UNITED
STATES
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, 2009
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 26, 2009, there were
100,137,226 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, 2009
|
|
|
|
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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19
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Item
3.
|
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35
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Item
4.
|
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37
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Part
II
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Item
1.
|
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38
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Item 1A.
|
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38
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Item
2.
|
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38
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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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Item
5.
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39
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Item
6.
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39
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We
own or have rights to use trademarks, trade names and service marks that we use
in conjunction with the operation of our business, including, but not limited
to: @CREDIT, @ENERGY, @INTEREST, ACWI, Aegis, Alphabuilder, Barra, Barra One,
BarraOne, Cosmos, EAFE, FEA, GICS, IndexMap, Market Impact Model, MSCI,
ProStorage, StructureTool, TotalRisk, VaRdelta and VaRworks. All other
trademarks, trade names and service marks included in this Quarterly Report on
Form 10-Q are property of their respective owners. For ease of reading,
designations of trademarks and registered marks have been omitted from the text
of this Quarterly Report on Form 10-Q.
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 http://ir.msci.com. 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 http://ir.msci.com/governance.cfm. 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 MSCI Inc. 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.
PART
I
|
Condensed
Consolidated Financial Statements
|
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in
thousands, except share and per share data)
|
|
As
of
|
|
|
|
May 31,
2009
|
|
|
November 30,
2008
|
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
72,769
|
|
|
$
|
268,077
|
|
Short-term
investments
|
|
|
244,878
|
|
|
|
—
|
|
Trade
receivables (net of allowances of $798 and $712 as of May 31, 2009 and
November 30, 2008, respectively)
|
|
|
95,374
|
|
|
|
85,723
|
|
Due
from related parties
|
|
|
—
|
|
|
|
1,765
|
|
Deferred
taxes
|
|
|
26,869
|
|
|
|
18,590
|
|
Prepaid
and other assets
|
|
|
12,973
|
|
|
|
18,100
|
|
Total
current assets
|
|
|
452,863
|
|
|
|
392,255
|
|
Property,
equipment and leasehold improvements (net of accumulated depreciation
of
$20,537
and $14,069 at May 31, 2009 and November 30, 2008,
respectively)
|
|
|
29,853
|
|
|
|
28,447
|
|
Goodwill
|
|
|
441,623
|
|
|
|
441,623
|
|
Intangible
assets (net of accumulated amortization of $135,617 and
$123,043
at May 31, 2009 and November 30, 2008, respectively)
|
|
|
132,887
|
|
|
|
145,907
|
|
Other
non-current assets
|
|
|
6,635
|
|
|
|
6,816
|
|
Total
assets
|
|
$
|
1,063,861
|
|
|
$
|
1,015,048
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
38,606
|
|
|
$
|
900
|
|
Payable
to related parties
|
|
|
—
|
|
|
|
34,992
|
|
Accrued
compensation and related benefits
|
|
|
34,708
|
|
|
|
58,946
|
|
Other
accrued liabilities
|
|
|
27,093
|
|
|
|
29,459
|
|
Current
maturities of long-term debt
|
|
|
32,087
|
|
|
|
22,086
|
|
Deferred
revenue
|
|
|
176,029
|
|
|
|
144,711
|
|
Total
current liabilities
|
|
|
308,523
|
|
|
|
291,094
|
|
Long-term
debt, net of current maturities
|
|
|
358,665
|
|
|
|
379,709
|
|
Deferred
taxes
|
|
|
45,834
|
|
|
|
49,364
|
|
Other
non-current liabilities
|
|
|
10,402
|
|
|
|
8,499
|
|
Total
liabilities
|
|
|
723,424
|
|
|
|
728,666
|
|
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; 100,189,277 class A shares issued and 100,136,377 class
A shares outstanding at May 31, 2009; no class B shares issued and
outstanding at May 31, 2009)
|
|
|
1,002
|
|
|
|
1,001
|
|
Treasury
shares, at cost (52,900 and 23,216 shares at May 31, 2009 and
November 30, 2008, respectively)
|
|
|
(1,286
|
)
|
|
|
(681)
|
|
Additional
paid in capital
|
|
|
310,770
|
|
|
|
291,204
|
|
Retained
earnings
|
|
|
38,554
|
|
|
|
2,212
|
|
Accumulated
other comprehensive loss
|
|
|
(8,603
|
)
|
|
|
(7,354
|
)
|
Total
shareholders’ equity
|
|
|
340,437
|
|
|
|
286,382
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,063,861
|
|
|
$
|
1,015,048
|
|
See
Notes to Condensed Consolidated Financial Statements
MSCI
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(in
thousands, except per share data)
|
|
Three
Months Ended
May 31,
|
|
|
Six
Months Ended
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Operating
revenues (1)
|
|
$
|
109,375
|
|
|
$
|
108,195
|
|
|
$
|
215,290
|
|
|
$
|
213,146
|
|
Cost
of services (1)
|
|
|
29,269
|
|
|
|
29,636
|
|
|
|
58,204
|
|
|
|
60,496
|
|
Selling,
general and administrative (1)
|
|
|
34,052
|
|
|
|
38,005
|
|
|
|
68,768
|
|
|
|
69,325
|
|
Amortization
of intangible assets
|
|
|
6,428
|
|
|
|
7,125
|
|
|
|
12,857
|
|
|
|
14,250
|
|
Depreciation
and amortization of property, equipment and leasehold
improvements
|
|
|
2,972
|
|
|
|
522
|
|
|
|
6,023
|
|
|
|
1,006
|
|
Total
operating expenses
|
|
|
72,721
|
|
|
|
75,288
|
|
|
|
145,852
|
|
|
|
145,077
|
|
Operating
income
|
|
|
36,654
|
|
|
|
32,907
|
|
|
|
69,438
|
|
|
|
68,069
|
|
Interest
income (1)
|
|
|
(220
|
)
|
|
|
(3,508
|
)
|
|
|
(341
|
)
|
|
|
(5,880
|
)
|
Interest
expense (1)
|
|
|
4,904
|
|
|
|
6,668
|
|
|
|
10,542
|
|
|
|
15,131
|
|
Other
expense (income)
|
|
|
(2
|
)
|
|
|
(638
|
)
|
|
|
880
|
|
|
|
(302
|
)
|
Interest
income (expense) and other, net
|
|
|
4,682
|
|
|
|
2,522
|
|
|
|
11,081
|
|
|
|
8,949
|
|
Income
before provision for income taxes
|
|
|
31,972
|
|
|
|
30,385
|
|
|
|
58,357
|
|
|
|
59,120
|
|
Provision
for income taxes
|
|
|
12,354
|
|
|
|
11,754
|
|
|
|
22,015
|
|
|
|
22,555
|
|
Net
income
|
|
$
|
19,618
|
|
|
$
|
18,631
|
|
|
$
|
36,342
|
|
|
$
|
36,565
|
|
Earnings
per basic common share
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
Earnings
per diluted common share
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
Weighted
average shares outstanding used in computing earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,360
|
|
|
|
100,026
|
|
|
|
100,324
|
|
|
|
100,019
|
|
Diluted
|
|
|
101,915
|
|
|
|
101,282
|
|
|
|
101,693
|
|
|
|
101,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________________ (1) Amounts
corresponding to Morgan Stanley as a related party are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months
Ended
May 31,
|
|
|
For
the Six Months
Ended
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Operating
revenues
|
|
$
|
2,493
|
|
|
$
|
3,085
|
|
|
$
|
5,284
|
|
|
$
|
6,235
|
|
Cost
of services
|
|
$
|
116
|
|
|
$
|
2,628
|
|
|
$
|
383
|
|
|
$
|
6,034
|
|
Selling,
general and administrative
|
|
$
|
529
|
|
|
$
|
3,132
|
|
|
$
|
1,336
|
|
|
$
|
6,038
|
|
Interest
income
|
|
$
|
—
|
|
|
$
|
2,065
|
|
|
$
|
—
|
|
|
$
|
4,384
|
|
Interest
expense
|
|
$
|
176
|
|
|
$
|
171
|
|
|
$
|
413
|
|
|
$
|
362
|
|
See
Notes to Condensed Consolidated Financial Statements
MSCI
INC.
CONDENSED
CONSOLIDATED STATEMENTS CASH FLOWS
(in
thousands)
|
|
Six
Months Ended May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
36,342
|
|
|
$
|
36,565
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
12,857
|
|
|
|
14,250
|
|
Depreciation
of property, equipment and leasehold improvements
|
|
|
6,023
|
|
|
|
1,006
|
|
Foreign
currency loss
|
|
|
616
|
|
|
|
—
|
|
Loss on
sale or disposal of property, equipment and leasehold improvements,
net
|
|
|
274
|
|
|
|
18
|
|
Share
based compensation
|
|
|
16,714
|
|
|
|
12,097
|
|
Provision
for (recovery of) bad debts
|
|
|
376
|
|
|
|
(1,336)
|
|
Amortization
of debt origination fees
|
|
|
716
|
|
|
|
—
|
|
Amortization
of discount on U.S. Treasury securities
|
|
|
(144
|
)
|
|
|
—
|
|
Amortization
of discount on long-term debt
|
|
|
82
|
|
|
|
—
|
|
Deferred
taxes
|
|
|
(10,950
|
)
|
|
|
(6,908
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(9,350
|
)
|
|
|
(27,120
|
)
|
Due
from related parties
|
|
|
1,765
|
|
|
|
662
|
|
Prepaid
and other assets
|
|
|
5,880
|
|
|
|
(4,453
|
)
|
Accounts
payable
|
|
|
37,205
|
|
|
|
—
|
|
Payable
to related parties
|
|
|
(34,992
|
)
|
|
|
15,007
|
|
Deferred
revenue
|
|
|
29,963
|
|
|
|
43,594
|
|
Accrued
compensation and related benefits
|
|
|
(21,892
|
)
|
|
|
(18,160
|
)
|
Income
taxes payable
|
|
|
—
|
|
|
|
9,725
|
|
Other
accrued liabilities
|
|
|
(2,387
|
)
|
|
|
5,790
|
|
Other
|
|
|
59
|
|
|
|
—
|
|
Net
cash provided by operating activities
|
|
|
69,157
|
|
|
|
80,737
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of investments
|
|
|
(244,734
|
)
|
|
|
—
|
|
Cash deposited
with related parties
|
|
|
—
|
|
|
|
(65,690
|
)
|
Capital
expenditures
|
|
|
(9,519
|
)
|
|
|
(5,820
|
)
|
Net
cash used in investing activities
|
|
|
(254,253
|
)
|
|
|
(71,510
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
(11,125
|
)
|
|
|
(11,125
|
)
|
Repurchase
of treasury shares
|
|
|
(605
|
)
|
|
|
(557
|
)
|
Proceeds
from exercise of stock options
|
|
|
30
|
|
|
|
—
|
|
Net
cash used by financing activities
|
|
|
(11,700
|
)
|
|
|
(11,682
|
)
|
Effect
of exchange rate changes
|
|
|
1,488
|
|
|
|
931
|
|
Net decrease
in cash
|
|
|
(195,308
|
)
|
|
|
(1,524
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
268,077
|
|
|
|
33,818
|
|
Cash
and cash equivalents, end of period
|
|
$
|
72,769
|
|
|
$
|
32,294
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
9,802
|
|
|
$
|
15,312
|
|
Cash
paid for income taxes
|
|
$
|
26,121
|
|
|
$
|
20,798
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities
|
|
|
|
|
|
|
|
|
Property,
equipment and leasehold improvements in other accrued
liabilities
|
|
$
|
2,449
|
|
|
$
|
6,281
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
INTRODUCTION AND BASIS OF PRESENTATION
Organization
The
condensed consolidated financial statements include the accounts of MSCI Inc.
and its subsidiaries. MSCI Inc. and its subsidiaries are hereafter referred to
collectively as the “Company” or “MSCI.”
MSCI
is a leading global provider of investment decision support tools including
indices and portfolio risk and performance analytics for use by institutions in
managing investment portfolios. The Company’s products are used by institutions
investing in or trading equity, fixed income and multi-asset class instruments
and portfolios around the world. The Company’s flagship products are its
international equity indices marketed under the MSCI brand and its equity and
multi-asset class portfolio analytics marketed under the Barra brand. The
Company’s products are used in many areas of the investment process, including
portfolio construction and optimization, performance benchmarking and
attribution, risk management and analysis, index-linked investment product
creation, asset allocation, investment manager selection and investment
research.
The
Company’s primary products consist of equity indices, equity portfolio analytics
and multi-asset class portfolio analytics. The Company also has product
offerings in the areas of fixed income portfolio analytics and energy and
commodity asset valuation analytics. The Company’s products are generally
comprised of proprietary index data, risk data and sophisticated software
applications. The Company’s index and risk data are created by applying its
models and methodologies to market data. The Company’s clients can use its data
together with its proprietary software applications, third-party applications or
their own applications in their investment processes. The Company’s proprietary
software applications offer its clients sophisticated portfolio analytics to
perform in-depth analysis of their portfolios, using its risk data, the client’s
portfolio data and fundamental and market data.
Prior to
May 22, 2009, Morgan Stanley was the controlling shareholder of
MSCI. On May 22, 2009, Morgan Stanley completed the sale, pursuant to
a secondary offering, of its remaining economic and voting interests in
MSCI. While MSCI currently operates on a separate stand-alone basis,
it remains a party to several transition related agreements with Morgan
Stanley. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Factors Impacting Comparability of our
Financial Results—Our Relationship with Morgan Stanley” for a discussion of our
current relationship with Morgan Stanley.
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 necessary to
present fairly the financial condition as of May 31, 2009 and November 30, 2008,
the results of operations for the three and six months ended May 31, 2009 and
2008 and cash flows for the six months ended May 31, 2009 and
2008. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes included in MSCI’s Annual Report on Form 10-K for the fiscal year ended
November 30, 2008. The November 30, 2008 consolidated financial
statement information has been derived from the 2008 audited consolidated
financial statements. The results of operations for interim periods
are not necessarily indicative of results for the entire year.
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Condensed Consolidated Statements of Income reflect expense allocations for
certain corporate functions historically provided by Morgan Stanley, including
human resources, information technology, accounting, legal and compliance,
corporate services, treasury and other services. These allocations are 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 are based on methods that include direct time tracking, headcount,
inventory metrics and corporate overhead.
Inter-company
balances and transactions are eliminated in consolidation.
During
the three and six months ended May 31, 2009, certain balances for prior periods
have been reclassified to conform to current period presentations. These include
the reclassification of $299,000 and $595,000 from the cost of services category
and $223,000 and $411,000 from
the selling, general, and administrative category to the
depreciation and amortization of property, equipment, and leasehold improvements
category on the condensed consolidated statements of income for the three and
six months ended May 31, 2008, respectively.
Concentration
of Credit Risk
Financial
instruments that may potentially subject the Company to concentrations of credit
risk consist principally of cash investments and short-term
investments. At May 31, 2009 and November 30, 2008, cash and
cash equivalent amounts held primarily on deposit were $72.8 million and $268.1
million, respectively. At May 31, 2009, the Company has invested
$244.9 million in US Treasury Securities with maturity dates ranging between
four and twelve months.
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 likelihood of default of outstanding customer
receivables and maintains reserves for estimated losses.
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 PRONOUNCEMENTS
In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
“Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133” (“SFAS No. 161”). SFAS No. 161 establishes, among other things, the
disclosure requirements for derivative instruments and for hedging
activities. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS No. 161 did not have a
material impact on the Company’s condensed consolidated financial
statements.
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 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 in SFAS No. 128,
“Earnings per Share .”
Under the guidance in FSP EITF 03-6-1, 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 pursuant to the two-class method. FSP EITF
03-6-1 is effective for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. All prior-period earnings per share
data presented shall be adjusted retrospectively. Early application is not
permitted. The Company is currently evaluating the potential impact of adopting
FSP EITF 03-6-1.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 amends FASB
Statement No. 107, “Disclosures about Fair Value of
Financial Instruments,” to require disclosures about fair value of
financial instruments in interim financial statements as well as in annual
financial statements. This FSP also would amend APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in all interim financial
statements. FSP FAS 107-1 and APB 28-1 is effective for interim reporting
periods ending after June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. The Company early adopted the
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
provisions
of this statement. The adoption did not have a material effect on the
Company’s condensed consolidated financial statements.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments," (FSP FAS 115-2) which amends the
recognition guidance for other-than-temporary impairments (“OTTI”) of debt
securities and expands the financial statement disclosures for OTTI on debt and
equity securities. This FSP is effective for interim reporting periods ending
after June 15, 2009 with early adoption permitted for periods ending after March
15, 2009. The Company early adopted the provisions of this
statement. The adoption did not have a material effect on the
Company’s condensed consolidated financial statements.
In April
2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” which
provides additional guidance for establishing fair value when the volume and
level of activity for the asset or liability have significantly decreased. This
FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly.
The guidance is effective for the periods ending after June 15, 2009 with
early adoption permitted for the periods ending after March 15, 2009. The
Company early adopted the provisions of this statement. The adoption
did not have a material effect on the Company’s condensed consolidated financial
statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No.
165”). SFAS No. 165 establishes general standards of accounting for, and
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In
particular, this statement sets forth: (1) the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and (3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. SFAS No. 165 is effective for the interim or annual financial
periods ending after June 15, 2009. The effect of adoption is not
expected to have a material impact on the Company’s condensed consolidated
financial statements.
3.
EARNINGS PER COMMON SHARE
Basic and
diluted earnings per common share (“EPS”) is computed by dividing net income 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 weighted average common shares
includes outstanding stock options and unvested restricted stock
awards. There were no anti-dilutive stock options or restricted stock
awards excluded from the calculation of diluted earnings per share for the three
months ended May 31, 2009. There were 1,017,225 stock options
excluded from the calculation of diluted earnings per share for the six months
ended May 31, 2009 because of their anti-dilutive effect. No stock
options or restricted stock awards were excluded from the calculation of diluted
earnings per share for the three or six months ended May 31, 2008.
The
following table sets forth the computation of earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Six Months Ended May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands, except per share data)
|
|
Net
income
|
|
$ |
19,618 |
|
|
$ |
18,631 |
|
|
$ |
36,342 |
|
|
$ |
36,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
100,360 |
|
|
|
100,026 |
|
|
|
100,324 |
|
|
|
100,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
100,360 |
|
|
|
100,026 |
|
|
|
100,324 |
|
|
|
100,019 |
|
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and restricted stock units
|
|
|
1,555 |
|
|
|
1,256 |
|
|
|
1,369 |
|
|
|
1,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
101,915 |
|
|
|
101,282 |
|
|
|
101,693 |
|
|
|
101,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per basic common share
|
|
$ |
0.20 |
|
|
$ |
0.19 |
|
|
$ |
0.36 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per diluted common share
|
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
components of comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Six Months Ended May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Net
income
|
|
$ |
19,618 |
|
|
$ |
18,631 |
|
|
$ |
36,342 |
|
|
$ |
36,565 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in unrealized gains on cash flow hedges
|
|
|
(620
|
) |
|
|
2,966 |
|
|
|
(1,534
|
) |
|
|
2,163 |
|
Pension
and other post-retirement adjustments
|
|
|
70 |
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
Foreign
currency translation adjustments
|
|
|
207 |
|
|
|
564 |
|
|
|
266 |
|
|
|
931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
19,275 |
|
|
$ |
22,161 |
|
|
$ |
35,093 |
|
|
$ |
39,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. SHORT-TERM
INVESTMENTS
Short-term
investments include U.S. Treasury securities with maturity dates ranging from
four to twelve months. As the Company has the intent and ability to
hold the investments to maturity, these investments are classified as
held-to-maturity and are stated 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.
At May
31, 2009, the carrying value of the short-term investments was $244.9
million. The Company held no short-term investments at November 30,
2008.
The
carrying value and fair value of securities held-to-maturity at May 31,
2009 were as follows:
In
thousands of dollars
|
|
Amortized
cost
|
|
|
Gross
unrecognized
gains
|
|
|
Gross
unrecognized
losses
|
|
|
Fair
value
|
|
May 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
244,878 |
|
|
$ |
72 |
|
|
$ |
— |
|
|
$ |
244,950 |
|
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
None of
the Company’s investments in held-to-maturity securities have been in an
unrealized loss position as of May 31, 2009.
If
the fair value of the Company’s U.S. Treasury security investments is less than
the amortized cost at the balance sheet date, the Company assesses whether the
impairment is other than temporary. As the Company currently invests only in
U.S. Treasury securities with a short duration (less than one year) and intends
to hold these investments to maturity, 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 amortized
cost basis. Management has asserted that it has no intent to sell and that it
believes it is more-likely-than-not that it will not be required to sell the
investment before recovery of its amortized cost basis.
As of May 31, 2009, no other than
temporary impairment has 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 Inc. are accounted for, and
presented as, third party transactions.
Receivables from Related Parties and
Interest Income. At May 31, 2009, there are no related party
receivables. Receivable amounts from Morgan Stanley of $1.2 million
are included in trade receivables at May 31, 2009. At November 30, 2008, related
party receivables consisted of amounts due to the Company for sales of products
and services to Morgan Stanley. The receivable amounts were
unsecured, bore interest at Morgan Stanley’s internal prevailing rates and were
payable on demand. The Company did not earn interest from Morgan
Stanley during the six months ended May 31, 2009.
Prior to
July 1, 2008, the Company deposited substantially all of its excess funds with
Morgan Stanley. The Company received interest at Morgan Stanley’s internal
prevailing rates on its cash deposits. Interest earned on both cash
on deposit with Morgan Stanley and related party receivables for the six months
ended May 31, 2008 totaled approximately $4.4 million.
Revenues. Morgan Stanley or
its affiliates subscribe to, in the normal course of business, certain of the
Company’s products. Related party revenues recognized 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.
For the three and six months ended May 31, 2008, revenues of $3.1 million
and $6.2 million, respectively, were from Morgan Stanley.
Administrative Expenses.
Morgan Stanley affiliates have invoiced administrative expenses to the Company
relating to office space, equipment and staff services. The amounts invoiced as
related party items by Morgan Stanley affiliates for staff services for the
three months ended May 31, 2009 and 2008 were $0.6 million and $5.8
million, respectively. The amounts invoiced as related party items by Morgan
Stanley affiliates for the six months ended May 31, 2009 and 2008 was $1.7
million and $12.1 million, respectively.
Payables to Related Parties.
At May 31, 2009, there are no payables to related parties. Payable
amounts to Morgan Stanley of $37.7 million are included in accounts payable at
May 31, 2009. At November 30, 2008, payables to related parties consisted of
amounts due to Morgan Stanley affiliates for the Company’s expenses, income
taxes and prepayments for the Company’s services. The amounts outstanding were
unsecured, bore interest at Morgan Stanley’s internal prevailing rates and were
payable on demand. Interest expense incurred on these payables prior to May 22,
2009 was $0.2 million for each of the three months ended May 31, 2009 and
2008. Interest expense incurred on these payables prior to May 22, 2009 was $0.4
million for each of the six months ended May 31, 2009 and
2008.
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property,
equipment and leasehold improvements at May 31, 2009 and November 30, 2008
consisted of the following:
|
|
As
of
|
|
|
|
May
31,
|
|
|
November
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Computer
& related equipment
|
|
$
|
34,958
|
|
|
$
|
28,112
|
|
Furniture
& fixtures
|
|
|
2,800
|
|
|
|
2,163
|
|
Leasehold
improvements
|
|
|
12,632
|
|
|
|
10,879
|
|
Work-in-process
|
|
|
—
|
|
|
1,362
|
|
Subtotal
|
|
|
50,390
|
|
|
|
42,516
|
|
Accumulated
depreciation and amortization
|
|
|
(20,537
|
)
|
|
|
(14,069)
|
|
Property,
equipment and leasehold improvements, net
|
|
$
|
29,853
|
|
|
$
|
28,447
|
|
Depreciation
and amortization expense of property, equipment and leasehold improvements was
$3.0 million and $0.5 million for the three months ended May 31, 2009 and 2008,
respectively. Depreciation and amortization expense of property,
equipment and leasehold improvements was $6.0 million and $1.0 million for the
six months ended May 31, 2009 and 2008, 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, 2009 and
2008 was $6.4 million and $7.1 million, respectively. Amortization
expense related to intangible assets for the six months ended May 31, 2009 and
2008 was $12.9 million and $14.3 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, 2009
|
|
|
|
|
|
|
|
|
|
Technology/software
|
|
$
|
140,354
|
|
|
$
|
(99,359
|
)
|
|
$
|
40,995
|
|
Trademarks
|
|
|
102,220
|
|
|
|
(24,248
|
)
|
|
|
77,972
|
|
Customer
relationships
|
|
|
25,880
|
|
|
|
(11,960
|
)
|
|
|
13,920
|
|
Non-competes
|
|
|
50
|
|
|
|
(50
|
)
|
|
|
—
|
|
Total
intangible assets
|
|
$
|
268,504
|
|
|
$
|
(135,617
|
)
|
|
$
|
132,887
|
|
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
(in
thousands)
|
|
|
As
of November 30, 2008
|
|
|
|
|
|
|
|
|
|
Technology/software
|
|
$
|
140,800
|
|
|
$
|
(90,077
|
)
|
|
$
|
50,723
|
|
Trademarks
|
|
|
102,220
|
|
|
|
(21,884
|
)
|
|
|
80,336
|
|
Customer
relationships
|
|
|
25,880
|
|
|
|
(11,032
|
)
|
|
|
14,848
|
|
Non-competes
|
|
|
50
|
|
|
|
(50
|
)
|
|
|
—
|
|
Total
intangible assets
|
|
$
|
268,950
|
|
|
$
|
(123,043
|
)
|
|
$
|
145,907
|
|
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, 2009 was $2.4 million and $5.0 million, respectively. For the
three and six months ended May 31, 2008, rent expense was $3.3 million and
$5.9 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 consists of a $425.0 million term loan facility
and a $75.0 million revolving credit facility. Outstanding borrowings
under the Credit Facility initially accrued interest at (i) 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%. 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 weighted average rate on the term loan A facility
and term loan B facility was 3.53% and 4.16%, respectively, for the six months
ended May 31, 2009. The term loan A facility and the term loan B facility will
mature on November 20, 2012 and November 20, 2014, respectively.
As of May
31, 2009, $391.6 million was outstanding and there was $74.7 million of unused
credit under the revolving credit facility. In May 2009, Bank of
America, N.A. issued, on the Company’s behalf, letters of credit under the
revolving credit facility in the amount of $0.3 million to certain of the
Company’s lessors to be used as security under the related property
leases. The beneficiaries of the letters of credit may draw down on the
letters of credit under the terms of the applicable lease and letter of
credit. The Company pays an annual 2.125% fee for the letters of
credit. 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, 2009 and 2008 and $0.2 million for each of the six
months ended May 31, 2009 and 2008. Interest and principal repayment
requirements are paid quarterly in February, May, August and November. The
principal repayment requirements are paid quarterly until November 20,
2012, when the final payment of $50 million is due on the term loan A
facility and November 20, 2014, when the final payment of $209.8 million is
due on the term loan B facility.
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, 2009 was $32.1 million, net of a $0.2
million discount. Long term debt, net of current maturities was $358.7 million,
net of a $0.7 million discount at May 31, 2009. For each of the three and six
month periods ended May 31, 2009 and May 31, 2008, less than $0.1 million of the
debt discount had been amortized.
At May
31, 2009, the fair market value of the Company’s debt obligations was $370.3
million. The fair market value was estimated based on actionable bid quotes
available in the over the counter markets.
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 interest rate swap agreements through the end of 2010
for an aggregate notional principal amount of $251.7 million. The effective
fixed rate on the aggregate notional principal amount swapped of $234.5 million
for the six months ended May 31, 2009 was 5.19%. These interest rate swaps are
designated as cash flow hedges and qualify for hedge accounting treatment under
SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (“SFAS No.
133”).
In
accordance with SFAS No. 133, the Company's derivative instruments are recorded
as assets or liabilities at fair value. Changes in fair value derivatives that
have been designated as cash flow hedges are included in "unrealized losses on
cash flow hedges" as a component of “other comprehensive income” to the extent
of the effectiveness of such hedging instruments. Any ineffective portion of the
change in fair value of such hedging instruments would be included in the
Condensed Consolidated Statements of Income in “interest (income)
expense.” No hedge ineffectiveness on cash flow hedges was recognized
during the six months ended May 31, 2009. Gains and losses are reclassified from
“accumulated other comprehensive loss” to the Condensed Consolidated Statement
of Income in the period the hedged transaction affects earnings.
Amounts
reported in “accumulated other comprehensive loss” related to derivatives will
be reclassified to “interest expense” as interest payments are made on the
Company’s variable-rate debt. Over the next twelve months, the Company estimates
that $4.7 million will be reclassified as an increase to interest
expense.
The gross
carrying values of the interest rate contracts as of May 31, 2009 were $6.2
million and were recorded in other accrued liabilities on the Condensed
Consolidated Statements of Financial Condition.
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 income 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, 2009, the amount of loss on the effective
portion of these interest rate contracts reclassified from accumulated other
comprehensive income into interest expense on the Condensed Consolidated
Statements of Income was $1.0 million and $1.4 million,
respectively.
Credit-risk-related contingent
features. The Company has agreements with each of its
derivative counterparties that contain cross-default provisions whereby if the
Company defaults on any of its indebtedness, the Company could also be declared
in default on its derivative obligations.
As of May
31, 2009, the fair value of derivatives in a liability position related to these
agreements was $6.2 million. As of May 31, 2009, 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 $6.3 million.
10.
EMPLOYEE BENEFITS
During
the six months ended May 31, 2009, the Company sponsored a 401(k) plan for
eligible U.S. employees. The Company also participates in separate
defined contribution pension plans that cover substantially all of its non-U.S.
employees. During the six months ended May 31, 2008, the Company participated in
plans sponsored by Morgan Stanley and the associated costs were allocated by
Morgan Stanley to the Company.
For the
three months ended May 31, 2009 and 2008, costs relating to 401(k), pension and
post-retirement benefit expenses were $1.4 million and $1.5 million,
respectively. Of these amounts, $0.7 million and $1.0 million were recorded in
cost of services and $0.7 million and $0.5 million were recorded in selling,
general and administrative for the three months ended May 31, 2009 and 2008,
respectively.
For the
six months ended May 31, 2009, costs relating to 401(k), pension and
post-retirement benefit expenses were $4.5 million of which $2.2 million and
$2.3 million were recorded in cost of services and selling, general and
administrative,
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
respectively.
For the six months ended May 31, 2008, costs relating to 401(k), pension and
post-retirement benefit expenses were $2.6 million of which $1.9 million and
$0.7 million were recorded in cost of services and selling, general and
administrative, respectively.
401(k) Plan. Eligible
employees may participate in the MSCI 401(k) Plan immediately upon hire.
Eligible employees receive 401(k) matching contributions and 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 for the three months ended May 31, 2009 and
2008 were approximately $0.6 million and $0.8 million, respectively. For the six
months ended May 31, 2009 and 2008, expenses associated with the 401(k)
Plan were $2.3 million and $1.5 million, respectively.
Net Periodic Benefit Expense.
Net periodic benefit expense related to pension and other postretirement
costs was $0.8 million and $2.2 million for the three and six months ended
May 31, 2009, respectively. During the three and six months ended May 31,
2008, the Company participated in Morgan Stanley sponsored plans and was
allocated costs of $0.7 million and $1.1 million, respectively.
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 SFAS No. 123
(revised 2004), “Share Based
Payment” (“SFAS No. 123R”).
On
December 16, 2008, the Company, as a component of the 2008 annual bonus, awarded
a portion 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 SFAS No. 123R, the Company accrues the
estimated cost of these awards over the course of the fiscal year in which the
award is earned. As such, the Company accrued the estimated cost of the fiscal
2008 Bonus Award granted to retirement-eligible employees over the 2008 fiscal
year rather than expensing the awards on the date of grant.
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 Bonus Award, 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, 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. During
the six months ended May 31, 2008, the Company awarded 9,776 shares in MSCI
common stock and 8,096 restricted stock units to directors who were not
employees of the Company or Morgan Stanley during the period.
Share
based compensation expense was $8.9 million and $16.6 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. Share based compensation expense for
the three and six months ended May 31, 2008 was $7.7 million and $13.4 million,
of which $6.9 million and $11.7 million was related to the Founders Grant Award,
respectively.
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company’s provision for income taxes was $12.4 million and $11.8 million for the
three months ended May 31, 2009 and 2008, respectively, and $22.0 million and
$22.6 million for the six months ended May 31, 2009 and 2008,
respectively. These amounts reflect effective tax rates of 38.6% and
38.7% for the three months ended May 31, 2009 and 2008, respectively, and 37.7%
and 38.2% for the six months ended May 31, 2009 and 2008, respectively. The
effective tax rate of 37.7% for the six months ended May 31, 2009 reflects the
Company’s estimate of the effective annual tax rate adjusted for discrete events
that occurred 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
|
1999-2007
|
|
|
California
|
2004-2007
|
|
|
New
York State and City
|
2002-2007
|
|
|
Hong
Kong
|
2001-2007
|
|
|
Japan
|
2004-2007
|
|
13.
SEGMENT INFORMATION
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, 2009
|
|
|
May
31, 2008
|
|
May
31, 2009
|
|
|
May
31, 2008
|
Revenues
|
|
(in
thousands)
|
|
(in
thousands)
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
53,070
|
|
|
$
|
53,004
|
|
$
|
103,093
|
|
|
$
|
104,191
|
Other
|
|
|
3,496
|
|
|
|
3,249
|
|
|
6,876
|
|
|
|
6,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Americas
|
|
|
56,566
|
|
|
|
56,253
|
|
|
109,969
|
|
|
|
110,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
13,368
|
|
|
|
13,851
|
|
|
26,944
|
|
|
|
27,038
|
Other
|
|
|
21,416
|
|
|
|
20,788
|
|
|
42,113
|
|
|
|
42,738
|
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
EMEA
|
|
|
34,784
|
|
|
|
34,639
|
|
|
69,057
|
|
|
|
69,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
& Australia:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
9,982
|
|
|
|
9,549
|
|
|
20,352
|
|
|
|
18,027
|
Other
|
|
|
8,043
|
|
|
|
7,754
|
|
|
15,912
|
|
|
|
14,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Asia & Australia
|
|
|
18,025
|
|
|
|
17,303
|
|
|
36,264
|
|
|
|
32,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
109,375
|
|
|
$
|
108,195
|
|
$
|
215,290
|
|
|
$
|
213,146
|
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, 2009
|
|
|
November
30, 2008
|
|
Long-lived
assets
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
United
States
|
|
$
|
585,014
|
|
|
$
|
597,254
|
|
Other
|
|
|
542
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
Total
Americas
|
|
|
585,556
|
|
|
|
597,574
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
1,286
|
|
|
|
1,572
|
|
Other
|
|
|
12,253
|
|
|
|
11,722
|
|
|
|
|
|
|
|
|
|
|
Total
EMEA
|
|
|
13,539
|
|
|
|
13,294
|
|
|
|
|
|
|
|
|
|
|
Asia
& Australia:
|
|
|
|
|
|
|
|
|
Japan
|
|
|
519
|
|
|
|
483
|
|
Other
|
|
|
4,749
|
|
|
|
4,626
|
|
|
|
|
|
|
|
|
|
|
Total
Asia & Australia
|
|
|
5,268
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
604,363
|
|
|
$
|
615,977
|
|
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.
MSCI
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
To the
Board of Directors and Shareholders of MSCI Inc.:
We have
reviewed the accompanying condensed consolidated statement of financial position
of MSCI Inc. and subsidiaries (the “Company”) as of May 31, 2009, and the
related condensed consolidated statements of income for the three-month and
six-month periods ended May 31, 2009 and 2008, and the condensed
consolidated statements of cash flows for the six-month periods ended
May 31, 2009 and 2008. 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, 2008,
and the related consolidated statements of income, comprehensive income, cash
flows and shareholders’ equity for the fiscal year then ended (not presented
herein) included in the Company’s Annual Report on Form 10-K; and in our report
dated January 29, 2009, which report contains an explanatory paragraph relating
to the adoption, in fiscal 2008, of Statement of Financial Accounting Standards
(“SFAS”) No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”, 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, 2008 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 2,
2009
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, 2008 (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,” 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 for use by institutions in managing
equity, fixed income and multi-asset class portfolios. Our flagship products are
our international equity indices marketed under the MSCI brand and our equity
portfolio analytics marketed under the Barra brand. Our products are used in
many areas of the investment process, including portfolio construction and
optimization, performance benchmarking and attribution, risk management and
analysis, index-linked investment product creation, asset allocation, investment
manager selection and investment research.
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,
2009, we had approximately 3,100 clients across 63 countries. We had 21 offices
in 15 countries to help serve our diverse client base, with approximately 51.1%
of our revenue from clients in the Americas, 32.1% in Europe, the Middle East
and Africa (“EMEA”), 9.5% in Japan and 7.3% in Asia-Pacific (not including
Japan), based on revenues for the six months ended May 31, 2009.
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. We
expect to use this cash to make investments in our business both internally and
externally through acquisitions in order to capitalize on the many growth
opportunities before us and to expand our market position. 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 management and production
functions and our general and administrative functions. 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.
The
discussion of our results of operations for the three months ended May 31,
2009 and May 31, 2008 is provided below. These statements, which
reflect our beliefs and expectations, are subject to risks and
uncertainties that may cause actual results to differ materially. For
a discussion of the risks and uncertainties that may affect our
future results, please see “Forward-Looking Statements” immediately
preceding Part I, Item 1, “Risk Factors” in Part I, Item 1A, “Certain Factors
Affecting Results of Operations” in Part II, Item 7 and other items throughout
our Form 10-K for the fiscal year ended November 30, 2008. Income
from interim periods may not be indicative of future results.
Results
of Operations
Three
Months Ended May 31, 2009 Compared to the Three Months Ended May 31,
2008:
|
|
Three
Months Ended
May 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase/(Decrease)
|
|
|
|
(in
thousands, except per share data)
|
|
Operating
revenues
|
|
$
|
109,375
|
|
|
$
|
108,195
|
|
|
$
|
1,180
|
|
|
1.1
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
29,269
|
|
|
|
29,636
|
|
|
|
(367
|
)
|
|
(1.2
|
)%
|
Selling,
general and administrative
|
|
|
34,052
|
|
|
|
38,005
|
|
|
|
(3,953
|
)
|
|
(10.4
|
)%
|
Amortization
of intangible assets
|
|
|
6,428
|
|
|
|
7,125
|
|
|
|
(697
|
)
|
|
(9.8
|
)%
|
Depreciation
and amortization of property, equipment, and leasehold
improvements
|
|
|
2,972
|
|
|
|
522
|
|
|
|
2,450
|
|
|
469.3
|
%
|
Total
operating expenses
|
|
|
72,721
|
|
|
|
75,288
|
|
|
|
(2,567
|
)
|
|
(3.4
|
)%
|
Operating
income
|
|
|
36,654
|
|
|
|
32,907
|
|
|
|
3,747
|
|
|
11.4
|
%
|
Interest
expense (income) and other, net
|
|
|
4,682
|
|
|
|
2,522
|
|
|
|
2,160
|
|
|
85.6
|
%
|
Provision
for income taxes
|
|
|
12,354
|
|
|
|
11,754
|
|
|
|
600
|
|
|
5.1
|
%
|
Net
income
|
|
$
|
19,618
|
|
|
$
|
18,631
|
|
|
$
|
987
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per basic common share
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
$
|
0.01
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per diluted common share
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.01
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
33.5
|
%
|
|
|
30.4
|
%
|
|
|
|
|
|
|
|
Operating
Revenues
We group
our revenues into the following four product categories:
|
•
|
|
Equity
portfolio analytics
|
|
•
|
|
Multi-asset
class portfolio analytics
|
The
following table summarizes the revenue by category for the three months ended
May 31, 2009 compared to the three months ended May 31, 2008:
|
|
Three
Months Ended
May 31,
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase/(Decrease)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
indices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
index subscriptions
|
|
$
|
47,282
|
|
|
$
|
41,804
|
|
|
$
|
5,478
|
|
|
|
13.1
|
%
|
Equity
index asset based fees
|
|
|
15,220 |
|
|
|
18,307 |
|
|
|
(3,087
|
) |
|
|
(16.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity indices
|
|
|
62,502 |
|
|
|
60,111 |
|
|
|
2,391 |
|
|
|
4.0
|
% |
Equity
portfolio analytics
|
|
|
31,582 |
|
|
|
33,902 |
|
|
|
(2,320
|
) |
|
|
(6.8 |
)% |
Multi-asset
class portfolio analytics
|
|
|
9,572 |
|
|
|
8,598 |
|
|
|
974 |
|
|
|
11.3
|
% |
Other
products
|
|
|
5,719 |
|
|
|
5,584 |
|
|
|
135 |
|
|
|
2.4
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
$ |
109,375 |
|
|
$ |
108,195 |
|
|
$ |
1,180 |
|
|
|
1.1
|
% |
Total operating revenues for the three months ended
May 31, 2009 increased 1.1% to $109.4 million compared to $108.2 million for the
three months ended May 31, 2008. The growth was comprised of a 4.7% increase to
$94.2 million in subscription revenues offset, in part, by a 16.9% decrease in
equity index asset based fees. The increase in subscription revenues
was driven by an increase in our revenues related to equity index subscriptions,
multi-asset class portfolio analytics and other products, which were up 13.1%,
11.3% and 2.4%, respectively, for the three months ended May 31, 2009, offset,
in part, by declines of 6.8% in equity portfolio analytics. Our revenues are
impacted by changes in exchange rates primarily as they relate to the U.S.
dollar. Using exchange rates for the same period of the prior year, our
revenues, excluding asset based fees, for the three months ended May 31, 2009
would have been higher by $1.2 million had the U.S. dollar not strengthened
relative to the prior year.
Revenues
related to equity indices increased 4.0% to $62.5 million for the three months
ended May 31, 2009 compared to the same period in 2008. Revenues from the equity
index subscriptions sub-category were up 13.1% to $47.3 million during the
current period with strength across all regions. This growth was led by
increases in our emerging market, small cap, and developed market index modules
as well as derivative product license fees and user fees, which more than offset
a decline in fees for historical index data.
Revenues
attributable to the equity index asset based
fees sub-category decreased 16.9% to $15.2 million for the three
months ended May 31, 2009 compared to the same period in 2008 primarily
reflecting decreases of 19.4% to $11.7 million for the ETF asset based
fees sub-category of that category. The average value of
assets in ETFs linked to MSCI equity indices decreased 27.0% to $134.7 billion
for the three months ended May 31, 2009 compared to $184.4 billion for the three
months ended May 31, 2008. As of May 31, 2009, the value of assets in
ETFs linked to MSCI equity indices was $175.9 billion, representing a decrease
of $23.7 billion, or 11.9%, from $199.6 billion as of May 31, 2008. We estimate
that the $23.7 billion year-over-year decline in value of assets in ETFs linked
to MSCI equity indices was attributable to $65.8 billion of net asset
depreciation offset, in part, by $42.1 billion of net cash inflows.
The three
MSCI indices with the largest amount of ETF assets linked to them as of May 31,
2009 were the MSCI Emerging Markets, EAFE and U.S. Broad Market Indices with
$45.1 billion, $33.6 billion and $10.2 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
|
|
|
2008
|
|
2009
|
$
in Billions
|
|
February
|
|
May
|
|
August
|
|
|
November
|
|
February
|
|
|
May
|
AUM
in ETFs linked to MSCI Indices
|
|
$
|
179.2
|
|
$
|
199.6
|
|
$
|
166.3
|
|
|
$
|
119.0
|
|
$
|
107.8
|
|
|
$
|
175.9
|
Sequential
Change ($ Growth in Billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Appreciation/(Depreciation)
|
|
$
|
(15.2
|
)
|
$
|
9.9
|
|
$
|
(31.2
|
)
|
|
$
|
(63.2
|
)
|
$
|
(13.6
|
)
|
|
$
|
42.2
|
Cash
Inflow/(Outflow)
|
|
|
2.7
|
|
|
10.5
|
|
|
(2.1
|
)
|
|
|
15.9
|
|
|
2.4
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Change
|
|
$
|
(12.5
|
)
|
$
|
20.4
|
|
$
|
(33.3
|
)
|
|
$
|
(47.3
|
)
|
$
|
(11.2
|
)
|
|
$
|
68.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source:
Bloomberg and MSCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth the average value of assets in ETFs linked to MSCI
indices for the quarters ended:
|
|
Quarterly
Average
|
|
|
2008
|
|
2009
|
$
in Billions
|
|
February
|
|
May
|
|
August
|
|
November
|
|
February
|
|
May
|
AUM
in ETFs linked to MSCI Indices
|
|
$
|
183.2
|
|
$
|
184.4
|
|
$
|
178.3
|
|
$
|
134.9
|
|
$
|
126.4
|
|
$
|
134.7
|
|
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
SEC.
Revenues related to equity
portfolio analytics products decreased 6.8% to $31.6 million for the three
months ended May 31, 2009 compared to the same period in 2008 resulting from
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 9.7% to $21.0
million, while Models Direct, our proprietary risk data accessed directly, and
Barra on Vendors, our proprietary risk data product accessed through vendors,
remained flat for the three months ended May 31, 2009 compared to the same
period in 2008.
Revenues
related to multi-asset class portfolio analytics increased 11.3% to $9.6 million
for the three months ended May 31, 2009 compared to the same period in 2008.
This growth reflects an increase of 21.6% to $7.2 million for BarraOne and a
decrease of 11.1% to $2.4 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 manager category and,
from a regional perspective, the Americas, reflecting growth in new
subscriptions as well as relatively high retention rates.
Revenues
from other products increased 2.4% to $5.7 million for the three months ended
May 31, 2009 compared to the same period in 2008. This reflects an increase of
12.6% to $3.7 million for our energy and commodity analytics products, partially
offset by a decline of 29.9% to $0.4 million in asset based fees from investment
products linked to MSCI investable hedge fund indices and a decrease of 7.6% to
$1.6 million for fixed income analytics products.
Run
Rate
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 one-time
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;
|
|
•
|
|
timing
differences under GAAP between when we receive fees and the realization of
the related revenues; 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
|
|
|
|
|
|
May
31,
|
|
February
28,
|
|
|
Year
Over Year
|
|
Sequential
|
|
|
2009
|
|
2008
|
|
2009
|
|
|
Comparison
|
|
Comparison
|
|
|
(in
thousands)
|
|
|
|
Run
Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
indices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
178,634
|
|
|
$
|
158,989
|
|
|
$
|
174,242
|
|
|
|
12.4
|
|
%
|
|
|
2.5
|
|
%
|
Asset
based fees
|
|
|
68,892
|
|
|
|
78,926
|
|
|
|
50,574
|
|
|
|
(12.7
|
)
|
%
|
|
|
36.2
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Indices total
|
|
|
247,526
|
|
|
|
237,915
|
|
|
|
224,816
|
|
|
|
4.0
|
|
%
|
|
|
10.1
|
|
%
|
Equity
portfolio analytics
|
|
|
126,344
|
|
|
|
135,616
|
|
|
|
126,789
|
|
|
|
(6.8
|
)
|
%
|
|
|
(0.4
|
)
|
%
|
Multi-asset
class analytics
|
|
|
37,194
|
|
|
|
31,861
|
|
|
|
35,309
|
|
|
|
16.7
|
|
%
|
|
|
5.3
|
|
%
|
Other
products (1)
|
|
|
21,612
|
|
|
|
22,329
|
|
|
|
20,993
|
|
|
|
(3.2
|
)
|
%
|
|
|
2.9
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Run Rate
|
|
$
|
432,676
|
|
|
$
|
427,721
|
|
|
$
|
407,907
|
|
|
|
1.2
|
|
%
|
|
|
6.1
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
total
|
|
$
|
362,784
|
|
|
$
|
346,011
|
|
|
$
|
356,333
|
|
|
|
4.8
|
|
%
|
|
|
1.8
|
|
%
|
Asset
based fees total
|
|
|
69,892
|
|
|
|
81,710
|
|
|
|
51,574
|
|
|
|
(14.5
|
)
|
%
|
|
|
35.5
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Run Rate
|
|
$
|
432,676
|
|
|
$
|
427,721
|
|
|
$
|
407,907
|
|
|
|
1.2
|
|
%
|
|
|
6.1
|
|
%
|
(1)
Includes run rate related to subscriptions to other products, including
energy and commodity valuation tools and fixed income analytics, and to
hedge fund asset based fees.
|
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, 2009, we had a total of 3,080 clients, excluding clients that pay only asset
based fees, as compared to 3,032 at May 31, 2008 and 3,074 at February 28, 2009.
The sequential increase in the client count reflects an increase across all
client types except for a slight decline in the number of hedge fund
clients.
Aggregate
and Core Retention Rates
The
following table sets forth our Aggregate Retention Rates by product category for
the three months ended:
|
|
May
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Equity
Index
|
|
|
92.8
|
%
|
|
|
94.3
|
%
|
Equity
Portfolio Analytics
|
|
|
82.0
|
%
|
|
|
88.9
|
%
|
Multi-Asset
Class Analytics
|
|
|
83.2
|
%
|
|
|
76.9
|
%
|
Other
|
|
|
88.3
|
%
|
|
|
96.1
|
%
|
Total
|
|
|
87.7
|
%
|
|
|
90.6
|
%
|
The
following table sets forth our Core Retention Rates by product category for the
three months ended:
|
|
May
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Equity
Index
|
|
|
93.2
|
%
|
|
|
94.5
|
%
|
Equity
Portfolio Analytics
|
|
|
83.5
|
%
|
|
|
91.8
|
%
|
Multi-Asset
Class Analytics
|
|
|
93.7
|
%
|
|
|
76.9
|
%
|
Other
|
|
|
89.6
|
%
|
|
|
96.1
|
%
|
Total
|
|
|
89.5
|
%
|
|
|
91.9
|
%
|
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 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 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 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.
Retention
Rates for the three months ended May 31, 2009 declined, reflecting clients’
budget constraints due to depressed equity values as a result of stock market
volatility, the closure or merger of a number of our clients and the shutdown of
quantitative funds and teams. In fiscal 2008, 48% of our cancellations occurred
in the fourth fiscal quarter. In years prior to fiscal 2008, approximately 40%,
on average, of our subscription cancellations occurred in the fourth fiscal
quarter.
Operating
Expenses
Operating
expenses decreased 3.4% to $72.7 million for the three months ended May 31,
2009 compared to $75.3 million in the same period in 2008. The
decrease reflects lower costs allocated by Morgan Stanley for staffing services,
reduced costs for consulting services, and reduced amortization of our
intangible assets, partially offset by increases in compensation costs and
depreciation expenses. Our operating expenses are impacted by changes
in exchange rates primarily as they relate to the U.S. dollar. Using
exchange rates for the same period of the prior year, our operating expense for
the three months ended May 31, 2009 would have been higher by $3.9 million had
the U.S. dollar not strengthened relative to the prior year.
Compensation and benefits
expenses represent the majority of our expenses across all of our operating
functions and typically have represented approximately 60% of our total
operating expenses. These expenses generally contribute to the
majority of our expense increases from period to period, reflecting existing
staff compensation and benefit increases 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. An important location for us is Mumbai, India, where we have
increased our staff levels significantly since commencing our operations there
in early 2004 with a small staff in data management and production.
Subsequently, we expanded the scale of our operations there by adding teams in
research and administration, as well as by continuing to expand the data
management and production team. Our office in Mumbai has grown from 12 employees
as of November 30, 2004 to 103 full-time employees as of May 31, 2009.
Another important location for us is Budapest, Hungary, where we opened an
office in August 2007. This location is an important information technology
center. Our Budapest office had 74 employees as of May 31, 2009. We
also opened an office in Monterrey,
Mexico in the first quarter of 2009, which had 22 employees to service clients
in the Americas as of May 31, 2009.
During
the three months ended May 31, 2009, compensation and benefits expenses were
$46.6 million, an increase of $2.7 million compared to the same period in
2008. The increase includes $1.1 million associated with compensation
costs related to the final separation from Morgan Stanley, $0.9 million
reflecting the adjustment of forfeiture estimates of stock based compensation
and $0.8 million of stock based compensation costs relating to the restricted
stock units granted as a component of the 2008 annual bonus. Stock
based compensation expense relating to the founders grant of $7.3 million and
$6.9 million is included in our expenses for the three months ended May 31, 2009
and 2008, respectively. The increase in the expense related to the
founders grant is primarily attributable to accelerated vesting of awards for
certain terminated employees and adjustments to the estimated rates of
forfeiture. Stock based compensation similar to the restricted stock
units granted as a component of the 2008 annual bonus was not granted during the
prior year.
Other
significant components of our expense base include information technology costs,
market data costs, amortization of intangible assets, telecommunications
services, occupancy costs and depreciation of property, equipment, and leasehold
improvements.
As a
majority-controlled subsidiary of Morgan Stanley, we relied on Morgan Stanley to
provide a number of administrative support services and
facilities. The amount and composition of our expenses has decreased
from historical levels as we replaced these services ourselves or through third
parties. In connection with the initial public offering (“IPO”), we began
investing in expanding our own administrative functions, including finance,
legal and compliance and human resources, as well as information technology
infrastructure, to replace services previously provided by Morgan
Stanley. On May 22, 2009, Morgan Stanley sold the remainder of its
ownership interest in us and Morgan Stanley agreed to provide us with certain
limited services. See “—Factors Impacting Comparability of our
Financial Results—Our Relationship with Morgan Stanley” below for a discussion
of our continuing contractual relationships with Morgan Stanley.
We
group our 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,
2009
|
|
|
May 31,
2008
|
|
|
Increase/(Decrease)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Cost
of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
$ |
22,430 |
|
|
$ |
19,472 |
|
|
$ |
2,958 |
|
|
|
15.2
|
% |
Non-compensation
expenses
|
|
|
6,839 |
|
|
|
10,164 |
|
|
|
(3,325
|
) |
|
|
(32.7 |
)
% |
Total
cost of services
|
|
|
29,269 |
|
|
|
29,636 |
|
|
|
(367
|
) |
|
|
(1.2 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
24,170 |
|
|
|
24,432 |
|
|
|
(262
|
) |
|
|
(1.1 |
)
% |
Non-compensation
expenses
|
|
|
9,882 |
|
|
|
13,573 |
|
|
|
(3,691
|
) |
|
|
(27.2 |
)
% |
Total
selling, general and administrative
|
|
|
34,052 |
|
|
|
38,005 |
|
|
|
(3,953
|
) |
|
|
(10.4 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
6,428 |
|
|
|
7,125 |
|
|
|
(697
|
) |
|
|
(9.8 |
)
% |
Depreciation
of property, equipment, and leasehold improvements
|
|
|
2,972 |
|
|
|
522 |
|
|
|
2,450 |
|
|
|
469.3
|
% |
Total
operating expenses
|
|
$ |
72,721 |
|
|
$ |
75,288 |
|
|
$ |
(2,567 |
) |
|
|
(3.4 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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, 2009, total cost of services expenses decreased 1.2%
to $29.3 million compared to $29.6 million for the three months ended May 31,
2008. The change was largely due to a decrease of $2.5 million in
costs allocated by Morgan Stanley for staffing services and a $1.0 million
decrease in information technology costs related to our separation from Morgan
Stanley, partially offset by a $3.0 million increase in compensation
expenses.
Compensation
expenses increased primarily as a result of higher expenses related to stock
based compensation, as previously discussed, and increased staffing levels
during the three months ended May 31, 2009 as compared to the same period of the
prior year.
Non-compensation
expenses decreased by $3.3 million, or 32.7%, to $6.8 million for the three
months ended May 31, 2009. The change is largely due to the decreases in
allocated costs for staffing services provided by Morgan Stanley and information
technology costs related to our separation from Morgan Stanley.
Our cost
of services expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Using exchange rates for the same period of the prior
year, our cost of services for the three months ended May 31, 2009 would have
been higher by $1.8 million had the U.S. dollar not strengthened relative to the
prior year.
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 Morgan Stanley allocations. As with cost
of services, the largest expense in this category relates to compensation and
benefits. As such, 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. Other significant expenses are for
office space, consulting services and information technology
costs.
Compensation
expenses decreased to $24.2 million for the three months ended May 31, 2009
compared to $24.4 million for the same period in 2008.
Our
SG&A expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Using exchange rates for the same period of the prior
year, our cost of services for the three months ended May 31, 2009 would have
been higher by $1.9 million had the U.S. dollar not strengthened relative to the
prior year.
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, 2009,
amortization of intangibles expense totaled $6.4 million compared to $7.1
million for the same period in 2008. A portion of the intangible assets became
fully amortized during fiscal 2008, resulting in the decrease of $0.7 million,
or 9.8%, versus the prior year. (See Note 8 to the Notes to Condensed
Consolidated Financial Statements, “Intangible Assets” for further
information.)
Depreciation
and amortization of property, equipment, and leasehold
improvements
For the
three months ended May 31, 2009 and 2008, depreciation and amortization of
property, equipment, and leasehold improvements totaled $3.0 million and $0.5
million, respectively. The increase of $2.5 million principally
relates to greater depreciation and amortization of the property, equipment and
leasehold improvements purchased to operate independently from Morgan
Stanley.
Interest
Income (Expense) and Other, Net
Interest
income (expense) and other, net was an expense of $4.7 million and
$2.5 million for the three months ended May 31, 2009 and 2008,
respectively. The increase in expense of $2.2 million resulted from
lower interest income of $3.3 million as a result of lower interest returns on
invested balances, partially offset by a decrease in interest expense of $1.8
million due to lower average outstanding debt and the impact of the decrease of
interest rates on the unhedged portion of our debt as well as lower gains from
changes in foreign exchange rates.
Income
Taxes
The
provision for income tax expense was $12.4 million and $11.8 million for the
three months ended May 31, 2009 and 2008, respectively. The effective
tax rate was 38.6% and 38.7% for the three months ended May 31, 2009 and 2008,
respectively.
Results
of Operations
Six
Months Ended May 31, 2009 Compared to the Six Months Ended May 31,
2008:
|
|
Six
Months Ended
May 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase/(Decrease)
|
|
|
|
(in
thousands, except per share data)
|
|
Operating
Revenues
|
|
$
|
215,290
|
|
|
$
|
213,146
|
|
|
$
|
2,144
|
|
|
1.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
58,204
|
|
|
|
60,496
|
|
|
|
(2,292
|
)
|
|
(3.8
|
)%
|
Selling,
general and administrative
|
|
|
68,768
|
|
|
|
69,325
|
|
|
|
(557
|
)
|
|
(0.8
|
)%
|
Amortization
of intangible assets
|
|
|
12,857
|
|
|
|
14,250
|
|
|
|
(1,393
|
)
|
|
(9.8
|
)%
|
Depreciation
and amortization of property, equipment, and leasehold
improvements
|
|
|
6,023
|
|
|
|
1,006
|
|
|
|
5,017
|
|
|
498.7
|
%
|
Total
operating expenses
|
|
|
145,852
|
|
|
|
145,077
|
|
|
|
775
|
|
|
0.5
|
%
|
Operating
income
|
|
|
69,438
|
|
|
|
68,069
|
|
|
|
1,369
|
|
|
2.0
|
%
|
Interest
expense (income) and other, net
|
|
|
11,081
|
|
|
|
8,949
|
|
|
|
2,132
|
|
|
23.8
|
%
|
Provision
for income taxes
|
|
|
22,015
|
|
|
|
22,555
|
|
|
|
(540
|
)
|
|
(2.4
|
)%
|
Net
income
|
|
$
|
36,342
|
|
|
$
|
36,565
|
|
|
$
|
(223
|
)
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per basic common share
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
(0.01
|
)
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per diluted common share
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
—
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
32.3
|
%
|
|
|
31.9
|
%
|
|
|
|
|
|
|
|
Operating
Revenues
The following table summarizes the
revenue by category for the six months ended May 31, 2009 compared to the six
months ended May 31, 2008:
|
|
Six
Months Ended
May 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Increase/(Decrease)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Equity
indices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
index subscriptions
|
|
$
|
92,549
|
|
$
|
80,613
|
|
$
|
11,936
|
|
|
14.8
|
%
|
Equity
index asset based fees
|
|
|
28,402
|
|
|
37,895
|
|
|
(9,493
|
)
|
|
(25.1
|
)%
|
Total
equity indices
|
|
|
120,951
|
|
|
118,508
|
|
|
2,443
|
|
|
2.1
|
%
|
Equity
portfolio analytics
|
|
|
63,722
|
|
|
66,244
|
|
|
(2,522
|
)
|
|
(3.8
|
)%
|
Multi-asset
class portfolio analytics
|
|
|
19,195
|
|
|
16,490
|
|
|
2,705
|
|
|
16.4
|
%
|
Other
products
|
|
|
11,422
|
|
|
11,904
|
|
|
(482
|
)
|
|
(4.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
$
|
215,290
|
|
$
|
213,146
|
|
$
|
2,144
|
|
|
1.0
|
%
|
Total
operating revenues for the six months ended May 31, 2009 increased 1.0% to
$215.3 million compared to $213.1 million for the six months ended May 31,
2008. The growth was driven by an increase in our revenues related to equity
index subscriptions of $11.9 million and multi-asset class portfolio analytics
of $2.7 million partially offset decreases of $9.5 million in equity index asset
based fees, $2.5 million in equity portfolio analytics and $0.5 million in other
products. Revenues from our subscription products grew 6.6% in the aggregate for
the six months ended May 31, 2009 to $186.9 million. Our revenues are
impacted by changes in exchange rates primarily as they relate to the US dollar.
Using exchange rates for the same period of the prior year, our revenues,
excluding asset based fees, for the six months ended May 31, 2009 would have
been higher by $2.3 million had the US dollar not strengthened relative to the
prior year.
Revenues
related to equity indices increased $2.4 million, or 2.1%, to $121.0 million for
the six months ended May 31, 2009 compared to the same period in
2008. Revenues from the equity index subscriptions sub-category
were up 14.8% to $92.5 million during the current period with strength across
all regions, most notably the Americas. This growth was led by strong increases
in our emerging market, small cap, and developed market index modules as well as
user fees, derivative product license fees, and our value/growth index extension
modules.
Revenues
attributable to the equity index asset based fees sub-category decreased
$9.5 million, or 25.1%, to $28.4 million in the six months ended May 31,
2009. The average value of assets in ETFs linked to MSCI equity
indices decreased 40.5% to $130.5 billion for the six months ended May 31, 2009
compared to $183.4 billion for the six months ended May 31, 2008. As of
May 31, 2009, the value of assets in ETFs linked to MSCI equity indices was
$175.9 billion, representing a decrease of $23.7 billion, or 11.9%, from $199.6
billion as of May 31, 2008. We estimate that the $23.7 billion
year-over-year decline in value of assets in ETFs linked to MSCI equity indices
was attributable to $65.8 billion of net asset depreciation offset, in part, by
$42.1 billion of net cash inflows.
During
the six month period ended May 31, 2009, revenues related to equity portfolio
analytics were $63.7 million, a decrease of $2.5 million, or 3.8%, compared to
$66.2 million for the six months ended May 31, 2008. Within equity
portfolio analytics, Aegis revenue declined 7.9% to $42.6 million, partially
offset by an increase of 6.2% to $18.7 million in revenue for equity models
direct for the six months ended May 31, 2009 compared to the same period in
2008.
Revenues
related to multi-asset class portfolio analytics for the six months ended May
31, 2009 were $19.2 million, an increase of $2.7 million, or 16.4%, compared to
$16.5 million for the six months ended May 31, 2008. This reflects an increase
of 29.2% to $14.6 million for BarraOne, offset in part by a decrease of 11.5% to
$4.6 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 4.0% to $11.4 million in the six months ended May
31, 2009 compared to $11.9 million for the six months ended May 31, 2008. The
decline reflects a decrease of 63.4% in asset based fees from investment
products linked to MSCI investable hedge fund indices and a decrease of 4.6% for
fixed income analytics, partially offset by an 11.8% increase for our energy and
commodity analytics products. The
decline in MSCI investable hedge fund indices revenues reflects the termination
of one of our licenses to an asset manager 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,
2009
|
|
|
May
31,
2008
|
|
|
|
|
|
|
|
|
|
|
Equity
Index
|
|
|
93.9
|
%
|
|
|
96.1
|
%
|
Equity
Portfolio Analytics
|
|
|
84.1
|
%
|
|
|
92.1
|
%
|
Multi-Asset
Class Analytics
|
|
|
87.6
|
%
|
|
|
87.8
|
%
|
Other
|
|
|
85.8
|
%
|
|
|
93.9
|
%
|
Total
|
|
|
89.2
|
%
|
|
|
93.6
|
%
|
The
following table sets forth our Core Retention Rates by product category for the
six months ended:
|
|
May
31,
2009
|
|
|
May
31,
2008
|
|
|
|
|
|
|
|
|
Equity
Index
|
|
|
94.1
|
%
|
|
|
96.3
|
%
|
Equity
Portfolio Analytics
|
|
|
85.4
|
%
|
|
|
94.3
|
%
|
Multi-Asset
Class Analytics
|
|
|
92.8
|
%
|
|
|
87.8
|
%
|
Other
|
|
|
86.8
|
%
|
|
|
93.9
|
%
|
Total
|
|
|
90.4
|
%
|
|
|
94.6
|
%
|
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 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. 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 Retention Rate for the six month period. For the
calculation of the Core Retention Rate the same methodology is used except the
amount of cancellations during the six month period is reduced by the amount of
product swaps.
Retention
Rates for the six months ended May 31, 2009 declined, reflecting clients’ budget
constraints due to depressed equity values as a result of stock market
volatility, the closure or merger of a number of our clients and the shutdown of
quantitative funds and teams. In fiscal 2008, 48% of our cancellations occurred
in the fourth fiscal quarter. In years prior to fiscal 2008, approximately 40%,
on average, of our subscription cancellations occurred in the fourth fiscal
quarter.
Operating
Expenses
Operating
expenses for the six months ended May 31, 2009 increased $0.8 million to $145.9
million compared to $145.1 million in the same period of 2008. The
increase reflects higher compensation and benefits costs and depreciation
expenses, partially offset by lower costs allocated by Morgan Stanley for
staffing services and lower consulting costs. Our
operating
expenses are impacted by changes in exchange rates primarily as they relate to
the U.S. dollar. Using exchange rates for the same period of the
prior year, our operating expense for the six months ended May 31, 2009 would
have been higher by $7.5 million had the U.S. dollar not strengthened relative
to the prior year.
During
the six month period ended May 31, 2009, compensation and benefits expenses were
$91.1 million, an increase of $6.0 million, compared to $85.1 million in the
same period in 2008. The increase primarily reflects $3.2 million in
higher costs for stock based compensation expense, an additional $1.9 million in
retirement benefit costs and $0.5 million higher compensation costs related to
the final separation from Morgan Stanley.
During
the six month period ended May 31, 2009, we incurred stock based compensation
costs of $1.5 million relating to the restricted stock units granted as a
component of the 2008 annual bonus. Similar stock based compensation
was not granted during the six months ended May 31, 2008. Stock based
compensation expense relating to the founders grant of $13.5 million and $11.7
million is included in our expenses for the six months ended May 31, 2009 and
May 31, 2008, respectively. The increase in the stock based
compensation costs relating to the founders grant is primarily attributable to
accelerated vesting of awards for certain terminated employees and adjustments
to the estimated rates of forfeiture.
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 consistent with the
allocation of employees to those respective areas.
The
following table shows operating expenses by each of the categories:
|
|
Six
Months Ended
|
|
|
|
|
|
May 31,
2009
|
|
May 31,
2008
|
|
Increase/(Decrease)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Cost
of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
$
|
43,727
|
|
$
|
39,699
|
|
$
|
4,028
|
|
|
10.1
|
%
|
Non-compensation
expenses
|
|
|
14,477
|
|
|
20,797
|
|
|
(6,320
|
)
|
|
(30.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of services
|
|
|
58,204
|
|
|
60,496
|
|
|
(2,292
|
)
|
|
(3.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
47,373
|
|
|
45,368
|
|
|
2,005
|
|
|
4.4
|
%
|
Non-compensation
expenses
|
|
|
21,395
|
|
|
23,957
|
|
|
(2,562
|
)
|
|
(10.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
selling, general and administrative
|
|
|
68,768
|
|
|
69,325
|
|
|
(557
|
)
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
12,857
|
|
|
14,250
|
|
|
(1,393
|
)
|
|
(9.8
|
)%
|
Depreciation
and amortization of property, equipment, and leasehold
improvements
|
|
|
6,023
|
|
|
1,006
|
|
|
5,017
|
|
|
498.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
$
|
145,852
|
|
$
|
145,077
|
|
$
|
775
|
|
|
0.5
|
%
|
Cost
of Services
Cost of
services decreased $2.3 million, or 3.8%, to $58.2 million for the six months
ended May 31, 2009 compared to the same period in 2008. The change
was largely due to a decrease in costs allocated by Morgan Stanley for staffing
services and a decrease in information technology costs related to our
separation from Morgan Stanley, partially offset by an increase in compensation
and benefit expenses as previously discussed.
Our cost
of services expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Using exchange rates for the same period of the prior
year, our cost of services for the six months ended May 31, 2009 would have been
higher by $3.4 million had the U.S. dollar not strengthened relative to the
prior year.
Selling,
General and Administrative
SG&A
expenses decreased to $68.8 million for the six months ended May 31, 2009
compared to $69.3 million for the same period in 2008. The decline
resulted from a decrease in costs allocated by Morgan Stanley for staffing
services, partially offset by an increase in compensation and benefit expense,
an increase in the allowance for bad debt compared to the prior year due to
market conditions and an increase in franchise and license fees.
Our
SG&A expenses are impacted by changes in exchange rates primarily as they
relate to the U.S. dollar. Using exchange rates for the same period of the prior
year, our cost of services for the six months ended May 31, 2009 would have been
higher by $3.7 million had the U.S. dollar not strengthened relative to the
prior year.
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, 2009,
amortization of intangibles expense totaled $12.9 million compared to $14.3
million for the same period in 2008. A portion of the intangible assets became
fully amortized during fiscal 2008, resulting in the decrease of $1.4 million,
or 9.8%, versus the prior year. (See Note 8 to the Notes to Condensed
Consolidated Financial Statements, “Intangible Assets” for further
information.)
Depreciation
and amortization of property, equipment, and leasehold
improvements
For the
six months ended May 31, 2009 and 2008, depreciation and amortization of
property, equipment, and leasehold improvements totaled $6.0 million and $1.0
million, respectively. The increase of $5.0 million principally
relates to greater depreciation and amortization of the property, equipment and
leasehold improvements purchased to operate independently from Morgan
Stanley.
Interest
Expense (Income) and Other, Net
Interest
expense (income) and other, net was an expense of $11.1 million for the six
months ended May 31, 2009 compared to $8.9 million for the same period in 2008.
The $2.1 million increase in expense reflects a reduction of interest income
resulting from lower interest returns on invested balances and a loss on foreign
currency exchange rate changes in 2009 compared to a gain in 2008, partially
offset by a decrease in interest expense due to lower average outstanding debt
and the impact of the decrease of interest rates on the unhedged portion of our
debt.
Income
Taxes
The
provision for income taxes decreased 2.4% to $22.0 million for the six months
ended May 31, 2009 compared to $22.6 million in the same period in 2008 as a
result of lower pre-tax income, partially offset by the effect of one-time tax
items. The effective tax rate for the six months ended May 31, 2009 was 37.7%
compared to 38.2% in the same period of 2008. The decrease is largely due to tax
credits available during the six months ended May 31, 2009 that were not
available during the same period in 2008.
Factors
Impacting Comparability of Our Financial Results
Our
historical results of operations for the periods presented may not be comparable
with prior periods or with our results of operations in the future for the
reasons discussed below.
Our
Relationship with Morgan Stanley
Prior to
May 22, 2009, Morgan Stanley was our controlling shareholder. On May
22, 2009, Morgan Stanley completed the sale, pursuant to a secondary offering,
of its remaining economic and voting interests in us. In connection
with the secondary offering, we and Morgan Stanley entered into: (i) a
separation agreement pursuant to which we agreed to settle all intercompany
amounts owed between us and Morgan Stanley within 90 days of the closing of the
offering and agreed to certain insurance matters between us and Morgan Stanley;
and (ii) an employee matters agreement which governs certain employee related
matters associated with our separation from Morgan Stanley.
Prior to
July 1, 2008, our consolidated financial statements were derived from the
financial statements and accounting records of Morgan Stanley using the
historical results of operations and historical bases of assets and liabilities
of our business. Following July 1, 2008, only certain tax, allocation and
compensation and benefits related information have been
derived
from the financial statements and accounting records of Morgan Stanley.
Following the May 2009 secondary offering, we will no longer file any Federal,
state, or foreign tax returns with Morgan Stanley on a consolidated combined or
unitary basis and will no longer rely on the financial and accounting records of
Morgan Stanley for certain tax related information for future periods. The
historical costs and expenses reflected in our condensed consolidated financial
statements include an allocation for certain corporate
functions historically provided by Morgan Stanley, including human resources,
information technology, accounting, legal and compliance, tax, office space
leasing, corporate services, treasury and other services. On July 21, 2008,
we entered into an amended services agreement with Morgan Stanley pursuant to
which Morgan Stanley and its affiliates agreed to provide us with certain of
these services for so long as Morgan Stanley owned greater than 50% of the total
voting power to elect our directors and for periods, varying for different
services, of up to 12 months thereafter. In connection with the May 2009
secondary offering, we amended certain schedules to the amended services
agreement and provided that such services will continue until no later than
November 23, 2009. The allocations were based on what we and Morgan
Stanley considered reasonable reflections of the utilization levels of the
services required in support of our business and are based on methods that
include direct time tracking, headcount, inventory metrics and corporate
overhead. Since the IPO, we have implemented our own financial, administrative
and other support systems or contracted with third parties to replace Morgan
Stanley’s systems. We have also established our own accounting and internal
auditing functions separate from those historically provided to us by Morgan
Stanley. The historical information does not necessarily indicate
what our results of operations, financial condition or cash flows will be in the
future.
The table
below presents costs allocated to us for staffing services provided by Morgan
Stanley as well as the costs incurred to replace those services:
|
|
For
the Six Months Ended
|
|
Amounts in
thousands
|
|
May
31,
2009
|
|
|
May
31,
2008
|
|
Allocation
expenses:
|
|
|
|
|
|
|
Staffing
services
|
|
$
|
1,746
|
|
|
|
11,554
|
|
|
|
|
|
|
|
|
|
|
Total
allocation expenses
|
|
|
1,746
|
|
|
|
11,554
|
|
|
|
|
|
|
|
|
|
|
Replacement
expenses:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
6,133
|
|
|
|
3,054
|
|
Non-compensation:
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
4,033
|
|
|
|
2,415
|
|
Non-recurring
|
|
|
2,214
|
|
|
|
2,255
|
|
Depreciation
|
|
|
4,466
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Non-compensation
total
|
|
|
10,713
|
|
|
|
4,710
|
|
|
|
|
|
|
|
|
|
|
Total
replacement expenses
|
|
|
16,846
|
|
|
|
7,764
|
|
|
|
|
|
|
|
|
|
|
Total
allocation and replacement expenses
|
|
$
|
18,592
|
|
|
|
19,318
|
|
|
|
|
|
|
|
|
|
|
Total
compensation expenses
|
|
$
|
6,133
|
|
|
|
3,054
|
|
Total
non-compensation expenses
|
|
|
12,459
|
|
|
|
16,264
|
|
|
|
|
|
|
|
|
|
|
Total
allocation and replacement expenses
|
|
$
|
18,592
|
|
|
|
19,318
|
|
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, 2008 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, 2008.
In 2009,
the Company invested in U.S. Treasury securities and accounts for these
investments in accordance with SFAS 115, “Investments and Debt
Securities.” Other than this item, there were no significant
changes in our accounting policies or critical accounting estimates since the
end of fiscal year 2008.
Liquidity
and Capital Resources
We
require capital to fund ongoing operations, internal growth initiatives and
acquisitions. We are solely responsible for the provision of funds to finance
our working capital and other cash requirements.
Our
primary sources of liquidity are cash flows generated from our operations,
existing cash and cash equivalents and funds available under the Credit
Facility. We intend to use these sources of liquidity to service our debt 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
November 14, 2007, we 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. Outstanding borrowings under the Credit Facility initially
accrued interest at (i) 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%. During the
three months ended May 31, 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 weighted average
rate on the term loan A facility and term loan B facility was 3.53% and 4.16%,
respectively, for the six months ended May 31, 2009. The term loan A facility
and the term loan B facility will mature on November 20, 2012 and
November 20, 2014, respectively.
On
February 13, 2008, we entered into 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. The effective fixed rate on the notional principal amount
swapped was 5.19% for the six months ended May 31, 2009.
The
effective combined rate on our hedged and unhedged debt was 4.68% for the six
months ended May 31, 2009.
At May
31, 2009, $391.6 million was outstanding and there was $74.7 million of unused
credit under the Revolving Credit Facility. In May 2009, Bank of America, N.A.
issued, on our behalf, letters of credit under the revolving credit facility in
the amount of $0.3 million to certain of our lessors to be used as security
under the related property leases. The beneficiaries of the letters of
credit may draw down on the letters of credit under the terms of the applicable
lease and letter of credit. Interest is paid quarterly in February, May,
August and November. The final installment of $50.0 million from term loan A is
due November 30, 2012. The final installment of $209.8 million on term loan
B is due November 30, 2014.We pay an annual 0.5% fee on the unused portion
of the $74.7 million Revolving Credit Facility. For the amount used
to issue letters of credit in lieu of security deposits, we pay an annual 2.125%
fee.
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, and matures on November 20,
2012. Banc of America Securities LLC and an affiliate of Morgan Stanley acted as
joint lead arrangers for the Credit Facility.
The
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 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 Credit Facility contains restrictive covenants that limit our
ability and our existing or future subsidiaries’ abilities, among other things,
to:
·
|
incur
additional indebtedness;
|
·
|
make
or hold investments;
|
·
|
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
(except as described in “Arrangements Between Morgan Stanley and Us” and
“Relationships and Related Transactions”);
and
|
·
|
prepay,
redeem or repurchase debt.
|
The
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 Credit Facility) measured quarterly on a rolling
four-quarter basis shall not exceed (a) 3.75:1.0 through November 30,
2009, (b) 3.50:1.0 from December 1, 2009 through November 30,
2010 and (c) 3.25:1.0 thereafter; and (2) the minimum interest
coverage ratio (as defined in the Credit Facility) measured quarterly on a
rolling four-quarter basis shall be (a) 3.00:1.0 through November 30,
2009, (b) 3.50:1.0 from December 1, 2009 through November 30,
2010 and (c) 4.00:1.0 thereafter. As of May 31, 2009, our Consolidated
Leverage Ratio as defined in the Credit Facility was 1.86:1 and our Consolidated
Interest Coverage Ratio as defined in the Credit Facility was
10.18:1.
In
addition, the 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.
On our
balance sheet, our debt balances are recorded net of discount. In
connection with our Credit Agreement, we entered into an interest rate swap
agreement on February 13, 2008. See “Item 3. Quantitative and
Qualitative Disclosures About Market Risk — Interest Rate Sensitivity”
below.
Cash
flows
Cash
and cash equivalents
|
As
of
|
|
|
|
May
31,
|
|
November
30,
|
|
|
|
2009
|
|
2008
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
$
|
72,769
|
|
$
|
268,077
|
|
Cash
provided by operating activities and used in investing and financing
activities
|
|
For
the six months ended
|
|
|
May
31,
|
|
May
31,
|
|
|
2009
|
|
2008
|
|
|
(in
thousands)
|
Cash
provided by operating activities
|
|
$
|
69,157
|
|
|
$
|
80,737
|
|
Cash
used in investing activities
|
|
$
|
(254,253
|
)
|
|
$
|
(71,510
|
)
|
Cash
used in financing activities
|
|
$
|
(11,700
|
)
|
|
$
|
(11,682
|
)
|
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, 2009 was $69.2 million compared to
$80.7 million for the prior year. Our operating cash flows are lower by 14.3%
primarily due to the timing of payments made to third party vendors compared to
the prior year in which the majority of payments were made to Morgan
Stanley. For the six months ended May 31, 2009, we paid our own operating
expenses, including estimated tax payments, vendor invoices and compensation and
related benefits, when due. In the same period of 2008 we experienced timing
differences in the reimbursement to Morgan Stanley of those costs allocated or
recharged to us during the period.
Our
primary uses of cash from operating activities are for payment of cash
compensation expenses, office rent, technology costs, market data costs, income
taxes and services provided by Morgan Stanley. The payment of cash compensation
expense is historically at its highest level in the first quarter when we pay
discretionary employee compensation related to the previous fiscal year. In the
future, we believe that our cash flow from operations (including prepaid
subscription fees), together with existing cash balances, will be sufficient to
meet our cash requirements for capital expenditures and other cash needs for
ongoing business operations for the foreseeable future.
Cash
flows from investing activities
Cash
flows from investing activities include cash used to purchase investments in
U.S. Treasury securities and for capital expenditures. During the six months
ended May 31, 2009, we purchased $244.7 million in U.S. Treasury securities and
$9.5 million of capital equipment. We anticipate funding any future capital
expenditures from our operating cash flows.
Cash
flows from financing activities
Cash
flows from financing activities were an outflow of $11.7 million, primarily
reflecting scheduled payments on the outstanding long-term debt and the
repurchase of treasury shares.
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 $28.9 million,
or 13.4%, and $39.7 million, or 18.6%, of our operating revenues for the six
months ended May 31, 2009 and May 31, 2008, 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 $27.4 million, or 12.7%, and $31.1
million, or 14.6%, of our revenues for the six months ended May 31, 2009 and May
31, 2008, 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 $44.8 million, or 30.7%, and $32.7 million, or 22.6%, of our
expenses for the six months ended May 31, 2009 and May 31, 2008, respectively,
were denominated in foreign currencies, the significant majority of which were
denominated in Swiss francs, pounds sterling, Hong Kong dollars, euros 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 $0.6 million and foreign currency exchange gains of $0.1 million for the six
months ended May 31, 2009 and May 31, 2008, 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 and short-term investments of $72.8
million and $244.9 million, respectively, at May 31, 2009. At
November 30, 2008, we had unrestricted cash and cash equivalents totaling $268.1
million. We did not have short-term investments at November 30, 2008.
The cash and cash equivalents were held primarily in checking money market
accounts in the countries where we maintain banking relationships. The
short-term investments were made in U.S. Treasury securities with maturity dates
ranging from four to twelve months. The unrestricted cash and cash
equivalents are held for working capital purposes. 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
July 8, 2008, we met certain conditions as defined in the Credit Facility
and qualified for a tier change, resulting in a decrease in the LIBOR fixed
margin to 2.00% for the term loan A facility and 2.50% for the term loan B
facility. In the near-term, we expect to continue to pay down the Credit
Facility as scheduled with cash generated from our ongoing
operations.
On
February 13, 2008, we entered into 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
reduces our risk of incurring higher interest costs in periods of rising
interest rates and improves the overall balance between floating and fixed rate
debt. The effective fixed rate on the notional principal amount swapped was
approximately 5.19% for the six months ended May 31, 2009. On May 31,
2009, the
effective fixed rate on the notional principal amount swapped was 5.24%. These
swaps are designated as cash flow hedges and qualify for hedge accounting
treatment under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities.
Changes
in LIBOR will affect the interest rate on the portion of our credit facilities
which have not been hedged by the interest rate swaps and, therefore, our costs
under the credit facilities. Assuming an average of $157.1 million of variable
rate debt outstanding, a hypothetical 100 basis point increase in LIBOR for a
one year period would result in approximately $1.6 million of additional
interest expense.
For the
three and six months ended May 31, 2009, we recorded a pre-tax loss in other
comprehensive income of $1.1 million ($0.6 million net of tax) and $2.5 million
($1.5 million net of tax), respectively, as a result of the fair value
measurement of these swaps. The fair value of these swaps is included in other
accrued liabilities on our Condensed Consolidated Statement of Financial
Condition.
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, 2009 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.
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
For a
discussion of the risk factors affecting the Company, see “Risk Factors” in Part
I, Item 1A of our Form 10-K for the fiscal year ended November 30,
2008.
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,
2009.
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, 2009-March 31, 2009)
Employee
Transactions (1)
|
915
|
$16.37
|
N/A
|
N/A
|
|
|
|
|
|
Month
#2
(April
1, 2009-April 30, 2009)
Employee
Transactions (1)
|
3,650
|
$19.75
|
N/A
|
N/A
|
|
|
|
|
|
Month
#3
(May
1, 2009-May 31, 2009)
Employee
Transactions (1)
|
18,694
|
$21.80
|
N/A
|
N/A
|
|
|
|
|
|
Total
Employee
Transactions (1)
|
23,259
|
$21.26
|
N/A
|
N/A
|
(1)
Includes shares withheld to offset tax withholding obligations that occur upon
vesting and delivery of outstanding shares underlying restricted stock units
and/or upon the exercise of employee stock options. 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.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information.
None.
An
exhibit index has been filed as part of this Report on page E-1.
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 2, 2009
MSCI
INC.
(Registrant)
|
|
|
|
|
By:
|
|
/s/
Michael K. Neborak
|
|
|
|
Michael
K. Neborak
Principal
Financial Officer
|
|
EXHIBIT
INDEX
MSCI
INC.
QUARTER
ENDED MAY 31, 2009
|
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
|
MSCI
Inc. Amended and Restated 2007 Equity Incentive Compensation Plan (filed
as Annex B to the Company’s Proxy Statement on Schedule 14A (File No.
001-33812), filed with the SEC on February 28, 2008)
|
|
|
|
|
10.2
|
MSCI
Inc. Performance Formula and Incentive Plan (filed as Annex C to the
Company’s Proxy Statement on Schedule 14A (File No. 001-33812), filed with
the SEC on May 31, 2008)
|
|
|
|
|
10.3
|
Separation
Agreement, dated May 22, 2009, between MSCI Inc. and Morgan Stanley (filed
as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33812), filed with
the SEC on June 2, 2009).
|
|
|
|
|
10.4
|
Employee
Matters Agreement, dated May 22, 2009, between MSCI Inc. and Morgan
Stanley (filed as Exhibit 10.2 to the Company’s Form 8-K (File No.
001-33812), filed with the SEC on June 2, 2009).
|
|
|
|
|
10.5
|
Letter
Agreement, dated May 22, 2009, between MSCI Inc. and Morgan Stanley (filed
as Exhibit 10.3 to the Company’s Form 8-K (File No. 001-33812), filed with
the SEC on June 2, 2009).
|
|
|
|
|
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.
|
|
|
|
*
|
15
|
Letter
of awareness from Deloitte & Touche LLP, dated July 2, 2009,
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