Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - MSCI Inc. | dp18350_ex3201.htm |
EX-15 - EXHIBIT 15 - MSCI Inc. | dp18350_ex15.htm |
EX-10.3 - EXHIBIT-10.3 - MSCI Inc. | dp18350_ex1003.htm |
EX-10.4 - EXHIBIT-10.4 - MSCI Inc. | dp18350_ex1004.htm |
EX-31.2 - EXHIBIT 31.2 - MSCI Inc. | dp18350_ex3102.htm |
EX-10.10 - EXHIBIT-10.10 - MSCI Inc. | dp18350_ex1010.htm |
EX-31.1 - EXHIBIT 31.1 - MSCI Inc. | dp18350_ex3101.htm |
EX-10.5 - EXHIBIT-10.5 - MSCI Inc. | dp18350_ex1005.htm |
EX-10.2 - EXHIBIT-10.2 - MSCI Inc. | dp18350_ex1002.htm |
EX-10.10 - EXHIBIT-10.11 - MSCI Inc. | dp18350_ex-1011.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended May 31, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to
Commission
file number 001-33812
MSCI
INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
13-4038723
|
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification Number)
|
|
Wall
Street Plaza, 88 Pine Street
New
York, NY
|
10005
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (212) 804-3900
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ¨
No ¨
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 Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
x
|
Accelerated filer
¨
|
Non-accelerated filer
¨
|
|
Smaller reporting company
¨
|
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No x
As
of June 29, 2010, there were 117,796,084 shares of the Registrant’s class A
common stock, $0.01 par value, outstanding and no shares of Registrant’s class B
common stock, $0.01 par value, outstanding.
MSCI
INC.
FORM
10-Q
FOR
THE QUARTER ENDED MAY 31, 2010
|
|
Page
|
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|
Part I
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Item 1.
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4
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Item 2.
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23
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Item 3.
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38
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Item 4.
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39
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Part II
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Item 1.
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40
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Item 1A.
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40
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Item 2.
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46
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Item 3.
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47
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Item 5.
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47
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Item 6.
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47
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2
AVAILABLE
INFORMATION
MSCI Inc.
files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (the “SEC”). You may
read and copy any document we file with the SEC at the SEC’s public reference
room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains
an internet site that contains annual, quarterly and current reports, proxy and
information statements and other information that issuers (including MSCI Inc.)
file electronically with the SEC. MSCI Inc.’s electronic SEC filings are
available to the public at the SEC’s internet site, www.sec.gov.
MSCI
Inc.’s internet site is www.mscibarra.com. You can
access MSCI Inc.’s Investor Relations webpage at www.mscibarra.com/about/ir.
MSCI Inc. makes available free of charge, on or through its Investor
Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those
reports filed or furnished pursuant to the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC. MSCI Inc. also
makes available, through its Investor Relations webpage, via a link to the SEC’s
internet site, statements of beneficial ownership of MSCI Inc.’s equity
securities filed by its directors, officers, 10% or greater shareholders and
others under Section 16 of the Exchange Act.
MSCI Inc.
has a Corporate Governance webpage. You can access information about MSCI Inc.’s
corporate governance at www.mscibarra.com/about/company/governance.
MSCI Inc. posts the following on its Corporate Governance webpage:
•
|
Charters
for our Audit Committee, Compensation Committee and Nominating and
Governance Committee;
|
•
|
Corporate
Governance Policies; and
|
•
|
Code
of Ethics and Business Conduct.
|
MSCI
Inc.’s Code of Ethics and Business Conduct applies to all directors, officers
and employees, including its Chief Executive Officer and its Chief Financial
Officer. MSCI Inc. will post any amendments to the Code of Ethics and Business
Conduct and any waivers that are required to be disclosed by the rules of either
the SEC or the New York Stock Exchange, Inc. (“NYSE”) on its internet site. You
can request a copy of these documents, excluding exhibits, at no cost, by
contacting Investor Relations, Wall Street Plaza, 88 Pine Street, New York, NY
10005; (212) 804-1583. The information on MSCI Inc.’s internet site is not
incorporated by reference into this report.
3
PART
I
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in
thousands, except share and per share data)
As
of
|
||||||||
May
31,
|
November
30,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 152,148 | $ | 176,024 | ||||
Short-term
investments
|
61,399 | 295,304 | ||||||
Trade
receivables (net of allowances of $740 and $847 as of May 31, 2010 and
November 30, 2009, respectively)
|
92,530 | 77,180 | ||||||
Deferred
taxes
|
23,334 | 24,577 | ||||||
Prepaid
and other assets
|
32,975 | 29,399 | ||||||
Total
current assets
|
362,386 | 602,484 | ||||||
Property,
equipment and leasehold improvements (net of accumulated depreciation of
$30,256 and $26,498 at May 31, 2010 and November 30, 2009,
respectively)
|
25,387 | 29,381 | ||||||
Goodwill
|
441,623 | 441,623 | ||||||
Intangible
assets (net of accumulated amortization of $156,928 and $148,589 at May
31, 2010 and November 30, 2009, respectively)
|
111,634 | 120,189 | ||||||
Other
non-current assets
|
6,901 | 6,592 | ||||||
Total
assets
|
$ | 947,931 | $ | 1,200,269 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 534 | $ | 1,878 | ||||
Accrued
compensation and related benefits
|
35,200 | 65,088 | ||||||
Other
accrued liabilities
|
23,289 | 30,502 | ||||||
Current
maturities of long term debt
|
8,245 | 42,088 | ||||||
Deferred
revenue
|
181,906 | 152,944 | ||||||
Total
current liabilities
|
249,174 | 292,500 | ||||||
Long
term debt, net of current maturities
|
62,325 | 337,622 | ||||||
Deferred
taxes
|
36,712 | 40,080 | ||||||
Other
non-current liabilities
|
23,286 | 23,011 | ||||||
Total
liabilities
|
371,497 | 693,213 | ||||||
Commitments
and Contingencies (see Note 9)
|
||||||||
Shareholders'
equity:
|
||||||||
Preferred
stock (par value $0.01; 100,000,000 shares authorized; no shares
issued)
|
— | — | ||||||
Common
stock (par value $0.01; 500,000,000 class A shares and 250,000,000 class B
shares authorized; 105,701,071 and 105,391,919 class A shares issued and
105,019,494 and 104,781,404 class A shares outstanding at May 31, 2010 and
November 30, 2009, respectively; no class B shares issued and outstanding
at May 31, 2010 and November 30, 2009, respectively)
|
1,057 | 1,054 | ||||||
Treasury
shares, at cost (681,577 and 610,515 shares at May 31, 2010 and
November 30, 2009, respectively)
|
(21,618 | ) | (19,168 | ) | ||||
Additional
paid in capital
|
465,384 | 448,747 | ||||||
Retained
earnings
|
135,598 | 84,013 | ||||||
Accumulated
other comprehensive loss
|
(3,987 | ) | (7,590 | ) | ||||
Total
shareholders' equity
|
576,434 | 507,056 | ||||||
Total
liabilities and shareholders' equity
|
$ | 947,931 | $ | 1,200,269 |
See
Notes to Unaudited Condensed Consolidated Financial Statements
4
MSCI
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(in
thousands, except per share data)
|
Three
Months Ended
May 31,
|
Six
Months Ended
May 31,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||||
Operating
revenues
|
|
$
|
125,170
|
$
|
109,375
|
$
|
246,850
|
$
|
215,290
|
|||||||
Cost
of services
|
|
30,463
|
29,269
|
59,754
|
58,204
|
|||||||||||
Selling,
general and administrative
|
|
40,177
|
34,052
|
77,638
|
68,768
|
|||||||||||
Amortization
of intangible assets
|
|
4,277
|
6,428
|
8,555
|
12,857
|
|||||||||||
Depreciation
and amortization of property, equipment and leasehold
improvements
|
3,556
|
2,972
|
6,949
|
6,023
|
||||||||||||
Total
operating expenses
|
|
78,473
|
72,721
|
152,896
|
145,852
|
|||||||||||
Operating
income
|
|
46,697
|
36,654
|
93,954
|
69,438
|
|||||||||||
Interest
income
|
|
(343
|
)
|
(220
|
)
|
(751
|
)
|
(341
|
)
|
|||||||
Interest
expense
|
|
8,991
|
4,904
|
13,427
|
10,542
|
|||||||||||
Other
expense (income)
|
|
98
|
(2
|
)
|
(510
|
)
|
880
|
|||||||||
Other
expense (income), net
|
|
8,746
|
4,682
|
12,166
|
11,081
|
|||||||||||
Income
before provision for income taxes
|
|
37,951
|
31,972
|
81,788
|
58,357
|
|||||||||||
Provision
for income taxes
|
|
13,884
|
12,354
|
30,203
|
22,015
|
|||||||||||
Net
income
|
|
$
|
24,067
|
$
|
19,618
|
$
|
51,585
|
$
|
36,342
|
|||||||
Earnings
per basic common share
|
|
$
|
0.23
|
$
|
0.19
|
$
|
0.48
|
$
|
0.35
|
|||||||
Earnings
per diluted common share
|
|
$
|
0.22
|
$
|
0.19
|
$
|
0.48
|
$
|
0.35
|
|||||||
Weighted
average shares outstanding used in computing earnings per
share
|
|
|||||||||||||||
Basic
|
|
105,345
|
100,359
|
105,290
|
|
100,324
|
||||||||||
Diluted
|
|
106,003
|
100,371
|
105,923
|
|
100,330
|
See
Notes to Unaudited Condensed Consolidated Financial Statements
5
MSCI
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Six
Months Ended May 31,
|
|||||||
|
2010
|
2009
|
||||||
|
(unaudited)
|
|||||||
Cash
flows from operating activities
|
|
|||||||
Net
income
|
|
$
|
51,585
|
$
|
36,342
|
|||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|||||||
Share
based compensation
|
10,486
|
16,714
|
||||||
Amortization
of intangible assets
|
|
8,555
|
12,857
|
|||||
Depreciation
of property, equipment and leasehold improvements
|
|
6,949
|
6,023
|
|||||
Amortization
of debt origination fees
|
3,429
|
716
|
||||||
Foreign
currency loss
|
|
50
|
616
|
|||||
Unpaid
interest rate swap expense
|
700
|
—
|
||||||
Loss on
sale or disposal of property, equipment and leasehold improvements,
net
|
—
|
274
|
||||||
Excess
tax benefits from share-based compensation
|
(1,463
|
)
|
—
|
|||||
Provision
for bad debts
|
|
322
|
376
|
|||||
Amortization
of discount on U.S. Treasury securities
|
(548
|
)
|
(144
|
)
|
||||
Amortization
of discount on long-term debt
|
500
|
82
|
||||||
Deferred
taxes
|
|
(4,583
|
)
|
(10,950
|
)
|
|||
Changes
in assets and liabilities:
|
|
|||||||
Trade
receivables
|
|
(17,143
|
)
|
(9,350
|
)
|
|||
Due
from related parties
|
|
—
|
1,765
|
|||||
Prepaid
and other assets
|
|
(3,208
|
)
|
5,880
|
||||
Accounts
payable
|
(1,335
|
)
|
37,205
|
|||||
Payable
to related parties
|
|
—
|
(34,992
|
)
|
||||
Deferred
revenue
|
|
32,834
|
29,963
|
|||||
Accrued
compensation and related benefits
|
|
(26,973
|
)
|
(21,892
|
)
|
|||
Other
accrued liabilities
|
(2,215
|
)
|
(2,387
|
)
|
||||
Other
|
|
(2,838
|
)
|
59
|
||||
Net
cash provided by operating activities
|
|
55,104
|
69,157
|
|||||
|
||||||||
Cash
flows from investing activities
|
|
|||||||
Proceeds
from redemption of short-term investments
|
347,114
|
—
|
||||||
Purchase
of investments
|
(112,556
|
)
|
(244,734
|
)
|
||||
Capital
expenditures
|
|
(4,696
|
)
|
(9,519
|
)
|
|||
Net
cash provided by (used in) investing activities
|
|
229,862
|
(254,253
|
)
|
||||
|
||||||||
Cash
flows from financing activities
|
|
|||||||
Repayment
of long-term debt
|
|
(309,640
|
)
|
(11,125
|
)
|
|||
Repurchase
of treasury shares
|
|
(2,450
|
)
|
(605
|
)
|
|||
Proceeds
from exercise of stock options
|
2,214
|
30
|
||||||
Excess
tax benefits from share-based compensation
|
1,463
|
—
|
||||||
Net
cash used in financing activities
|
|
(308,413
|
)
|
(11,700
|
)
|
|||
Effect
of exchange rate changes
|
|
(429
|
)
|
1,488
|
||||
Net decrease
in cash
|
|
(23,876
|
)
|
(195,308
|
)
|
|||
Cash
and cash equivalents, beginning of period
|
|
176,024
|
268,077
|
|||||
Cash
and cash equivalents, end of period
|
|
$
|
152,148
|
$
|
72,769
|
|||
|
||||||||
Supplemental
disclosure of cash flow information
|
|
|||||||
Cash
paid for interest
|
|
$
|
8,559
|
$
|
9,802
|
|||
Cash
paid for income taxes
|
|
$
|
36,964
|
$
|
26,121
|
|||
|
||||||||
Supplemental
disclosure of non-cash investing activities
|
|
|||||||
Property,
equipment and leasehold improvements in other accrued
liabilities
|
|
$
|
3,405
|
$
|
2,449
|
|||
|
See
Notes to Unaudited Condensed Consolidated Financial Statements
6
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
INTRODUCTION AND BASIS OF PRESENTATION
MSCI Inc.
together with its wholly-owned subsidiaries (the “Company” or “MSCI”) is a
leading global provider of investment decision support tools, including indices
and portfolio risk and performance analytics. MSCI products and
services include indices, portfolio risk and performance analytics and,
following the acquisition discussed below, governance tools. The Company’s
flagship products are its global equity indices marketed under the MSCI brand,
its equity portfolio analytics marketed under the Barra brand and its energy and
commodity asset valuation analytics products marketed under the FEA
brand.
On June
1, 2010, MSCI completed its acquisition of RiskMetrics Group, Inc.
(“RiskMetrics”) in a cash-and-stock transaction valued at approximately $1,572.4
million. With the acquisition of RiskMetrics, MSCI expanded its primary product
offerings to include market and credit risk analytics products marketed under
the RiskMetrics brand, out-sourced proxy research voting and vote reporting
services marketed under the ISS brand, and forensic accounting risk research,
legal/regulatory risk assessment and due diligence products marketed under the
CFRA brand.
Certain
actions taken and costs incurred in connection with acquisition of RiskMetrics
prior to the acquisition closing date are reflected in these condensed
consolidated financial statements. However, the assets acquired and
liabilities assumed and the results of operations from RiskMetrics are not
reflected in these condensed consolidated financial statements as of and for the
three and six months ended May 31, 2010. (See Note 15. “Acquisition
of RiskMetrics Group, Inc.” for additional information.)
Basis
of Presentation and Use of Estimates
These
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries and include all adjustments of a normal,
recurring nature necessary to present fairly the financial condition as of May
31, 2010 and November 30, 2009, the results of operations for the three and six
months ended May 31, 2010 and 2009 and cash flows for the six months ended May
31, 2010 and 2009. The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes included in MSCI’s Annual Report on Form 10-K for the
fiscal year ended November 30, 2009. The condensed consolidated
financial statement information as of November 30, 2009 has been derived from
the 2009 audited consolidated financial statements. The results of
operations for interim periods are not necessarily indicative of results for the
entire year.
The Company’s condensed
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). These
accounting principles require the Company to make certain estimates and
judgments that can affect the reported amounts of assets and liabilities as of
the date of the condensed consolidated financial statements, as well as the
reported amounts of revenue and expenses during the periods presented.
Significant estimates and assumptions made by management include the deferral
and recognition of income, the allowance for doubtful accounts, impairment of
long-lived assets, accounting for income taxes and other matters that affect the
condensed consolidated financial statements and related disclosures. The Company
believes that estimates used in the preparation of these condensed consolidated
financial statements are reasonable; however, actual results could differ
materially from these estimates.
The
Condensed Consolidated Statements of Income for the three and six months ended
May 31, 2009 reflect expense allocations for certain corporate functions
previously provided by Morgan Stanley, including human resources, information
technology, accounting, legal and compliance, corporate services, treasury and
other services. These allocations were based on what the Company and Morgan
Stanley considered reasonable reflections of the utilization levels of these
services required in support of the Company’s business and were based on methods
that include direct time tracking, headcount, inventory metrics and corporate
overhead. As of May 22, 2009, Morgan Stanley no longer provided corporate
functions for the Company and no additional expense allocations have been
recorded by the Company since that date. (See Note 6, “Related Party
Transactions,” for further information.)
Inter-company
balances and transactions are eliminated in consolidation.
Concentration
of Credit Risk
The
Company licenses its products and services primarily to investment managers
principally in the United States, Europe and Asia (primarily Hong Kong and
Japan). The Company evaluates the credit of its customers and does not require
collateral. The Company maintains reserves for estimated credit
losses.
7
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial
instruments that may potentially subject the Company to concentrations of credit
risk consist principally of cash deposits and short-term
investments. At May 31, 2010 and November 30, 2009, cash and
cash equivalents held primarily on deposit were $152.1 million and $176.0
million, respectively. At May 31, 2010 and November 30, 2009, the
Company had invested $61.4 million and $295.3 million, respectively, in debt
securities with maturity dates ranging from 91 to 365 days from the date of
purchase.
For the
three months ended May 31, 2010, BlackRock Inc. accounted for 12.4% of the
Company’s operating revenues. For the six months ended May 31, 2010,
BlackRock Inc. accounted for 12.5% of the Company’s operating
revenues. For the three and six months ended May 31, 2009, no single
customer accounted for 10.0% or more of the Company’s operating
revenues.
2.
RECENT ACCOUNTING STANDARDS UPDATES
In June
2008, the Financial Accounting Standards Board (“FASB”) issued guidance titled,
“Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” This guidance is covered under ASC Section 260-10-55, “Earnings Per
Share-Overall-Implementation Guidance and Illustrations.” The guidance
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described by ASC Section 260-10-45, “Earnings Per Share-Overall-Other
Presentation Matters.” Under the guidance, unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share (“EPS”) pursuant to the two-class method.
The accounting guidance on whether share-based payment transactions are
participating securities became effective for the Company on December 1,
2009. All prior-period EPS data presented have been adjusted retrospectively.
The Company’s adoption of this accounting guidance, which addresses the
computation of EPS under the two-class method for share-based payment
transactions that are participating securities, reduced basic EPS by $0.01 for
both the three and six months ended May 31, 2009 and reduced diluted EPS by
$0.01 for the six months ended May 31, 2009. The Company’s adoption
of this accounting guidance had no effect on diluted EPS for the three months
ended May 31, 2009.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”)
No. 2009-13, “Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” or
ASU No. 2009-13. ASU No. 2009-13 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting and how the arrangement consideration should be allocated among the
separate units of accounting. ASU No. 2009-13 will be effective for the
Company’s fiscal year 2011 with early adoption permitted. The guidance may be
applied retrospectively or prospectively for new or materially modified
arrangements. The Company is currently assessing the impact that this guidance
will have on its condensed consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985): Certain
Revenue Arrangements That Include Software Elements,” or ASU
No. 2009-14. ASU No. 2009-14 modifies the scope of the software
revenue recognition guidance to exclude (a) non-software components of
tangible products and (b) software components of tangible products that are
sold, licensed or leased with tangible products when the software components and
non-software components of the tangible product function together to deliver the
tangible product’s essential functionality. ASC No. 2009-14 will be
effective for the Company’s fiscal year 2011 with early adoption permitted. The
guidance may be applied retrospectively or prospectively for new or materially
modified arrangements. The Company is currently assessing the impact that this
guidance will have on its condensed consolidated financial
statements.
In
February 2010, the FASB issued ASU No. 2010-9, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements,” or ASU
2010-9. ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An
entity that is a U.S. Securities and Exchange Commission (“SEC”) filer is not
required to disclose the date through which subsequent events have been
evaluated. This change alleviates potential conflicts between Subtopic 855-10
and the SEC's requirements. ASU 2010-9 was effective immediately for the
Company. The adoption of ASU 2010-09 did not have a material impact on its
condensed consolidated financial statements.
In April
2010, the FASB issued ASU No. 2010-12, “Accounting for Certain Tax Effects
of the 2010 Health Care Reform Acts,” or ASU 2010-12. This update
clarifies questions surrounding the accounting implications of the different
signing dates of the Health Care and Education Reconciliation Act
(signed March 30, 2010) and the Patient Protection and Affordable Care Act
(signed March 23, 2010). ASU 2010-12 states that the FASB and the
Office of the Chief Accountant at the SEC would not be opposed to viewing the
two Acts together for accounting purposes. The adoption of ASU 2010-12 did
not have a material impact on its condensed consolidated financial
statements.
8
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3.
EARNINGS PER COMMON SHARE
Basic EPS
is computed by dividing income available to MSCI common shareholders by the
weighted average number of common shares outstanding during the period. Common
shares outstanding include common stock and vested restricted stock unit awards
where recipients have satisfied either the explicit vesting terms or
retirement-eligible requirements. Diluted EPS reflects the assumed conversion of
all dilutive securities. There were no anti-dilutive stock options
excluded from the calculation of diluted EPS for the three or six months ended
May 31, 2010. There were no anti-dilutive stock options excluded from
the calculation of diluted EPS for the three months ended May 31,
2009. There were 1,038,170 stock options excluded from the
calculation of diluted EPS for the six months ended May 31, 2009 because of
their anti-dilutive effect.
The
Company computes EPS using the two-class method and determines whether
instruments granted in share-based payment transactions are participating
securities. The following table presents the computation of basic and diluted
EPS:
|
Three
Months Ended
May
31,
|
|
Six
Months Ended
May
31,
|
|||||||||||||
|
2010
|
2009
|
|
2010
|
2009
|
|||||||||||
|
(in thousands, except per share data)
|
|||||||||||||||
Net
income
|
|
$
|
24,067
|
|
$
|
19,618
|
|
$
|
51,585
|
|
$
|
36,342
|
||||
Less:
Allocations of earnings to unvested restricted stock units (1)
|
(337
|
)
|
(569
|
)
|
(722
|
)
|
(1,054
|
)
|
||||||||
Earnings
available to MSCI common shareholders
|
$
|
23,730
|
$
|
19,049
|
$
|
50,863
|
$
|
35,288
|
||||||||
|
|
|
|
|||||||||||||
Basic
weighted average common shares outstanding
|
|
105,345
|
|
100,359
|
|
105,290
|
|
100,324
|
||||||||
|
|
|
|
|||||||||||||
Basic
weighted average common shares outstanding
|
|
|
|
|
||||||||||||
Effect
of dilutive securities:
|
|
|
|
|
||||||||||||
Stock
options
|
|
658
|
|
12
|
|
633
|
|
6
|
||||||||
|
|
|
|
|||||||||||||
Diluted
weighted average common shares outstanding
|
|
106,003
|
|
100,371
|
|
105,923
|
|
100,330
|
||||||||
|
|
|
|
|||||||||||||
Earnings
per basic common share
|
|
$
|
0.23
|
|
$
|
0.19
|
|
$
|
0.48
|
|
$
|
0.35
|
||||
|
|
|
|
|||||||||||||
Earnings
per diluted common share
|
|
$
|
0.22
|
|
$
|
0.19
|
|
$
|
0.48
|
|
$
|
0.35
|
||||
|
|
|
|
(1)
|
The
restricted stock units participate in all of the earnings of the Company
in the computation of basic EPS and, therefore, the restricted stock units
are not included as incremental shares in the diluted EPS
computation.
|
The
components of comprehensive income are as follows:
Three Months Ended May 31,
|
Six Months Ended May 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Net
income
|
$
|
24,067
|
$
|
19,618
|
$
|
51,585
|
$
|
36,342
|
||||||||
Other
comprehensive income (loss), before tax:
|
||||||||||||||||
Unrealized
gains (losses) on cash flow hedges
|
4,191
|
(1,089
|
)
|
5,379
|
(2,533
|
)
|
||||||||||
Pension
and other post-retirement adjustments
|
104
|
336
|
206
|
257
|
||||||||||||
Unrealized
gains (losses) on available-for-sale securities
|
(210
|
)
|
—
|
3
|
—
|
|||||||||||
Foreign
currency translation adjustments
|
(200
|
)
|
254
|
274
|
355
|
|||||||||||
Other
comprehensive income (loss), before tax
|
3,885
|
(499
|
)
|
5,862
|
(1,921
|
)
|
||||||||||
Income
tax (expense) benefit related to items of other comprehensive
income
|
(1,524
|
)
|
156
|
(2,259
|
)
|
672
|
||||||||||
Other
comprehensive income (loss), net of tax
|
2,361
|
(343
|
)
|
3,603
|
(1,249
|
)
|
||||||||||
Comprehensive
income
|
$
|
26,428
|
$
|
19,275
|
$
|
55,188
|
$
|
35,093
|
9
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SHORT-TERM
INVESTMENTS
Short-term
investments include U.S. Treasury and state and municipal securities with
maturity dates ranging from 91 to 365 days from the date of
purchase.
The
Company classifies its short-term investments as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of shareholders’
equity. Fair value is determined based on quoted market rates. The cost of
securities sold is based on the specific-identification method. Realized gains
and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included as a component of interest income
(expense). Interest on securities classified as available-for-sale is included
as a component of interest income.
The fair
value and gross unrealized gains and losses of securities available-for-sale at
May 31, 2010 were as follows:
(in
thousands)
|
Amortized
Cost plus Accrued Interest
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Estimated
Fair
value
|
||||||||||||
Debt
securities available-for-sale
|
||||||||||||||||
U.S.
Treasury securities
|
$
|
57,466
|
$
|
5
|
$
|
(2
|
)
|
$
|
57,469
|
|||||||
State
and municipal securities
|
3,930
|
—
|
—
|
3,930
|
||||||||||||
Total
|
$
|
61,396
|
$
|
5
|
$
|
(2
|
)
|
$
|
61,399
|
As of
November 30, 2009, the Company had the intent and ability to hold its
investments to maturity and, thus, classified these investments as
held-to-maturity and stated them at amortized cost plus accrued interest. The
changes in the value of these securities, other than impairment charges, are not
reported on the condensed consolidated financial statements.
The net
carrying value and fair value of securities held-to-maturity at November 30,
2009 were as follows:
(in
thousands)
|
Net
Carrying Value
|
Gross
unrecognized
gains
|
Gross
unrecognized
losses
|
Estimated
Fair
value
|
||||||||||||
Debt
securities held-to-maturity
|
||||||||||||||||
U.S.
Treasury securities
|
$
|
295,304
|
$
|
264
|
$
|
—
|
$
|
295,568
|
||||||||
State
and municipal securities
|
—
|
—
|
—
|
—
|
||||||||||||
Total
|
$
|
295,304
|
$
|
264
|
$
|
—
|
$
|
295,568
|
10
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unrealized
Losses on Investments
Investments
with continuous unrealized losses for less than 12 months and for 12 months or
greater and their related fair values at May 31, 2010 were as
follows:
Less than 12 Months
|
12 Months or Greater
|
Total
|
|||||||||||||||||||||
(in
thousands)
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
Total
Fair Value
|
Total
Unrealized Losses
|
|||||||||||||||||
U.S.
Treasury securities
|
$
|
28,090
|
$
|
(2
|
)
|
$
|
—
|
$
|
—
|
$
|
28,090
|
$
|
(2
|
)
|
|||||||||
State
and municipal securities
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
Total
|
$
|
28,090
|
$
|
(2
|
)
|
$
|
—
|
$
|
—
|
$
|
28,090
|
$
|
(2
|
)
|
None of
the Company’s investments in held-to-maturity securities had been in an
unrealized loss position as of November 30, 2009.
Evaluating
Investments for Other-than-Temporary Impairments
If the
fair values of the Company’s debt security investments are less than the
amortized costs at the balance sheet date, the Company assesses whether the
impairments are other than temporary. As the Company currently invests only in
U.S. Treasury and state and municipal securities with a short duration (one year
or less), it would take a significant decline in fair value and U.S. economic
conditions for the Company to determine that these investments are other than
temporarily impaired.
Additionally,
management assesses whether it intends to sell or would more-likely-than-not not
be required to sell the investment before the expected recovery of the cost
basis. Management has asserted that it believes it is more-likely-than-not that
it will not be required to sell the investment before recovery of the cost
basis.
As
of May 31, 2010, no other-than-temporary impairment had been recorded on any of
the Company’s investments.
6.
RELATED PARTY TRANSACTIONS
Prior to
May 22, 2009, Morgan Stanley owned a controlling interest in the Company and, as
such, was treated as a related party. On May 22, 2009, Morgan Stanley
sold all of its remaining shares of the Company’s stock. At that
time, Morgan Stanley ceased to be a related party and all subsequent
transactions between Morgan Stanley and MSCI are accounted for, and presented
as, third party transactions.
Morgan
Stanley or its affiliates subscribe to, in the normal course of business,
certain of the Company’s products. Amounts recognized as related party revenues
by the Company from subscription to the Company’s products
by Morgan Stanley for the three and six
months ended May 31, 2009 were $2.5 million and $5.3 million,
respectively.
Morgan
Stanley affiliates had invoiced administrative expenses to the Company primarily
relating to staff services. The amounts invoiced by Morgan Stanley affiliates
for staff services for the three and six months ended May 31, 2009 were $0.6
million and $5.8 million, respectively. Interest expense incurred on
payables to Morgan Stanley for the three and six months ended May 31, 2009 was
$0.2 million and $0.4 million, respectively.
11
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property,
equipment and leasehold improvements at May 31, 2010 and November 30, 2009
consisted of the following:
As
of
|
||||||||
May
31,
|
November
30,
|
|||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Computer
& related equipment
|
$
|
37,029
|
$
|
38,773
|
||||
Furniture
& fixtures
|
2,918
|
3,004
|
||||||
Leasehold
improvements
|
14,978
|
13,947
|
||||||
Work-in-process
|
718
|
155
|
||||||
Subtotal
|
55,643
|
55,879
|
||||||
Accumulated
depreciation and amortization
|
(30,256
|
)
|
(26,498
|
)
|
||||
Property,
equipment and leasehold improvements, net
|
$
|
25,387
|
$
|
29,381
|
Depreciation
and amortization expense of property, equipment and leasehold improvements was
$3.6 million and $3.0 million for the three months ended May 31, 2010 and 2009,
respectively. Depreciation and amortization expense of property,
equipment and leasehold improvements was $6.9 million and $6.0 million for the
six months ended May 31, 2010 and 2009, respectively.
8.
INTANGIBLE ASSETS
The
Company amortizes definite-lived intangible assets over their estimated useful
lives. Amortizable intangible assets are tested for impairment when impairment
indicators are present, and, if impaired, written down to fair value based on
either discounted cash flows or appraised values. No impairment of intangible
assets has been identified during any of the periods presented. The Company has
no indefinite-lived intangibles.
Amortization
expense related to intangible assets for the three months ended May 31, 2010 and
2009 was $4.3 million and $6.4 million, respectively. Amortization
expense related to intangible assets for the six months ended May 31, 2010 and
2009 was $8.6 million and $12.9 million, respectively.
The gross
carrying amounts and accumulated amortization totals related to the Company’s
identifiable intangible assets are as follows:
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
||||||||||
Value
|
Amortization
|
Value
|
||||||||||
(in
thousands)
|
||||||||||||
As
of May 31, 2010
|
||||||||||||
Technology/software
|
$
|
140,462
|
$
|
(114,139
|
)
|
$
|
26,323
|
|||||
Trademarks
|
102,220
|
(28,973
|
)
|
73,247
|
||||||||
Customer
relationships
|
25,880
|
(13,816
|
)
|
12,064
|
||||||||
Total
intangible assets
|
$
|
268,562
|
$
|
(156,928
|
)
|
$
|
111,634
|
12
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
||||||||||
Value
|
Amortization
|
Value
|
||||||||||
(in
thousands)
|
||||||||||||
As
of November 30, 2009
|
||||||||||||
Technology/software
|
$
|
140,678
|
$
|
(109,090
|
)
|
$
|
31,588
|
|||||
Trademarks
|
102,220
|
(26,611
|
)
|
75,609
|
||||||||
Customer
relationships
|
25,880
|
(12,888
|
)
|
12,992
|
||||||||
Total
intangible assets
|
$
|
268,778
|
$
|
(148,589
|
)
|
$
|
120,189
|
The
estimated amortization expense for succeeding years is presented
below:
Fiscal Year
|
|
Amortization
Expense
|
|
|
(in thousands)
|
||
Remainder
of 2010
|
|
$
|
8,556
|
2011
|
|
17,111
|
|
2012
|
|
17,110
|
|
2013
|
|
6,582
|
|
2014
|
6,582
|
||
Thereafter
|
|
55,693
|
|
Total
|
|
$
|
111,634
|
9.
COMMITMENTS AND CONTINGENCIES
Leases. The
Company leases facilities under non-cancelable operating lease
agreements. The terms of certain lease agreements provide for rental
payments on a graduated basis. The Company recognizes rent expense on
the straight-line basis over the lease period and has accrued for rent expense
incurred but not paid. Rent expense for the three and six months
ended May 31, 2010 was $2.9 million and $5.6 million, respectively. For the
three and six months ended May 31, 2009, rent expense was $2.4 million and
$5.0 million, respectively.
Long-term debt.
On November 14, 2007, the Company entered into a secured $500.0 million
credit facility with Morgan Stanley Senior Funding, Inc. and Bank of America,
N.A., as agents for a syndicate of lenders, and other lenders party thereto
pursuant to a credit agreement dated as of November 20, 2007 (the “Credit
Facility”). The Credit Facility consisted of a $425.0 million term loan facility
and a $75.0 million revolving credit facility. The revolving credit
facility is available for working capital requirements and other general
corporate purposes (including the financing of permitted acquisitions), subject
to certain conditions. Outstanding borrowings under the Credit
Facility initially accrued interest at (i) the London Interbank Offered
Rate (“LIBOR”) plus a fixed margin of 2.50% in the case of the term loan A
facility and the revolving credit facility and 3.00% in the case of the term
loan B facility or (ii) the base rate plus a fixed margin of 1.50% in the
case of the term loan A facility and the revolving credit facility and 2.00% in
the case of the term loan B facility. In April 2008 and again in July 2008, the
Company’s fixed margin rate was reduced by 0.25% on both the term loan A
facility and the term loan B facility. In February 2010, the Company’s fixed
margin rate on its term loan A facility was reduced by an additional
0.25%. During the three months ended February 28, 2009, the Company
exercised its rights and chose to have a portion of both the term loan A
facility and term loan B facility referenced to the one month LIBOR rates while
the remaining portions continued to reference the three month LIBOR
rates. The term loan A facility and the term loan B facility
were scheduled to mature on November 20, 2012 and November 20, 2014,
respectively. The revolving credit facility was scheduled to mature on
November 20, 2012.
On April
1, 2010 and April 15, 2010, the Company prepaid principal balances on its term
loan facility of approximately $147.0 million and $150.0 million,
respectively. As of May 31, 2010, $70.9 million remained outstanding
under the term loan facility and there was $75.0 million of unused credit under
the revolving credit facility. For the unused credit, the Company
pays an annual 0.5% non-usage fee which was approximately $0.1 million for each
of the three months ended May 31, 2010 and 2009 and approximately $0.2 million
for each of the six months ended May 31, 2010 and 2009. Interest on the
principal is required to be paid either every three months in February, May,
August and November or monthly, depending on whether the referenced LIBOR rates
are three-month or one-month LIBOR rates.
In
connection with entering into the Credit Facility, the Company recorded
origination fees of $8.0 million which were being amortized over five to seven
years. As a result of the prepayments described above, the Company
recognized approximately $2.7 million in accelerated amortization of the
origination fees during the three months ended May 31, 2010. At May
31, 2010, $1.7 million of the origination fees remained
unamortized.
13
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Credit Facility is guaranteed by each of the Company’s direct and indirect
wholly-owned domestic subsidiaries and secured by substantially all of the
shares of the capital stock of the Company’s present and future domestic
subsidiaries and up to 65% of the shares of capital stock of its foreign
subsidiaries, substantially all of the Company’s and its domestic subsidiaries’
present and future property and assets. In addition, the Credit Facility
contains restrictive covenants.
Current
maturities of long term debt at May 31, 2010 was $8.2 million, net of a $0.1
million discount. Long term debt, net of current maturities at May 31, 2010 was
$62.3 million, net of a $0.2 million discount. For the three and six months
ended May 31, 2010, approximately $0.5 million of the debt discount had been
amortized. For the three and six months ended May 31, 2009, less than
$0.1 million of the debt discount had been amortized.
At May
31, 2010, the fair market value of the Company’s debt obligations was
approximated by its carrying value. The fair market value was estimated based on
the termination value paid on June 1, 2010. (See Note 16, “Subsequent Events,”
for further information.)
Interest Rate Swaps and Derivative
Instruments. The Company
manages its interest rate risk by using derivative instruments in the form of
interest rate swaps designed to reduce interest rate risk by effectively
converting a portion of floating-rate debt into fixed rate debt. This
action reduces the Company’s risk of incurring higher interest costs in periods
of rising interest rates and improves the overall balance between floating and
fixed-rate debt. On February 13, 2008, the Company entered into two interest
rate swap agreements for an aggregate notional principal amount of $251.7
million, amortizing through November 2010, that were designated as cash flow
hedges of interest rate risk. The Company's interest rate swaps are
recorded as assets or liabilities at fair value. The effective portion of the
changes in fair value of interest rate swaps designated, and that qualify as,
cash flow hedges is initially recorded as a component of accumulated other
comprehensive loss on the Condensed Consolidated Statements of Financial
Condition and is subsequently reclassified into interest expense on the
Condensed Consolidated Statements of Income in the period that the hedged
forecasted transaction affects earnings. The ineffective portion of
the change in fair value of the derivatives is recognized directly in
earnings.
On April 15, 2010, MSCI prepaid a
portion of its existing term loan facilities that was being hedged with its
interest rate swaps. As a result, MSCI fully terminated one of its
interest rate swaps and partially terminated the other interest rate swap to
match the remaining projected debt balances outstanding under the existing term
loan facilities terms through November 2010.
On April
15, 2010, MSCI discontinued prospective hedge accounting on the terminated swap
notional amounts and the loss in accumulated other comprehensive loss on the
Condensed Consolidated Statements of Financial Condition as of the termination
date relating to the terminated swap contract amounts was reclassified to
earnings in interest expense on the Condensed Consolidated Statements of Income
as the hedged transactions were no longer probable to occur. The Company also
discontinued prospective hedge accounting on the remaining swap contract at
April 15, 2010 as it no longer met the strict requirements for hedge
accounting.
At May
31, 2010, the Company planned to prepay the remaining portion of its existing
term loan facilities and terminate the remaining swap contract on June 1,
2010. Because the hedged transactions were no longer probable to
occur, the remaining loss in accumulated other comprehensive loss on the
Condensed Consolidated Statements of Financial Condition was reclassified to
interest expense on the Condensed Consolidated Statements of Income on May 31,
2010. (See Note 16, “Subsequent Events,” for further
information.)
The gross
carrying values of the interest rate contracts as of May 31, 2010 and 2009 were
$0.7 million and $6.2 million, respectively, and were recorded in other accrued
liabilities on the Condensed Consolidated Statements of Financial
Condition.
For the
three and six months ended May 31, 2010, the amount of loss recognized on the
effective portion of these interest rate contracts in accumulated other
comprehensive loss on the Condensed Consolidated Statements of Financial
Condition was less than $0.1 million and $0.3 million,
respectively. For the three and six months ended May 31, 2009, the
amount of
loss recognized on the effective portion of these interest rate contracts in
accumulated other comprehensive loss on the Condensed Consolidated Statements of
Financial Condition was $1.1 million and $2.5 million,
respectively.
For the
three and six months ended May 31, 2010, the amount of loss on the effective
portion of these interest rate contracts reclassified from accumulated other
comprehensive loss into interest expense on the Condensed Consolidated
Statements of Income was $1.0 million and $2.5 million,
respectively. For the three and six months ended May 31, 2009, the
14
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
amount of
loss on the effective portion of these interest rate contracts reclassified from
accumulated other comprehensive loss into interest expense on the Condensed
Consolidated Statements of Income was $1.0 million and $1.4 million,
respectively.
During
the three months ended May 31, 2010, the Company accelerated the
reclassification of amounts in accumulated other comprehensive loss to earnings
as a result of the hedged forecasted transactions becoming probable not to
occur. The accelerated amounts were a loss of $3.1 million and were
included in interest expense on the Condensed Consolidated Statements of
Income. No hedge ineffectiveness was recorded for the three and six
months ending May 31, 2010 and 2009.
Credit-risk-related contingent
features. The Company had agreements with each of its
derivative counterparties that contained cross-default provisions whereby if the
Company defaulted on any of its indebtedness, the Company could also be declared
in default on its derivative obligations.
As of May
31, 2010, the fair value of derivatives in a liability position related to these
agreements was $0.7 million. As of May 31, 2010, the Company has not
posted any collateral related to these agreements. If the company
breached any of these provisions it would be required to settle its obligations
under the agreements at their termination value of $0.7 million.
10.
EMPLOYEE BENEFITS
The
Company sponsors a 401(k) plan for eligible U.S. employees and defined
contribution and defined benefit pension plans that cover substantially all of
its non-U.S. employees. For the three months ended May 31, 2010 and
2009, costs relating to 401(k), pension and post-retirement benefit expenses
were $1.8 million and $1.4 million, respectively. Of these amounts,
$0.9 million and $0.7 million were recorded in cost of services and $0.9 million
and $0.7 million were recorded in selling, general and administrative for the
three months ended May 31, 2010 and 2009, respectively.
For the
six months ended May 31, 2010 and 2009, costs relating to 401(k), pension and
post-retirement benefit expenses were $4.4 million and $4.5 million,
respectively. Of these amounts, $2.5 million and $2.2 million were
recorded in cost of services and $1.9 million and $2.3 million were recorded in
selling, general and administrative for the six months ended May 31, 2010 and
2009, respectively.
401(k) and Other Defined
Contribution Plans. Eligible employees may participate in the
MSCI 401(k) plan (or any other regional defined contribution plan sponsored by
MSCI) immediately upon hire. Eligible employees receive 401(k) and other defined
contribution plan matching contributions and, in the case of the MSCI 401(k)
plan, an additional Company contribution of 3% of the employees’ cash
compensation, which is subject to vesting and certain other
limitations. The Company’s expenses associated with the 401(k) plan
and other defined contribution plans for the three months ended May 31, 2010 and
2009 were $1.2 million and $1.1 million, respectively. The Company’s
expenses associated with the 401(k) plan and other defined contribution plans
for the six months ended May 31, 2010 and 2009 were $3.3 million and $3.4
million, respectively.
Net Periodic Benefit
Expense. Net periodic benefit expense related to defined
benefit pension plans was $0.6 million and $0.3 million for the three
months ended May 31, 2010 and 2009, respectively. Net periodic benefit
expense related to defined benefit pension plans was $1.1 million
for each of the six months ended May 31, 2010 and 2009.
11. SHARE BASED
COMPENSATION
On
November 6, 2007, the Company’s Board of Directors approved the award of
founders grants to its employees in the form of restricted stock units and/or
options (“Founders Grant Award”). The aggregate value of the grants, which were
made on November 14, 2007, was approximately $68.0 million. The restricted
stock units and options vest over a four year period, with 50% vesting on the
second anniversary of the grant date and 25% vesting on each of the third and
fourth anniversary of the grant date. The options have an exercise price per
share of $18.00 and have a term of 10 years, subject to earlier cancellation in
certain circumstances. The aggregate value of the options was calculated
using the Black-Scholes valuation method consistent with ASC Subtopic 718-10,
“Compensation-Stock
Compensation.” The first tranche of the Founders Grant Award,
representing one-half of the total award, vested on November 14,
2009.
On
December 16, 2008, the Company, as a component of the 2008 annual bonus, awarded
certain of its employees with a grant in the form of restricted stock units
(“2008 Bonus Award”). The aggregate value of the grants was approximately $9.5
million of restricted stock units. The restricted stock units vest over a three
year period, with one-third vesting on January 8, 2010, January 10, 2011 and
January 9, 2012, respectively. Approximately $4.2 million of this grant was
awarded to retirement-eligible employees under the award terms. Based
on interpretive guidance related to ASC Subtopic 718-10, the Company accrues the
estimated cost of these awards over the course of the fiscal year in which the
award is earned. As such,
15
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the
Company accrued the estimated cost of the 2008 Bonus Award related to
retirement-eligible employees over the 2008 fiscal year. The first
tranche of the 2008 Bonus Award vested on January 8, 2010.
On
December 16, 2009, the Company, as a component of the 2009 annual bonus, awarded
certain of its employees with a grant in the form of restricted stock units
(“2009 Bonus Award”). The aggregate value of the grants was approximately $13.2
million of restricted stock units. The restricted stock units vest over a three
year period, with one-third vesting on December 20, 2010, December 19, 2011 and
December 17, 2012, respectively. Approximately $5.1 million of this grant was
awarded to retirement-eligible employees under the award terms. The
Company accrued the estimated cost of the 2009 Bonus Award granted to
retirement-eligible employees over the 2009 fiscal year.
For the
Founders Grant Award, all or a portion of the award may be cancelled in certain
limited situations, including termination for cause, if employment is terminated
before the end of the relevant restriction period. For the 2008 and 2009 Bonus
Awards, all or a portion of the award may be cancelled if employment is
terminated for certain reasons before the end of the relevant restriction period
for non-retirement-eligible employees.
During
the six months ended May 31, 2010, the Company awarded 8,427 shares in MSCI
common stock and 8,286 restricted stock units to directors who were not
employees of the Company or Morgan Stanley during the period. During
the six months ended May 31, 2009, the Company awarded 13,703 shares in MSCI
common stock and 7,824 restricted stock units to directors who were not
employees of the Company or Morgan Stanley during the
period.
Share
based compensation expense was $5.4 million and $10.5 million for the three and
six months ended May 31, 2010, of which $2.0 million and $4.1 million was
related to the Founders Grant Award, respectively. Share based compensation
expense was $9.0 million and $16.7 million for the three and six months ended
May 31, 2009, of which $7.3 million and $13.5 million was related to the
Founders Grant Award, respectively.
12.
INCOME TAXES
The
Company’s provision for income taxes was $30.2 million and $22.0 million for the
six months ended May 31, 2010 and 2009, respectively. These
amounts reflect effective tax rates of 36.9% and 37.7% for the six months ended
May 31, 2010 and 2009, respectively. The Company’s effective tax rate of
36.9% for the six months ended May 31, 2010 reflects the Company’s estimate of
the annual effective tax rate adjusted for the impact of the costs related to
the acquisition of RiskMetrics, which are not tax deductible, and net discrete
tax benefits recognized during the period.
The
Company is under examination by the Internal Revenue Service (the “IRS”) and
other tax authorities in certain countries, such as Japan and the United
Kingdom, and states in which the Company has significant business operations,
such as New York. The Company regularly assesses the likelihood of
additional assessments in each of the taxing jurisdictions resulting from these
open examinations and subsequent years’ examinations. The Company
believes the resolution of tax matters will not have a material effect on the
consolidated financial condition of the Company, although a resolution could
have a material impact on the Company’s Consolidated Statement of Income for a
particular future period and on the Company’s effective tax rate for any period
in which such resolution occurs.
The
following table summarizes the major taxing jurisdictions in which the Company
and its affiliates operate and the open tax years for each major jurisdiction:
Tax
Jurisdiction
|
Open
Tax Years
|
||
United
States
|
1999-2008
|
||
California
|
2004-2008
|
||
New
York State and City
|
2002-2008
|
||
Hong
Kong
|
2002-2008
|
||
United
Kingdom
|
2006-2008
|
||
Japan
|
2006-2008
|
13.
SEGMENT INFORMATION
ASC
Subtopic 280-10, “Segment
Reporting,” establishes standards for reporting information about
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to
16
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
allocate
resources and in assessing performance. Based on the Company’s integration and
management strategies, the Company leverages common production, development and
client coverage teams to create, produce and license investment decision support
tools to various types of investment organizations worldwide. On this basis, the
Company assesses that it operates in a single business segment.
Revenue
by geography is based on the shipping address of the customer.
The
following table sets forth revenue for the periods indicated by geographic
area:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
May
31, 2010
|
May 31, 2009 | May 31, 2010 | May 31, 2009 | |||||||||
(in
thousands)
|
||||||||||||
Revenues | ||||||||||||
Americas: | ||||||||||||
United
States
|
$
|
56,278
|
$
|
53,070
|
$
|
116,436
|
$
|
103,093
|
||||
Other
|
4,288
|
3,496
|
8,148
|
6,876
|
||||||||
Total
Americas
|
60,566
|
56,566
|
124,584
|
109,969
|
||||||||
EMEA:
|
||||||||||||
United
Kingdom
|
20,127
|
13,368
|
34,108
|
26,944
|
||||||||
Other
|
23,219
|
21,416
|
46,646
|
42,113
|
||||||||
Total
EMEA
|
43,346
|
34,784
|
80,754
|
69,057
|
||||||||
Asia
& Australia:
|
||||||||||||
Japan
|
11,305
|
9,982
|
21,915
|
20,352
|
||||||||
Other
|
9,953
|
8,043
|
19,597
|
15,912
|
||||||||
Total
Asia & Australia
|
21,258
|
18,025
|
41,512
|
36,264
|
||||||||
Total
|
$
|
125,170
|
$
|
109,375
|
$
|
246,850
|
$
|
215,290
|
Long-lived
assets consist of property, equipment, leasehold improvements, goodwill and
intangible assets, net of accumulated depreciation and
amortization.
The
following table sets forth long-lived assets on the dates indicated by
geographic area:
As
of
|
||||||||
May
31,
2010
|
November
30,
2009
|
|||||||
Long-lived
assets
|
(in
thousands)
|
|||||||
Americas:
|
||||||||
United
States
|
$
|
560,604
|
$
|
571,052
|
||||
Other
|
1,952
|
672
|
||||||
Total
Americas
|
562,556
|
571,724
|
||||||
EMEA:
|
||||||||
United
Kingdom
|
2,199
|
1,488
|
||||||
Other
|
8,196
|
11,997
|
||||||
Total
EMEA
|
10,395
|
13,485
|
||||||
Asia
& Australia:
|
||||||||
Japan
|
435
|
503
|
||||||
Other
|
5,258
|
5,481
|
||||||
Total
Asia & Australia
|
5,693
|
5,984
|
||||||
Total
|
$
|
578,644
|
$
|
591,193
|
17
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14.
LEGAL MATTERS
From time
to time, the Company is party to various litigation matters incidental to the
conduct of its business. The Company is not presently party to any legal
proceedings the resolution of which the Company believes would have a material
adverse effect on its business, operating results, financial condition or cash
flows.
15. ACQUISITION OF RISKMETRICS GROUP,
INC.
On June
1, 2010, MSCI acquired RiskMetrics. Under the terms of the Agreement
and Plan of Merger dated as of February 28, 2010 by and among MSCI, Crossway
Inc. (“Merger Sub”), a wholly owned subsidiary of MSCI, and RiskMetrics, Merger
Sub merged with and into RiskMetrics, with RiskMetrics continuing as the
surviving corporation and a wholly owned subsidiary of MSCI. MSCI and
RiskMetrics began joint operations immediately after the Merger became
effective. MSCI acquired RiskMetrics to, among other things, offer
clients a more comprehensive portfolio of investment decision support tools that
will enable clients to understand risk across their entire investment processes
as well as broaden the focus of the Company’s client base beyond asset owners,
asset managers and broker dealers to include a greater number of hedge fund,
mutual fund and bank clients. No financial results of RiskMetrics
have been included in the Company’s condensed financial statements as of, or for
the three or six months ended, May 31, 2010.
The total
preliminary purchase price for RiskMetrics was approximately $1,572.4 million
and was comprised of:
(in
thousands)
|
||||
Cash
|
$ | 1,146,699 | ||
MSCI
class A common stock valued using the New York Stock Exchange closing
price on June 1, 2010
|
371,817 | |||
Preliminary
fair value of outstanding vested and unvested stock options and unvested
restricted stock awards assumed
|
53,904 | |||
Total
preliminary purchase price
|
$ | 1,572,420 |
MSCI
issued approximately 12.6 million class A common shares and reserved
approximately 4.3 million class A common shares for outstanding vested and
unvested stock options and unvested restricted stock awards assumed as part of
the acquisition of RiskMetrics.
The
preliminary fair values of stock options assumed were estimated using a
Hull-White Lattice option-pricing model. The preliminary fair value of the
unearned portion of the unvested RiskMetrics stock options and restricted stock
awards will be recorded as operating expense over the remaining service periods,
while the preliminary fair values of the earned portion of the vested and
unvested stock options and unvested restricted stock awards are included in the
total purchase price. The preliminary purchase price for RiskMetrics is subject
to change during the measurement period as MSCI finalizes the number of
RiskMetrics common shares outstanding that it purchased, validates the
conversion calculations of RiskMetrics stock options and restricted stock awards
assumed, and finalizes the proportion of such stock options and restricted stock
awards assumed that are earned as of the acquisition date.
18
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Preliminary
Purchase Price Allocation
The
acquisition method of accounting is based on ASC Subtopic 805-10, “Business Combinations,” and
uses the fair value concepts defined in ASC Subtopic 820-10, “Fair Value Measurements and
Disclosures,” which MSCI has adopted as required. The total
preliminary purchase price for RiskMetrics was allocated to the preliminary net
tangible and intangible assets based upon their preliminary fair values as of
June 1, 2010 as set forth below. The excess of the preliminary purchase price
over the preliminary net tangible assets and preliminary intangible assets was
recorded as goodwill. The preliminary allocation of the purchase price was based
upon a preliminary valuation and the estimates and assumptions are subject to
change within the measurement period (up to one year from the acquisition date).
The primary areas of the preliminary purchase price allocation that are not yet
finalized relate to the fair values of certain tangible assets acquired and
liabilities assumed, the valuation of intangible assets acquired, certain legal
matters, income and non-income based taxes and residual goodwill. MSCI expects
to continue to obtain information to assist it in determining the fair value of
the net assets acquired at the acquisition date during the measurement period.
The preliminary purchase price allocation for RiskMetrics is as
follows:
(in
thousands)
|
||||
Cash
and cash equivalents
|
$ | 76,459 | ||
Trade
receivables
|
33,577 | |||
Other
assets
|
36,203 | |||
Intangible
assets
|
622,667 | |||
Goodwill
|
1,252,036 | |||
Accounts
payable and other liabilities
|
(42,139 | ) | ||
Debt
|
(107,485 | ) | ||
Deferred
revenues
|
(115,526 | ) | ||
Deferred
tax liabilities, net
|
(183,372 | ) | ||
Total
preliminary purchase price
|
$ | 1,572,420 |
MSCI
generally does not expect the goodwill recognized to be deductible for income
tax purposes.
Preliminary
Valuations of Intangible Assets Acquired
The
following table sets forth the preliminary components of intangible assets
acquired in connection with the RiskMetrics acquisition:
Estimated Fair Value
|
Estimated Useful Life
|
|||||
(in thousands)
|
||||||
Customer
relationships—finite-lived
|
$ | 424,500 | 13 to 15 years | |||
Developed
technology—finite-lived
|
51,200 | 4 to 7 years | ||||
Proprietary
processes—finite-lived
|
4,900 | 6 years | ||||
Trade
names—finite-lived
|
138,700 | 10 to 20 years | ||||
Internally
developed software—finite-lived
|
787 | 3 years | ||||
Non-compete
agreements—finite-lived
|
2,580 | 1.5 years | ||||
Total
|
$ | 622,667 |
Preliminary
Pre-Acquisition Contingencies Assumed
MSCI has
evaluated and continues to evaluate pre-acquisition contingencies relating to
RiskMetrics that existed as of the acquisition date. MSCI has preliminarily
determined that certain of these pre-acquisition contingencies are probable in
nature and estimable as of the acquisition date and, accordingly, have
preliminarily recorded the best estimates for these contingencies as a part of
the preliminary purchase price allocation for RiskMetrics. MSCI continues to
gather information
19
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
for, and
evaluate substantially all, pre-acquisition contingencies that have been assumed
from RiskMetrics. If MSCI makes changes to the amounts recorded or identifies
additional pre-acquisition contingencies during the remainder of the measurement
period, such amounts recorded will be included in the purchase price allocation
during the measurement period and, subsequently, in MSCI’s results of
operations.
Unaudited
Pro Forma Financial Information
The
unaudited pro forma financial information in the table below summarizes the
combined results of operations for MSCI and RiskMetrics as though the companies
were combined as of December 1, 2008. The pro forma financial information for
all periods presented also includes the business combination accounting effects
resulting from the acquisition including the amortization charges from acquired
intangible assets (certain of which are preliminary), adjustments to interest
income for lower average cash balances, interest expense for borrowings and the
amortization of deferred financing fees, debt discounts and prepaid agency fees,
the elimination of certain goodwill impairment charges incurred by RiskMetrics
and the related tax effects as though the aforementioned companies were combined
as of December 1, 2008. The pro forma financial information as presented below
is for informational purposes only and is not indicative of the results of
operations that would have been achieved if the acquisitions and any borrowings
undertaken to finance the acquisition had taken place at December 1,
2008.
The
unaudited pro forma financial information for the six months ended May 31, 2010
combined the historical results of MSCI for the six months ended May 31, 2010
and the historical results of RiskMetrics for the six month-period ended March
31, 2010 (due to differences in reporting periods). The unaudited pro forma
financial information for the six months ended May 31, 2009 combined the
historical results of MSCI for the six months ended May 31, 2009 and the
historical results of RiskMetrics for the six month-period ended March 31, 2009
(due to differences in reporting periods).
The
unaudited pro forma financial information and the effects of the pro forma
adjustments listed above were as follows for the six months ended May 31, 2010
and 2009:
Six
Months Ended
May
31,
|
||||||||
(in
thousands)
|
2010
|
2009
|
||||||
Total
revenues
|
$ | 400,368 | $ | 368,164 | ||||
Net
income
|
$ | 59,626 | $ | 39,474 | ||||
Earnings
per diluted common share
|
$ | 0.49 | $ | 0.33 |
16.
SUBSEQUENT EVENTS
Management
of the Company evaluated subsequent events from May 31, 2010 through the
issuance date of this Form 10-Q.
On June
1, 2010, MSCI acquired RiskMetrics. (See Note 15, “Acquisition of
RiskMetrics Group, Inc.,” for further information.) In connection with the
acquisition, MSCI entered into a senior secured credit agreement dated as of
June 1, 2010 with Morgan Stanley Senior Funding, Inc., as administrative agent,
Morgan Stanley & Co. Incorporated, as collateral agent, and the other
lenders party thereto, which is comprised of (i) a $1,275.0 million six-year
term loan facility and (ii) a $100.0 million five-year revolving credit
facility. Principal on the term loan facility is expected to be paid at 1.00%
per year plus a portion of MSCI’s excess cash flows (as defined in the agreement
and depending on its leverage ratio), with remaining principal
payable in the final year. Borrowings under the credit facilities
bear interest at a rate equal to the greater of LIBOR, or 1.50%, plus a margin
of 3.25%, which margin, beginning a specified period after the acquisition, will
be subject to adjustment based on MSCI’s leverage ratio.
In
connection with entering into the senior secured credit agreement described
above, MSCI paid $71.1 million on June 1, 2010 to retire its then-existing term
loan facility plus accrued interest and $0.7 million to retire its interest rate
swap and accrued interest. (See Note 9, “Commitments and Contingencies,” for
further information.)
20
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have
reviewed the accompanying condensed consolidated statement of financial
condition of MSCI Inc. and subsidiaries (the “Company”) as of May 31, 2010, and
the related condensed consolidated statements of income for the three and six
month periods ended May 31, 2010 and 2009, and the condensed consolidated
statements of cash flows for the six month periods ended May 31, 2010 and 2009.
These interim financial statements are the responsibility of the management of
MSCI Inc.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to such condensed consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statement of
financial condition of MSCI Inc. and subsidiaries as of November 30, 2009
and the related consolidated statements of income, comprehensive income, cash
flows and shareholders’ equity for the fiscal year then ended (not presented
herein); and in our report dated January 29, 2010, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated statement of
financial condition as of November 30, 2009 is fairly stated, in all
material respects, in relation to the consolidated statement of financial
condition from which it has been derived.
/s/
Deloitte & Touche LLP
New York,
New York
July 1,
2010
21
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the condensed consolidated
financial statements and related notes included elsewhere in this Form 10-Q and
in our Annual Report on Form 10-K for the fiscal year ended November 30, 2009
(the “Form 10-K”). This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed below. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below and those
discussed in “Item 1A.—Risk Factors,” within this Form 10-Q and in our Form
10-K.
Overview
We are a
leading global provider of investment decision support tools, including indices
and portfolio risk and performance analytics. Our products and
services include indices, portfolio risk and performance analytics, and,
following the acquisition discussed below, governance tools. Our flagship
products are our global equity indices marketed under the MSCI brand, our equity
portfolio analytics marketed under the Barra brand and our energy and commodity
asset valuation analytics products marketed under the FEA
brand. Certain products and services added as the result of the
acquisition of RiskMetrics Group, Inc. (“RiskMetrics”) are discussed
below.
As of May
31, 2010 our clients include asset owners such as pension funds, endowments,
foundations, central banks and insurance companies; institutional and retail
asset managers, such as managers of pension assets, mutual funds, exchange
traded funds (“ETFs”), hedge funds and private wealth; and financial
intermediaries such as broker-dealers, exchanges, custodians and investment
consultants. As of May 31, 2010, we had over 3,200 clients across 66 countries.
We had 21 offices in 15 countries to help serve our diverse client base, with
approximately 50.5% of our revenue from clients in the Americas, 32.7% in
Europe, the Middle East and Africa (“EMEA”), 8.9% in Japan and 7.9% in
Asia-Pacific (not including Japan), based on revenues for the six months ended
May 31, 2010.
Our
principal sales model is to license annual, recurring subscriptions to our
products for use at specified locations by a given number of users for an annual
fee paid up front. The substantial majority of our revenues come from these
annual, recurring subscriptions. Over time, as their needs evolve, our clients
often add product modules, users and locations to their subscriptions, which
results in an increase in our revenues per client. Additionally, a significant
source of our revenues comes from clients who use our indices as the basis for
index-linked investment products such as ETFs. These clients commonly pay us a
license fee based on the investment product’s assets. We also generate a limited
amount of our revenues from certain exchanges that use our indices as the basis
for futures and options contracts and pay us a license fee based on their volume
of trades.
In
evaluating our financial performance, we focus on revenue growth for the company
in total and by product category as well as operating profit growth and the
level of profitability as measured by our operating margin. Our business is not
highly capital intensive and, as such, we expect to continue to convert a high
percentage of our operating profits into excess cash in the future. Our
revenue growth strategy includes: (a) expanding and deepening our
relationships with investment institutions worldwide; (b) developing new
and enhancing existing equity product offerings, as well as further developing
and growing our investment tools for multi-asset class investment institutions;
and (c) actively seeking to acquire products, technologies and companies
that will enhance, complement or expand our client base and our product
offerings.
To
maintain and accelerate our revenue and operating income growth, we will
continue to invest in and expand our operating functions and infrastructure,
including new sales and client support staff and facilities in locations around
the world and additional staff and supporting technology for our research and
our data operations and technology. At the same time, managing and controlling
our operating expenses is very important to us and a distinct part of our
culture. Over time, our goal is to keep the rate of growth of our operating
expenses below the rate of growth of our revenues, allowing us to expand our
operating margins. However, at times, because of significant market
opportunities, it may be more important for us to invest in our business in
order to support increased efforts to attract new clients and to develop new
product offerings, rather than emphasize short-term operating margin expansion.
Furthermore, in some periods our operating expense growth may exceed our
operating revenue growth due to the variability of revenues from several of our
products, including our equity indices licensed as the basis of
ETFs.
Acquisition of RiskMetrics
Group, Inc.
On June
1, 2010, MSCI completed its acquisition of RiskMetrics in a cash-and-stock
transaction valued at approximately $1,572.4 million. In connection
with the acquisition, we entered into a senior secured credit agreement, which
22
is
comprised of (i) a $1,275.0 million six-year term loan facility and (ii) a
$100.0 million five-year revolving credit facility. See “—Liquidity and
Capital Resources” below for additional information.
RiskMetrics
is a leading provider of risk management and corporate governance products and
services to participants in the global financial markets. With the
acquisition of RiskMetrics, the Company now offers clients a more comprehensive
portfolio of investment decision support tools that will enable clients to
understand risk across their entire investment processes, with product offerings
including the MSCI indices which include over 120,000 daily indices covering
more than 70 countries; Barra portfolio risk and performance analytics covering
global equity and fixed income markets; RiskMetrics market and credit risk
analytics; ISS out-sourced proxy research, voting and vote reporting services;
CFRA forensic accounting risk research, legal/regulatory risk assessment, and
due-diligence; and FEA valuation models and risk management software for the
energy and commodities markets. The acquisition of RiskMetrics also
broadens the focus of the Company’s client base beyond asset owners, asset
managers and broker dealers to include a greater number of hedge fund, mutual
fund and bank clients.
For the
year ended November 30, 2009, we had total operating revenues of $442.9 million
and operating expenses of $292.0 million. For the year ended December 31,
2009, RiskMetrics had total operating revenues of $303.4 million and operating
expenses of $236.4 million. We will assign a significant value to the
intangible assets of RiskMetrics as part of the acquisition, which will increase
the amortization expense we will recognize. We also expect to incur
increased interest expense as a result of the credit facility we entered into in
connection with acquisition. We therefore expect that the acquisition
of RiskMetrics will have a significant impact on our financial results in future
periods. Additionally, we may have additional exposure to foreign
currency risk following the acquisition as a result of the subsequent change in
the relative mix of our non-U.S. dollar revenues and expenses.
As part
of the acquisition, we increased our employee base by approximately 1,140
additional people and acquired 20 offices in 12 countries. As a result, we
expect we will experience increased costs related to compensation and benefits,
occupancy costs, market data fees and information technology services. In
the near term, we expect we will also experience duplicative selling, general
and administrative costs due to the increased size and scope of our selling,
marketing and administrative functions. While we are continuing to focus
on the cost structure of the combined company and expect to generate significant
synergies, we also expect to incur non-recurring restructuring costs associated
with integrating the companies.
Due to
significant limitations on access to certain information relating to RiskMetrics
prior to the acquisition date and the limited time since the acquisition date,
management is continuing to review the potential impact of the acquisition on
our financial results in future periods.
Certain
actions taken and costs incurred in connection with acquisition of RiskMetrics
prior to the acquisition closing date are reflected in these condensed
consolidated financial statements. However, the assets acquired and
liabilities assumed and the results of operations from RiskMetrics are not
reflected in these condensed consolidated financial statements as of and for the
three and six months ended May 31, 2010. See Note 15. Acquisition of
RiskMetrics Group, Inc. for additional information.
Additional
information, such as the unaudited pro forma condensed combined financial
statements of MSCI and RiskMetrics as of and for the three months ended February
28, 2010 and for the year ended November 30, 2009, can be found in MSCI’s
Current Report on Form 8-K filed with the SEC on June 7, 2010. Also See
Note 15. Acquisition of RiskMetrics Group, Inc. —Unaudited Pro Forma Financial
Information.
The
discussion of our results of operations for the three and six months ended May
31, 2010 and 2009 are presented below. The results of operations for
interim periods may not be indicative of future results.
Results
of Operations
Three
Months Ended May 31, 2010 Compared to the Three Months Ended May 31,
2009:
23
|
Three
Months Ended
May 31,
|
|||||||||||||
|
2010
|
2009
|
Increase/(Decrease)
|
|||||||||||
|
(in
thousands, except per share data)
|
|||||||||||||
Operating
revenues
|
|
$
|
125,170
|
$
|
109,375
|
$
|
15,795
|
14.4
|
%
|
|||||
Operating
expenses:
|
|
|||||||||||||
Cost
of services
|
|
30,463
|
29,269
|
1,194
|
4.1
|
%
|
||||||||
Selling,
general and administrative
|
|
40,177
|
34,052
|
6,125
|
18.0
|
%
|
||||||||
Amortization
of intangible assets
|
|
4,277
|
6,428
|
(2,151
|
)
|
(33.5
|
%)
|
|||||||
Depreciation
and amortization of property, equipment, and leasehold
improvements
|
3,556
|
2,972
|
584
|
19.7
|
%
|
|||||||||
Total
operating expenses
|
|
78,473
|
72,721
|
5,752
|
7.9
|
%
|
||||||||
Operating
income
|
|
46,697
|
36,654
|
10,043
|
27.4
|
%
|
||||||||
Other
expense (income), net
|
|
8,746
|
4,682
|
4,064
|
86.8
|
%
|
||||||||
Provision
for income taxes
|
|
13,884
|
12,354
|
1,530
|
12.4
|
%
|
||||||||
Net
income
|
|
$
|
24,067
|
$
|
19,618
|
$
|
4,499
|
22.7
|
%
|
|||||
|
||||||||||||||
Earnings
per basic common share
|
|
$
|
0.23
|
$
|
0.19
|
$
|
0.04
|
21.1
|
%
|
|||||
|
||||||||||||||
Earnings
per diluted common share
|
|
$
|
0.22
|
$
|
0.19
|
$
|
0.03
|
15.8
|
%
|
|||||
|
||||||||||||||
Operating
margin
|
|
37.3%
|
|
33.5%
|
|
Operating
Revenues
We group
our revenues into the following four product categories:
•
|
Equity
indices
|
•
|
Equity
portfolio analytics
|
•
|
Multi-asset
class portfolio analytics
|
•
|
Other
products
|
The
following table summarizes the revenue by category for the three months ended
May 31, 2010 compared to the three months ended May 31, 2009:
|
Three
Months Ended
May 31,
|
|
||||||||||||||
2010
|
2009
|
Increase/(Decrease)
|
||||||||||||||
(in
thousands)
|
||||||||||||||||
Equity
indices:
|
|
|
|
|||||||||||||
Equity
index subscriptions
|
|
$
|
54,222
|
|
$
|
47,282
|
|
$
|
6,940
|
14.7
|
%
|
|||||
Equity
index asset based fees
|
25,696
|
15,220
|
10,476
|
68.8
|
%
|
|||||||||||
Total
equity indices
|
79,918
|
62,502
|
17,416
|
27.9
|
%
|
|||||||||||
Equity
portfolio analytics
|
29,041
|
31,582
|
(2,541
|
)
|
(8.0
|
%)
|
||||||||||
Multi-asset
class portfolio analytics
|
11,107
|
9,572
|
1,535
|
16.0
|
%
|
|||||||||||
Other
products
|
5,104
|
5,719
|
(615
|
)
|
(10.8
|
%)
|
||||||||||
Total
operating revenues
|
$
|
125,170
|
$
|
109,375
|
$
|
15,795
|
14.4
|
%
|
Total
operating revenues for the three months ended May 31, 2010 increased $15.8
million, or 14.4%, to $125.2 million compared to $109.4 million for the three
months ended May 31, 2009. The growth was comprised of increases in asset based
fees and subscription revenues of $10.5 million and $5.3 million,
respectively. Subscription revenues consist of our revenues related
to equity index subscriptions, equity portfolio analytics, multi-asset class
portfolio analytics and other products. Our revenues are impacted by changes in
exchange rates primarily as they relate to the U.S. dollar. Had the
U.S. dollar not strengthened relative to exchange rates at the beginning of the
year, our revenues for the three months ended May 31, 2010 would have been
higher by $1.2 million.
24
Revenues
related to equity indices increased $17.4 million, or 27.9%, to $79.9 million
for the three months ended May 31, 2010 compared to $62.5 million in the same
period in 2009. Revenues from the equity index subscriptions sub-category
were up $6.9 million, or 14.7%, to $54.2 million during the current period with
strength across all regions and client types except broker dealers, which were
down slightly. The growth was led by increases in our emerging market and small
cap index modules as well as custom indices and our value/growth index extension
modules.
Revenues
attributable to the equity index asset based
fees sub-category increased $10.5 million, or 68.8%, to $25.7 million
for the three months ended May 31, 2010 compared to $15.2 million in the same
period in 2009 led by growth in our ETF asset based fee revenues. The
average value of assets in ETFs linked to MSCI equity indices in the aggregate
increased 87.4% to $252.4 billion for the three months ended May 31, 2010
compared to $134.7 billion for the three months ended May 31,
2009. As of May 31, 2010, the value of assets in ETFs linked to MSCI
equity indices was $237.6 billion, representing an increase of 35.1% from $175.9
billion as of May 31, 2009. We estimate that the $61.7 billion year-over-year
increase in value of assets in ETFs linked to MSCI equity indices was
attributable to $32.5 billion of net cash inflows and $29.2 billion of net asset
appreciation.
The three
MSCI indices with the largest amount of ETF assets linked to them as of May 31,
2010 were the MSCI Emerging Markets, EAFE and U.S. Broad Market Indices with
$67.5 billion, $35.8 billion and $13.7 billion in assets,
respectively.
The
following table sets forth the value of assets in ETFs linked to MSCI indices
and the sequential change of such assets as of the periods
indicated:
Quarter
Ended
|
||||||||||||||||||||||||
2009
|
2010
|
|||||||||||||||||||||||
$
in Billions
|
February
|
May
|
August
|
November
|
February
|
May
|
||||||||||||||||||
AUM
in ETFs linked to MSCI Indices
|
$ | 107.8 | $ | 175.9 | $ | 199.2 | $ | 234.2 | $ | 235.6 | $ | 237.6 | ||||||||||||
Sequential
Change ($ Growth in Billions)
|
||||||||||||||||||||||||
Market
Appreciation/(Depreciation)
|
$ | (13.6 | ) | $ | 42.2 | $ | 20.1 | $ | 18.0 | $ | (3.0 | ) | $ | (5.9 | ) | |||||||||
Cash
Inflow/(Outflow)
|
2.4 | 25.9 | 3.2 | 17.0 | 4.4 | 7.9 | ||||||||||||||||||
Total
Change
|
$ | (11.2 | ) | $ | 68.1 | $ | 23.3 | $ | 35.0 | $ | 1.4 | $ | 2.0 | |||||||||||
Source:
Bloomberg and MSCI
|
The
following table sets forth the average value of assets in ETFs linked to MSCI
indices for the periods indicated:
Quarterly
Average
|
||||||||||||||||||||||||
2009
|
2010
|
|||||||||||||||||||||||
$
in Billions
|
February
|
May
|
August
|
November
|
February
|
May
|
||||||||||||||||||
AUM
in ETFs linked to MSCI Indices
|
$ | 126.4 | $ | 134.7 | $ | 180.3 | $ | 216.8 | $ | 239.6 | $ | 252.4 | ||||||||||||
Source:
Bloomberg and MSCI
|
The value
of the assets in ETFs linked to our equity indices as of the last day of the
month and the monthly average balance for the prior six months can be found
under the link “AUM in ETFs Linked to MSCI Indices” on our website at
http://ir.msci.com. Information contained on our website is not incorporated by
reference into this Quarterly Report on Form 10-Q or any other report filed
with the Securities and Exchange Commission.
Revenues
related to equity portfolio analytics products decreased 8.0% to $29.0 million
for the three months ended May 31, 2010 compared to $31.6 million in the same
period in 2009. The decreases were the result of lower levels of new
subscriptions and lower retention rates in recent quarters, most notably for
Aegis, our propriety equity risk data and software product. Within equity
portfolio analytics, Aegis revenue declined 9.8% to $18.9 million and
Models Direct, our proprietary risk data accessed directly, declined 7.3% to
$8.6 million, partially offset by an increase of 20.0% to $1.5 million in Barra
on Vendors, our proprietary risk data product accessed through
vendors.
25
Revenues
related to multi-asset class portfolio analytics increased $1.5 million, or
16.0%, to $11.1 million for the three months ended May 31, 2010 compared to $9.6
million in the same period in 2009. This growth reflects an increase of 26.9% to
$9.1 million for BarraOne, partially offset by a decrease of 16.3% to $2.0
million for TotalRisk, which is a product being decommissioned with its existing
users being given the opportunity to transition to BarraOne. The growth in
BarraOne was led by the asset managers and asset owners and, from a regional
perspective, EMEA, reflecting growth in new subscriptions as well as relatively
high retention rates.
Revenues
from other products decreased $0.6 million, or 10.8%, to $5.1 million for the
three months ended May 31, 2010 compared to $5.7 million in the same period in
2009. This reflects a decline of 24.7% to $1.2 million for fixed income
analytics products offset, in part, by an increase of 3.6% to $3.9 million for
our energy and commodity analytics products.
Run
Rate
At the
end of any period, we generally have subscription and investment product license
agreements in place for a large portion of our total revenues for the following
12 months. We measure the fees related to these agreements and refer to this as
our “Run Rate.” The Run Rate at a particular point in time represents the
forward-looking fees for the next 12 months from all subscriptions and
investment product licenses we currently provide to our clients under renewable
contracts assuming all contracts that come up for renewal are renewed and
assuming then-current exchange rates. For any license where fees are linked to
an investment product’s assets or trading volume, the Run Rate calculation
reflects an annualization of the most recent periodic fee earned under such
license. The Run Rate does not include fees associated with “one-time” and other
non-recurring transactions. In addition, we remove from the Run Rate the fees
associated with any subscription or investment product license agreement with
respect to which we have
received a notice of
termination or non-renewal during the period and we have determined that such
notice evidences the client’s final decision to terminate or not renew the
applicable subscription or agreement, even though such notice is not effective
until a later date.
Because
the Run Rate represents potential future fees, there is typically a delayed
impact on our operating revenues from changes in our Run Rate. In addition, the
actual amount of revenues we will realize over the following 12 months will
differ from the Run Rate because of:
•
|
revenues
associated with new subscriptions and non-recurring
sales;
|
•
|
modifications,
cancellations and non-renewals of existing agreements, subject to
specified notice requirements;
|
•
|
fluctuations
in asset-based fees, which may result from market movements or from
investment inflows into and outflows from investment products linked to
our indices;
|
•
|
fluctuations
in fees based on trading volumes of futures and options contracts linked
to our indices;
|
•
|
price
changes;
|
•
|
revenue
recognition differences under U.S. GAAP;
and
|
•
|
fluctuations
in foreign exchange rates.
|
The
following tables set forth our Run Rates as of the dates indicated and the
percentage growth over the periods indicated:
26
As
of
|
||||||||||||||||||
May
31,
|
February
28,
|
Year
Over Year
|
Sequential
|
|||||||||||||||
2010
|
2009
|
2010
|
Comparison
|
Comparison
|
||||||||||||||
(in
thousands)
|
||||||||||||||||||
Run
Rates
|
||||||||||||||||||
Equity
indices
|
||||||||||||||||||
Subscription
|
$
|
202,101
|
$
|
178,634
|
$
|
191,862
|
13.1
|
%
|
5.3
|
%
|
||||||||
Asset
based fees
|
91,977
|
68,892
|
94,033
|
33.5
|
%
|
(2.2
|
)
|
%
|
||||||||||
Equity
Indices total
|
294,078
|
247,526
|
285,895
|
18.8
|
%
|
2.9
|
%
|
|||||||||||
Equity
portfolio analytics
|
118,064
|
126,344
|
119,046
|
(6.6
|
)
|
%
|
(0.8
|
)
|
%
|
|||||||||
Multi-asset
class analytics
|
42,145
|
37,194
|
41,142
|
13.3
|
%
|
2.4
|
%
|
|||||||||||
Other
products
|
19,938
|
21,612
|
20,500
|
(7.7
|
)
|
%
|
(2.7
|
)
|
%
|
|||||||||
Total
Run Rate
|
$
|
474,225
|
$
|
432,676
|
$
|
466,583
|
9.6
|
%
|
1.6
|
%
|
||||||||
Subscription
total
|
$
|
382,248
|
$
|
362,784
|
$
|
372,550
|
5.4
|
%
|
2.6
|
%
|
||||||||
Asset
based fees total
|
91,977
|
69,892
|
94,033
|
31.6
|
%
|
(2.2
|
)
|
%
|
||||||||||
Total
Run Rate
|
$
|
474,225
|
$
|
432,676
|
$
|
466,583
|
9.6
|
%
|
1.6
|
%
|
||||||||
Changes
in Run Rate between periods reflect increases from new subscriptions, decreases
from cancellations, increases or decreases, as the case may be, from the change
in the value of assets of investment products linked to MSCI indices, the change
in trading volumes of futures and options contracts linked to MSCI indices,
price changes and fluctuations in foreign exchange rates.
At May
31, 2010, we had a total of 3,203 clients, excluding clients that pay only asset
based fees, as compared to 3,080 at May 31, 2009 and 3,153 at February 28, 2010.
The sequential increase in the client count reflects an increase across all
client types except for the number of hedge fund clients which were
flat.
Aggregate
and Core Retention Rates
The
following table sets forth our Aggregate Retention Rates by product category for
the three months ended:
May
31,
|
||||||||
2010
|
2009
|
|||||||
Equity
Index
|
92.9
|
%
|
92.8
|
%
|
||||
Equity
Portfolio Analytics
|
84.5
|
%
|
82.0
|
%
|
||||
Multi-Asset
Class Analytics
|
89.1
|
%
|
83.2
|
%
|
||||
Other
|
81.3
|
%
|
88.3
|
%
|
||||
Total
|
89.1
|
%
|
87.7
|
%
|
The
following table sets forth our Core Retention Rates by product category for the
three months ended:
May
31,
|
||||||||
2010
|
2009
|
|||||||
Equity
Index
|
93.4
|
%
|
93.2
|
%
|
||||
Equity
Portfolio Analytics
|
86.4
|
%
|
83.5
|
%
|
||||
Multi-Asset
Class Analytics
|
93.5
|
%
|
93.7
|
%
|
||||
Other
|
81.3
|
%
|
89.6
|
%
|
||||
Total
|
90.5
|
%
|
89.5
|
%
|
The
quarterly Aggregate Retention Rates are calculated by annualizing the
cancellations for which we have received a notice of termination or non-renewal
during the quarter and have determined that such notice evidences the client’s
final decision to terminate or not renew the applicable subscription or
agreement, even though such notice is not effective until a later date. This
annualized cancellation figure is then divided by the subscription Run Rate at
the beginning of the year to calculate a cancellation rate. This cancellation
rate is then subtracted from 100% to derive the annualized Aggregate Retention
Rate for the quarter. The Aggregate Retention Rate is computed on a
product-by-product basis. Therefore, if a client reduces the number of products
to which it subscribes or switches between our products, we treat it as a
cancellation. In addition, we treat any reduction in fees resulting from
renegotiated contracts as a cancellation in the calculation to the extent of the
reduction. Aggregate Retention Rates are generally higher during the first
three fiscal quarters and lower in the fourth
27
fiscal
quarter. For the calculation of the Core Retention Rate the same methodology is
used except the cancellations in the quarter are reduced by the amount of
product swaps. We do not calculate Aggregate or Core Retention Rates for that
portion of our Run Rate attributable to assets in investment products linked to
our indices or to trading volumes of futures and options contracts linked to our
indices.
Operating
Expenses
We group
our operating expenses into four categories:
· Cost
of services
|
|
·
Selling, general and administrative (“SG&A”)
|
|
·
Amortization of intangible assets
|
|
In both
the cost of services and SG&A expense categories, compensation and benefits
represent the majority of our expenses. Other costs associated with the number
of employees such as office space and professional services are included in both
the cost of services and SG&A expense categories and are consistent with the
allocation of employees to those respective areas.
The
following table shows operating expenses by each of the categories:
Three
Months Ended
May
31,
|
|||||||||||||||||
2010
|
2009
|
Increase/(Decrease)
|
|||||||||||||||
(in
thousands)
|
|||||||||||||||||
Cost
of services
|
|||||||||||||||||
Compensation
and benefits
|
$
|
22,354
|
$
|
22,430
|
$
|
(76)
|
(0.3
|
)
|
%
|
||||||||
Non-compensation
expenses
|
8,109
|
6,839
|
1,270
|
18.6
|
%
|
||||||||||||
Total
cost of services
|
30,463
|
29,269
|
1,194
|
4.1
|
%
|
||||||||||||
Selling,
general and administrative
|
|||||||||||||||||
Compensation
and benefits
|
22,410
|
24,170
|
(1,760
|
)
|
(7.3
|
)
|
%
|
||||||||||
Non-compensation
expenses
|
17,767
|
9,882
|
7,885
|
79.8
|
%
|
||||||||||||
Total
selling, general and administrative
|
40,177
|
34,052
|
6,125
|
18.0
|
%
|
||||||||||||
Amortization
of intangible assets
|
4,277
|
6,428
|
(2,151
|
)
|
(33.5
|
)
|
%
|
||||||||||
Depreciation
of property, equipment, and leasehold improvements
|
3,556
|
2,972
|
584
|
19.7
|
%
|
||||||||||||
Total
operating expenses
|
$
|
78,473
|
$
|
72,721
|
$
|
5,752
|
7.9
|
%
|
Compensation
and benefits
|
$
|
44,764
|
$
|
46,600
|
$
|
(1,836
|
)
|
(3.9
|
)
|
%
|
|||||||
Non-compensation
expenses
|
25,876
|
16,721
|
9,155
|
54.8
|
%
|
||||||||||||
Amortization
of intangible assets
|
4,277
|
6,428
|
(2,151
|
)
|
(33.5
|
)
|
%
|
||||||||||
Depreciation
of property, equipment, and leasehold improvements
|
3,556
|
2,972
|
584
|
19.7
|
%
|
||||||||||||
Total
operating expenses
|
$
|
78,473
|
$
|
72,721
|
$
|
5,752
|
7.9
|
%
|
Operating
expenses were $78.5 million for the three months ended May 31, 2010, an increase
of $5.8 million, or 7.9%, compared to $72.7 million in the same period of
2009. The increase reflects $5.3 million in costs associated with
the acquisition of RiskMetrics and higher non-compensation costs offset, in
part, by reduced amortization of our intangible assets, a decrease in
compensation and benefits and the elimination of costs allocated by Morgan
Stanley following our May 22, 2009 separation. Our operating expenses
are impacted by changes in exchange rates primarily as they relate to the U.S.
dollar. Had the U.S. dollar not strengthened relative to exchange
rates at the beginning of the year, our operating expense for the three months
ended May 31, 2010 would have been higher by $1.9 million.
Compensation
and benefits expenses represent the majority of our expenses across all of our
operating functions and typically have represented approximately 50% to 60% of
our total operating expenses. These costs generally contribute to the
28
majority
of our expense increases from period to period, reflecting increased
compensation and benefits expenses for current staff and increased staffing
levels. Continued growth of our emerging market centers around the
world is an important factor in our ability to manage and control the growth of
our compensation and benefit expenses. As of May 31, 2010,
approximately 47.9% of our employees were located in emerging market centers
compared to 35.3% as of May 31, 2009.
During
the three months ended May 31, 2010, compensation and benefits costs were $44.8
million, a decrease of $1.8 million, or 3.9%, compared to $46.6 million in the
same period of 2009. The decrease reflects lower stock based
compensation expense of $3.7 million and reduced severance costs of $0.5
million. Additionally, during the three months ended May 31, 2009 we
incurred $1.2 million of costs related to the separation from Morgan Stanley
which were not incurred in the current year. These decreases were
offset, in part, by $3.7 million in higher costs related to current staff and
increased staffing levels.
Stock
based compensation expense for the three months ended May 31, 2010 was $5.2
million, a decrease of $3.7 million, or 41.4%, compared to $8.9 million in same
period of 2009. For the three months ended May 31, 2010, stock based
compensation consisted of $2.0 million for the founders grant award, $1.7
million for restricted stock units granted as a component of the 2008 and 2009
annual bonus awards, and $1.4 million for retirement eligible
employees. For the three months ended May 31, 2009, stock based
compensation consisted of $7.3 million for the founders grant award, $0.8
million for retirement eligible employees, and $0.8 million for restricted stock
units granted as a component of the 2008 annual bonus award. The decrease in the
expense related to the founders grant award is primarily attributable to the
vesting of the first tranche in November 2009, representing one-half of the
award, and increased expense in the prior year due to adjustments to the
estimated rates of forfeiture.
Non-compensation
expenses for the three months ended May 31, 2010 was $25.9 million, an increase
of $9.2 million, or 54.8%, compared to $16.7 million in the same period of
2009. The increase reflects $5.3 million in costs related to the
acquisition of RiskMetrics as well as increased market data, information
technology, third party consulting, travel and entertainment and occupancy costs
of $4.6 million. The increases were partially offset by a $0.7
million year over year decrease in costs resulting from the elimination of costs
allocated by Morgan Stanley following our May 22, 2009 separation.
Cost
of Services
Cost of
services includes costs related to our research, data management and production,
software engineering and product management functions. Costs in these areas
include staff compensation and benefits, occupancy costs, market data fees,
information technology services and, for the period prior to our May 22, 2009
separation, costs allocated by Morgan Stanley for staffing
services. Compensation and benefits generally contribute to a
majority of our expense increases from period to period, reflecting increases
for existing staff and increased staffing levels.
For the
three months ended May 31, 2010, total cost of services expenses increased $1.2
million, or 4.1%, to $30.5 million compared to $29.3 million for the three
months ended May 31, 2009. The change was largely due to an increase
in market data and third party consulting costs, partially offset by the
elimination of cost allocations from Morgan Stanley as a result of our
separation on May 22, 2009.
Compensation
and benefits expenses for the three months ended May 31, 2010 and 2009 was $22.4
million. The cost associated with increased staffing levels was
offset by the previously discussed decrease in founders grant expense.
Non-compensation expenses for the three months ended May 31, 2010 increased $1.3
million, or 18.6%, to $8.1 million compared to $6.8 million in the same period
of 2009. The change is largely due to higher market data and third party
consulting costs, offset in part, by the elimination of cost allocations from
Morgan Stanley as a result of our separation on May 22, 2009.
Our cost
of services expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Had the U.S. dollar not strengthened relative to
exchange rates at the beginning of the year, our cost of services for the three
months ended May 31, 2010 would have been higher by $0.7 million.
Selling,
General and Administrative
SG&A
includes expenses for our sales and marketing staff, and our finance, human
resources, legal and compliance, information technology infrastructure,
corporate administration personnel and, for the period prior to our May 22, 2009
separation, costs allocated from Morgan Stanley. As with cost of services, the
largest expense in this category relates to compensation and benefits. Other
significant expenses are for occupancy costs, consulting services and
information technology costs. For the three months ended May 31,
2010, SG&A expenses were $40.2 million, an increase of $6.1 million, or
18.0%, compared to $34.1 million in the same period of 2009.
29
Compensation
expenses of $22.4 million decreased by $1.8 million, or 7.3%, for the three
months ended May 31, 2010 compared to $24.2 million in the same period of
2009. The decrease was primarily due to lower founders grant expense,
as previously discussed, offset, in part, by costs associated with current staff
and increased staffing levels.
Non-compensation expenses for the three
months ended May 31, 2010 increased $7.9 million, or 79.8%, to $17.8 million
compared to $9.9 million in the same period of 2009. The increase
reflects $5.3 million in costs related to the acquisition of RiskMetrics as well
as increased information technology, third party consulting, travel and
entertainment and occupancy costs totaling $3.2 million. These
increases were partially offset by a $0.6 million year over year decrease in
costs resulting from the elimination of costs allocated by Morgan Stanley
following our May 22, 2009 separation.
Our
SG&A expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Had the U.S. dollar not strengthened relative to
exchange rates at the beginning of the year, our SG&A expenses for the three
months ended May 31, 2010 would have been higher by $1.0 million.
Amortization
of Intangibles
Amortization
of intangibles expense relates to the intangible assets arising from the
acquisition of Barra in June 2004. For the three months ended May 31, 2010,
amortization of intangibles expense totaled $4.3 million compared to $6.4
million for the same period in 2009. A portion of the intangible assets became
fully amortized at the end of fiscal 2009, resulting in the decrease of $2.2
million, or 33.5%, versus the prior year.
Depreciation
and amortization of property, equipment, and leasehold
improvements
For the
three months ended May 31, 2010 and 2009, depreciation and amortization of
property, equipment, and leasehold improvements totaled $3.6 million and $3.0
million, respectively.
Other
Expense (Income), Net
Other
expense (income), net for the three months ended May 31, 2010 was $8.7
million, an increase of $4.0 million, or 86.8%, compared to $4.7 million for the
same period of 2009. The increase reflects accelerated interest expense of
$3.1 million associated with the termination of our interest rate swap and $3.1
million associated with the accelerated recognition of deferred financing and
debt discount costs as a result of $297.0 million in debt prepayments made
during the three months ended May 31, 2010. Partially offsetting this
increase was a $2.2 million decrease in interest on our term loans due to lower
average outstanding debt and the impact of decreased interest
rates.
Income
Taxes
The
provision for income tax expense was $13.9 million for the three months ended
May 31, 2010, an increase of $1.5 million, or 12.4%, compared to $12.4 million
for the same period in 2009. The increase was the result of higher
taxable income and the impact of costs related to the acquisition of
RiskMetrics, which are not tax deductible, partially offset by the net discrete
tax benefits recognized during the three months ended May 31, 2010. Our
effective tax rate was 36.6% for the three months ended May 31,
2010. This rate reflects the impact of the acquisition costs and net
discrete tax benefits recognized during the three months May 31, 2010 which
increased our effective tax rate by approximately 1.6%. Our
effective tax rate was 38.6% for the three months ended May 31,
2009. This rate reflects the impact of net discrete tax expenses
recognized during the three months ended May 31, 2009 which increased our
effective tax rate by approximately 2.3%.
Results
of Operations
Six
Months Ended May 31, 2010 Compared to the Six Months Ended May 31,
2009:
30
|
Six
Months Ended
May 31,
|
||||||||||||||
|
2010
|
2009
|
Increase/(Decrease)
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||
Operating
Revenues
|
|
$
|
246,850
|
$
|
215,290
|
$
|
31,560
|
14.7
|
%
|
||||||
Operating
expenses:
|
|
||||||||||||||
Cost
of services
|
|
59,754
|
58,204
|
1,550
|
2.7
|
%
|
|||||||||
Selling,
general and administrative
|
|
77,638
|
68,768
|
8,870
|
12.9
|
%
|
|||||||||
Amortization
of intangible assets
|
|
8,555
|
12,857
|
(4,302
|
)
|
(33.5
|
%)
|
||||||||
Depreciation
and amortization of property, equipment, and leasehold
improvements
|
6,949
|
6,023
|
926
|
15.4
|
%
|
||||||||||
Total
operating expenses
|
|
152,896
|
145,852
|
7,044
|
4.8
|
%
|
|||||||||
Operating
income
|
|
93,954
|
69,438
|
24,516
|
35.3
|
%
|
|||||||||
Other
expense (income), net
|
|
12,166
|
11,081
|
1,085
|
9.8
|
%
|
|||||||||
Provision
for income taxes
|
|
30,203
|
22,015
|
8,188
|
37.2
|
%
|
|||||||||
Net
income
|
|
$
|
51,585
|
$
|
36,342
|
$
|
15,243
|
41.9
|
%
|
||||||
|
|||||||||||||||
Earnings
per basic common share
|
|
$
|
0.48
|
$
|
0.35
|
$
|
0.13
|
37.1
|
%
|
||||||
|
|||||||||||||||
Earnings
per diluted common share
|
|
$
|
0.48
|
$
|
0.35
|
$
|
0.13
|
37.1
|
%
|
||||||
|
|||||||||||||||
Operating
margin
|
|
38.1%
|
|
32.3%
|
|
The
following table summarizes the revenue by category for the six months ended May
31, 2010 compared to the six months ended May 31, 2009:
Six
Months Ended
May 31,
|
||||||||||||||||
2010
|
2009
|
Increase/(Decrease)
|
||||||||||||||
(in
thousands)
|
||||||||||||||||
Equity
indices:
|
||||||||||||||||
Equity
index subscriptions
|
$ | 104,397 | $ | 92,549 | $ | 11,848 | 12.8 | % | ||||||||
Equity
index asset based fees
|
50,681 | 28,402 | 22,279 | 78.4 | % | |||||||||||
Total
equity indices
|
155,078 | 120,951 | 34,127 | 28.2 | % | |||||||||||
Equity
portfolio analytics
|
59,024 | 63,722 | (4,698 | ) | (7.4 | %) | ||||||||||
Multi-asset
class portfolio analytics
|
21,952 | 19,195 | 2,757 | 14.4 | % | |||||||||||
Other
products
|
10,796 | 11,422 | (626 | ) | (5.5 | %) | ||||||||||
Total
operating revenues
|
$ | 246,850 | $ | 215,290 | $ | 31,560 | 14.7 | % |
Total
operating revenues for the six months ended May 31, 2010 increased $31.6
million, or 14.7%, to $246.9 million compared to $215.3 million for the six
months ended May 31, 2009. The growth was comprised of increases in asset
based fees and subscription revenues of $22.3 million and $9.3 million,
respectively. Our revenues are impacted by changes in exchange rates
primarily as they relate to the U.S. dollar. Had the U.S. dollar not
strengthened relative to exchange rates at the beginning of the year, our
revenues for the six months ended May 31, 2010 would have been higher by $1.8
million.
Revenues
related to equity indices increased $34.1 million, or 28.2%, to $155.1 million
for the six months ended May 31, 2010 compared to $121.0 million in the same
period in 2009. Revenues from the equity index
subscriptions sub-category were up 12.8% to $104.4 million during the six
months ended May 31, 2010, with strength across all regions, most notably in
EMEA. This growth was led by strong increases in our custom equity indices, the
emerging market and small cap market index modules as well as our equity index
user fees.
Revenues
attributable to the equity index asset based fees sub-category increased
$22.3 million, or 78.4%, to $50.7 million in the six months ended May 31, 2010
compared to $28.4 million in the same period of 2009. The average
value of assets in ETFs linked to MSCI equity indices increased 88.5% to $246.0
billion for the six months ended May 31, 2010 compared to $130.5 billion for the
six months ended May 31, 2009. As of May 31, 2010, the value of assets in
ETFs linked to MSCI equity indices was $237.6 billion, representing an increase
of 35.1% from $175.9 billion as of May 31, 2009. We estimate that the $61.7
billion year-over-year increase in value of assets in ETFs linked to MSCI equity
indices was attributable to $32.5 billion of net cash inflows and $29.2 billion
of net asset appreciation.
31
Revenues
related to equity portfolio analytics decreased $4.7 million, or 7.4%, to $59.0
million for the six months ended May 31, 2010 compared to $63.7 million for the
six months ended May 31, 2009. Within equity portfolio analytics,
Aegis revenue declined 10.0% to $38.3 million and equity models direct revenues
declined 5.4% to $17.7 million, partially offset by an increase of 24.8% to $3.0
million in our Barra on Vendors product.
Revenues
related to multi-asset class portfolio analytics increased $2.8 million, or
14.4%, to $22.0 million for the six months ended May 31, 2010 compared to $19.2
million for the six months ended May 31, 2009. This reflects an increase of
25.2% to $18.3 million for BarraOne, offset in part by a decrease of 20.2% to
$3.7 million for TotalRisk, which is in the process of being decommissioned with
its existing users being offered the opportunity to transition to
BarraOne.
Revenues
from other products decreased $0.6 million, or 5.5%, to $10.8 million in the six
months ended May 31, 2010 compared to $11.4 million for the six months ended May
31, 2009. The decline reflects a decrease of 97.6% in asset based fees from
investment products linked to MSCI investable hedge fund indices and a decrease
of 16.3% for fixed income analytics, partially offset by a 7.1% increase for our
energy and commodity analytics products. The decline in MSCI investable hedge
fund indices revenues reflects the termination of licenses to create a fund
based on an MSCI investable hedge fund index.
The
following table sets forth our Aggregate Retention Rates by product category for
the six months ended:
May
31,
2010
|
May
31,
2009
|
|||||||
Equity
Index
|
93.9
|
%
|
93.9
|
%
|
||||
Equity
Portfolio Analytics
|
88.4
|
%
|
84.1
|
%
|
||||
Multi-Asset
Class Analytics
|
85.9
|
%
|
87.6
|
%
|
||||
Other
|
83.5
|
%
|
85.8
|
%
|
||||
Total
|
90.6
|
%
|
89.2
|
%
|
The
following table sets forth our Core Retention Rates by product category for the
six months ended:
May
31,
2010
|
May
31,
2009
|
|||||||
Equity
Index
|
94.6
|
%
|
94.1
|
%
|
||||
Equity
Portfolio Analytics
|
90.1
|
%
|
85.4
|
%
|
||||
Multi-Asset
Class Analytics
|
91.5
|
%
|
92.8
|
%
|
||||
Other
|
85.0
|
%
|
86.8
|
%
|
||||
Total
|
92.2
|
%
|
90.4
|
%
|
The
Aggregate Retention Rates for any six month period are calculated by annualizing
the cancellations for which we have received a notice of termination or
non-renewal and we have determined that such notice evidences the client’s final
decision to terminate or not renew the applicable subscription or agreement,
even though such notice is not effective until a later date. This annualized
cancellation figure is then divided by the subscription Run Rate at the
beginning of the year to calculate a cancellation rate. This cancellation rate
is then subtracted from 100% to derive the annualized Aggregate Retention Rate
for the six month period. For the calculation of the Core Retention
Rate the same methodology is used except the cancellations during the six month
period are reduced by the amount of product swaps. We do not calculate Aggregate
or Core Retention Rates for that portion of our Run Rate attributable to assets
in investment products linked to our indices or to trading volumes of futures
and options contracts linked to our indices.
Operating
Expenses
32
Six
Months Ended
May
31,
|
|||||||||||||||
2010
|
2009
|
Increase/(Decrease)
|
|||||||||||||
(in
thousands)
|
|||||||||||||||
Cost
of services
|
|||||||||||||||
Compensation
and benefits
|
$
|
44,721
|
$
|
43,727
|
$
|
994
|
2.3
|
%
|
|||||||
Non-compensation
expenses
|
15,033
|
14,477
|
556
|
3.8
|
%
|
||||||||||
Total
cost of services
|
59,754
|
58,204
|
1,550
|
2.7
|
%
|
||||||||||
Selling,
general and administrative
|
|||||||||||||||
Compensation
and benefits
|
45,069
|
47,373
|
(2,304
|
)
|
(4.9
|
)
|
%
|
||||||||
Non-compensation
expenses
|
32,569
|
21,395
|
11,174
|
52.2
|
%
|
||||||||||
Total
selling, general and administrative
|
77,638
|
68,768
|
8,870
|
12.9
|
%
|
||||||||||
Amortization
of intangible assets
|
8,555
|
12,857
|
(4,302
|
)
|
(33.5
|
)
|
%
|
||||||||
Depreciation
of property, equipment, and leasehold improvements
|
6,949
|
6,023
|
926
|
15.4
|
%
|
||||||||||
Total
operating expenses
|
$
|
152,896
|
$
|
145,852
|
$
|
7,044
|
4.8
|
%
|
|||||||
Compensation
and benefits
|
$
|
89,790
|
$
|
91,100
|
$
|
(1,310
|
)
|
(1.4
|
)
|
%
|
|||||
Non-compensation
expenses
|
47,602
|
35,872
|
11,730
|
32.7
|
%
|
||||||||||
Amortization
of intangible assets
|
8,555
|
12,857
|
(4,302
|
)
|
(33.5
|
)
|
%
|
||||||||
Depreciation
of property, equipment, and leasehold improvements
|
6,949
|
6,023
|
926
|
15.4
|
%
|
||||||||||
Total
operating expenses
|
$
|
152,896
|
$
|
145,852
|
$
|
7,044
|
4.8
|
%
|
Operating
expenses were $152.9 million for the six months ended May 31, 2010, an increase
of $7.0 million, or 4.8%, compared to $145.9 million in the same period of
2009. The increase reflects $7.5 million in costs associated with the
acquisition of RiskMetrics, higher non-compensation costs and depreciation
expenses offset, in part, by reduced amortization of our intangible assets,
decreased compensation and benefits costs and the elimination of costs allocated
by Morgan Stanley following our May 22, 2009 separation. Our
operating expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Had the U.S. dollar not strengthened
relative to exchange rates at the beginning of the year, our operating expense
for the six months ended May 31, 2010 would have been higher by $2.7
million.
During
the six months ended May 31, 2010, compensation and benefits costs were $89.8
million, a decrease of $1.3 million, or 1.4%, compared to $91.1 million in the
same period of 2009. The decrease reflects lower stock based
compensation expense of $6.5 million and reduced severance and other employee
benefits costs of $1.3 million. Additionally, during the six months ended May
31, 2009 we incurred costs of $1.3 million related to the separation from Morgan
Stanley which were not incurred in the current year. These decreases
were offset, in part, $7.8 million of higher costs related to current staff and
increased staffing levels.
Stock
based compensation expense for the six months ended May 31, 2010 was $10.2
million, a decrease of $6.4 million, or 38.8%, compared to $16.6 million in same
period of 2009. For the six months ended May 31, 2010, stock based
compensation consisted of $4.1 million for the founders grant award, $3.1
million for restricted stock units granted as a component of the 2008 and 2009
annual bonus awards and $2.8 million for retirement eligible
employees. For the six months ended May 31, 2009, stock based
compensation consisted of $13.5 million for the founders grant award, $1.6
million for retirement eligible employees, and $1.5 million for restricted stock
units granted as a component of the 2008 annual bonus award. The decrease in the
expense related to the founders grant award is primarily attributable to the
vesting of the first tranche in November 2009, representing one-half of the
award, and increased expense in the prior year due to adjustments to the
estimated rates of forfeiture.
Non-compensation
expenses for the six months ended May 31, 2010 increased 32.7% to $47.6 million
compared to $35.9 million in the same period of 2009. The increase
reflects $7.5 million in costs related to the acquisition of RiskMetrics as well
as increased market data, information technology, third party consulting, travel
& entertainment and occupancy costs of $6.0 million. These
increases were partially offset by a $1.8 million year over year decrease in
costs resulting from the elimination of costs allocated by Morgan Stanley
following our May 22, 2009 separation.
Cost
of Services
33
For the
six months ended May 31, 2010, total cost of services was $59.8 million, an
increase of $1.6 million, or 2.7%, compared to $58.2 million for the six months
ended May 31, 2009. The change was largely due to an increase in
compensation and benefits and market data costs, partially offset by the
elimination of cost allocations from Morgan Stanley as a result of our
separation on May 22, 2009.
Compensation
and benefit expense for the six months ended May 31, 2010 was $44.7 million, an
increase of 2.3% compared to $43.7 million in the same period of
2009. The increase reflects higher costs related to current staff and
increased staffing levels offset, in part, by a decrease in founders grant
expense as previously discussed. Non-compensation expense for the six
months ended May 31, 2010 was $15.0 million, an increase of 3.8% compared to
$14.5 million in the same period of 2009. The increase was largely
due to higher market data and occupancy costs offset, in part, by the
elimination of cost allocations from Morgan Stanley as a result of our
separation on May 22, 2009.
Our cost
of services expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Had the U.S. dollar not strengthened relative to
exchange rates at the beginning of the year, our cost of services for the six
months ended May 31, 2010 would have been higher by $1.0 million.
SG&A
expenses were $77.6 million for the six months ended May 31, 2010, an increase
of $8.9 million, or 12.9%, compared to $68.8 million in the same period of
2009. The increase reflects costs associated with the acquisition of
RiskMetrics and higher non-compensation costs offset, in part, by a decrease in
compensation and benefits and the elimination of cost allocations from Morgan
Stanley reflecting our separation as of May 22, 2009.
Compensation
and benefit expense for the six months ended May 31, 2010 was $45.1 million, a
decrease of 4.9%, compared to $47.4 million in the same period of
2009. The change was largely due to a decrease in founders grant
expense, as previously discussed, offset by higher costs related to current
staff and increased staffing levels. Non-compensation expense for the
six months ended May 31, 2010 was $32.6 million, an increase of 52.2%, compared
to $21.4 million in the same period of 2009. The increase was due to
$7.5 million in costs associated with the acquisition of RiskMetrics as well as
increased information technology, recruiting, occupancy and travel and
entertainment offset, in part, by the elimination of cost allocations from
Morgan Stanley as a result of our separation on May 22, 2009.
Our
SG&A expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Had the U.S. dollar not strengthened relative to
exchange rates at the beginning of the year, our SG&A expenses for the six
months ended May 31, 2010 would have been higher by $1.5
million.
Amortization
of Intangibles
Amortization
of intangibles expense relates to the intangible assets arising from the
acquisition of Barra in June 2004. For the six months ended May 31, 2010,
amortization of intangibles expense totaled $8.6 million compared to $12.9
million for the same period in 2009. A portion of the intangible assets became
fully amortized at the end of fiscal 2009, resulting in the decrease of $4.3
million, or 33.5%, versus the prior year
Depreciation
and amortization of property, equipment, and leasehold
improvements
For the
six months ended May 31, 2010 and 2009, depreciation and amortization of
property, equipment, and leasehold improvements totaled $6.9 million and $6.0
million, respectively.
Other
Expense (Income), Net
Other
expense (income), net for the six months ended May 31, 2010 was
an expense of $12.2 million, an increase of $1.1 million, or 9.8%, compared
to $11.1 million for the same period of 2009. The increase reflects
accelerated interest expense of $3.1 million associated with the termination of
our interest rate swap and $3.1 million associated with the accelerated
recognition of deferred financing and debt discount costs as a result of $297.0
million in debt prepayments. Partially offsetting these amounts was a
$3.4 million decrease in interest on our term loans due to lower average
outstanding debt and the impact of decreased interest
rates. Additionally, we had higher interest income and decreased
losses from changes in foreign exchange rates for the six months ended May 31,
2010 compared to the same period of 2009.
Income
Taxes
34
The
provision for income tax expense was $30.2 million for the six months ended May
31, 2010, an increase of $8.2 million, or 37.2%, compared to $22.0 million for
the same period in 2009. The increase was the result of higher
taxable income and the impact of costs related to the acquisition of
RiskMetrics, which are not tax deductible, partially offset by the net discrete
tax benefits recognized during the six months ended May 31, 2010. The effective
tax rate was 36.9% and 37.7% for the six months ended May 31, 2010 and 2009,
respectively. Our effective tax rate was approximately 0.3% higher for the six
months ended May 31, 2010 as a result of the acquisition costs and net discrete
tax benefits recognized during the period.
Critical
Accounting Policies and Estimates
We
describe our significant accounting policies in Note 1, “Introduction and Basis
of Presentation,” of the Notes to Consolidated Financial Statements included in
our Form 10-K for the fiscal year ended November 30, 2009 and also in Note
2, “Recent Accounting Pronouncements,” in Notes to Condensed Consolidated
Financial Statements included herein. We discuss our critical accounting
estimates in Management’s Discussion and Analysis of Financial Condition and
Results of Operations in our Form 10-K for the fiscal year ended November
30, 2009. There were no significant changes in our accounting
policies or critical accounting estimates since the end of the fiscal year ended
November 30, 2009.
Liquidity
and Capital Resources
We
require capital to fund ongoing operations, internal growth initiatives and
acquisitions. Our primary sources of liquidity are cash flows generated from our
operations, proceeds from the maturity and sale of our short-term investments,
existing cash and cash equivalents and credit capacity under our credit
facilities. We intend to use these sources of liquidity to service our existing
and future debt obligations and fund our working capital requirements, capital
expenditures, investments and acquisitions. In connection with our business
strategy, we regularly evaluate acquisition opportunities. We believe our
liquidity, along with other financing alternatives, will provide the necessary
capital to fund these transactions and achieve our planned growth.
On June
1, 2010, we paid $71.8 million to retire our then-existing credit facility and
interest rate swaps plus the related accrued interest. On that same day,
we entered into a new senior secured credit agreement with Morgan Stanley Senior
Funding, Inc., as administrative agent, Morgan Stanley & Co. Incorporated,
as collateral agent, and the other lenders party thereto, which is comprised of
(i) a $1,275.0 million six-year term loan facility and (ii) a $100.0
million five-year revolving credit facility, which includes a $25.0 million
letter of credit subfacility and a $10.0 million swingline loan subfacility (the
“New Credit Facility”). We are required to repay 1.00% of the principal of the
term loan facility per year in quarterly installments. The New Credit
Facility also contains number of mandatory prepayment requirements, including a
requirement to repay a specified amount of the term loan facility annually from
a portion of our excess cash flows (as defined in the New Credit Facility, which
varies based on our leverage ratio). Any remaining principal of the term loan
facility will be payable on the final maturity date of the
facility We expect to repay the New Credit Facility with cash
generated from our ongoing operations.
The
senior secured term loan facility matures in June 2016. We are
permitted to use the proceeds of the senior secured term loan facility to pay
the cash consideration for the acquisition of RiskMetrics, the outstanding
credit facilities of MSCI and RiskMetrics and related fees and expenses.
The revolving credit facility matures in June 2015 and is available to fund our
working capital requirements and for other general corporate purposes. We
borrowed the full amount of the $1,275.0 million senior secured term loan
facility on June 1, 2010 and used the proceeds to fund in part the $1,146.7
million cash consideration for our acquisition of
RiskMetrics.
Borrowings
under the New Credit Facility will bear interest at a rate equal to the sum of
the greater of the London Interbank Offered Rate and 1.50%, and a margin of
3.25%, which margin will be subject to adjustment based on our leverage ratio
after we deliver our first quarterly compliance certificate (as defined in the
New Credit Facility). In addition, we are required by the terms of
our New Credit Facility to enter into an interest rate swap within 60 days of
June 1, 2010 such that at least 30% of our borrowings bear interest at a fixed
or maximum rate.
The
obligations under the New Credit Facility are guaranteed by each of our direct
and indirect wholly-owned domestic subsidiaries, subject to limited exceptions.
The obligations under the New Credit Facility are secured by a lien on
substantially all of the equity interests of our present and future domestic
subsidiaries, up to 65% of the equity interests of our first-tier foreign
subsidiaries, and substantially all of our and our domestic subsidiaries’
present and future property and assets, subject to certain
exceptions.
35
The New
Credit Facility contains affirmative and restrictive covenants that, among other
things, limit our ability and our existing or future subsidiaries’ abilities
to:
·
|
incur
liens and further negative pledges;
|
·
|
incur
additional indebtedness or prepay, redeem or repurchase
indebtedness;
|
·
|
make
loans or hold investments;
|
·
|
merge,
dissolve, liquidate, consolidate with or into another
person;
|
·
|
enter
into acquisition transactions;
|
·
|
make
capital expenditures;
|
·
|
issuance
of disqualified capital stock;
|
·
|
sell,
transfer or dispose of assets;
|
·
|
pay
dividends or make other distributions in respect of our capital stock or
engage in stock repurchases, redemptions and other restricted
payments;
|
·
|
create
new subsidiaries;
|
·
|
permit
certain restrictions affecting our
subsidiaries;
|
·
|
change
the nature of our business, accounting policies or fiscal
periods;
|
·
|
enter
into any transactions with affiliates other than on an arm’s length
basis;
|
·
|
modify
or waive material documents; and
|
·
|
prepay,
redeem or repurchase debt.
|
The New
Credit Facility also requires us to achieve specified financial and operating
results and maintain compliance with the following financial ratios on a
consolidated basis: (1) a maximum total leverage ratio (as defined in the
New Credit Facility) measured quarterly on a rolling four-quarter basis shall
not exceed (a) 4.00:1.00 through February 28, 2011, (b) 3.75:1.00 from
March 1, 2011 through May 31, 2011, (c) 3.50:1.00 from June 1, 2011 through
August 31, 2011, (d) 3.25:1.00 from September 1, 2011 through December 31, 2011
and (e) 2.75:1.00 thereafter; and (2) a minimum interest coverage
ratio (as defined in the New Credit Facility) measured quarterly on a rolling
four-quarter basis shall be (a) 4.50:1.00 through February 28, 2011, and
(b) 5.00:1.00 thereafter.
The New
Credit Facility also contains customary events of default, including those
relating to non-payment, breach of representations, warranties or covenants,
cross-default and cross-acceleration, bankruptcy and insolvency events,
invalidity or impairment of loan documentation or collateral, change of control
and customary ERISA defaults.
Cash
flows
Cash
and cash equivalents
As
of
|
||||||||
May
31,
|
November
30,
|
|||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Cash
and cash equivalents
|
$ | 152,148 | $ | 176,024 |
Cash
provided by (used in) operating, investing and financing activities
For
the six months ended
|
||||||||
May
31,
|
May
31,
|
|||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Cash
provided by operating activities
|
$
|
55,104
|
$
|
69,157
|
||||
Cash
provided by (used in) investing activities
|
$
|
229,862
|
$
|
(254,253
|
)
|
|||
Cash
used in financing activities
|
$
|
(308,413
|
)
|
$
|
(11,700
|
)
|
Cash
flows from operating activities
Cash
flows from operating activities consist of net income adjusted for certain
non-cash items and changes in assets and liabilities. Cash flow from operating
activities for the six months ended May 31, 2010 was $55.1 million compared to
36
$69.2
million for the same period of 2009. The change primarily reflects
increased cash payments for income taxes and a decrease in non-cash items during
the six months ended May 31, 2010 compared to the same period in
2009.
Our
primary uses of cash from operating activities are for the payment of cash
compensation expenses, office rent, technology costs, market data costs and
income taxes. The payment of cash for compensation and benefits is historically
at its highest level in the first quarter when we pay discretionary employee
compensation related to the previous fiscal year.
Cash
flows from investing activities
Cash
flows provided by investing activities were $229.9 million for the six months
ended May 31, 2010 compared to cash used in investing activities of $254.3
million for the six months ended May 31, 2009. The increase reflects
a net inflow of $479.2 million related to the purchase of and proceeds from the
liquidation of short-term investments, a significant portion of which was
utilized to prepay $297.0 million of our long-term debt during the three months
ended May 31, 2010, and a decrease in capital expenditures of $4.8
million.
Cash
flows from financing activities
Cash
flows used in financing activities were $308.4 million and $11.7 million for six
months ended May 31, 2010 and 2009, respectively. The change reflects
$298.5 million in increased payments on the outstanding long-term debt and a
$1.8 million increase to repurchase shares to be held in treasury to satisfy tax
obligations related to converted shared based compensation
awards. Partially offsetting these were the receipt of $2.2 million
in proceeds from the exercise of employee stock options and $1.5 million in
excess tax benefits related to the exercise of options and the conversion of
restricted stock units that occurred during the six months ended May 31,
2010.
Off-Balance
Sheet Arrangements
We do not
have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.
Item 3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Foreign
Currency Risk
We are
subject to foreign currency exchange fluctuation risk. Exchange rate movements
can impact the U.S. dollar reported value of our revenues, expenses, assets
and liabilities denominated in non-U.S. dollar currencies or where the currency
of such items is different than the functional currency of the entity where
these items were recorded.
Substantially
all of our revenues from our index linked investment products are based on fees
earned on the value of assets invested in securities denominated in currencies
other than the U.S. dollar. For all operations outside the United States where
the Company has designated the local non-U.S. dollar currency as the functional
currency, revenue and expenses are translated using average monthly exchange
rates and assets and liabilities are translated into U.S. dollars using
month-end exchange rates. For these operations, currency translation adjustments
arising from a change in the rate of exchange between the functional currency
and the U.S. dollar are accumulated in a separate component of shareholders’
equity. In addition, transaction gains and losses arising from a change in
exchange rates for transactions denominated in a currency other than the
functional currency of the entity are reflected in other income.
Revenues
from index-linked investment products represented approximately $50.7 million,
or 20.5%, and $28.9 million, or 13.4%, of our operating revenues for the six
months ended May 31, 2010 and May 31, 2009, respectively. While our
fees for index-linked investment products are generally invoiced in U.S.
dollars, the fees are based on the investment product’s assets, substantially
all of which are invested in securities denominated in currencies other than the
U.S. dollar. Accordingly, declines in such other currencies against the U.S.
dollar will decrease the fees payable to us under such licenses. In addition,
declines in such currencies against the U.S. dollar could impact the
attractiveness of such investment products resulting in net fund outflows, which
would further reduce the fees payable under such licenses.
We
generally invoice our clients in U.S. dollars; however, we invoice a portion of
clients in euros, pounds sterling, Japanese yen and a limited number of other
non-U.S. dollar currencies. Approximately $24.7 million, or 10.0%, and $27.4
37
million,
or 12.7%, of our revenues for the six months ended May 31, 2010 and 2009,
respectively, were denominated in foreign currencies, the majority of which were
in euros, pounds sterling and Japanese yen.
We are
exposed to additional foreign currency risk in certain of our operating costs.
Approximately $62.0 million, or 40.5%, and $44.8 million, or 30.7%, of our
expenses for the six months ended May 31, 2010 and 2009, respectively, were
denominated in foreign currencies, the significant majority of which were
denominated in Swiss francs, pounds sterling, Hong Kong dollars, euros,
Hungarian forints, Indian rupees, and Japanese yen. Expenses paid in foreign
currency may increase as we expand our business outside the U.S.
We have
certain monetary assets and liabilities denominated in currencies other than
local functional amounts and when these balances were remeasured into their
local functional currency, either a gain or a loss resulted from the change of
the value of the functional currency as compared to the originating currencies.
As a result of these positions, we recognized foreign currency exchange losses
of $0.1 million and $0.6 million for the six months ended May 31, 2010 and May
31, 2009, respectively. These amounts were recorded in “other expense (income)”
in our Condensed Consolidated Statements of Income. Although we do not currently
hedge the foreign exchange risk of assets and liabilities denominated in
currencies other than the functional currency, we minimize exposure by reducing
the value of the assets and liabilities in currencies other than the functional
currency of the legal entity in which they are located.
To the
extent that our international activities recorded in local currencies increase
in the future, our exposure to fluctuations in currency exchange rates will
correspondingly increase. Generally, we do not use derivative financial
instruments as a means of hedging this risk; however, we may do so in the
future. Foreign currency cash balances held overseas are generally kept at
levels necessary to meet current operating and capitalization needs.
Interest
Rate Sensitivity
We had
unrestricted cash and cash equivalents totaling $152.1 million at May 31, 2010
and $176.0 million at November 30, 2009, respectively. These amounts were
held primarily in checking and money market accounts in the countries where we
maintain banking relationships. The unrestricted cash and cash equivalents are
held for working capital purposes. At May 31, 2010 and November 30, 2009, we had
invested $61.4 million and $295.3 million, respectively, in debt securities with
maturity dates ranging from 91 to 365 days from the date of purchase. We do not
enter into investments for trading or speculative purposes. We believe we do not
have any material exposure to changes in fair value as a result of changes in
interest rates. Declines in interest rates, however, will reduce future interest
income.
Borrowings
under the Credit Facility accrued interest at a variable rate equal to LIBOR
plus a fixed margin subject to interest rate step-downs based on the achievement
of consolidated leverage ratio conditions (as defined in the Credit
Facility).
On
February 13, 2008, we entered into two interest rate swap agreements
effective through the end of November 2010 for an aggregate notional principal
amount of $251.7 million. By entering into these agreements, we reduced interest
rate risk by effectively converting floating-rate debt into fixed-rate debt.
This action reduced our risk of incurring higher interest costs in periods of
rising interest rates and improved the overall balance between floating and
fixed rate debt. On April 1, 2010 and on April 15, 2010, we prepaid a portion of
our Credit Facility, fully terminated one of our interest rate swaps, partially
terminated the other interest rate swap and intended to pay the remaining
portion of our existing credit facility on or about June 1, 2010. As
a result, we discontinued prospective hedge accounting on the remaining swap
contract at April 15, 2010 as it no longer met the strict requirements for hedge
accounting.
These
events would have resulted in a greater sensitivity to interest rate
volatility. However, on June 1, 2010, we paid $70.9 million to retire
our existing Credit Facility and $0.7 million to retire our remaining interest
rate swap. As a result, we do not believe that the exposure to
changes in LIBOR interest rates at May 31, 2010 on our existing Credit Facility
is material.
On June
1, 2010, we entered into a New Credit Facility comprised of a $1,275.0 million
six-year term loan facility and a $100.0 million five-year revolving credit
facility. See “Item 2. Management’s Discussion and Analysis—Liquidity
and Capital Resources” for additional information.
Our Chief
Executive Officer and Chief Financial Officer have evaluated our disclosure
controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended, (the “Exchange Act”), as of May 31, 2010
38
and have
concluded that these disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time specified in the SEC’s rules
and forms. These disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports we file or submit is accumulated and
communicated to management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report.
There were
no changes during the three months ended May 31, 2010 in our internal control
over financial reporting, as defined in Rule 13a-15(f) under the Exchange
Act, that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
39
From time
to time we are party to various litigation matters incidental to the conduct of
our business. We are not presently party to any legal proceedings the
resolution of which we believe would have a material adverse effect on our
business, operating results, financial condition or cash flows.
Item
1A. Risk Factors
The risk
factors below supplement the risks disclosed under “Risk Factors” in Part I,
Item 1A of our Annual Report on Form 10-K for the fiscal year ended
November 30, 2009 and replace the risks disclosed under “Risk Factors” in Item
1A of our Quarterly Report on Form 10-Q for the period ended February 28,
2010.
Risks
Related to the Acquisition of RiskMetrics Group, Inc.
Our
business relationships, including client relationships, may be subject to
disruption due to uncertainty associated with the merger.
Parties
with which we do business, including clients and suppliers, may experience
uncertainty associated with the merger, including with respect to our current or
future business relationships. Our business relationships may be
subject to disruption as clients, suppliers and others may attempt to negotiate
changes in existing business relationships or consider entering into business
relationships with parties other than us. These disruptions could have an
adverse effect on the businesses, financial condition, results of operations or
prospects of the combined business.
We
may fail to realize the anticipated benefits and cost savings of the merger,
which could adversely affect the value of our class A common
stock.
The
success of the merger will depend, in part, on our ability to realize the
anticipated benefits and cost savings from combining our business with
RiskMetrics’ business. Our ability to realize these anticipated benefits and
cost savings is subject to certain risks including:
·
|
Our
ability to successfully combine our business with RiskMetrics’
business;
|
|
·
|
whether
the combined businesses will perform as expected;
|
|
·
|
the
possibility that we paid more than the value we will derive from the
acquisition;
|
|
·
|
the
reduction of our cash available for operations and other uses, the
increase in amortization expense related to identifiable assets acquired
and the incurrence of indebtedness to finance the acquisition;
and
|
|
·
|
the
assumption of certain known and unknown liabilities of
RiskMetrics.
|
If we are
not able to successfully combine our business with RiskMetrics’ business within
the anticipated time frame, or at all, the anticipated benefits and cost savings
of the merger may not be realized fully or at all or may take longer to realize
than expected, we may not perform as expected and the value of our class A
common stock may be adversely affected.
It is
possible that the integration process could result in the loss of key employees,
the disruption of our ongoing business or in unexpected integration issues,
higher than expected integration costs and an overall post-closing integration
process that takes longer than originally anticipated. Specifically, issues that
must be addressed in integrating the operations of RiskMetrics into our
operations in order to realize the anticipated benefits of the merger so we
perform as expected, include, among other things:
·
|
combining
the companies’ sales, marketing, data, operations and research and
development functions;
|
|
·
|
integrating
the companies’ technologies, products and services;
|
|
·
|
identifying
and eliminating redundant and underperforming operations and
assets;
|
|
·
|
harmonizing
the companies’ operating practices, employee development and compensation
programs,
|
40
internal
controls and other policies, procedures and processes;
|
||
·
|
addressing
possible differences in business backgrounds, corporate cultures and
management philosophies;
|
|
·
|
consolidating
the companies’ corporate, administrative and information technology
infrastructure;
|
|
·
|
coordinating
sales, distribution and marketing efforts;
|
|
·
|
managing
the movement of certain positions to different locations, including
certain of our offices outside the U.S.;
|
|
·
|
maintaining
existing agreements with customers and suppliers and avoiding delays in
entering into new agreements with prospective customers and
suppliers;
|
|
·
|
coordinating
geographically dispersed organizations; and
|
|
·
|
consolidating
our offices with those of RiskMetrics that are currently in the same
location.
|
In
addition, at times, the attention of certain members of our management and
resources may be focused on the integration of the businesses of the two
companies and diverted from day-to-day business operations, which may disrupt
our business.
Our
future results may suffer if we do not effectively manage RiskMetrics’ risk
management platform and RiskMetrics’ other operations following the
merger.
We plan
to combine RiskMetrics’ risk management platform with our expertise in portfolio
equity models and analytics to provide clients with the capability to understand
risk across their entire investment processes. Our future success
depends, in part, upon the ability to manage this combination as well as its
other businesses, including RiskMetrics’ corporate governance operation, which
will pose challenges for management, including challenges relating to the
management and monitoring of new operations and the coordination of activities
across a larger organization. We cannot assure you that it will be
successful or that we will realize expected operational efficiencies, cost
savings, revenue enhancement and other benefits currently anticipated from the
merger.
We
may have difficulty attracting, motivating and retaining executives and other
key employees as a result of the merger.
Uncertainty
about the success of the integration process and the effect of the merger on
employees may have an adverse effect on the combined business. This
uncertainty may impair our ability to attract, retain and motivate key
personnel. Employee retention may be particularly challenging during the
integration process, as employees may experience uncertainty about their future
roles with the combined business. Additionally, RiskMetrics’ officers
and employees may have owned shares of RiskMetrics’ common stock
and/or had vested stock option grants and, may have been entitled to
the merger consideration upon the closing of the transaction, the payment of
which could provide sufficient financial incentive for certain officers and
employees to no longer pursue employment with the combined
business. If key employees depart because of issues relating to the
uncertainty and difficulty of integration, financial incentives or a desire not
to become employees of the combined business, we may have to incur significant
costs in identifying, hiring and retaining replacements for departing employees,
which could adversely affect our ability to realize the anticipated benefits of
the merger.
Our
increased level of indebtedness as a result of the merger could adversely affect
us.
In
connection with the merger, we incurred acquisition debt financing of $1,275.0
million, which replaced our senior credit facility of $70.9 million and the
senior secured credit facilities of RiskMetrics of $206.7 outstanding as of May
31, 2010. Covenants to which we agreed to in connection with the
acquisition debt financing, and our substantial increased indebtedness and
higher debt-to-equity ratio following completion of the merger in comparison to
that of the pre-merger Company on a recent historical basis, has the effect,
among other things, of reducing our flexibility to respond to changing business
and economic conditions and will increase borrowing costs. In
addition, the amount of cash required to service our increased indebtedness
levels and thus the demands on our cash resources will be significantly greater
than the percentages of cash flows required to service the indebtedness of us or
RiskMetrics individually prior to the merger. The increased levels of
indebtedness could also reduce funds available
41
for our
investment in product development as well as capital expenditures and other
activities, and may create competitive disadvantages for us relative to other
companies with lower debt levels.
We
will incur significant transaction and integration-related costs in connection
with the merger.
We expect
to incur a number of non-recurring costs associated with combining the
operations of the two companies. The substantial majority of non-recurring
expenses resulting from the merger will be comprised of transaction costs
related to the merger, facilities and systems consolidation costs and
employment-related costs. As of May 31, 2010, we incurred $7.5
million of transaction related fees and expense. We will also incur transaction
fees and costs related to formulating and implementing integration plans. We
continue to assess the magnitude of these costs and additional unanticipated
costs may be incurred in the integration of the two companies’
businesses. Although we expect that the elimination of duplicative
costs, as well as the realization of other efficiencies related to the
integration of the businesses, should allow us to offset incremental transaction
and merger-related costs over time, this net benefit may not be achieved in the
near term, or at all.
The
merger may not be accretive, and may be dilutive, to our earnings per share,
which may negatively affect the market price of our class A common
stock.
We
currently anticipate that the merger will be accretive to earnings per share
during the first full calendar year after the merger. This expectation is
based on preliminary estimates that may materially change. In addition, future
events and conditions could decrease or delay the accretion that is currently
expected or could result in dilution, including adverse changes in market
conditions, additional transaction and integration related costs and other
factors such as the failure to realize all of the benefits anticipated in the
merger. Any dilution of, or decrease or delay of any accretion to, our earnings
per share could cause the price of our common stock to
decline.
Risks
Related to Our Business
If
we lose key outside suppliers of data and products or if the data or products of
these suppliers have errors or are delayed, we may not be able to provide our
clients with the information and products they desire.
Our
ability to produce our products and develop new products is dependent upon the
products of other suppliers, including certain data, software and service
suppliers. Our index and analytics products are dependent upon (and of little
value without) updates from our data suppliers and most of our software products
are dependent upon (and of little value without) continuing access to historical
and current data. As of May 31, 2010, we utilized and distributed certain data
provided to us by over 240 data sources, including large volumes of data from
certain stock exchanges around the world. If the products of our suppliers have
errors, are delayed, have design defects, are unavailable on acceptable terms or
are not available at all, our business, financial condition or results of
operations could be materially adversely affected.
Some of
our agreements with data suppliers allow them to cancel on short notice and we
have not completed formal agreements with all of our data suppliers, such as
certain stock exchanges. Many of these data suppliers compete with one another
and, to some extent, with us. For example, ISS relies on a data feed agreement
with Broadridge Financial Soultions which allows for many ballots to be received
and proxy votes to be made electronically, minimizing the manual aspects of the
proxy voting process and limiting the risk of error inherent in manual
processes. If the data feed agreement with Broadridge was terminated,
we would have to incur significant expenses in order to input our clients’
voting instructions directly into Broadridge’s proprietary electronic voting
systems and our business and results of operations would be materially and
adversely affected. Since ISS also competes with Broadridge in some
markets with respect to providing certain aspects of proxy voting services,
Broadridge may have an incentive not to renew ISS’ data feed agreement when its
initial term expires or to offer renewal terms which we may deem
unreasonable. From time to time we receive notices from data
suppliers
, including stock exchanges,
threatening to terminate the provision of their data to us. Termination of one
or more of our significant data agreements or exclusion from, or restricted use
of, or litigation in connection with, a data provider’s information could
decrease the available information for us to use and offer our clients and may
have a material adverse effect on our business, financial condition or results
of operations.
Although
data suppliers and stock exchanges typically benefit from broad access to their
data, some of our competitors could enter into exclusive contracts with our data
suppliers, including with certain stock exchanges. If our competitors enter into
such exclusive contracts, we may be precluded from receiving certain data from
these suppliers or restricted in our use of such data, which would give our
competitors a competitive advantage. Such exclusive contracts would hinder our
ability to provide our clients with the data they prefer, which could lead to a
decrease in our client base and could have a material adverse effect on our
business, financial condition or results of operations.
Some data
suppliers may seek to increase licensing fees for providing their content to us.
If we are unable to renegotiate acceptable licensing arrangements with these
data suppliers or find alternative sources of equivalent content, we may be
required to reduce our profit margins or experience a reduction in our market
share.
Some of
our third-party suppliers also are our competitors, increasing the risks noted
above.
42
We
are dependent on key personnel in our professional staff for their expertise. If
we fail to attract and retain the necessary qualified personnel, our business,
financial condition or results of operations could be materially adversely
affected.
The
development, maintenance and support of our products is dependent upon the
knowledge, experience and ability of our highly skilled, educated and trained
employees. Accordingly, the success of our business depends to a significant
extent upon the continued service of our executive officers and other key
management, research, sales and marketing, operations, information technology
and other technical personnel. In addition, the members of ISS’ policy board use
their experience and expertise in corporate governance and policy formation to
ensure ISS’ voting policies are developed and applied within a framework of
corporate governance best practices. Other ISS employees have
extensive experience in the process and mechanics of voting
proxies. Although we do not believe that we are dependent upon any
individual employee, the loss of a group of our key professional employees could
have a material adverse effect on our business, financial condition or results
of operations. We believe our future success will also depend in large part upon
our ability to attract and retain highly skilled managerial, research, sales and
marketing, information technology, software engineering and other technical
personnel. Competition for such personnel worldwide is intense, and there can be
no assurance that we will be successful in attracting or retaining such
personnel. Additionally, in connection with our IPO, we issued founders grants
to some of our employees and as these awards vest their effectiveness as a
retention tool diminishes. If the equity incentive plans that we currently have
in place do not adequately compensate our key employees or are not competitive,
we may lose key personnel. If we fail to attract and retain the necessary
qualified personnel our products may suffer, which could have a material adverse
effect on our business, financial condition or results of
operations.
Our
indebtedness could materially adversely affect our business, financial condition
or results of operations.
On June
1, 2009, we entered into a senior secured credit agreement, which is comprised
of (i) a 1,275.0 million six-year term loan facility and (ii) a $100.0 million
five-year revolving credit facility (“New Credit Facility”).
“Item 2.—Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources.”
The New
Credit Facility is guaranteed on a senior secured basis by each of our direct
and indirect wholly-owned domestic subsidiaries and secured by a valid and
perfected first priority lien and security interest in substantially all of the
shares of the capital stock of our present and future domestic subsidiaries and
up to 65% of the shares of capital stock of our foreign subsidiaries,
substantially all of our and our domestic subsidiaries’ present and future
property and assets and the proceeds thereof. In addition, the New Credit
Facility contains restrictive covenants that limit our ability and our existing
future subsidiaries’ abilities to, among other things, incur liens; incur
additional indebtedness; make or hold investments; make acquisitions, merge,
dissolve, liquidate, consolidate with or into another person; sell, transfer or
dispose of assets; pay dividends or other distributions in respect of our
capital stock; change the nature of our business; enter into any transactions
with affiliates other than on an arm’s length basis; and prepay, redeem or
repurchase debt.
The New
Credit Facility also requires us and our subsidiaries to achieve specified
financial and operating results and maintain compliance with the following
financial ratios on a consolidated basis: (1) the maximum total leverage
ratio (as defined in the New Credit Facility) measured quarterly on a rolling
four-quarter basis shall not exceed (a) 4.0:1.00 through February 28, 2011,
(b) 3.75:1.00 from March 1, 2011 through May 31, 2011, (c) 3.5:1.00 from
June 1, 2011 through August 31, 2011, (d) 3.25:1.00 from September 1, 2011
through December 31, 2011 and (e) 2.75:1.00 thereafter; and (2) the
minimum interest coverage ratio (as defined in the New Credit Facility) measured
quarterly on a rolling four-quarter basis shall be (a) 4.5:1.00 through
February 28, 2011, (b) 5.0:1.00 thereafter.
In
addition, our New Credit Facility contains the following affirmative covenants,
among others: periodic delivery of financial statements, budgets and officer’s
certificates; payment of other obligations; compliance with laws and
regulations; payment of taxes and other material obligations; maintenance of
property and insurance; performance of material leases; right of the lenders to
inspect property, books and records; notices of defaults and other material
events; and maintenance of books and records.
In
addition, we may need to incur additional indebtedness in the future in the
ordinary course of business. Our level of indebtedness could increase our
vulnerability to general economic consequences; require us to dedicate a
substantial portion of our cash flow and proceeds of any additional equity
issuances to payments of our indebtedness; make it difficult for us to optimally
capitalize and manage the cash flow for our business; limit our flexibility in
planning for, or reacting to, changes in our business and the markets in which
we operate; place us at a competitive disadvantage to our competitors that have
less debt; limit our ability to borrow money or sell stock to fund our working
capital and capital expenditures; limit our ability to consummate acquisitions;
and increase our interest expense.
43
Changes
in government regulations could materially adversely affect our business,
financial condition or results of operations.
The
financial services industry is subject to extensive regulation at the federal
and state levels, as well as by foreign governments. It is very difficult to
predict the future impact of the broad and expanding legislative and regulatory
requirements affecting our business and our clients’ businesses. If we fail to
comply with any applicable laws, rules or regulations, we could be subject to
fines or other penalties. There can be no assurance that changes in laws, rules
or regulations will not have a material adverse effect on our business,
financial condition or results of operations.
•
|
Investment
Advisers Act—Except with respect to our Institutional Shareholder
Services, Inc. (“ISS”) subsidiary, we believe that our products do not
provide investment advice for purposes of the Investment Advisers Act of
1940. Future developments in our product line or changes to the current
laws, rules or regulations could cause this status to change. It is
possible we may become registered as an investment adviser under the
Investment Advisers Act or similar laws in states or foreign
jurisdictions. As a registered investment adviser, we would be subject to
the requirements and regulations of the Investment Advisers Act, which
relate to, among other things, fiduciary duties, recordkeeping and
reporting requirements, disclosure requirements, limitations on agency and
principal transactions between an adviser and advisory clients, as well as
general anti-fraud prohibitions. Our ISS subsidiary is a registered
investment advisor in the U.S. and is therefore subject to these
requirements and regulations. We may also be adversely affected as a
result of new or revised legislation or regulations imposed by the SEC,
other U.S. or foreign governmental regulatory authorities or
self-regulatory organizations that supervise the financial markets around
the world. In addition, we may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by these
governmental authorities and self-regulatory organizations. It is
impossible to determine the extent of the impact of any new laws,
regulations or initiatives that may be proposed, or whether any of the
proposals will become law. Compliance with any new laws or regulations
could make compliance more difficult and expensive and affect the manner
in which we conduct business.
|
•
|
Data
Privacy Legislation—Changes in laws, rules or regulations, or consumer
environments relating to consumer privacy or information collection and
use may affect our ability to collect and use data. There could be a
material adverse impact on our direct marketing, data sales and business
due to the enactment of legislation or industry regulations, or simply a
change in customs, arising from public concern over consumer privacy
issues. Restrictions could be placed upon the collection, management,
aggregation and use of information that is currently legally available, in
which case our cost of collecting some kinds of data could materially
increase. It is also possible that we could be prohibited from collecting
or disseminating certain types of data, which could affect our ability to
meet our clients’ needs.
|
•
|
Soft
Dollars—Approximately 7% and 12% of our revenues were paid through
softdollar arrangements for the six months ended May 31, 2010 and 2009,
respectively. Approximately 8%, 12% and 13% of our revenues
were paid through soft dollar arrangements for the fiscal years ended
November 30, 2009, 2008 and 2007, respectively. U.S. clients
accounted for 73%, 62% and 68% of total soft dollar revenues for the
fiscal years ended November 30, 2009, 2008 and 2007,
respectively. On July 18, 2006, the SEC issued Interpretive Release
No. 34-54165, which became effective on July 24, 2006. The
release provides guidance on asset managers’ use of client commissions to
pay for brokerage and research services within the scope of
Section 28(e) of the Securities Exchange Act of 1934 (the “Exchange
Act”). The Interpretive Release outlines a framework for determining what
types of research services fall within the safe harbor provisions of that
section. Market participants had a six-month grace period that ended on
January 24, 2007 to bring their soft dollar practices into compliance
with the new guidance. We rely on our clients to determine whether our
products fall within the description of eligible research services,
whether our products provide lawful and appropriate assistance to the
money manager in undertaking investment decisions, and whether the
commissions are reasonable in relation to the value of the products
provided for their particular business in the U.S. and abroad. If clients
decide they cannot or will not pay for our products through soft dollar
arrangements, or if additional rules are issued or certain interpretations
are followed that narrow the definition of research or brokerage services
that can be paid for on behalf of a money manager through use of soft
dollars in the U.S. or abroad or the safe harbor provisions of
Section 28(e) of the Exchange Act are eliminated, our revenues could
decrease.
|
We
are subject to political, economic, legal, operational, franchise and other
risks as a result of our international operations, which could adversely impact
our businesses in many ways.
In order
to continue to expand our growth outside the United States, we must establish
and maintain a local presence of sales, distribution and customer service by
establishing local offices throughout the world. As we continue to
expand our international operations, we increase our exposure to political,
economic, legal, operational, franchise and other risks that are inherent in
operating in many countries, including risks of possible capital controls,
exchange controls and other restrictive governmental actions, as well as the
outbreak of hostilities or political and governmental instability. We have
established and intend to further grow our presence in the Middle East, Asia,
Africa, Eastern Europe and Latin America. In the last few years, we have opened
offices in Budapest, Dubai, Monterrey, Mumbai and Shanghai. A
significant number of our employees are
44
located
in offices outside of the United States and a number of those employees are
located in emerging market centers. In many countries, the laws and regulations
applicable to the financial services industries are uncertain and evolving, and
it may be difficult for us to determine the exact requirements of local laws in
every market. Our inability to maintain consistent internal policies and
procedures across our office and remain in compliance with local laws in a
particular market could have a significant and negative effect not only on our
businesses in that market but also on our reputation generally.
In order
to penetrate markets outside of the United States, we must provide a suite of
products and services that fit the needs of the local market. Demand
for our products and services are still nascent in many parts of the
world. Many countries have not fully developed laws and regulations
regarding risk management and corporate governance and, in many cases,
institutions in these countries have not developed widely accepted best
practices regarding the same. If we do not appropriately tailor our
products and services that fit the needs of the local market, we may be unable
to effectively grow sales of our products and services outside of the United
States. There can be no assurances that demand for our products and services
will develop in these countries.
Any
perceived conflicts of interest resulting from providing products and services
to institutional investors in addition to proxy voting recommendations, or
providing products and services to corporations which are the subject of our
proxy recommendations or other analytical products and services could harm our
reputation and business.
ISS'
institutional clients rely on ISS to provide them with informed vote
recommendations, benchmark proxy voting guidelines and unbiased analyses of
companies' environmental, social and governance attributes. The institutional
clients of both our and ISS businesses, particularly hedge funds and more active
institutional investors, may have material economic and other interests in the
corporations on which ISS provides proxy analyses and ratings or which are the
subject of our financial research and analysis products and services. In some
cases these institutional clients pay us a significant amount of money for our
or ISS products and services and, accordingly, there may be a perception that we
might advocate a particular position or provide research that supports a
particular conclusion with respect to a corporation in order to satisfy the
unique economic or other interests of a particular institutional client. As a
result, institutional clients, competitors and other market participants could
raise questions about our ability to provide unbiased services, which could harm
our reputation.
Through
our ISS Corporate Services subsidiary, we provide products and services to
corporate clients who often use our services to learn about and improve their
governance practices. Accordingly, there may be a perceived conflict of interest
between the services we provide to institutional clients and the services,
including our Compensation Advisory Services, provided to certain corporate
clients. For example, when we provide corporate governance services to a
corporate client and at the same time provide proxy vote recommendations to
institutional clients regarding that corporation's proxy items, there may be a
perception that we may treat that corporation more favorably due to its use of
our services.
The
safeguards that we have implemented may not be adequate to manage these apparent
conflicts of interest, and clients or competitors may question the integrity of
our services. In the event that we fail to adequately manage these perceived
conflicts of interest, we could incur reputational damage, which could have a
material adverse effect on our business, financial condition and operating
results.
Changes
in the legislative, regulatory and corporate environments in which our clients
operate may adversely impact our financial results.
ISS'
historical growth has been due, in large part, to increased regulatory
requirements, highly visible corporate scandals, increased shareholder activism
and corporate chief executive officers and boards of directors that are
increasingly concerned about, and responsive to, shareholder concerns. To the
extent that any of these trends change, the demand for ISS’ products and
services could be reduced, and this could have a material adverse effect on our
business, financial condition or results of operation. To the extent these
regulations change or are not extended to other markets, our business, financial
condition and results of operation could be materially adversely affected.
ISS’
products and services support the proxy voting processes of clients.
Consequently, we may be exposed to potential liability claims brought by ISS’
clients or third parties as a result of the operational failure of our products
and services.
ISS’
products and services support the proxy voting processes of clients. If ISS were
to fail to provide the services provided for in its client contracts, we could
be required to provide credits to its clients and in some cases we may be
subject to contractual penalties. ISS’ client agreements generally have
provisions designed to limit our exposure to potential liability claims brought
by its clients or other third parties based on the operational failure of its
products and services. However, these provisions could be invalidated by
unfavorable judicial decisions or by federal, state, foreign or local laws. Any
such
45
claim,
even if the outcome were to be ultimately favorable to us, could involve a
significant commitment of management, personnel, financial and other resources.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
There
have been no unregistered sales of equity securities.
The table
below sets forth the information with respect to purchases made by or on behalf
of the Company of its common shares during the quarter ended May 31,
2010.
Issuer
Purchases of Equity Securities
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased As Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs
|
Month
#1
(March
1, 2010-March 31, 2010)
Employee
Transactions (1)
|
142
|
$32.61
|
N/A
|
N/A
|
Month
#2
(April
1, 2010-April 30, 2010)
Employee
Transactions (1)
|
—
|
$—
|
N/A
|
N/A
|
Month
#3
(May
1, 2010-May 31, 2010)
Employee
Transactions (1)
|
—
|
$—
|
N/A
|
N/A
|
Total
Employee
Transactions (1)
|
142
|
$32.61
|
N/A
|
N/A
|
(1)
Includes shares withheld to satisfy tax withholding obligations on behalf of
employees that occur upon vesting and delivery of outstanding shares underlying
restricted stock units. The value of the shares withheld were valued using the
fair market value of the Company’s class A common shares on the date of
withholding, using a valuation methodology established by the
Company.
46
Item
3. Defaults Upon Senior Securities
None.
None.
An
exhibit index has been filed as part of this Report on page E-1.
47
Pursuant
to the requirements 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.
Dated:
July 1, 2010
MSCI
INC.
(Registrant)
|
|||
By:
|
/s/
David M. Obstler
|
||
David
M. Obstler
Principal
Financial Officer
|
48
EXHIBIT
INDEX
MSCI
INC.
QUARTER
ENDED MAY 31, 2010
3.1
|
Amended
and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Company’s Form 10-K (File No. 001-33812), filed with the SEC on February
28, 2008)
|
|
3.2
|
Amended
and Restated By-laws (filed as Exhibit 3.2 to the Company’s Form 10-K
(File No. 001-33812), filed with the SEC on February 28,
2008)
|
|
10.1
|
Credit
Agreement dated as of June 1, 2010 among MSCI Inc., as the Borrower,
Morgan Stanley Senior Funding, Inc., as Administrative Agent, Morgan
Stanley & Co. Incorporated, as Collateral Agent, Morgan Stanley Senior
Funding, Inc., as Swing Line Lender and L/C Issuer and the other lenders
party thereto (filed as Exhibit 2.2 to the Company’s Form 8-K (File No.
001-33812), filed with the SEC on June 1, 2010 and incorporated herein by
reference herein)
|
|
*†
|
10.2
|
Amendment
to Index License Agreement for Funds, dated as of December 9, 2008,
between MSCI Inc. and Barclays Global Investors, N.A.
|
*†
|
10.3
|
Amendment
to Index License Agreement for Funds, dated as of May 21, 2009, between
MSCI Inc. and Barclays Global Investors, N.A.
|
*
|
10.4
|
Amendment
to Index License Agreement for Funds, dated as of September 30, 2009,
between MSCI Inc. and Barclays Global Investors, N.A.
|
*†
|
10.5
|
Amendment
to Index License Agreement for Funds, dated as of October 27, 2009,
between MSCI Inc. and Barclays Global Investors, N.A.
|
10.6
|
RiskMetrics
Group, Inc. 2000 Stock Option Plan (filed as Exhibit 99.1 to the Company’s
Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (File No. 333-165888), filed on June
3, 2010 and incorporated by reference herein)
|
|
10.7
|
RiskMetrics
Group, Inc. 2004 Stock Option Plan (filed as Exhibit 99.2 to the Company’s
Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (File No. 333-165888), filed on June
3, 2010 and incorporated by reference herein)
|
|
10.8
|
Institutional
Shareholder Services Holdings, Inc. Equity Incentive Plan (filed as
Exhibit 99.3 to the Company’s Post-Effective Amendment No. 1 on Form S-8
to Form S-4 (File No. 333-165888), filed on June
3, 2010 and incorporated by reference herein)
|
|
10.9
|
RiskMetrics
Group, Inc. 2007 Omnibus Incentive Compensation Plan (filed as Exhibit
99.4 to the Company’s Post-Effective Amendment No. 1 on Form S-8 to Form
S-4 (File No. 333-165888), filed on June
3, 2010 and incorporated by reference herein)
|
|
*†
|
10.10
|
Datafeed
License Agreement, dated October 27, 2003, between ISS and ADP
Investor Communications Services, Inc.
|
*†
|
10.11
|
First
Amendment to Datafeed License Agreement, dated as of January 3, 2005,
between ISS and ADP Investor Communications
Services, Inc.
|
11
|
Statement
Re: Computation of Earnings Per Common share (The calculation per share
earnings is in Part I, Item I, Note 3 to the Condensed Consolidated
Financial Statements (Earnings Per Common Share) and is omitted in
accordance with Section (b)(11) of Item 601 of Regulation
S-K.
|
|
E-1
*
|
15
|
Letter
of awareness from Deloitte & Touche LLP, dated July 1, 2010,
concerning unaudited interim financial information
|
**
|
31.1
|
Rule
13a-14(a) Certification of the Chief Executive Officer
|
**
|
31.2
|
Rule
13a-14(a) Certification of the Chief Financial Officer
|
**
|
32.1
|
Section
1350 Certification of the Chief Executive Officer and the Chief Financial
Officer
|
* |
Filed
herewith
|
** |
Furnished
herewith
|
†
|
Portions
of this Exhibit have been omitted pursuant to a request for confidential
treatment. These portions have been filed separately with the
Securities and Exchange Commission.
|
E-2