes, where it is both probable that a liability has beenis expected to be incurred and the amount of loss can be reasonably estimated, the Company has recordedrecords liabilities in the consolidated financial statements and periodically adjusts these as appropriate. In other instances, because of uncertainties related to the probable outcome and/or the amount or range of loss, management does not record a liability but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilitiesmatters accordingly. For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

The Company cannot predict the ultimate impact that any of the legislative, regulatory, enforcement or litigation matters may have on how its business is conducted and thus its competitive position, financial position or results of operations. Based on its review of the latest information available, in the opinion of management, the ultimate monetary liability of the Company in connection withfor the pending legal and tax proceedings, claims and litigation willmatters referred to above (other than the Legacy Tax Matters that are discussed below) is not likely to have a material adverse effect on Moody’sthe Company’s consolidated financial position, although it is possible that the effect could be material to the Company’s consolidated results of operations or cash flows, subjectfor an individual reporting period.

Legacy Tax Matters

Moody's continues to the contingencies described below.

Legacy Contingencies

Moody’s hashave exposure to certain potential liabilities assumed in connection witharising from Legacy Tax Matters. As of December 31, 2009, Moody's has recorded liabilities for Legacy Tax Matters totaling $55.8 million. This includes liabilities and accrued interest due to New D&B arising from the 2000 Distribution. These contingencies are referredDistribution 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 by Moody’s as “Legacy Contingencies”. Moody's future reported results, financial position and cash flows.

The principal Legacy Contingencies presently outstanding relate to tax matters.

To understandfollowing summary of the Company’srelationships among Moody's, New D&B and their predecessor entities is important in understanding our exposure to the potential liabilities described below, it is important to understand the relationship between Moody’s and New D&B, and the relationship among New D&B and its predecessors and other parties who, through various corporate reorganizations and related contractual commitments, have assumed varying degrees of responsibility with respect to such matters.Legacy Tax Matters.

59


In November 1996, The Dun & Bradstreet Corporation through a spin-off separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”).Corporation. In June 1998, The Dun & Bradstreet Corporation through a spin-off separated into two separate public companies: The Dun & Bradstreet CorporationOld D&B and R.H. Donnelley Corporation. During 1998, Cognizant through a spin-off separated into two separate public companies: IMS Health Incorporated (“IMS Health”) and Nielsen Media Research, Inc. (“NMR”). In September 2000, Old D&B through a spin-off separated into two separate public companies: New D&B and Moody’s, as further described in Note 1 to the consolidated financial statements.

Legacy Tax MattersMoody’s.

Old D&B and its predecessors entered into global tax planning initiatives in the normal course of business, including through tax-free restructurings of both their foreign and domestic operations.business. These initiatives are subject to normal review by tax authorities.

Pursuant to Old D&B and its predecessors also entered into a series of agreements as between themselves, IMS Health and NMR are jointly and severally liable to pay one-half, and New D&B and Moody’s are jointly and severally liable to paycovering the other half,sharing of any paymentsliabilities for payment of taxes, penalties and accrued interest resulting from unfavorable Internal Revenue Service (“IRS”) rulingsIRS determinations on certain tax matters, as described in such agreements (excluding the matter described below as “Amortization Expense Deductions” for which New D&B and Moody’s are solely responsible) and certain other potential tax liabilities, alsoall as described in such agreements.

In Further, in connection with the 2000 Distribution and pursuant to the terms of the 2000 Distribution Agreement, New D&B and Moody’s have between themselves, agreed to be financially responsibleon the financial responsibility for any potential liabilities that may arise to the extent such potential liabilities are not directly attributable to their respective business operations.

Without limiting the generality of the foregoing, three specific tax matters are discussed below.

Royalty Expense Deductions

This matter related to the IRS’s stated intention to disallow certain royalty expense deductions claimed by Old D&B on its tax returns for the years 1993 through 1996 as well as the IRS’s intention to reallocate to Old D&B income and expense items that had been reported in a certain partnership tax return for 1996. These mattersthese Legacy Tax Matters.

Settlement agreements were settledexecuted with the IRS in a closing agreement executed in2005 regarding the third quarterLegacy Tax Matters for the years 1989-1990 and 1993-1996. These settlements represent substantially all of 2005 and accordingly,the total potential liability to the IRS, including penalties. As of December 31, 2009, the Company reduced its reservecontinues to carry a liability of $1.9 million for this matter by $11.5 million. However,the remaining potential exposure. In addition, with respect to these settlement agreements, Moody’s and New D&B believe that IMS Health and NMR disagreed with New D&B’s calculation of each party’sdid not pay their full share of the liability.liability to the IRS pursuant to the terms of the applicable separation agreements among the parties. Moody’s and New D&B may commencepaid these amounts to the IRS on their behalf, and attempted to resolve this dispute with IMS Health and NMR. As a result, Moody’s and New D&B commenced arbitration proceedings against IMS Health and NMR to collectin connection with the $7.3 million that1989-1990 matter. This matter was resolved during the third quarter of 2008 in favor of Moody’s and New D&B, and Moody’s each were obligated to pay to the IRS on their behalf. Based upon the current understanding of the positions that New D&B andresulting in IMS Health may take, the Company believes it is likely that New D&B will prevail, but Moody’s cannot predict with certainty the outcome.

and NMR having paid a total of $6.7 million to Moody’s. In the second quarter of 2006, Moody’s paid approximately $9 million for the state income tax liability connected with the terms of the October 20052009, Moody's and New D&B reached a settlement with the IRSIMS Health and reversed the remaining reserve of $1.5 million.

Additionally, the IRS reasserted its position that certain tax refund claims made by Old D&B related to 1993 and 1994 may be offset by tax liabilities relatingNMR with respect to the above mentioned partnership formed1993-1996 matter, resulting in 1993. In the fourth quarter$10.8 million of 2005, New D&B filedcash proceeds paid to Moody's of which $6.5 million represents interest and $4.3 million is a protest with the IRS Appeals Office concerning the IRS’s denialreduction of the tax refunds. In the third quarter of 2006, the IRS Appeals Office rejected New D&B’s protest. New D&B is determining whether to file suit for the refund. Moody’s share is estimated at approximately $9 million.expense.

92MOODY’S2009 10-K


Amortization Expense Deductions

In April 2004, New D&B received Examination Reports (the “April Examination Reports”) from the IRS with respect toThis Legacy Tax Matter, which was affected by developments in June 2007 and 2008 as further described below, involves a partnership transaction entered into in 1997 which resulted in amortization expense deductions on the tax returns of Old D&B since 1997. These deductions could continue through 2012. In the April Examination Reports, the IRS stated its intention to disallow the amortization expense deductions related to this partnership that were claimed by Old D&B on its 1997 and 1998 tax returns. The IRS also stated its intention to disallow certain royalty expense deductions claimed by Old D&B on its 1997 and 1998 tax returns with respect to the partnership transaction. In addition, the IRS stated its intention to disregard the partnership structure and to reallocate to Old D&B certain partnership income and expense items that had been reported in the partnership tax returns for 1997 and 1998. New D&B disagrees with these positions taken by the IRS. IRS audits of Old D&B’s orand New D&B’s tax returns for the years subsequent1997 through 2002 concluded in June 2007 without any disallowance of the amortization expense deductions, or any other adjustments to 1998 haveincome related to this partnership transaction. These audits resulted in the issuance of similar Examination ReportsIRS issuing the Notices for other tax issues for the 1999 through 20021997-2000 years aggregating $9.5 million in tax years. Similar Examination Reports could result for tax years subsequent to 2002.

60


Should any such paymentsand penalties, plus statutory interest of approximately $6 million, which should be made byapportioned among Moody’s, New D&B, related to either the April Examination Reports or any potential Examination Reports for future years, including years subsequent to the separation of Moody’s from New D&B, thenIMS Health and NMR pursuant to the terms of the 2000 Distribution Agreement,applicable separation agreements. Moody’s would haveshare of this assessment was $6.6 million including interest, net of tax. In November 2007, the IRS assessed the tax and penalties and used a portion of the deposit discussed below to paysatisfy the assessment, together with interest. The Company believes it has meritorious grounds to New D&Bchallenge the IRS’s actions and is evaluating its share. In addition, should New D&B discontinue claimingalternatives to recover these amounts. The absence of any tax deficiencies in the Notices for the amortization expense deductions onfor the years 1997 through 2002, combined with the expiration of the statute of limitations for 1997 through 2002, for issues not assessed, resulted in Moody’s recording an earnings benefit of $52.3 million in the second quarter of 2007. This is comprised of two components, as follows: (i) a reversal of a tax liability of $27.3 million related to the period from 1997 through the Distribution Date, reducing the provision for income taxes; and (ii) a reduction of accrued interest expense of $17.5 million ($10.6 million, net of tax) and an increase in other non-operating income of $14.4 million, relating to amounts due to New D&B. In June 2008, the statute of limitations for New D&B relating to the 2003 tax year expired. As a result, in the second quarter of 2008, Moody’s recorded a reduction of accrued interest expense of $2.3 million ($1.4 million, net of tax) and an increase in other non-operating income of $6.4 million, relating to amounts due to New D&B. As of December 31, 2009, Moody's carries a liability of $1.1 million with respect to this matter.

On the Distribution Date, New D&B paid Moody’s $55.0 million for 50% of certain anticipated future tax returns,benefits of New D&B through 2012. It is possible that IRS audits of New D&B for tax years after 2003 could result in income adjustments with respect to the amortization expense deductions of this partnership transaction. In the event that these tax benefits are not claimed or otherwise not realized by New D&B, or there is an audit adjustment, Moody’s would be required, pursuant to the terms of the 2000 Distribution Agreement, to repay to New D&B an amount equal to the discounted value of its share of the related future tax benefits.benefits and its share of any tax liability that New D&B had paid the discounted valueincurs. As of 50% of the future tax benefits fromDecember 31, 2009, Moody’s liability with respect to this transaction in cash to Moody’s at the Distribution Date. Moody’s estimates that the Company’s potential exposures (including penalties and interest, and net of tax benefits) could be up to $120 million relating to the disallowance of amortization expense deductions and could increase by approximately $6 million to $10 million per year, depending on actions that the IRS may take and on whether New D&B continues claiming the amortization expense deductions on its tax returns. Additionally, there are potential exposures that could be up to $164 million relating to the reallocation of the partnership income and expense to Old D&B. Moody’s also could be obligated for future interest payments on its share of such liability.matter totaled $52.8 million.

New D&B is currently in discussion with the IRS on these issues. OnIn March 3, 2006, New D&B and Moody’s each deposited $39.8 million with the IRS in order to stop the accrual of statutory interest on potential tax deficiencies up to or equal to that amount with respect to the 1997 through 2002 tax years.

Moody’s believes that the IRS’s proposed assessments of tax against Old In July 2007, New D&B and the proposed reallocationsMoody’s commenced procedures to recover approximately $57 million of partnership income and expense to Old D&B are inconsistent with each other. Accordingly, while it is possible that the IRS could ultimately prevail in whole or in part on one of such positions, Moody’s believes that it is unlikely that the IRS will prevail on both.

Utilization of Capital Losses

In December 2004,these deposits ($24.6 million for New D&B executed a formal settlement agreementand $31.9 million for all outstanding issuesMoody’s), which represents the excess of the original deposits over the total of the deficiencies asserted in the Notices. As noted above, in November 2007 the IRS used $7.9 million of Moody’s portion of the deposit to satisfy an assessment and related to the matter concerning utilization of certain capital losses generated by Old D&B during 1989 and 1990. New D&B received two assessments on this matter duringinterest. Additionally, in the first quarter of 2005. The third2008 the IRS returned to Moody’s $33.1 million in connection with this matter, which includes $3.0 million of interest. In July 2008, the IRS paid Moody’s the remaining $1.8 million balance of the original deposit, and final assessment was received in April 2006September 2008 the IRS paid Moody’s $0.2 million of interest on that balance.

NOTE18SEGMENT INFORMATION

Beginning in January 2008, Moody’s segments were changed to reflect the business Reorganization announced in August 2007. As a result of the Reorganization, the rating agency is reported in the MIS segment and several ratings business lines have been realigned. All of Moody’s other non-rating commercial activities are reported in the MA segment. As a result, the Company began operating in two new reportable segments beginning in January 2008.

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. Additionally, overhead costs and corporate expenses of the Company, all of which Moody’s paid $0.3 million. The amounts paid by Moody’s for the first two assessmentswere previously included its share of approximately $4 million that Moody’s and New D&B believe should have been paid by IMS Health and NMR, but were not paid by them due to their disagreement with various aspects of New D&B’s calculation of their respective shares of the payments. New D&B was unable to resolve this dispute with IMS Health and NMR, and has commenced arbitration proceedings against them. Moody’s believes that New D&B should prevail in its position, but the Company cannot predict with certainty the outcome. In the first quarter of 2005, Moody’s had increased its liabilities by $2.7 million due to this disagreement.

Summary of Moody’s Exposure to Legacy Tax Related Matters

The Company considers from time to time the range and probability of potential outcomes related to its legacy tax matters and establishes liabilities that it believes are appropriate in light of the relevant facts and circumstances. In doing so, Moody’s makes estimates and judgments as to future events and conditions and evaluates its estimates and judgments on an ongoing basis.

For the years ended December 31, 2006, 2005 and 2004, the Company recorded $2.4 million and $8.8 million net reversals of reserves and increased reserves by $30.0 million, respectively. The Company also has recorded $3.5 million, $5.8 million and $3.4 million of net interest expense related to its legacy tax matters in the years ended December 31, 2006, 2005former MIS segment, are allocated to each new segment based on a revenue-split methodology. Overhead expenses include costs such as rent and 2004, respectively. Moody’s total recorded net legacy tax related liabilitiesoccupancy, information technology and support staff such as of December 31, 2006 were $93 millionfinance, human resource, information technology and are classified as long term.

It is possible that the legacy tax matters could be resolved in amounts that are 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. In matters where Moody’s believes the IRS has taken inconsistent positions, Moody’s may be obligated initially to pay its share of related duplicative assessments. However, Moody’s believes that ultimately it is unlikely that the IRS would retain such duplicative payments.

Note 17 Segment Information

Moody’s operates in two reportable segments: Moody’s Investors Service and Moody’s KMV. The Company reports segment information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. SFAS No. 131 defines operating segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.

61


Moody’s Investors Service consists of four rating groups — structured finance, corporate finance, financial institutions and sovereign risk, and public finance — that generate revenue principally from the assignment of credit ratings on issuers and issues of fixed-income obligationslegal. “Eliminations” in the debt markets, and research, which primarily generates revenue from the sale of investor-oriented credit research, principally produced by the rating groups and economic commentary. Public financetable below represents U.S. public finance. Given the dominance of Moody’s Investors Service to Moody’s overall results, the Company does not separately measure or report corporate expenses, nor are such expenses allocated between the Company’s business segments. Accordingly, all corporate expenses are included in operating income of the Moody’s Investors Service segment and none have been allocated to the Moody’s KMV segment.

The Moody’s KMV business develops and distributes quantitative credit risk assessment products and services and credit processing software for banks, corporations and investors in credit-sensitive assets. Assets used solely by Moody’s KMV are separately disclosed within that segment. All other Company assets, including corporate assets, are reported as part of Moody’s Investors Service. Revenue by geographic area is generally based on the location of the customer. Inter-segment sales are insignificant and no single customer accounted for 10% or more of total revenue.

intersegment royalty revenue/expense. Below is financial information by segment, Moody’s Investors ServiceMIS revenue by business unit and consolidated revenue and long-lived asset information by geographic area and total assets by segment. The effects of the change in the composition of reportable segments have been reflected throughout the accompanying financial statements.

MOODY’S2009 10-K93


FINANCIAL INFORMATION BY SEGMENT:

   Year Ended December 31, 
   2009  2008 
   MIS  MA  Eliminations  Consolidated  MIS  MA  Eliminations  Consolidated 
Revenue  $1,277.7  $579.5  $(60.0 $1,797.2  $1,268.3   $550.7   $(63.6 $1,755.4  
                                 
Expenses:            

Operating and SG&A

   680.1   408.0   (60.0  1,028.1   636.0    362.2    (63.6  934.6  

Restructuring

   9.1   8.4       17.5   (1.6  (0.9      (2.5

Depreciation and amortization

   31.3   32.8       64.1   33.3    41.8        75.1  
                                 

Total

   720.5   449.2   (60.0  1,109.7   667.7    403.1    (63.6  1,007.2  
                                 
Operating income  $557.2  $130.3  $   $687.5  $600.6   $147.6   $   $748.2  
                                 

   Year Ended December 31, 2007
  MIS  MA  Eliminations/
Corporate Items
  Consolidated
Revenue  $1,835.4  $479.1  $(55.5 $2,259.0
                
Expenses:       

Operating and SG&A

   759.4   331.2   (55.5  1,035.1

Restructuring

   41.3   8.7       50.0

Depreciation and amortization

   24.0   18.9       42.9
                

Total

   824.7   358.8   (55.5  1,128.0
                
Operating income  $1,010.7  $120.3  $   $1,131.0
                

MIS AND MA REVENUE BY LINE OF BUSINESS

As part of the Reorganization there were several realignments within the MIS LOB as follows: Sovereign and sub-sovereign ratings, which were previously part of financial institutions; infrastructure/utilities ratings, which were previously part of CFG; and project finance, which was previously part of structured finance, were combined with the public finance business to form a new LOB called public, project and infrastructure finance or PPIF. In addition, real estate investment trust ratings were moved from FIG and CFG to the SFG business. Furthermore, in August 2008, the global managed investments ratings group which was previously part of SFG, was moved to the FIG business.

94MOODY’S2009 10-K


Within MA, various aspects of the legacy MIS research business and MKMV business were combined to form the subscriptions, software and professional services LOB. The subscriptions business included credit and economic research, data and analytical models that are sold on a subscription basis; the software business included license and maintenance fees for credit risk software products; and the professional services business included risk modeling, credit scorecard development, and other specialized analytical projects, as well as credit education services that are typically sold on a per-engagement basis.

In 2009, the aforementioned MA businesses were realigned and renamed to reflect the reporting unit structure for the years ended and as ofMA segment at December 31, 2006, 20052009. Pursuant to this realignment the subscriptions business was renamed RD&A and 2004. Certain prior year amounts have been reclassifiedthe software business was renamed RMS. The revised groupings classify certain subscription-based risk management software revenue and advisory services relating to conformsoftware sales to the current presentation.redefined RMS business.

Financial InformationThe tables below present revenue by SegmentLOB within each new segment and reflects the related intra-segment realignment:

 

   Year Ended December 31, 2006 
   

Moody’s

Investors

Service

  

Moody’s

KMV

  Consolidated 

Revenue

  $1,894.3  $142.8  $2,037.1 

Operating expenses

   789.1   109.6   898.7 

Gain on sale of building

   (160.6)  —     (160.6)

Depreciation and amortization

   22.9   16.6   39.5 
             

Operating income

   1,242.9   16.6   1,259.5 
             

Non-operating income, net

      1.0 
        

Income before provision for income taxes

      1,260.5 

Provision for income taxes

      506.6 
        

Net income

     $753.9 
        

Total assets at December 31

  $1,255.8  $241.9  $1,497.7 
             
   Year Ended December 31, 
   2009  2008  2007 
MIS:    
Structured finance  $304.9   $404.7   $868.4  
Corporate finance   408.2    307.0    416.4  
Financial institutions   258.5    263.0    274.3  
Public, project and infrastructure finance   246.1    230.0    220.8  
             

Total external revenue

   1,217.7    1,204.7    1,779.9  
Intersegment royalty   60.0    63.6    55.5  
             
Total   1,277.7    1,268.3    1,835.4  
             
MA:    
RD&A   413.6    418.7    370.3  
RMS   145.1    108.8    92.4  
Professional services   20.8    23.2    16.4  
             
Total   579.5    550.7    479.1  
             
Eliminations   (60.0  (63.6  (55.5
             
Total MCO  $1,797.2   $1,755.4   $2,259.0  
             

 

   Year Ended December 31, 2005  Year Ended December 31, 2004 
   

Moody’s

Investors

Service

  

Moody’s

KMV

  Consolidated  

Moody’s

Investors

Service

  

Moody’s

KMV

  Consolidated 

Revenue

  $1,600.3  $131.3  $1,731.6  $1,317.5  $120.8  $1,438.3 

Operating expenses

   645.4   111.4   756.8   518.0   99.8   617.8 

Depreciation and amortization

   18.6   16.6   35.2   17.3   16.8   34.1 
                         

Operating income

   936.3   3.3   939.6   782.2   4.2   786.4 
                         

Non-operating expense, net

       (4.9)      (15.1)
                 

Income before provision for income taxes

       934.7       771.3 

Provision for income taxes

       373.9       346.2 
                 

Net income

      $560.8      $425.1 
                 

Total assets at December 31

  $1,204.5  $252.7  $1,457.2  $1,123.5  $265.8  $1,389.3 
                         
MOODY’S2009 10-K95


 

62


Moody’s Investors Service Revenue by Business UnitCONSOLIDATED REVENUE INFORMATION BY GEOGRAPHIC AREA

 

   Year Ended December 31,
   2006  2005  2004

Ratings revenue:

      

Structured finance

  $886.7  $715.4  $553.1

Corporate finance

   396.2   323.2   299.6

Financial institutions and sovereign risk

   266.8   254.6   208.9

Public finance

   85.9   91.8   82.2
            

Total ratings revenue

   1,635.6   1,385.0   1,143.8

Research revenue

   258.7   215.3   173.7
            

Total Moody’s Investors Service

  $1,894.3  $1,600.3  $1,317.5
            
   Year Ended December 31,
   2009  2008  2007
Revenue:      
U.S.  $920.8  $910.1  $1,361.8
            
International:      

EMEA

   624.7   603.1   659.3

Other

   251.7   242.2   237.9
            

Total International

   876.4   845.3   897.2
            
Total  $1,797.2  $1,755.4  $2,259.0
            
Long-lived assets at December 31:      
United States  $465.0  $456.4  $414.6
International   282.1   243.3   37.1
            
Total  $747.1  $699.7  $451.7
            

Revenue and Long-lived Asset Information by Geographic AreaTOTAL ASSETS BY SEGMENT

 

   2006  2005  2004

Revenue:

      

United States

  $1,277.8  $1,085.4  $911.2

International

   759.3   646.2   527.1
            

Total

  $2,037.1  $1,731.6  $1,438.3
            

Long-lived assets:

      

United States

  $283.6  $267.3  $245.2

International

   22.0   18.9   18.7
            

Total

  $305.6  $286.2  $263.9
            
   December 31, 2009  December 31, 2008
  MIS  MA  Corporate
Assets (a)
  Consolidated  MIS  MA  Corporate
Assets (a)
  Consolidated
Total Assets  $579.4  $724.9  $699.0  $2,003.3  $392.4  $692.5  $688.5  $1,773.4
                                

Revenue in Europe was $524.8 million, $437.2 million and $360.8 million for the years ended December 31, 2006, 2005 and 2004, respectively.

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

Note 18 Valuation and Qualifying Accounts

NOTE19VALUATION AND QUALIFYING ACCOUNTS

Accounts receivable allowances primarily represent adjustments to customer billings that are estimated when the related revenue is recognized. Below is a summary of activity for each of the three years ended December 31, 2006, 2005 and 2004, respectively:activity:

 

   

Balance at

Beginning

of the Year

  

Additions

Charged to

Revenue

  

Write-offs

and

Adjustments

  

Balance

at End of

the Year

 

2006

  (12.7) (34.9) 33.1  (14.5)

2005

  (14.6) (24.4) 26.3  (12.7)

2004

  (15.9) (18.1) 19.4  (14.6)

Year Ended December 31,

  Balance at Beginning
of the Year
  Additions  Write-offs and
Adjustments
  Balance at End of the
Year
 
2009  $(23.9 $(41.2 $40.5  $(24.6
2008  $(16.2 $(39.6 $31.9  $(23.9
2007  $(14.5 $(39.3 $37.6  $(16.2

Note 19 Related Party Transactions

NOTE20OTHER NON-OPERATING INCOME (EXPENSE), NET

Moody’s Corporation made grantsThe following table summarizes the components of $6.0 million, $6.0 million and $7.0 million to The Moody’s Foundation (the “Foundation”) in 2006, 2005 and 2004, respectively. The Foundation carries out philanthropic activities on behalf of Moody’s Corporation primarilyother non-operating income (expense) as presented in the areasconsolidated statements of education and health and human services. Certain members of senior management of Moody’s Corporation are on the Board of Directors of the Foundation.operations:

 

   Year Ended December 31, 
  2009  2008  2007 
FX gain/(loss)  $(9.5 $24.7   $0.2  
Legacy Tax (see Note 17)       11.0    14.4  
Joint venture income   6.1    3.9    2.2  
Other   (4.5  (5.8  (1.5
             

Total

  $(7.9 $33.8   $15.3  
             

63

96MOODY’S2009 10-K


Note 20 Quarterly Financial Data (Unaudited)

NOTE21QUARTERLY FINANCIAL DATA (UNAUDITED)

 

   Three Months Ended
   March 31  June 30  September 30  December 31

2006

        

Revenue

  $440.2  $511.4  $495.5  $590.0

Operating income

   238.3   289.1   268.8   463.3

Net income

   146.2   172.1   157.0   278.6

Basic earnings per share

  $0.50  $0.60  $0.56  $1.00

Diluted earnings per share

  $0.49  $0.59  $0.55  $0.97

2005

        

Revenue

  $390.5  $446.8  $421.1  $473.2

Operating income

   212.5   252.8   231.9   242.4

Net income

   118.7   145.4   146.6   150.1

Basic earnings per share

  $0.40  $0.48  $0.49  $0.51

Diluted earnings per share

  $0.39  $0.47  $0.48  $0.50
   Three Months Ended

(amounts in millions, except EPS)

  March 31  June 30  September 30  December 31
2009        
Revenue  $408.9  $450.7  $451.8  $485.8
Operating income  $148.9  $187.2  $172.5  $178.9
Net income attributable to Moody’s  $90.2  $109.3  $100.6  $101.9
EPS:        

Basic

  $0.38  $0.46  $0.43  $0.43

Diluted

  $0.38  $0.46  $0.42  $0.43
2008        
Revenue  $430.7  $487.6  $433.4  $403.7
Operating income  $199.3  $233.7  $189.8  $125.4
Net income attributable to Moody’s  $120.7  $135.2  $113.0  $88.7
EPS:        

Basic

  $0.49  $0.55  $0.47  $0.38

Diluted

  $0.48  $0.54  $0.46  $0.37

Basic and diluted earnings per shareEPS are computed for each of the periods presented. The number of weighted average shares outstanding changes as common shares are issued pursuant to employee stock plans and for other purposes or as shares are repurchased. Therefore, the sum of basic and diluted earnings per shareEPS for each of the four quarters may not equal the full year basic and diluted earnings per share.EPS.

The quarterly financial data includes an $8.2 million, $7.8 million and $2.9 million benefit to net income related to the resolution of Legacy Tax Matters for the three months ended DecemberJune 30, 2009, June 30, 2008 and September 30, 2008, respectively. There was an $11.8 million pre-tax restructuring charge for the three months ended March 31, 2006 includes a pre-tax gain of $160.6 million relating to the sale of the Company’s corporate headquarters building.2009.

 

NOTE 22SUBSEQUENT EVENTS

Subsequent events were evaluated by the Company through the date the financial statements were issued. There were no events that occurred subsequent to December 31, 2009 that would require recognition in the Company’s consolidated financial statements.

MOODY’S2009 10-K97


ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.On or about February 28, 2008, the independent registered public accounting firm for the Company and the Profit Participation Plan of Moody’s Corporation was changed from PricewaterhouseCoopers LLP to KPMG LLP. Information regarding this change in the independent registered public accounting firm was disclosed in our Current Report on Form 8-K dated March 5, 2008. There were no disagreements or any reportable events requiring disclosure under Item 304(b) of Regulation S-K.

 

ITEM 9A.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes In Internal Control Over Financial Reporting

Information in response to this Item is set forth under the caption “Management’s Report on Internal Control Over Financial Reporting”, in Part II, Item 8 of this annual report on Form 10-K.

In addition, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has determined that there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, these internal controls over financial reporting during the period covered by this report.

 

ITEM 9B.OTHER INFORMATION

Not applicable.

 

64

98MOODY’S2009 10-K


PART III

Except for the information relating to the executive officers of the Company set forth in Part I of this annual report on Form 10-K, the information called for by Items 10-13 is contained in the Company’s definitive proxy statement for use in connection with its annual meeting of stockholders scheduled to be held on April 24, 2007,20, 2010, and is incorporated herein by reference.

 

ITEM 10.DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE

 

ITEM 11.EXECUTIVE COMPENSATION

 

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

The Audit Committee has established a policy setting forth the requirements for the pre-approval of audit and permissible non-audit services to be provided by the Company’s independent registered public accounting firm. Under the policy, the Audit Committee pre-approves the annual audit engagement terms and fees, as well as any other audit services and specified categories of non-audit services, subject to certain pre-approved fee levels. In addition, pursuant to the policy, the Audit Committee has authorized its chair to pre-approve other audit and permissible non-audit services up to $50,000 per engagement and a maximum of $250,000 per year. The policy requires that the Audit Committee chair report any pre-approval decisions to the full Audit Committee at its next scheduled meeting. For the year ended December 31, 2006,2009, the Audit Committee approved all of the services provided by the Company’s independent registered public accounting firm, which are described below.

Audit Fees

The aggregate fees for professional services rendered for (i) the integrated audit of the Company’s annual financial statements for the years ended December 31, 20062009 and 2005, for2008, (ii) the review of the financial statements included in the Company’s Reports on Forms 10-Q and 8-K, and for(iii) statutory audits of non-U.S. subsidiaries, were approximately $2.1$1.8 million (including $0.2 million not billed) in 2006 and $2.0$1.8 million in 2005. All such2009 and 2008, respectively. These fees were attributable to PricewaterhouseCoopers LLP.included amounts accrued but not billed of $1.3 million and $0.9 million in 2009 and 2008, respectively.

Audit-Related Fees

The aggregate fees billed for audit-related services rendered to the Company by PricewaterhouseCoopers LLP were approximately $0.1 million and $0.2 million for both the years ended December 31, 20062009 and 2005.2008, respectively. Such services included employee benefit plan audits and consultations concerning financial accounting and reporting standards.

Tax Fees

The aggregate fees billed for professional services rendered for tax services rendered toby the Company by PricewaterhouseCoopers LLPauditors for the years ended December 31, 20062009 and 20052008 were approximately $5,000$6,900 and $3,000,$0, respectively. Tax services rendered by PricewaterhouseCoopers LLP principally related to tax consulting and compliance.

All Other Fees

The aggregate fees billed for all other services rendered to the Company by PricewaterhouseCoopersKPMG LLP for the yearsyear ended December 31, 20062009 was $0 and 2005 were approximately $4,000 and $11,000, respectively. Other fees principally relate to accounting research software.$0.3 million for the year ended December 31, 2008.

 

65

MOODY’S2009 10-K99


PART IV

 

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

List of documents filed as part of this report.LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.

(1) Financial Statements.

(1)Financial Statements.

See Index to Financial Statements on page 56, in Part II. Item 8 of this Form 10-K.

(2) Financial Statement Schedules.

(2)Financial Statement Schedules.

None.

(3) Exhibits.

(3)Exhibits.

See Index to Exhibits on pages 68-71102 – 106 of this Form 10-K.

 

66

100MOODY’S2009 10-K


SIGNATURES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MOODY’S CORPORATION

MOODY’S CORPORATION

(Registrant)

By: /s/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr.

Chairman and Chief Executive Officer

(Registrant)

By:

/s/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr.

Chairman and Chief Executive Officer

Date: February 28, 200726, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

/s/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr.,

Chairman of the Board and Chief Executive Officer

(principal executive officer)

/s/ LINDA S. HUBER

Linda S. Huber,

Executive Vice President and Chief Financial Officer

(principal financial officer)

/s/ JOSEPH MCCABE

Joseph McCabe,

Senior Vice President—Corporate

Controller (principal accounting officer)

/s/ BASIL L. ANDERSON

Basil L. Anderson,

Director

/s/ ROBERT R. GLAUBER

Robert R. Glauber,

Director

/s/ EWALD KIST

Ewald Kist,

Director

/s/ CONNIE MACK

Connie Mack,

Director

/s/ HENRY A. MCKINNELL, JR.

Henry A. McKinnell, Jr. Ph.D.,

Director

/s/ NANCY S. NEWCOMB

Nancy S. Newcomb,

Director

/s/ JOHN K. WULFF

John K. Wulff,

Director

/s/ DARRELL DUFFIE

Darrell Duffie,

Director

Date: February 26, 2010


/s/ RAYMOND W. MCDANIEL, JR.

Raymond W. McDaniel, Jr., Chairman of the

Board of Directors and Chief Executive Officer

(principal executive officer)

/s/ LINDA S. HUBER

MOODY’S2009 10-K
 

Linda S. Huber, Executive Vice President

and Chief Financial Officer

(principal financial officer)

/s/ JOSEPH MCCABE

Joseph McCabe, Senior Vice President—Corporate

Controller (principal accounting officer)

/s/ BASIL L. ANDERSON

/s/ HENRY A. MCKINNELL, JR.

Basil L. Anderson, DirectorHenry A. McKinnell, Jr. Ph.D., Director

/s/ ROBERT R. GLAUBER

/s/ NANCY S. NEWCOMB

Robert R. Glauber, DirectorNancy S. Newcomb, Director

/s/ EWALD KIST

/s/ JOHN K. WULFF

Ewald Kist, DirectorJohn K. Wulff, Director

/s/ CONNIE MACK

Connie Mack, Director101

Date: February 28, 2007


 

67


INDEX TO EXHIBITS

 

S-K

EXHIBIT

NUMBER

   
3  ARTICLES OF INCORPORATION AND BY-LAWSArticles Of Incorporation And By-laws
  

.1

Restated Certificate of Incorporation of the Registrant dated June 15, 1998, as amended effective June 30, 1998, as amended effective October 1, 2000, and as further amended effective April 26, 2005 (incorporated by reference to Exhibit 3.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000, and Exhibit 3.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed April 27, 2005).

  

.2

Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.23 to the Report on Form 8-K of the Registrant’s Registration Statement on Form 10,Registrant, file number 1-14037, filed June 18, 1998).

February 25, 2008)
4  INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURESInstruments Defining The Rights Of Security Holders, Including Indentures
  

.1

Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000).

  

.2      Amended and Restated Rights Agreement between the Registrant and EquiServe Trust Company, N.A., as Rights Agent, dated as of September 27, 2000 (incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed September 29, 2000), as amended by Amendment No. 1 to the Rights Agreement among the Registrant, EquiServe Trust Company, N.A., as Rights Agent, and The Bank of New York, as successor Rights Agent, dated as of October 22, 2001 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-K of the Registrant, file number 1-14037, filed March 22, 2002).

  

.3      Five-Year Credit Agreement, dated as of September 11, 2000, among the Registrant, certain subsidiaries of the Registrant, the lenders party thereto, The Chase Manhattan Bank, as administrative agent, Citibank, N.A., as syndication agent, and The Bank of New York, as documentation agent (incorporated by reference to Exhibit 4.2 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000).

.4      Amended and Restated Credit Agreement, dated as of September 10, 2001, between Moody’s Corporation and certain subsidiaries of the Registrant, the lenders party thereto, The Chase Manhattan Bank, as administrative agent, Citibank, N.A., as syndication agent, and The Bank of New York, as documentation agent (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 14, 2001).

.5      Amended and Restated 364-Day Credit Agreement, dated as of September 8, 2003, between Moody’s Corporation and certain subsidiaries of the Registrant, the lenders party thereto, JP Morgan Chase Bank, as administrative agent, Citibank, N.A., as syndication agent, and The Bank of New York, as documentation agent (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 12, 2003).

.6      Five-Year Credit Agreement dated as of September 1, 2004, among Moody’s Corporation, the Borrowing Subsidiaries Party Hereto, the Lenders Party Hereto, JP Morgan Chase Bank, as Administrative Agent, Citibank, N.A., as Syndication Agent, and The Bank of New York, as Documentation Agent (incorporated by reference to Exhibit 99.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed September 8, 2004).

.7      Note Purchase Agreement, dated September 30, 2005, by and among Moody’s Corporation and the Note Purchasers party thereto, including the form of the 4.98% Series 2005-1 Senior Unsecured Note due 2015 (incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 5, 2005).

68


.3Note Purchase Agreement, dated September 7, 2007, by and among Moody’s Corporation and the Note Purchasers party thereto, including the form of the Series 2007-1 Note (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K of the Registrant file number 1-14037, filed September 13, 2007)
.4Five-Year Credit Agreement dated as of September 28, 2007, among Moody’s Corporation, the Borrowing Subsidiaries Party Hereto, the Lenders Party Hereto, Citibank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank, N.A., as Documentation Agent (incorporated by reference to Exhibit 99.1 to the Report on Form 8-K of the Registrant file number 1-14037, filed October 4, 2007)
.5Five-Year Credit Agreement dated as of May 7, 2008, with JPMorgan Chase Bank, N.A., as administrative agent, Bank of China and Fifth Third Bank, as co-syndication agents, Barclays Commercial Bank, as documentation agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Commerce Bank, N.A., as co-agents, J.P. Morgan Securities, Inc., as lead arranger and bookrunner, and the lenders party thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed May 8, 2008)
10  MATERIAL CONTRACTSMaterial Contracts
  

.1

Distribution Agreement, dated as of September 30, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000).

  

.2

Tax Allocation Agreement, dated as of September 30, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000).

  

.3

Employee Benefits Agreement, dated as of September 30, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.3 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000).

  

.4†   Supplemental Executive Benefit Plan of Moody’s Corporation, dated as of September 30, 2000 (incorporated by reference to Exhibit 10.4 to the Report on Form 10-K of the Registrant, file number 1-14037, filed March 22, 2002).

.4  

.5      Intellectual Property Assignments, dated as of September 1, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.4 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000).

102MOODY’S2009 10-K


S-K EXHIBIT NUMBER
  

.6†   Pension Benefit Equalization Plan of Moody’s Corporation (incorporated by reference to Exhibit 10.9 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000).

.5†  

.7†   Profit Participation Benefit Equalization Plan of Moody’s Corporation (incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000).

  

.8†   .6†

The Moody’s Corporation Nonfunded Deferred Compensation Plan for Non-Employee Directors (as amended December 16, 2008) (incorporated by reference to Exhibit 10.1210.6 to Registrant’s Quarterlythe Report on Form 10-Q,10-K of the Registrant file number 1-14037, filed November 14, 2000).

February 27, 2009)
  

.9†   .7†

1998 Moody’s Corporation Replacement Plan for Certain Non-Employee Directors Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit to Registrant’s Quarterly Report on Form 10-Q, file number 1- 14037, filed November 14, 2000).

  

.10† .8†

1998 Moody’s Corporation Replacement Plan for Certain Employees Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit 10.14 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000).

  

.11† .9†

1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan (as amended and restated on April 23, 2001)2001; amended October 23, 2006 and December 15, 2008) (incorporated by reference to Exhibit 10.1110.9 to the Report on Form 10-K of the Registrant file number 1-14037, filed March 22, 2002).

February 27, 2009)
  

.12† .10†

1998 Moody’s Corporation Key Employees’ Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000).

  

.13† .11†

Moody’s Corporation Career Transition Plan (incorporated by reference to Exhibit 10.17 to Registrant’s Annual Report on Form 10-K, file number 1-14037, filed March 15, 2001).

  

.14    .12

Distribution Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) and the Registrant (f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q, filed August 14, 1998).

69


.13†  

.15† 2001 Moody’s Corporation Key Employees Stock IncentiveDeferred Compensation Plan, effective as of January 1, 2008 (incorporated by reference to Exhibit 10.1510.1 to the Report on Form 8-K of the Registrant file number 1-14037, filed October 26, 2007)

.14Form of separation agreement and general release used by the Company in connection with its Career Transition Plan. (incorporated by reference to Exhibit 99.1 to Form 8-K filed November 20, 2007)
.15Commercial Paper Dealer Agreement between Moody’s Corporation and Goldman, Sachs & Co., dated as of October 3, 2007 (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Registrant file number 1-14037, filed October 9, 2007)
.16Commercial Paper Dealer Agreement between Moody’s Corporation and Morgan Stanley & Co. Incorporated, dated as of October 3, 2007 (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Registrant file number 1-14037, filed October 9, 2007)
.17Commercial Paper Dealer Agreement between Moody’s Corporation and Citigroup Global Markets Inc., dated as of October 3, 2007 (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Registrant file number 1-14037, filed October 9, 2007)
.18Issuing and Paying Agency Agreement dated as of September 28, 2007, between Moody’s Corporation and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 10.8 to the Report on Form 10-Q of the Registrant file number 1-14037, filed November 2, 2007)
.19Form of Assumption Agreement among Moody’s Corporation, JP Morgan Chase Bank as Administrative Agent, and each lender signatory thereto (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q of the Registrant file number 1-14037, filed May 3, 2007)
.20†Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan (amended December 15, 2008) (incorporated by reference to Exhibit 10.20 to the Report on Form 10-K of the Registrant file number 1-14037, filed March 22, 2002).February 27, 2009)

MOODY’S2009 10-K103


S-K EXHIBIT NUMBER
  

.16    .21

Tax Allocation Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) and the Registrant (f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q, filed August 14, 1998).

  

.17    .22

Employee Benefits Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) and the Registrant (f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q, filed August 14, 1998).

  

.18    .23

Distribution Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(x) to the Annual Report on Form 10-K of R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996 file number 1-7155, filed March 27, 1997).

  

.19    .24

Tax Allocation Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(y) to the Annual Report on Form 10-K of R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996 file number 1-7155, filed March 27, 1997).

  

.20    .25

Employee Benefits Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(z) to the Annual Report on Form 10-K of R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997).

  

.21    .26

Agreement and Plan of Merger and Stock Purchase Agreement, dated as of February 10, 2002, by and among Moody’s Corporation, XYZ Acquisition LLC, KMV LLC, KMV Corporation and the principal members of KMV LLC and the shareholders of KMV Corporation identified therein (incorporated by reference to Exhibit 2.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed February 22, 2002).

  

.22    .27

Note Purchase Agreement, dated as of October 3, 2000, among the Registrant and the purchasers named therein (incorporated by reference to Exhibit 10.25 to the Report on Form 10-K of the Registrant, file number 1-14037, filed March 21, 2003).

  

.23    .28

Form of 7.61% Senior Notes due 2005 (incorporated by reference to Exhibit 10.25 to the Report on Form 10-K of the Registrant, file number 1-14037, filed March 21, 2003).

  

.24† Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 3, 2004).

.29†  

.25† Form of Employee Non-Qualified Stock Option and Restricted Stock Grant Agreement for the Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 3, 2004).

  

.26† .30†

Form of Non-Employee Director Restricted Stock Grant Agreement for the 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan (as amended on April 23, 2001) (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 3, 2004).

  

.27† .31†

2004 Moody’s Corporation Covered Employee Cash Incentive Plan (incorporated by reference to Exhibit 10.4 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 3, 2004).

  

.28† .32†

Description of Bonus Terms under the 2004 Moody’s Corporation Covered Employee Cash Incentive Plan (incorporated by reference to Exhibit 10.5 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 3, 2004).

104MOODY’S2009 10-K


S-K EXHIBIT NUMBER
  

.29† .33†

Director Compensation Arrangements (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed May 2, 2006).

70


.34  

.30    Agreement of Lease, dated as of September 7, 2006, between the Registrant and 7 World Trade Center, LLC (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 2, 2006).

  

.31    Amendment No. 1.35

Agreement for Lease dated February 6, 2008, among CWCB Properties (DS7) Limited, CWCB Properties (DS7) Limited, Canary Wharf Holdings Limited, Moody’s Investors Service Limited, and Moody’s Corporation (incorporated by reference to Five-Year Credit Agreement, dated asExhibit 10.1 to the Report on Form 8-K of October 26, 2006, among the Registrant the borrowing subsidiariesfile number 1-14037, filed February 12, 2008)
.36Storage Agreement for Lease dated February 6, 2008 among Canary Wharf (Car Parks) Limited, Canary Wharf Holdings Limited, Canary Wharf Management Limited, Moody’s Investors Service Limited, and lenders party thereto, The Bank of New York, as documentation agent, Citibank, N.A., as syndication agent, and JPMorgan Chase Bank, N.A., as administrative agentMoody’s Corporation (incorporated by reference to Exhibit 10.2 to the Report on Form 10Q8-K of the Registrant filefiled number 1-14037, filed November 2, 2006).

February 12, 2008)
  

.32    .37

Purchase and Sale Agreement, dated as of November 20, 2006, between Moody’s Holdings, Inc. and 99 Church Investors LLC (incorporated by reference to Exhibit 99.2 to the Report on Form 8-Kof8-K of the Registrant, file number 1-14037, filed November 22, 2006).

  

.33*   .38

Moody’s Corporation 1999 Employee Stock Purchase Plan (as amended and restated December 15, 2008) (formerly, The Dun & Bradstreet Corporation 1999 Employee Stock Purchase Plan) (incorporated by reference to Exhibit 10.38 to the Report on Form 10-K of the Registrant file number 1-14037, filed February 27, 2009)
.39†Supplemental Executive Benefit Plan of Moody’s Corporation, amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K, File number 1-14037, Filed February, 29, 2008)
.40†Pension Benefit Equalization Plan of Moody’s Corporation, amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K, File number 1-14037, Filed February, 29, 2008)
.41†Moody’s Corporation Retirement Account, amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K, File number 1-14037, Filed February, 29, 2008)
.42†Profit Participation Plan of Moody’s Corporation, amended and restated as of January 1, 2007 (incorporated by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K, File number 1-14037, Filed February, 29, 2008)
.43Agreement of Lease between Moody’s Investors Service Limited and CWCB Properties (DS7) Limited, dated February 6, 2008 (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed February 12, 2008).
.44Storage Agreement for Lease between Moody’s Investors Service Limited and Canary Wharf (Car Parks) Limited (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed February 12, 2008)
.45Moody’s Corporation Career Transition Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed May 8, 2008)
.46†Moody’s Corporation Cafeteria Plan, effective January 1, 2008 (incorporated by reference to Exhibit 10.46 to the Report on Form 10-K of the Registrant file number 1-14037, filed February 27, 2009)
.47Separation Agreement and general release between the Company and Brian M. Clarkson, dated May 7, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, File number 1-14037, Filed August 4, 2008)
16LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT
.1Letter from PricewaterhouseCoopers LLP, dated March 5, 2008 (incorporated by reference to Exhibit 16.1 to the Report on Form 8-K of the Registrant file number 1-14037, filed February 12, 2008)

MOODY’S2009 10-K105


S-K EXHIBIT NUMBER
21* SUBSIDIARIES OF THE REGISTRANT List of Active Subsidiaries as of JanuaryDecember 31, 2007.2009
23*CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
.1*Consent of KPMG LLP
.2*  Consent of PricewaterhouseCoopers LLP an Independent Registered Public Accounting Firm.
31 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 

.1*

Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

2002
 

.2*

Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

2002
32 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 

.1*

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (The Company has furnished this certification and does not intend for it to be considered filed under the Securities Exchange Act of 1934 or incorporated by reference into future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934.)

1934)
 

.2*

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (The Company has furnished this certification and does not intend for it to be considered filed under the Securities Exchange Act of 1934 or incorporated by reference into future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934.)

1934)
101.1**The following financial information from Moody’s Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, formatted in XBRL: (i) the Consolidated Statements of Operations; (ii) the Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flows; (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

*Filed herewith

† Management contract or compensatory plan or arrangement

**Furnished with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009

 

Management contract of compensatory plan or arrangement

71

106MOODY’S2009 10-K