News Column

MOODYS CORP /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 31, 2014

This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moody's Corporation condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See "Forward-Looking Statements" commencing on page 64 for a discussion of uncertainties, risks and other factors associated with these statements.



The Company

Moody's is a provider of (i) credit ratings, (ii) credit and economic related research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) outsourced research and analytical services to institutional customers. Moody's has two reportable segments: MIS and MA. MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. The MA segment, which includes all of the Company's non-rating commercial activities, develops a wide range of products and services that primarily support financial analysis and risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. It also provides fixed income pricing services in the Asia-Pacific region. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its ERS business, MA provides software solutions as well as related risk management services. The PS business provides outsourced research and analytical services and financial training and certification programs.



Critical Accounting Estimates

Moody's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody's to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody's evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, restructuring, goodwill and acquired intangible assets, pension and other retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, MD&A, in the Company's annual report on Form 10-K for the year ended December 31, 2013, includes descriptions of some of the judgments that Moody's makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there have been no material changes to the Company's critical accounting estimates. 40



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Reportable Segments

The Company is organized into two reportable segments at June 30, 2014: MIS and MA. The MIS segment is comprised of all of the Company's ratings activities. All of Moody's other non-rating commercial activities are included in the MA segment. The MIS segment consists of four lines of business-CFG, SFG, FIG and PPIF-that generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MA segment, which includes all of the Company's non-rating commercial activities, develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. The MA segment consists of three lines of business - RD&A, ERS and PS.



In December 2013, a subsidiary of the Company acquired Amba, a provider of investment research and quantitative analytics for global financial institutions. Amba is part of the MA reportable segment and its revenue is included in the PS LOB.

The following is a discussion of the results of operations of the Company and its reportable segments. Total MIS revenue and total MA expenses include the intersegment royalty revenue for MIS and expense charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products developed by MIS. Total MA revenue and total MIS expenses include intersegment fees charged to MIS from MA for the use of certain MA products and services in MIS's ratings process. These fees charged by MA are generally equal to the costs incurred by MA to provide these products and services. Overhead charges and corporate expenses which exclusively benefit one segment are fully charged to that segment. Additionally, overhead costs and corporate expenses of the Company which benefit both segments are generally allocated to each segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. 41



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RESULTS OF OPERATIONS

Three months ended June 30, 2014 compared with three months ended June 30, 2013

Executive Summary

Moody's revenue in the second quarter of 2014 totaled $873.5 million, an increase of $117.5 million compared to 2013 and reflected strong growth in both MIS and MA. Total expenses increased $56.6 million compared to the second quarter of 2013 reflecting higher compensation and non-compensation costs of approximately $42 million and $15 million, respectively. Operating income of $411.7 million in the second quarter of 2014 increased $60.9 million compared to 2013 and resulted in an operating margin of 47.1%, compared to 46.4% in the prior year. Adjusted Operating Income of $434.0 million in the second quarter of 2014 increased $60.1 million compared to 2013, resulting in an Adjusted Operating Margin of 49.7% compared to 49.5% in the prior year period. Diluted EPS of $1.48 in the second quarter of 2014 increased $0.48 over 2013, and included $0.36 for the ICRA Gain. Excluding this gain in the second quarter of 2014, Diluted EPS in the second quarter of 2014 was $0.12 higher than the second quarter 2013 Diluted EPS of $1.00. Three months ended June 30, % Change Favorable 2014 2013 (Unfavorable) Revenue: United States $ 461.1$ 408.4 13 % International: EMEA 263.3 222.5 18 % Asia-Pacific 88.6 75.5 17 % Americas 60.5 49.6 22 % Total International 412.4 347.6 19 % Total 873.5 756.0 16 % Expenses: Operating 222.1 197.1 (13 %) SG&A 217.4 185.0 (18 %) Depreciation and amortization 22.3 23.1 3 % Total 461.8 405.2 (14 %) Operating income $ 411.7$ 350.8 17 % Adjusted Operating Income(1) $ 434.0$ 373.9 16 % Interest income (expense), net $ (26.0 )$ (21.7 ) (20 %) Other non-operating income (expense), net $ (3.3 )$ 7.7 (143 %) ICRA Gain $ 102.8 $ - NM Net income attributable to Moody's $ 319.2$ 225.5 42 % Diluted EPS attributable to Moody's common shareholders $ 1.48$ 1.00 48 % Non-GAAP EPS attributable to Moody's common shareholders $ 1.12$ 1.00 12 % Operating margin 47.1 % 46.4 % Adjusted Operating Margin(1) 49.7 % 49.5 %



(1) Adjusted Operating Income, Adjusted Operating Margin and Non-GAAP EPS

attributable to Moody's common shareholders are non-GAAP financial measures.

Refer to the section entitled "Non-GAAP Financial Measures" of this

Management Discussion and Analysis for further information regarding these

measures. 42



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

% June 30, Change 2014 2013 United States 2,888 2,686 8 % International 6,904 * 4,284 61 % Total 9,792 6,970 40 %



* Total as of June 30, 2014 includes approximately 2,200 staff from the

acquisitions of ICRA and Amba which occurred on June 26, 2014 and December 10,

2013, respectively, and for which a majority are located in low cost

jurisdictions.

Global revenue of $873.5 million in the second quarter of 2014 increased $117.5 million compared to 2013 reflecting strong growth in both reportable segments. The increase in ratings revenue reflects strong growth in high-yield corporate debt and bank loan revenue as well as changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. The growth also reflects higher rated issuance volumes in CLOs and infrastructure finance. The growth in MA reflects higher revenue across all LOBs. The growth in RD&A resulted from solid demand for credit research and content licensing while the growth in ERS was driven by higher software subscription and related service revenue as well as higher software maintenance fees. The growth in PS included revenue from the fourth quarter 2013 acquisition of Amba as well as growth from the FSTC business. Transaction revenue accounted for 53% of global MCO revenue in the second quarter of 2014 compared to 51% in the second quarter of 2013. U.S. revenue of $461.1 million in the second quarter of 2014 increased $52.7 million over the prior year, reflecting strong growth in CFG and SFG revenue within MIS coupled with growth in all LOBs within MA. Non-U.S. revenue increased $64.8 million compared to the second quarter of 2013, reflecting strong growth in MIS revenue across all regions coupled with strong growth in MA revenue in the EMEA and Americas regions. Operating expenses were $222.1 million in the second quarter of 2014 and increased $25.0 million from 2013 primarily due to growth in compensation costs reflecting higher salaries and related employee benefits primarily resulting from increases in headcount as well as the impact of annual compensation increases. Also contributing to the increase in compensation expenses were costs related to the acquisition of Amba in the fourth quarter of 2013. SG&A expenses of $217.4 million in the second quarter of 2014 increased $32.4 million from the prior year period due to approximately $17 million in higher compensation costs primarily reflecting higher salaries and related employee benefits resulting from annual compensation increases, headcount growth in MIS and MA as well as in overhead support areas coupled with higher headcount from the Amba acquisition. Additionally, there were higher rent and occupancy costs of approximately $4 million reflecting additional floors leased at the Company's 7WTC headquarters coupled with various other real estate expansion projects worldwide. Also, there were incremental legal expenses as well as expenses from the Amba business acquired in the fourth quarter of 2013. Operating income of $411.7 million increased $60.9 million from the second quarter of 2013. Adjusted Operating Income was $434.0 million in the second quarter of 2014 and increased $60.1 million compared to 2013. Operating margin increased 70bps compared to the second quarter of 2013. Adjusted Operating Margin in the second quarter of 2014 of 49.7% increased 20bps compared to the prior year.



Interest income (expense), net in the second quarter of 2014 was ($26.0) million, a $4.3 million increase in expense compared to 2013. This increase is due to approximately $5 million of higher interest primarily reflecting the issuance of the 2013 Senior Notes in August 2013.

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Other non-operating income (expense), net was ($3.3) million in the second quarter of 2014, an $11.0 million increase in expense compared to 2013. The increase in expense is primarily due to approximately $12 million in FX losses in the second quarter of 2014 compared to FX gains of approximately $6 million in the prior year. The FX losses in the second quarter of 2014 were primarily due to the decline of the euro relative to the British pound.



The $102.8 million ICRA Gain related to a fair value remeasurement of the Company's previously held equity investment in ICRA which occurred in connection with Moody's acquiring a controlling stake in ICRA on June 26, 2014.

The Company's ETR was 33.1% in the second quarter of 2014, up slightly from 32.2% in 2013 with the increase primarily due to higher taxes on foreign income.

Net Income in the second quarter of 2014, which included the ICRA Gain of $78.5 million, was $319.2 million, or $1.48 per diluted share. This is an increase of $93.7 million, or $0.48 per diluted share, compared to 2013. Excluding the aforementioned ICRA Gain, Non-GAAP Diluted EPS of $1.12 in the second quarter of 2014 was $0.12 higher than Diluted EPS of $1.00 in the same period of the prior year. Segment Results Moody's Investors Service



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

Three months ended June 30, % Change Favorable 2014 2013 (Unfavorable) Revenue: Corporate finance (CFG) $ 320.9$ 262.9 22 % Structured finance (SFG) 110.6 97.2 14 % Financial institutions (FIG) 92.2 84.5 9 % Public, project and infrastructure finance (PPIF) 98.0 92.7 6 % Total external revenue 621.7 537.3 16 % Intersegment royalty 21.9 19.0 15 % Total MIS Revenue 643.6 556.3 16 % Expenses: Operating and SG&A (external) 265.6 233.5 (14 %) Operating and SG&A (intersegment) 3.3 2.7 (22 %) Adjusted Operating Income 374.7 320.1 17 % Depreciation and amortization 11.4 11.5 1 % Operating income $ 363.3$ 308.6 18 % Adjusted Operating Margin 58.2 % 57.5 % Operating margin 56.4 % 55.5 % 44



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

Global MIS revenue of $621.7 million in the second quarter of 2014 increased $84.4 million compared to 2013 reflecting growth across all LOBs. The growth reflects higher rated issuance volumes for high-yield corporate debt and bank loans as well as higher CLO, infrastructure finance and banking-related rated issuance volumes. Also contributing to the growth were benefits from the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. These increases were partially offset by declines in rated issuance volumes for U.S. public finance. Transaction revenue for MIS was 65% and 64% in the second quarter of 2014 and 2013, respectively. In the U.S., revenue was $352.5 million in the second quarter of 2014, an increase of $39.3 million compared to 2013 and reflected growth in rated issuance volumes for high-yield corporate debt and bank loans as well as growth in volumes for CLOs and infrastructure finance. Also contributing to the increase were changes in the mix of fee type, new fee initiatives and certain pricing increases coupled with higher monitoring fees in CFG. These increases were partially offset by lower refunding volumes in the public finance sector. Non-U.S. revenue was $269.2 million in the second quarter of 2014, an increase of $45.1 million compared to 2013 reflecting growth in rated issuance volumes for high-yield corporate debt and bank loans coupled with increases in banking revenue across all regions and CLO revenue in EMEA. Also contributing to the growth were changes in the mix of fee type, new fee initiatives and certain pricing increases as well as higher monitoring fees in CFG. Global CFG revenue of $320.9 million in the second quarter of 2014 increased $58.0 million from 2013 primarily due to higher rated issuance volumes in the U.S. and EMEA for high-yield corporate debt and bank loans reflecting continued refinancing activity resulting from favorable market conditions as well as issuance to fund M&A activity. The growth over the prior year also reflects changes in the mix of fee type, new fee initiatives and certain pricing increases. Monitoring fee revenue also increased across all regions due to growth in the number of outstanding rated entities. Transaction revenue represented 74% of total CFG revenue in both the second quarter of 2014 and 2013. In the U.S., revenue in the second quarter of 2014 was $183.2 million, or $31.0 million higher than the prior year. Internationally, revenue of $137.7 million in the second quarter of 2014 increased $27.0 million compared to the prior year. Global SFG revenue of $110.6 million in the second quarter of 2014 increased $13.4 million compared to 2013 primarily reflecting higher rated issuance volumes for CLOs in the U.S. and EMEA. This growth in rated issuance volumes for CLOs over the prior year reflects attractive spreads in this asset class as well as continued investor demand for these instruments. The growth over 2013 also reflects changes in the mix of fee type, new fee initiatives and certain pricing increases. Partially offsetting these increases were declines in asset-backed commercial paper revenue in the U.S. and EMEA. Transaction revenue was 63% of total SFG revenue in the second quarter of 2014 compared to 61% in the prior year. In the U.S., revenue of $72.8 million increased $10.7 million compared to the second quarter of 2013. Non-U.S. revenue in the second quarter of 2014 of $37.8 million increased $2.7 million compared to the prior year. Global FIG revenue of $92.2 million in the second quarter of 2014 was $7.7 million higher compared to 2013 due to changes in the mix of fee type, new fee initiatives and pricing increases coupled with higher banking revenue primarily reflecting robust cross-border issuance from the financial sector in the Asia-Pacific region. These increases were partially offset by a decline in U.S. banking revenue which reflects an unfavorable shift in issuance mix. Transaction revenue was 35% of total FIG revenue in the second quarter of 2014 compared to 36% in the same period in 2013. In the U.S. revenue was $34.7 million, or 4% lower than the prior year. Internationally, revenue was $57.5 million in the second quarter of 2014, or $9.0 million higher compared to 2013. Global PPIF revenue was $98.0 million in the second quarter of 2014 and increased $5.3 million compared to 2013. The growth is primarily due to changes in the mix of fee type, new fee initiatives and pricing increases coupled with higher rated issuance volumes in infrastructure finance in the U.S. and Asia-Pacific reflecting favorable market 45



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conditions. These increases were partially offset by lower U.S. public finance revenue due to a decrease in refunding volumes which resulted from higher benchmark interest rates. Transaction revenue was 63% of total PPIF revenue in both the second quarter of 2014 and 2013. In the U.S., revenue in the second quarter of 2014 was $61.8 million, a decrease of $1.1 million compared to 2013. Outside the U.S., PPIF revenue increased $6.4 million compared to 2013. Operating and SG&A expenses in the second quarter of 2014 increased $32.1 million compared to 2013 primarily reflecting higher compensation costs of approximately $25 million resulting from annual compensation increases, headcount growth in the ratings LOBs as well as in support areas such as IT, finance and human resources for which the costs are allocated to each segment based on a revenue-split methodology. Also, there were higher costs in the second quarter of 2014 to support the Company's IT systems and infrastructure and incremental legal expenses. Furthermore, there were higher rent and occupancy costs for additional leased floors at 7WTC coupled with various other global real estate expansion projects. Adjusted Operating Income in the second quarter of 2014, which includes intersegment royalty revenue and intersegment expenses, was $374.7 million and increased $54.6 million compared to 2013. Operating income in the second quarter of 2014 was $363.3 million and increased $54.7 million compared to the prior year. Adjusted Operating Margin and operating margin were 58.2% and 56.4%, respectively, or 70bps and 90bps higher compared to the second quarter of 2013. The increase in both margins compared to the prior year reflects strong revenue growth outpacing growth in total operating expenses.



Moody's Analytics

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

Three months ended June 30, % Change Favorable 2014 2013 (Unfavorable) Revenue: Research, data and analytics (RD&A) $ 144.7 130.3 11 % Enterprise risk solutions (ERS) 67.2 60.2 12 % Professional services (PS) 39.9 28.2 41 % Total external revenue 251.8 218.7 15 % Intersegment revenue 3.3 2.7 22 % Total MA Revenue 255.1 221.4 15 % Expenses: Operating and SG&A (external) 173.9 148.6 (17 %) Operating and SG&A (intersegment) 21.9 19.0 (15 %) Adjusted Operating Income 59.3 53.8 10 % Depreciation and amortization 10.9 11.6 6 % Operating income $ 48.4$ 42.2 15 %

Adjusted Operating Margin 23.2 % 24.3 % Operating margin 19.0 % 19.1 %



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

Global MA revenue increased $33.1 million compared to the second quarter of 2013, with growth across all LOBs. Recurring revenue comprised 77% and 79% of total MA revenue in the second quarter of 2014 and 2013, respectively.

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In the U.S., revenue of $108.6 million in the second quarter of 2014 increased $13.4 million, and reflected growth across all LOBs. International revenue of $143.2 million in the second quarter of 2014 was $19.7 million higher than in 2013 also with growth across all LOBs. Global RD&A revenue, which comprised 57% and 60% of total external MA revenue in the second quarter of 2014 and 2013, respectively, increased $14.4 million over the prior year period. The growth, which was most notable in the U.S. and EMEA, was primarily due to strength in credit research and content licensing, general market price increases and the favorable impact of changes in FX translation rates. Global ERS revenue in the second quarter of 2014 increased $7.0 million over 2013, primarily due to growth in software subscriptions and related services as well as higher software maintenance fees resulting from growing demand for ERS products and services in the banking and insurance industries. Revenue in ERS is subject to quarterly volatility resulting from the variable nature of project timing and the concentration of software implementation and license revenue in a relatively small number of engagements. Revenue from PS increased $11.7 million compared to the second quarter of 2013 with a substantial portion of the growth relating to the acquisition of Amba in the fourth quarter of 2013 coupled with higher revenue from the FSTC business. Operating and SG&A expenses in the second quarter of 2014 increased $25.3 million compared to 2013. The expense growth reflects an approximate $18 million increase in compensation costs primarily due to higher headcount to support business growth and from the acquisition of Amba as well as higher headcount in support areas for which the costs are allocated to each segment based on a revenue-split methodology. Additionally, annual merit increases contributed to the growth in compensation costs. The increase also reflects an approximate $8 million increase in non-compensation expenses reflecting higher consulting costs due to product delivery in ERS coupled with higher variable costs to support business growth. Furthermore, there was an increase in rent and occupancy costs reflecting additional floors at 7WTC as well as various other real estate expansion projects worldwide. Adjusted Operating Income was $59.3 million in the second quarter of 2014 and increased $5.5 million compared to the same period in 2013. Operating income of $48.4 million in the second quarter of 2014 increased $6.2 million compared to the same period in 2013. Adjusted Operating Margin for the second quarter of 2014 was 23.2%, compared to 24.3% in 2013. Operating margin was 19.0%, or flat compared to the prior year. Adjusted operating income and operating income both include intersegment revenue and expense.



Six months ended June 30, 2014 compared with six months ended June 30, 2013

Executive Summary

Moody's revenue in the first half of 2014 totaled $1,640.7 million, an increase of $152.9 million compared to 2013 and reflected growth in both MIS and MA. Total expenses increased $39.4 million compared to the first half of 2013 reflecting higher compensation costs of approximately $76 million primarily relating to headcount growth and annual compensation increases. The expense growth also reflects a $7 million increase in costs to support ongoing IT initiatives as well as an $8 million increase in rent and occupancy costs. These increases in expenses were partially offset by a charge for the settlement of the Abu Dhabi and Rhinebridge litigation matters in the prior year more fully discussed in Note 14 to the condensed consolidated financial statements. Operating income of $744.7 million in the first half of 2014 increased $113.5 million compared to 2013 and resulted in an operating margin of 45.4%, compared to 42.4% in the prior year. Adjusted Operating Income of $790.1 million in the first half of 2014 increased $112.2 million compared to 2013, resulting in an Adjusted Operating Margin of 48.2% compared to 45.6% in the prior year period. Both the operating margin and Adjusted Operating Margin in 2013 included the aforementioned litigation settlement charge. Diluted EPS of $2.47 in the first half of 2014, which included $0.36 for the ICRA Gain, increased $0.64 over 2013, which included a $0.14 charge related to the aforementioned litigation settlement. Excluding both the ICRA Gain in 2014 and the litigation 47



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settlement charge in 2013, Non-GAAP Diluted EPS in the first half of 2014 of $2.11 was $0.14 higher than first half 2013 Non-GAAP Diluted EPS of $1.97.

Six months ended June 30 % Change Favorable 2014 2013 (Unfavorable) Revenue: United States $ 886.7$ 818.3 8 % International: EMEA 483.9 429.6 13 % Asia-Pacific 158.5 143.7 10 % Americas 111.6 96.2 16 % Total International 754.0 669.5 13 % Total 1,640.7 1,487.8 10 % Expenses: Operating 438.1 397.9 (10 %) SG&A 412.5 412.0 - Depreciation and amortization 45.4 46.7 3 % Total 896.0 856.6 (5 %) Operating income $ 744.7$ 631.2 18 % Adjusted Operating Income(1) $ 790.1$ 677.9 17 % Interest income (expense), net $ (49.8 )$ (43.7 ) (14 %)



Other non-operating income (expense), net $ (0.9 )$ 16.5

(105 %) ICRA Gain $ 102.8 $ - NM Net income attributable to Moody's $ 537.2$ 413.9 30 % Diluted EPS attributable to Moody's common shareholders $ 2.47$ 1.83 35 % Non-GAAP EPS attributable to Moody's common shareholders $ 2.11$ 1.97 7 % Operating margin 45.4 % 42.4 % Adjusted Operating Margin(1) 48.2 % 45.6 %



(1) Adjusted Operating Income, Adjusted Operating Margin and Non-GAAP EPS

attributable to Moody's common shareholders are non-GAAP financial measures.

Refer to the section entitled "Non-GAAP Financial Measures" of this

Management Discussion and Analysis for further information regarding these

measures.

Global revenue of $1,640.7 million in 2014 increased $152.9 million compared to 2013 reflecting growth in both MIS and MA. The increase in ratings revenue reflects strong growth in bank loan and infrastructure finance revenue coupled with changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. Also contributing to the growth were higher CLO rated issuance volumes as well as higher monitoring fees in CFG. These increases were partially offset by declines in rated issuance volumes for public finance in the U.S. The growth in MA reflects higher revenue across all LOBs. The growth in PS reflected revenue from the fourth quarter 2013 acquisition of Amba as well as growth from the Copal business. The growth in RD&A resulted from solid demand for credit research and content licensing while the growth in ERS was driven by higher revenue from software subscriptions and related services as well as software maintenance fees. Transaction revenue accounted for 51% of global MCO revenue in both the first half of 2014 and 2013. U.S. revenue of $886.7 million in the first half of 2014 increased $68.4 million over the prior year reflecting changes in the mix of fee type, new fee initiatives and certain pricing increases coupled with growth in rated issuance volumes for bank loans and CLOs. Also contributing to the increase was growth across all LOBs within MA. These increases were partially offset by declines in public finance reflecting a decrease in refunding volumes compared to the prior year. 48



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Non-U.S. revenue increased $84.5 million compared to the first half of 2013, reflecting growth across all regions in both reportable segments. The most notable growth in the MIS segment reflected higher bank loan rated issuance volumes in EMEA coupled with benefits from changes in the mix of fee type, new fee initiatives and certain pricing increases. Additionally, the non-U.S. growth within MA reflected increases in RD&A revenue in EMEA as well as higher ERS revenue in the EMEA and the Americas regions. PS revenue in MA increased primarily due to the acquisition of Amba in the fourth quarter of 2013. Operating expenses were $438.1 million in the first half of 2014 and increased $40.2 million from 2013 primarily due to an approximate $41 million increase in compensation costs reflecting higher salaries and related employee benefits resulting from growth in headcount as well as the impact of annual compensation increases. Also contributing to the increase in compensation expenses were costs related to the acquisition of Amba in the fourth quarter of 2013. SG&A expenses of $412.5 million in the first half of 2014 were flat compared to the prior year period reflecting the first quarter 2013 settlement charge relating to the Abu Dhabi and Rhinebridge litigation matters being offset by higher compensation and non-compensation expenses. The growth in compensation costs of approximately $35 million was primarily due to higher salaries and related employee benefits resulting from annual compensation increases, headcount growth in MIS and MA as well as in overhead support areas coupled with higher headcount from the Amba acquisition. Additionally, there were higher rent and occupancy costs reflecting additional floors leased at the Company's 7WTC headquarters coupled with various other real estate expansion projects worldwide as well as incremental expenses from the Amba business acquired in the fourth quarter of 2013. Operating income of $744.7 million increased $113.5 million from the first half of 2013. Adjusted Operating Income was $790.1 million in the first half of 2014 and increased $112.2 million compared to 2013. Operating margin increased 300bps compared to the first half of 2013. Adjusted Operating Margin in the first half of 2014 of 48.2% increased 260bps compared to the prior year. The increase in operating margin and Adjusted Operating Margin is due to the aforementioned litigation settlement charge in 2013 which negatively impacted the prior year margins. Interest income (expense), net in the first half of 2014 was ($49.8) million, a $6.1 million increase in net expense compared to 2013. This increase is due to higher interest of approximately $10 million primarily reflecting the issuance of the 2013 Senior Notes in August 2013. Partially offsetting the increase in expense was an approximate $2 million reversal of interest on UTPs in the first quarter of 2014 relating to the favorable resolution of certain international tax matters. Other non-operating income (expense), net was ($0.9) million in the first half of 2014, a $17.4 million increase in expense compared to 2013 and reflected approximately $6 million in FX losses in 2014 compared to approximately $13 million in FX gains in 2013. The FX losses in 2014 are primarily due to the decline of the euro relative to the British pound. The FX gains in 2013 primarily related to the strengthening of the euro to the British pound in the first six months of the prior year. The Company's ETR was 31.5% in the first half of 2014, up from 30.5% in 2013. The 2014 ETR included a benefit related to the reversal of UTPs resulting from the favorable resolution of certain international tax matters. The prior year ETR included a benefit related to U.S. tax legislation enacted in early 2013 which retroactively extended certain tax benefits to the 2012 tax year and prospectively extended these benefits to the 2013 tax year as well as tax benefits on the aforementioned litigation settlement. 49



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Net Income in the first half of 2014, which included $78.5 million for the ICRA Gain, was $537.2 million, or $2.47 per diluted share. This is an increase of $123.3 million, or $0.64 per diluted share, compared to 2013, which included a $0.14 charge related to the settlement of certain legal matters. Excluding the ICRA Gain in 2014 and the charge for the litigation settlement in the prior year, Non-GAAP Diluted EPS of $2.11 in the first half of 2014 was $0.14 higher than Non-GAAP Diluted EPS of $1.97 in the same period of the prior year.



Segment Results

Moody's Investors Service

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

Six months ended June 30, % Change Favorable 2014 2013 (Unfavorable) Revenue: Corporate finance (CFG) $ 585.3$ 521.2 12 % Structured finance (SFG) 205.9 190.2 8 % Financial institutions (FIG) 177.6 171.0 4 % Public, project and infrastructure finance (PPIF) 178.7 176.1 1 % Total external revenue 1,147.5 1,058.5 8 % Intersegment royalty 43.4 37.9 15 % Total MIS Revenue 1,190.9 1,096.4 9 % Expenses: Operating and SG&A (external) 508.0 515.0 1 % Operating and SG&A (intersegment) 6.6 5.5 (20 %) Adjusted Operating Income 676.3 575.9 17 % Depreciation and amortization 22.8 22.8 - Operating income $ 653.5$ 553.1 18 %

Adjusted Operating Margin 56.8 % 52.5 % Operating margin 54.9 % 50.4 %



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

Global MIS revenue of $1,147.5 million in the first half of 2014 increased $89.0 million compared to 2013 reflecting changes in the mix of fee type, new fee initiatives and certain pricing increases coupled with higher rated issuance volumes for bank loans, CLOs and infrastructure finance. These increases were partially offset by declines in rated issuance volumes in U.S. public finance. Transaction revenue for MIS was 63% and 64% in the first half of 2014 and 2013, respectively. In the U.S., revenue was $668.2 million in the first half of 2014, an increase of $41.9 million compared to 2013 reflecting changes in the mix of fee type, new fee initiatives and certain pricing increases coupled with growth in rated issuance volumes for bank loans, CLOs and infrastructure finance. Also contributing to the growth were higher monitoring fees in CFG. These increases were partially offset by lower refunding volumes in the public finance sector as well as declines in rated issuance volumes from high-yield corporate debt and banking-related issuers. 50



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Non-U.S. revenue was $479.3 million in the first half of 2014, an increase of $47.1 million compared to 2013 reflecting higher bank loan and CLO rated issuance volumes in EMEA coupled with changes in the mix of fee type, new fee initiatives and certain pricing increases. Additionally, the growth reflects higher monitoring fees resulting from an expanding base of monitored instruments. Partially offsetting these increases were declines in investment-grade corporate debt revenue in the EMEA region as well as declines in SFG revenue in the Asia-Pacific region across most asset classes. Global CFG revenue of $585.3 million in the first half of 2014 increased $64.1 million from 2013 reflecting higher rated issuance volumes for bank loans in the U.S. and EMEA resulting from issuers taking advantage of the overall low interest rate environment to issue new debt and refinance existing borrowings combined with increased investor appetite for higher-yielding variable rate fixed income securities. The growth also reflects changes in the mix of fee type, new fee initiatives and certain pricing increases, primarily in the U.S. Monitoring and program fee revenue also increased across all regions due to growth in the number of outstanding rated entities. Partially offsetting these increases was a decline in high-yield corporate debt issuance in the U.S. and investment-grade revenue in EMEA in the first half of 2014 compared to robust refinancing issuance volumes in the prior year. Transaction revenue represented 73% of total CFG revenue in the first half of 2014, compared to 75% in the prior year period. In the U.S., revenue in the first half of 2014 was $353.9 million, or $39.6 million higher than the prior year. Internationally, revenue of $231.4 million in the first half of 2014 increased $24.5 million compared to the prior year. Global SFG revenue of $205.9 million in the first half of 2014 increased $15.7 million compared to 2013 reflecting higher rated issuance volumes for CLOs in the U.S. and EMEA reflecting attractive interest rate spreads in this asset class as well as increasing investor demand for these instruments. Also contributing to the growth was an increase in the number of rated U.S. CMBS deals as well as the favorable impact of changes in the mix of fee type, new fee initiatives and certain pricing increases. Partially offsetting these increases were declines across most asset classes in the Asia-Pacific region. Transaction revenue was 61% of total SFG revenue in the first half of 2014 compared to 60% in the prior year. In the U.S., revenue of $135.5 million increased $13.9 million compared to the first half of 2013. Non-U.S. revenue in the first half of 2014 of $70.4 million increased $1.8 million compared to the prior year. Global FIG revenue of $177.6 million in the first half of 2014 was $6.6 million higher compared to 2013 due to changes in the mix of fee type, new fee initiatives and pricing increases as well as higher cross-border issuance from the financial sector in the Asia-Pacific region and higher refinancing activity in the managed investments sector. Partially offsetting these increases was a decline in U.S. banking revenue which reflected an unfavorable shift in issuance mix. Transaction revenue was 35% of total FIG revenue in the first half of 2014 compared to 37% in the same period in 2013. In the U.S. revenue was $69.5 million, or $2.4 million lower than the prior year. Internationally, revenue was $108.1 million in the first half of 2014, or $9.0 million higher compared to 2013. Global PPIF revenue was $178.7 million in the first half of 2014 and increased $2.6 million compared to 2013. The growth reflects changes in the mix of fee type, new fee initiatives and pricing increases coupled with growth in infrastructure finance rated issuance volumes in the U.S. and Asia-Pacific. These increases were partially offset by lower U.S. public finance revenue due to a decrease in refunding volumes resulting from higher benchmark interest rates. Transaction revenue was 59% and 62% of total PPIF revenue in the first half of 2014 and 2013, respectively. In the U.S., revenue in the first half of 2014 was $109.3 million and decreased $9.2 million compared to 2013. Outside the U.S., PPIF revenue increased $11.8 million compared to 2013. Operating and SG&A expenses in the first half of 2014 decreased $7.0 million compared to 2013 primarily reflecting a settlement charge for the Abu Dhabi and Rhinebridge litigation matters in the prior year which is more fully discussed in Note 14 to the condensed consolidated financial statements. Partially offsetting this decrease were higher compensation costs of approximately $40 million primarily resulting from annual compensation increases, headcount growth in the ratings LOBs as well as in support areas such as IT, finance and human resources for which the costs are allocated to each segment based on a revenue-split methodology. Also, there were higher non-compensation costs in the first half of 2014 51



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to support the Company's IT systems and infrastructure as well as higher rent and occupancy costs for additional leased floors at 7WTC coupled with various other global real estate expansion projects. Adjusted Operating Income and operating income in the first half of 2014, which includes intersegment royalty revenue and intersegment expenses, were $676.3 million and $653.5 million, respectively, and both increased $100.4 million compared to 2013. Adjusted Operating Margin and operating margin were 56.8% and 54.9%, respectively, or 430bps and 450bps higher than the prior year, respectively. The increase in both margins compared to the prior year is primarily due to the aforementioned litigation settlement charge in the first half of 2013. Moody's Analytics



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

Six months ended June 30, % Change Favorable 2014 2013 (Unfavorable) Revenue:



Research, data and analytics (RD&A) $ 285.6$ 259.9

10 % Enterprise risk solutions (ERS) 127.0 113.2 12 % Professional services (PS) 80.6 56.2 43 % Total external revenue 493.2 429.3 15 % Intersegment revenue 6.6 5.5 20 % Total MA Revenue 499.8 434.8 15 % Expenses: Operating and SG&A (external) 342.6 294.9 (16 %) Operating and SG&A (intersegment) 43.4 37.9 (15 %) Adjusted Operating Income 113.8 102.0 12 % Depreciation and amortization 22.6 23.9 5 % Operating income $ 91.2$ 78.1 17 %

Adjusted Operating Margin 22.8 % 23.5 % Operating margin 18.2 % 18.0 %



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

Global MA revenue increased $63.9 million compared to the first half of 2013, with growth across all LOBs. Recurring revenue comprised 77% and 80% of total MA revenue in the first half of 2014 and 2013, respectively. In the U.S., revenue of $218.5 million in the first half of 2014 increased $26.5 million, and reflected growth across all LOBs. International revenue of $274.7 million in the first half of 2014 was $37.4 million higher than in 2013. Global RD&A revenue, which comprised 58% and 61% of total external MA revenue in the first half of 2014 and 2013, respectively, increased $25.7 million over the prior year period. The growth, which was most notable in the U.S. and EMEA, was primarily due to increases in credit research and content licensing as well as general market price increases and the favorable impact of changes in FX translation rates. 52



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Global ERS revenue in the first half of 2014 increased $13.8 million over 2013, primarily due to growth in software subscriptions and related services as well as higher software maintenance fees resulting from growing demand for ERS products and services in the banking and insurance industries. Revenue in ERS is subject to quarterly volatility resulting from the variable nature of project timing and the concentration of software implementation and license revenue in a relatively small number of engagements. Revenue from PS increased $24.4 million compared to the first half of 2013 with approximately 90% of the growth reflecting revenue from the acquisition of Amba in the fourth quarter of 2013. In addition to the acquisition of Amba, the growth reflects higher revenue from Copal reflecting further penetration into the market for outsourced research and analytical services as well as growth in the FSTC business. Operating and SG&A expenses in the first half of 2014 increased $47.7 million compared to 2013. The expense growth reflects an approximate $37 million increase in compensation costs primarily due to higher headcount to support business growth as well as in support areas, for which the costs are allocated to each segment based on a revenue-split methodology. Headcount from the fourth quarter 2013 acquisition of Amba and annual merit increases also contributed to the compensation expense growth. The increase also reflects an approximate $8 million increase reflecting higher consulting costs primarily related to ERS product delivery coupled with costs related to continued investment in IT infrastructure. Furthermore, there was an increase in rent and occupancy costs of approximately $3 million reflecting additional floors at 7WTC as well as various other real estate expansion projects worldwide. These increases were partially offset by approximately $4 million in lower contingent consideration costs relating to the Copal acquisition. Adjusted Operating Income was $113.8 million in the first half of 2014 and increased $11.8 million compared to the same period in 2013. Operating income of $91.2 million in the first half of 2014 increased $13.1 million compared to the same period in 2013. Adjusted Operating Margin for the first half of 2014 was 22.8%, compared to 23.5% in 2013. Operating margin was 18.2%, or flat compared to the prior year. Adjusted operating income and operating income both include intersegment revenue and expense.



Liquidity and Capital Resources

Cash Flow

The Company is currently financing its operations, capital expenditures and share repurchases from cash flow from operating and financing activities. The following is a summary of the changes in the Company's cash flows followed by a brief discussion of these changes: $ Change Six Months Ended Favorable June 30, (Unfavorable) 2014 2013



Net cash provided by operating activities $ 458.0$ 369.1 $

88.9

Net cash used in investing activities $ (113.4 )$ (19.0 ) $

(94.4 )

Net cash used in financing activities $ (501.2 )$ (426.2 ) $

(75.0 ) Free Cash Flow* $ 419.2$ 351.0 $ 68.2



* Free Cash Flow is a non-GAAP financial measure. Refer to the section "Non-GAAP

Financial Measures" of this MD&A for further information on this financial

measure. 53



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Net cash provided by operating activities

The $88.9 million increase in net cash flows provided by operating activities primarily reflected:

an increase in net income of $126.6 million which was partially offset by

the net-of-tax non-cash ICRA Gain of $78.5 million; an approximate $50 million increase primarily relating to higher incentive



compensation payouts in 2013 compared to the first quarter of 2014 which

reflected greater achievement against full-year targeted results in 2012

compared to achievement in 2013;



an approximate $40 million increase in cash flows relating to the timing

of income tax payments primarily resulting from IRS relief due to Hurricane Sandy which allowed for the delay of fourth quarter 2012 estimated tax payments to the first quarter of 2013; Partially offset by:



a $48.2 million decrease in cash flow from changes in accounts receivable

balances primarily reflecting a larger increase in accounts receivable

balances in the first six months of 2014 compared to 2013. The increase in

accounts receivable balances primarily reflects growth in MIS rated

issuance volumes. Approximately 32% and 27% of the Company's accounts

receivable balance at June 30, 2014 and 2013, respectively, represents

unbilled receivables which primarily reflect certain annual fees in MIS which are invoiced in arrears;



Net cash used in investing activities

The $94.4 million increase in cash used in investing activities is primarily due to:

cash paid, net of cash acquired, of $80.5 million to acquire additional

equity shares of ICRA Limited. The acquisition of these additional shares resulted in the Company obtaining a controlling interest in ICRA;



an increase in capital additions of $20.7 million which reflects ongoing

initiatives to enhance the Company's IT infrastructure as well as costs relating to the build-out of additional leased space at 7WTC.



Net cash used in financing activities

The $75.0 million increase in cash used in financing activities was attributed to:

treasury shares repurchased of $459.7 million in the first six months of

2014 compared to $350.4 million repurchased in the prior year period;

higher dividends paid to MCO shareholders of $30.1 million reflecting

$0.56 per share paid in the first six months of 2014 compared to $0.40 per

share paid in the same period of the prior year;

Partially offset by:



repayments on the 2008 Term Loan of $63.8 million in 2013. The 2008 Term

Loan was fully repaid in 2013;



an $18.2 million increase relating to greater excess tax benefits from

stock-based compensation plans primarily due to a higher intrinsic value

of awards delivered and exercised in 2014 resulting from a higher Moody's

stock price. 54



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Cash and short-term investments held in non-U.S. jurisdictions

The Company's aggregate cash and cash equivalents and short-term investments of $2.0 billion at June 30, 2014 consisted of approximately $1.4 billion located outside of the U.S., of which approximately 53% is denominated in euros and British pounds. Approximately 94% of the cash and cash equivalents and short-term investments in the Company's non-U.S. operations are held by entities whose undistributed earnings are indefinitely reinvested in the Company's foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. A future distribution or change in assertion regarding reinvestment by the foreign subsidiaries relating to these earnings could result in additional tax liability to the Company. It is not practicable to determine the amount of the potential additional tax liability due to complexities in the tax laws and in the hypothetical calculations that would have to be made. The Company manages both its U.S. and international cash flow to maintain sufficient liquidity in all regions to effectively meet its operating needs.



Indebtedness

At June 30, 2014, Moody's had $2.1 billion of outstanding debt and $1.0 billion of additional capacity available under the 2012 Facility. At June 30, 2014, the Company was in compliance with all covenants contained within all of the debt agreements. The 2012 Facility, the 2005 Agreement, the 2007 Agreement, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of June 30, 2014, there were no such cross defaults. On July 16, 2014, the Company issued $450 million aggregate principal amount of unsecured notes in a public offering. The notes bear interest at 2.75% and mature on July 15, 2019. Also on July 16, 2014, the Company issued $300 million aggregate principal amount of unsecured notes in a public offering. The $300 million notes bear interest at 5.25% and mature on July 15, 2044. The Company will use the proceeds to retire the Series 2005-1 Notes as well as for general corporate purposes. The Company entered into interest rate swaps in July 2014 with a total notional amount of $250 million to convert the fixed interest rate on a portion of the $450 million unsecured notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of a portion of the $450 million unsecured notes. 55



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The repayment schedule for the Company's borrowings is as follows:

2014 Senior 2014 Senior Year Ended Series 2005-1 Series 2007-1 2010 Senior 2012 Senior 2013 Senior Notes Notes December 31, Notes Notes Notes Notes Notes (5-Year) (30-Year) Total 2014 (after June 30,) $ 300.0 (1) $ - $ - $ - $ - $ - $ - $ 300.0 2015 - - - - - - - - 2016 - - - - - - - - 2017 - 300.0 - - - - - 300.0 2018 - - - - - - - - Thereafter - - 500.0 500.0 500.0

450.0 (2) 300.0 (2) 2,250.0 Total $ 300.0 $ 300.0 $ 500.0$ 500.0$ 500.0$ 450.0$ 300.0$ 2,850.0



(1) Pursuant to the issuance of the 2014 Senior Notes (5-year) and the 2014

Senior Notes (30 year), the Company intends on repaying the outstanding

balance on the Series 2005-1 Notes in the third quarter of 2014.

(2) The 2014 Senior Notes (5-year) and the 2014 Senior Notes (30 year) were

issued in July 2014.

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

Other Material Future Cash Requirements

The Company believes that it has the financial resources needed to meet its cash requirements and expects to have positive operating cash flow for the next twelve months. Cash requirements for periods beyond the next twelve months will depend, among other things, on the Company's profitability and its ability to manage working capital requirements. The Company may also borrow from various sources. The Company remains committed to using its strong cash flow to create value for shareholders by investing in growing areas of the business, reinvesting in ratings quality initiatives, making selective acquisitions, repurchasing stock and paying a dividend, all in manner consistent with maintaining sufficient liquidity after giving effect to any additional indebtedness that may be incurred. In July 2014, the Board of Directors of the Company declared a quarterly dividend of $0.28 per share of Moody's common stock, payable on September 10, 2014 to shareholders of record at the close of business on August 20, 2014. The continued payment of dividends at this rate, or at all, is subject to the discretion of the Board. On February 12, 2013, the Board approved $1.0 billion of share repurchase authority. At June 30, 2014, the Company had $0.3 billion of share repurchase authority remaining under this program, which does not have an established expiration. On February 11, 2014, the Board approved an additional $1.0 billion of share repurchase authority which will be utilized once the February 12, 2013 authorization is exhausted. The Company expects to complete approximately $1 billion of share repurchases in 2014. Share repurchase activity in the near term is subject to available cash flow, market conditions and other capital allocation decisions. 56



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As part of the Copal acquisition in November 2011, Moody's and the non-controlling shareholders entered into a put/call arrangement whereby the noncontrolling shareholders have the option to sell the portion of Copal that Moody's does not currently own and Moody's has the option to purchase this portion from the noncontrolling shareholders. The exercise price of this option was valued at $68 million at the time of acquisition and will fluctuate based on the entity's financial results subject to a floor exercise price of approximately $46 million. In connection with the acquisition of Amba in December 2013, the revenue and EBITDA multiples set forth in the original put/call option agreement were modified to include the results of Amba. The redemption value of this redeemable noncontrolling interest was $122.6 million at June 30, 2014. There is no limit as to the amount of the strike price on the put/call option. It is estimated that the exercise of the put/call arrangement will take place in the next one to three and a half years. This put/call arrangement expires on the sixth anniversary date of the acquisition. 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, and the Company began making base rent payments in 2011. In addition to the base rent payments the Company will be obligated to pay certain customary amounts for its share of operating expenses and tax obligations. The total remaining lease payments as of June 30, 2014 are approximately 106 million, of which approximately 9 million will be paid in the next twelve months. On October 20, 2006, the Company entered into an operating lease agreement with 7 World Trade Center, LLC for 589,945 square-feet of an office building located at 7WTC at 250 Greenwich Street, New York, New York, which is serving as Moody's headquarters. The 7WTC Lease has an initial term of 21 years with a total of 20 years of renewal options. The total base rent of 7WTC Lease over its initial 21-year term is approximately $536 million including rent credits from the World Trade Center Rent Reduction Program promulgated by the Empire State Development Corporation. On March 28, 2007, the 7WTC lease agreement was amended for the Company to lease an additional 78,568 square-feet at 7WTC. The additional base rent is approximately $106 million over a 20-year term. The total remaining lease payments as of June 30, 2014, including the aforementioned rent credits, are approximately $463 million, of which approximately $31 million will be paid during the next twelve months. On October 21, 2013, the Company entered into a fourteen-year lease for three additional floors at its 7WTC headquarters. The total remaining net commitment for this lease is approximately $63 million. The lease became effective in January 2014 and the net cash outlay during the next twelve months will be immaterial.



Off-Balance Sheet Arrangements

At June 30, 2014, 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. 57



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Contractual Obligations

The following table presents payments due under the Company's contractual obligations as of June 30, 2014:

Payments Due by Period Less Than 1-3 3-5 Over (in millions) Total 1 Year Years Years 5 Years Indebtedness(1) $ 2,761.9$ 99.0$ 482.1$ 447.0$ 1,733.8 Operating lease obligations 803.0 84.1 134.6 124.8 459.5 Purchase obligations 119.4 61.2 58.2 - - Contingent consideration related to acquisitions(2) 17.2 14.9 2.3 - - Pension obligations(3) 131.0 27.7 11.1 36.6 55.6 Total(4) $ 3,832.5$ 286.9$ 688.3$ 608.4$ 2,248.9



(1) Reflects principal payments, related interest and applicable fees due on the

Series 2005-1 Notes, the Series 2007-1 Notes, the 2010 Senior Notes, the 2012

Senior Notes, the 2013 Senior Notes and the 2012 Facility as described in

Note 13 to the condensed consolidated financial statements. The table above

does not reflect the following: on July 16, 2014, the Company issued $450

million aggregate 5-year unsecured senior notes and $300 million aggregate

30-year unsecured notes as described in Note 17 to the condensed consolidated

financial statements. The Company plans to retire the Series 2005-1 Notes

with the proceeds of the aforementioned issuance.

(2) The amount in the "less than 1 year" category reflects a $4.3 million

contingent cash payment related to the December 10, 2013 acquisition of Amba

that was dependent on the acquired entity achieving certain revenue targets

for its fiscal year ended March 31, 2014 as well as a $10.6 million

contingent consideration obligation related to the Copal acquisition.

Additionally, the amount in the "1-3 years" category reflects a $2.3 million

contingent cash payment related to the November 18, 2010 acquisition of CSI

Global Education, Inc. The cash payment is dependent upon the achievement of

a certain contractual milestone by January 2016.

(3) Reflects projected benefit contributions to the Company's funded U.S. DBPP

and payments relating to the Company's U.S. unfunded DBPPs and Retirement and

Other Plans described in Note 12 to the condensed consolidated financial

statements

(4) The table above does not include the Company's net long-term tax liabilities

of $220.1 million relating to UTP and Legacy Tax Matters, since the expected

cash outflow of such amounts by period cannot be reasonably estimated. In

addition, the table above does not include the $122.6 million Redeemable

Noncontrolling Interest related to the acquisition of Copal, as the expected

cash outflow of such amounts by period cannot be reasonably estimated.

Dividends

On July 14, 2014, the Board approved the declaration of a quarterly dividend of $0.28 per share of Moody's common stock, payable on September 10, 2014 to shareholders of record at the close of business on August 20, 2014.

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Non-GAAP Financial Measures:

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 reported results, can provide useful supplemental information for investors analyzing period to period comparisons of the Company's performance, facilitate comparisons to competitors' operating results and can provide greater transparency to investors of supplemental information used by management in its financial and operational decision-making. These non-GAAP measures, as defined by the Company, are not necessarily comparable to similarly defined measures of other companies. Furthermore, these non-GAAP measures should not be viewed in isolation or used as a substitute for other GAAP measures in assessing the operating performance or cash flows of the Company. Below are brief descriptions of the Company's non-GAAP financial measures accompanied by a reconciliation of the non-GAAP measure to its most directly comparable GAAP measure:



Adjusted Operating Income and Adjusted Operating Margin:

The Company presents Adjusted Operating Income because management deems this metric to be a useful measure of assessing the operating performance of Moody's, measuring the Company's ability to service debt, fund capital expenditures, and expand its business. Adjusted Operating Income excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of acquiring productive assets. Companies also have different methods of depreciating and amortizing productive assets. Management believes that the exclusion of this item allows for a more meaningful comparison of the Company's operating results from period to period and across companies. Below is a reconciliation of the Company's operating income and operating margin to Adjusted Operating Income and Adjusted Operating Margin: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Operating income $ 411.7$ 350.8$ 744.7$ 631.2 Adjustments: Depreciation and amortization 22.3 23.1 45.4 46.7 Adjusted Operating Income $ 434.0$ 373.9$ 790.1$ 677.9 Operating Margin 47.1 % 46.4 % 45.4 % 42.4 % Adjusted Operating Margin 49.7 % 49.5 % 48.2 % 45.6 % Full-Year Ended December 31, 2014 Operating margin guidance 42% - 43% Depreciation and amortization 3% Adjusted Operating Margin guidance 45% - 46% 59



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Non-GAAP Diluted EPS

The Company presents this non-GAAP measure to exclude the impact of a litigation settlement charge in the first quarter of 2013 and the ICRA Gain in the second quarter of 2014 to allow for a more meaningful comparison of Moody's diluted earnings per share from period to period. Below is a reconciliation of these measures to their most directly comparable U.S. GAAP amount: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2013 2012 Diluted EPS - GAAP $ 1.48$ 1.00$ 2.47$ 1.83 ICRA Gain (0.36 ) - (0.36 ) -

Impact of litigation settlement - - - 0.14 Diluted EPS - Non-GAAP $ 1.12$ 1.00$ 2.11$ 1.97 Projected full-year ended December 31, 2014 Diluted EPS guidance - GAAP $ 4.26 - 4.36 ICRA Gain $ (0.36) Diluted EPS guidance - Non-GAAP $ 3.90 - 4.00



Free Cash Flow:

The Company defines free cash flow as net cash provided by operating activities minus payments for capital additions. Management believes that free cash flow is a useful metric in assessing the Company's cash flows to service debt, pay dividends and to fund acquisitions and share repurchases. Management deems capital expenditures essential to the Company's product and service innovations and maintenance of Moody's operational capabilities. Accordingly, capital expenditures are deemed to be a recurring use of Moody's cash flow. Below is a reconciliation of the Company's net cash flows from operating activities to free cash flow: Six months ended June 30, 2014 2013 Net cash flows provided by operating activities $ 458.0$ 369.1 Capital additions (38.8 ) (18.1 ) Free cash flow $ 419.2$ 351.0 Net cash used in investing activities $ (113.4 ) $



(19.0 )

Net cash used in financing activities $ (501.2 )$ (426.2 ) 60



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2014 Outlook

Moody's outlook for 2014 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 borrowing and securitization, and the amount of debt issued. There is an important degree of uncertainty surrounding these assumptions, and, if actual conditions differ, Moody's results for the year may differ materially from the current outlook. The Company's guidance, which is presented in the table below, assumes foreign currency translation at end-of-quarter exchange rates. Full-year 2014 Moody's Corporation guidance Current guidance as of the Last publicly disclosed MOODY'S CORPORATION filing of this Form 10Q guidance on May 1, 2014 Revenue growth in the low-double-digit growth in the percent range high-single-digit percent range Operating Expenses growth in the high-single-digit growth in the mid-single-digit percent range percent range Growth in compliance and Less than $5 million NC regulatory expense Depreciation & amortization Approximately $100 million NC Operating Margin 42% to 43% NC Adjusted Operating Margin 45% to 46% NC Effective tax rate Approximately 33% NC Non-GAAP EPS** $3.90 to $4.00 NC Capital expenditures Approximately $90 million NC Free cash flow Approximately $900 million NC Share repurchases Approximately $1 billion NC (subject to available cash, market conditions and other ongoing capital allocation decisions) Full-year 2014 revenue guidance Current guidance as of the filing of Last publicly disclosed guidance on MIS this Form 10Q May



1, 2014 MIS global growth in the high-single-digit growth in the mid-single-digit

percent range percent range MIS U.S. growth in the mid-single-digit growth in the



low-single-digit

percent range



percent range MIS Non-U.S. growth in the low-teens percent growth in the low-double-digit

range percent range CFG growth in the low-double-digit growth in the mid-single-digit percent range percent range SFG growth in the low-single-digit growth of approximately 10% percent range FIG growth in the low-single-digit growth in the



mid-single-digit

percent range percent range PPIF growth in the high-single-digit percent range NC ICRA Ltd.* Approximately $12 million NA MA MA global growth in the mid-teens percent growth in the



low-teens percent

range range MA U.S. growth in the low-double-digit percent range NC MA Non-U.S. growth in the high-teens percent range NC RD&A growth in the high-single-digit percent range NC ERS growth in the mid-teens percent growth in the

low-teens percent range range PS growth in the low-forties percent growth of approximately 40% range NC - There is no difference between the Company's current guidance and the last publicly disclosed guidance for this item. NA - Not applicable



* Due to the three month lag in consolidating ICRA's financial statements as more

fully discussed in Note 7 to the condensed consolidated financial statements,

there is only one quarter of ICRA revenue included in the above table.

** Full-Year 2014 GAAP Diluted EPS guidance is $4.26 to $4.36 and includes the

$0.36 ICRA Gain. 61



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Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers". This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual and interim reporting periods beginning after December 15, 2016 and early adoption is not permitted. Companies may either use a full retrospective or modified retrospective approach to adopt this ASU. The Company is currently evaluating both adoption options and the impact that adoption of this update will have on its consolidated financial statements. In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". The objective of this ASU is to change the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. In accordance with this ASU, only those disposals of components of an entity that represent a strategic shift which has or will have a material effect on an entity's operations and financial results will be reported as discontinued operations. The amendments in this ASU are required to be applied prospectively for any disposals (of classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. Early adoption is permitted, for disposals (or classifications as held for sale) that have not been previously reported in an entity's financial statements. The adoption of this ASU will not have any impact on the Company's consolidated financial statements other than changing the classification criteria and related disclosures for any potential future disposals (or classifications as held for sale). Contingencies Legal proceedings in which the Company is involved also may impact Moody's liquidity or operating results. No assurance can be provided as to the outcome of such proceedings. In addition, litigation inherently involves significant costs. For information regarding legal proceedings, see Item 1-"Financial Statements", Note 14 "Contingencies."



Regulation

MIS and many of the securities that it rates are subject to extensive regulation in both the U.S. and in other countries (including by state and local authorities). Thus, existing and proposed laws and regulations can impact the Company's operations and the markets for securities that it rates. Additional laws and regulations have been adopted but not yet implemented or have been proposed or are being considered. Each of the existing, adopted, proposed and potential laws and regulations can increase the costs and legal risk associated with the issuance of credit ratings and may negatively impact Moody's operations or profitability, the Company's ability to compete, or result in changes in the demand for credit ratings, in the manner in which ratings are utilized and in the manner in which Moody's operates. In the EU, the CRA industry is registered and supervised through a pan-European regulatory framework which is a compilation of three sets of legislative actions. In 2009, the European Parliament passed a new regulation ("CRA1") that established an oversight regime for the CRA industry in the EU. CRA1, which required the registration, formal regulation and periodic inspection of CRAs operating in the EU, became fully effective in September 2010. MIS applied for registration in August 2010 and was granted registration in October 2011. In January 2011, CRA2 established the European Securities and Markets Authority. ESMA has had direct supervisory responsibility for the registered CRA industry throughout the EU since July 2011. 62



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In the summer of 2013, a new set of rules that augmented the CRAs' supervisory framework went into effect. Commonly referred to as CRA3, these new rules, among other things:



impose various additional procedural requirements with respect to ratings

of sovereign issuers; require member states to adopt laws imposing liability on CRAs for an



intentional or grossly negligent failure to abide by the applicable

regulations; impose mandatory rotation requirements on CRAs hired by issuers of



securities for ratings of resecuritizations, which may limit the number of

years a CRA can issue ratings for such securities of a particular issuer; impose restrictions on CRAs or their shareholders if certain ownership thresholds are crossed; and impose additional procedural and substantive requirements on the pricing



of services.

Certain of the provisions of CRA3 are subject to further rule-making. In June, ESMA published its advice to the Commission regarding these additional rules. The advice covered two areas of direct relevance to the CRA industry: 1) registered CRAs' reporting requirements to ESMA on their fees; and, 2) the types of information that all registered CRAs are to provide on a daily basis for publication on a central website administered by ESMA (the European Ratings Platform). The Commission has 3 months to consider the proposal by ESMA and either endorse it or introduce changes to it before the draft is presented to the EU Parliament and Council for final adoption. It is expected that the full process will conclude by year-end 2014. In December 2012, the Staff of the SEC's Trading and Markets Division published a "Report to Congress on Assigned Credit Ratings." In the report, commonly referred to as the Franken Amendment Study, the SEC Staff identified several potential courses of action without endorsing any of them and noted that any changes through SEC rulemaking would require additional study of relevant information. The timing regarding the remainder of the SEC's rulemaking under the Financial Reform Act remains uncertain. In light of the regulations that have gone into effect in both the EU and the U.S. (as well as many other countries), from time to time and as a matter of course pursuant to their enabling legislation these regulatory authorities have and will continue to publish reports that describe their oversight activities over the industry. In addition, other legislation and regulation relating to credit rating and research services is being considered by local, national and multinational bodies and this type of activity is likely to continue in the future. Finally, in certain countries, governments may provide financial or other support to locally-based rating agencies. For example, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. If enacted, any such legislation and regulation could change the competitive landscape in which MIS operates. The legal status of rating agencies has been addressed by courts in various decisions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of the Company 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. 63



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Forward-Looking Statements

Certain statements contained in this quarterly report on Form 10-Q 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 quarterly report on Form 10-Q, including in the sections entitled "2014 Outlook" and "Contingencies" under Item 2. "MD&A", commencing on page 40 of this quarterly report on Form 10-Q, under "Legal Proceedings" in Part II, Item 1, of this Form 10-Q, and elsewhere in the context of statements containing the words "believe", "expect", "anticipate", "intend", "plan", "will", "predict", "potential", "continue", "strategy", "aspire", "target", "forecast", "project", "estimate", "should", "could", "may" and similar expressions or words and variations thereof relating to the Company's views on future events, trends and contingencies. Stockholders and investors are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements and other information are made as of the date of this quarterly report on Form 10-Q, and the Company undertakes no obligation (nor does it intend) to publicly supplement, update or revise such statements on a going-forward basis, whether as a result of subsequent developments, changed expectations or otherwise. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is identifying examples of factors, risks and uncertainties that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements. Those factors, risks and uncertainties include, but are not limited to, the current world-wide credit market disruptions and economic slowdown, which is affecting and could continue to affect the volume of debt and other securities issued in domestic and/or global capital markets; other matters that could affect the volume of debt and other securities issued in domestic and/or global capital markets, including credit quality concerns, changes in interest rates and other volatility in the financial markets; the level of merger and acquisition activity in the U.S. and abroad; the uncertain effectiveness and possible collateral consequences of U.S. and foreign government initiatives to respond to the current world-wide credit market disruptions and economic slowdown; concerns in the marketplace affecting our credibility or otherwise affecting market perceptions of the integrity or utility of independent credit agency ratings; the introduction of competing products or technologies by other companies; pricing pressure from competitors and/or customers; the level of success of new product development and global expansion; the impact of regulation as an NRSRO, the potential for new U.S., state and local legislation and regulations, including provisions in the Financial Reform Act and anticipated regulations resulting from that Act; the potential for increased competition and regulation in the EU and other foreign jurisdictions; exposure to litigation related to our rating opinions, as well as any other litigation to which the Company may be subject from time to time; provisions in the Financial Reform Act legislation modifying the pleading standards, and EU regulations modifying the liability standards, applicable to credit rating agencies in a manner adverse to credit rating agencies; provisions of EU regulations imposing additional procedural and substantive requirements on the pricing of services; the possible loss of key employees; failures or malfunctions of our operations and infrastructure; any vulnerabilities to cyber threats or other cybersecurity concerns; the outcome of any review by controlling tax authorities of the Company's global tax planning initiatives; the outcome of those Legacy Tax Matters and legal contingencies that relate to the Company, its predecessors and their affiliated companies for which Moody's has assumed portions of the financial responsibility; the impact of mergers, acquisitions or other business combinations and the ability of the Company to successfully integrate acquired businesses; currency and foreign exchange volatility; the level of future cash flows; the levels of capital investments; 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 of the Company's annual report on Form 10-K for the year ended December 31, 2013, and in other filings made by the Company from time to time with the SEC or in materials incorporated herein or therein. Stockholders and investors are cautioned that the occurrence of any of these factors, risks and uncertainties may cause the Company's actual results to differ materially from those contemplated, expressed, projected, anticipated or implied in the 64



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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.


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