MSCI Inc.
MSCI Inc. (Form: 10-Q, Received: 11/03/2017 11:44:42)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2017

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)

 

 

 

7 World Trade Center

250 Greenwich Street, 49 th Floor

New York, New York

 

10007

(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       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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of October 27, 2017, there were 90,068,843 shares of the registrant’s common stock, par value $0.01, outstanding.

 

 

 


MSCI INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

Part I

 

 

Item 1.

 

Financial Statements

 

5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 4.

 

Controls and Procedures

 

45

 

 

 

 

 

 

 

Part II

 

 

Item 1.

 

Legal Proceedings

 

46

Item 1A.

 

Risk Factors

 

46

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

Item 3.

 

Defaults Upon Senior Securities

 

47

Item 4.

 

Mine Safety Disclosures

 

47

Item 5.

 

Other Information

 

47

Item 6.

 

Exhibits

 

48

 

 

2


AVAILABLE INFORMATION

MSCI Inc. files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document MSCI Inc. files 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 a website 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 website, www.sec.gov.

MSCI Inc.’s website is www.msci.com. You can access MSCI Inc.’s Investor Relations homepage at http://ir.msci.com. MSCI Inc. makes available free of charge, on or through its Investor Relations homepage, 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 homepage, via a link to the SEC’s website, statements of beneficial ownership of MSCI Inc.’s equity securities filed by its directors, officers, 5% or greater shareholders and others under Section 16 of the Exchange Act.

You can access information about MSCI Inc.’s corporate governance at http://ir.msci.com/corporate-governance.cfm, including copies of the following:

 

Charters for MSCI Inc.’s Audit Committee, Compensation and Talent Management Committee, Nominating and Corporate Governance Committee and Strategy and Finance Committee;

 

Corporate Governance Policies;

 

Procedures for Submission of Ethical or Accounting Related Complaints; 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 LLC on its website. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, MSCI Inc., 7 World Trade Center, 250 Greenwich Street, 49th Floor, New York, NY 10007; (212) 804-1583. The information on MSCI Inc.’s website is not incorporated by reference into this report or any other report filed or furnished by us with the SEC.

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties and other factors that may cause MSCI Inc.’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond MSCI Inc.’s control and that could materially affect MSCI Inc.’s actual results, levels of activity, performance or achievements.

Other factors that could materially affect actual results, levels of activity, performance or achievements can be found in MSCI Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on February 24, 2017 and in quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished with the SEC. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what MSCI Inc. projected. Any forward-looking statement in this report reflects MSCI Inc.’s current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to MSCI Inc.’s operations, results of operations, growth strategy and liquidity. MSCI Inc. assumes no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise, except as required by law.

3


WEBSITE AND SOCIAL MEDI A DISCLOSURE

MSCI Inc. uses its website and corporate Twitter account (@MSCI_Inc) as channels of distribution of company information. The information MSCI Inc. posts through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following MSCI Inc.’s press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about MSCI Inc. when you enroll your email address by visiting the “Email Alerts Subscription” section of our Investor Relations homepage at http://ir.msci.com/alerts.cfm? . The contents of MSCI Inc.’s website and social media channels are not, however, incorporated by reference into this report or any other report filed or furnished by us with the SEC.

 

 

4


PAR T I

 

 

Item 1.

Financial Statements

MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except per share and share data)

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

799,015

 

 

$

791,834

 

Accounts receivable (net of allowances of $1,689 and $1,035 at September 30, 2017 and

    December 31, 2016, respectively)

 

 

309,196

 

 

 

221,504

 

Prepaid income taxes

 

 

7,420

 

 

 

12,389

 

Prepaid and other assets

 

 

37,450

 

 

 

29,943

 

Total current assets

 

 

1,153,081

 

 

 

1,055,670

 

Property, equipment and leasehold improvements (net of accumulated depreciation and

    amortization of $164,804 and $136,841 at September 30, 2017 and December 31, 2016,

    respectively)

 

 

85,680

 

 

 

95,585

 

Goodwill

 

 

1,560,169

 

 

 

1,555,850

 

Intangible assets (net of accumulated amortization of $497,114 and $462,860 at

    September 30, 2017 and December 31, 2016, respectively)

 

 

328,326

 

 

 

347,640

 

Deferred tax assets

 

 

11,091

 

 

 

9,531

 

Other non-current assets

 

 

16,125

 

 

 

18,302

 

Total assets

 

$

3,154,472

 

 

$

3,082,578

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,385

 

 

$

568

 

Accrued compensation and related benefits

 

 

102,581

 

 

 

119,113

 

Other accrued liabilities

 

 

83,821

 

 

 

82,531

 

Deferred revenue

 

 

374,730

 

 

 

334,358

 

Total current liabilities

 

 

563,517

 

 

 

536,570

 

Long-term debt

 

 

2,077,370

 

 

 

2,075,201

 

Deferred taxes

 

 

84,432

 

 

 

94,067

 

Other non-current liabilities

 

 

68,839

 

 

 

59,135

 

Total liabilities

 

 

2,794,158

 

 

 

2,764,973

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 6 and Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock (par value $0.01, 100,000,000 share authorized; no shares issued)

 

 

 

 

 

 

Common stock (par value $0.01; 750,000,000 common shares authorized; 129,505,173

    and 128,996,344 common shares issued and 90,067,232 and 91,279,590 common

    shares outstanding at September 30, 2017 and December 31, 2016, respectively)

 

 

1,295

 

 

 

1,290

 

Treasury shares, at cost (39,437,941 and 37,716,754 common shares held at September

     30, 2017 and December 31, 2016, respectively)

 

 

(2,321,862

)

 

 

(2,170,739

)

Additional paid in capital

 

 

1,255,616

 

 

 

1,225,565

 

Retained earnings

 

 

1,475,347

 

 

 

1,322,224

 

Accumulated other comprehensive loss

 

 

(50,082

)

 

 

(60,735

)

Total shareholders' equity

 

 

360,314

 

 

 

317,605

 

Total liabilities and shareholders' equity

 

$

3,154,472

 

 

$

3,082,578

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

5


MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Operating revenues

 

$

322,097

 

 

$

288,433

 

 

$

939,393

 

 

$

857,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

68,491

 

 

 

62,986

 

 

 

204,607

 

 

 

188,288

 

Selling and marketing

 

 

44,918

 

 

 

41,514

 

 

 

129,526

 

 

 

125,057

 

Research and development

 

 

17,983

 

 

 

18,750

 

 

 

55,163

 

 

 

56,244

 

General and administrative

 

 

22,103

 

 

 

21,859

 

 

 

64,555

 

 

 

65,768

 

Amortization of intangible assets

 

 

10,614

 

 

 

11,752

 

 

 

32,987

 

 

 

35,535

 

Depreciation and amortization of property, equipment and

   leasehold improvements

 

 

9,325

 

 

 

8,312

 

 

 

27,322

 

 

 

24,873

 

Total operating expenses

 

 

173,434

 

 

 

165,173

 

 

 

514,160

 

 

 

495,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

148,663

 

 

 

123,260

 

 

 

425,233

 

 

 

362,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(1,835

)

 

 

(799

)

 

 

(4,077

)

 

 

(2,005

)

Interest expense

 

 

29,020

 

 

 

26,790

 

 

 

87,071

 

 

 

72,612

 

Other expense (income)

 

 

675

 

 

 

(253

)

 

 

2,300

 

 

 

2,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

 

27,860

 

 

 

25,738

 

 

 

85,294

 

 

 

73,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

120,803

 

 

 

97,522

 

 

 

339,939

 

 

 

288,843

 

Provision for income taxes

 

 

35,650

 

 

 

32,241

 

 

 

100,569

 

 

 

96,238

 

Net income

 

$

85,153

 

 

$

65,281

 

 

$

239,370

 

 

$

192,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per basic common share

 

$

0.94

 

 

$

0.69

 

 

$

2.65

 

 

$

1.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per diluted common share

 

$

0.93

 

 

$

0.68

 

 

$

2.61

 

 

$

1.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding used in computing

   earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

90,112

 

 

 

94,823

 

 

 

90,406

 

 

 

96,879

 

Diluted

 

 

91,868

 

 

 

95,473

 

 

 

91,731

 

 

 

97,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared per common share

 

$

0.38

 

 

$

0.28

 

 

$

0.94

 

 

$

0.72

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

6


MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Net income

 

$

85,153

 

 

$

65,281

 

 

$

239,370

 

 

$

192,605

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

3,458

 

 

 

(2,627

)

 

 

11,362

 

 

 

(15,014

)

Income tax effect

 

 

 

 

 

(101

)

 

 

 

 

 

44

 

Foreign currency translation adjustments, net

 

 

3,458

 

 

 

(2,728

)

 

 

11,362

 

 

 

(14,970

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other post-retirement adjustments

 

 

(69

)

 

 

(30

)

 

 

(343

)

 

 

(262

)

Income tax effect

 

 

(106

)

 

 

13

 

 

 

(366

)

 

 

75

 

Pension and other post-retirement adjustments, net

 

 

(175

)

 

 

(17

)

 

 

(709

)

 

 

(187

)

Other comprehensive income (loss), net of tax

 

 

3,283

 

 

 

(2,745

)

 

 

10,653

 

 

 

(15,157

)

Comprehensive income

 

$

88,436

 

 

$

62,536

 

 

$

250,023

 

 

$

177,448

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

7


MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

239,370

 

 

$

192,605

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

32,987

 

 

 

35,535

 

Stock-based compensation expense

 

 

27,668

 

 

 

23,591

 

Depreciation and amortization of property, equipment and leasehold improvements

 

 

27,322

 

 

 

24,873

 

Amortization of debt origination fees

 

 

2,547

 

 

 

2,219

 

Deferred taxes

 

 

(11,452

)

 

 

(7,638

)

Gain on disposition

 

 

 

 

 

(449

)

Other non-cash adjustments

 

 

294

 

 

 

1,124

 

Changes in assets and liabilities, net of the effect of acquisitions and dispositions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(87,168

)

 

 

(31,021

)

Prepaid income taxes

 

 

4,605

 

 

 

32,002

 

Prepaid and other assets

 

 

(7,132

)

 

 

(981

)

Accounts payable

 

 

1,806

 

 

 

(1,263

)

Accrued compensation and related benefits

 

 

(19,074

)

 

 

(11,177

)

Other accrued liabilities

 

 

756

 

 

 

12,365

 

Deferred revenue

 

 

38,932

 

 

 

27,337

 

Other

 

 

9,544

 

 

 

4,388

 

Net cash provided by operating activities

 

 

261,005

 

 

 

303,510

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Disposition, net of cash divested

 

 

 

 

 

657

 

Capital expenditures

 

 

(17,440

)

 

 

(24,144

)

Capitalized software development costs

 

 

(10,777

)

 

 

(7,949

)

Proceeds from sale of investments

 

 

771

 

 

 

 

Acquisitions, net of cash acquired

 

 

 

 

 

(60

)

Net cash used in investing activities

 

 

(27,446

)

 

 

(31,496

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from borrowing

 

 

 

 

 

500,000

 

Proceeds from exercise of stock options

 

 

1,781

 

 

 

4,221

 

Repurchase of treasury shares

 

 

(150,350

)

 

 

(498,863

)

Payment of dividends

 

 

(85,306

)

 

 

(69,933

)

Payment of debt issuance costs in connection with debt

 

 

 

 

 

(7,183

)

Net cash used in financing activities

 

 

(233,875

)

 

 

(71,758

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes

 

 

7,497

 

 

 

(3,900

)

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

7,181

 

 

 

196,356

 

Cash and cash equivalent, beginning of period

 

 

791,834

 

 

 

777,706

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent, end of period

 

$

799,015

 

 

$

974,062

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

91,264

 

 

$

67,888

 

Cash paid for income taxes

 

$

100,161

 

 

$

69,471

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

 

Property, equipment and leasehold improvements accrued, but not yet paid

 

$

3,501

 

 

$

5,093

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

Cash dividends declared, but not yet paid

 

$

900

 

 

$

610

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

8


MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1. INTRODUCTION AND BASIS OF PRESENTATION

MSCI Inc., together with its wholly-owned subsidiaries (the “Company” or “MSCI”), offers products and services to support the needs of institutional investors throughout their investment processes. The Company’s products and services include the development and production of indexes and analytical models; the provision of ratings and analysis that identify environmental, social and governance risks and opportunities and the analysis of real estate in both privately and publicly owned portfolios.

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements include the accounts of MSCI Inc. and its subsidiaries and include all adjustments of a normal, recurring nature necessary to state fairly the financial condition as of September 30, 2017 and December 31, 2016, the results of operations and comprehensive income for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine months ended September 30, 2017 and 2016. The unaudited condensed consolidated statement of financial condition and related financial statement information as of December 31, 2016 have been derived from the 2016 audited consolidated financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in MSCI’s Annual Report on Form 10-K for the year ended December 31, 2016.  The results of operations for interim periods are not necessarily indicative of results for the entire year.

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require the Company to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the deferral and recognition of revenue, research and development and software capitalization, impairment of long-lived assets, accrued compensation, income taxes and other matters that affect the unaudited condensed consolidated financial statements and related disclosures. The Company believes that estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. Intercompany balances and transactions are eliminated in consolidation.

Concentrations

For the nine months ended September 30, 2017, BlackRock, Inc. accounted for 11.1% of the Company’s consolidated operating revenues while no single customer represented 10.0% or more of the Company’s consolidated operating revenues for the nine months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, BlackRock, Inc. accounted for 19.6% and 17.1% of the Index segment operating revenues, respectively. No single customer represented 10.0% or more of revenues within the Analytics and All Other segments for the nine months ended September 30, 2017 and 2016.

 

 

2. RECENT ACCOUNTING STANDARDS UPDATES

In May 2014, the FASB issued Accounting Standards Update 2014-09, “ Revenue from Contracts with Customers (Topic 606) ,” or ASU 2014-09. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities have the option of adopting ASU 2014-09 retrospectively to each prior period presented, or retrospectively with a cumulative-effect adjustment recognized as of the date of initial application. In August 2015, the FASB issued ASU 2015-14, “ Deferral of the Effective Date ,” which defers the effective date of ASU 2014-09 by one year by changing the effective date to be for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017 from December 15, 2016, with early adoption at the prior date permitted.

In March 2016, the FASB issued Accounting Standards Update 2016-08, “ Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) .” In April 2016, the FASB issued Accounting Standards Update 2016-10, “ Identifying Performance Obligations and Licensing .” In May 2016, the FASB issued Accounting Standards Update 2016-12, “ Narrow-Scope Improvements and Practical Expedients .” In December 2016, the FASB issued Accounting Standards Update No. 2016-20, “ Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers .” These updates provide supplemental adoption guidance

9


and clarification to ASU 2014-09 and must be adopted concurrently. The Company intends to adopt the new revenue guidance as of January  1, 2018 using the modified retrospective transition method. Under this adoption method, the Company will record a cumulative adjustment to retained earnings at January 1, 2018 and apply the provisions of the ASU prospectively. Currently, the Company expect s that ASU 2014-09 will have an impact on a number of accounting practices, including but not limited to, the timing of revenue recognition and costs for implementation services; the timing of revenue recognition of licenses for desktop applications; and a ccounting for multi-year deals. In addition, the new standard will require enhanced disclosures in relation to (i) disaggregated revenue, (ii) reconciliations of contract balances, (iii) performance obligations, (iv) significant judgments and (v) cost to o btain or fulfill contracts. The Company has not yet determined the quantitative impact of the new standard on its condensed consolidated financial statements. The Company is in the process of upgrading its technology infrastructure in order to support the accounting under the new standard as well as assessing the impact that the new standard will have on its processes and internal controls.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “ Leases (Topic 842) ,” or ASU 2016-02. The FASB issued ASU 2016-02 in order to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB amended the FASB Accounting Standards Codification and created Topic 842, Leases. ASU 2016-02 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 requires reporting organizations to take a modified retrospective transition approach (as opposed to a full retrospective transition approach). The Company is continuing to evaluate the potential impact that ASU 2016-02 will have on its condensed consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “ Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, ” or ASU 2016-09. The FASB issued ASU 2016-09 as part of its Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Amendments related to accounting for the income tax consequences have been adopted prospectively, resulting in the recognition of $0.7 million and $4.8 million of excess tax benefits within income taxes rather than additional paid in capital for the three and nine months ended September 30, 2017, respectively. This increased diluted earnings per share by $0.01 and $0.05 per share for the three and nine months ended September 30, 2017, respectively.  Excess tax benefits related to share-based compensation are now included in operating cash flows rather than financing cash flows. This change has been applied retrospectively in accordance with ASU 2016-09 and resulted in an increase of $6.5 million in net cash provided by operating activities with a matching decrease in net cash used in financing activities for the nine months ended September 30, 2016 compared to previously reported results. The Company has previously classified cash paid for tax withholding purposes as a financing activity in the statement of cash flows, therefore there is no change related to this requirement.  The amendments allow for a one-time accounting policy election to either account for forfeitures as they occur or to continue estimating forfeitures.  The Company has elected to continue estimating forfeitures under the current guidance.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “ Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ,” or ASU 2016-13. The amendments in ASU 2016-13 introduce an approach based on expected losses to estimate credit losses on certain types of financial instruments, modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The adoption of ASU 2016-13 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “ Business Combinations (Topic 805): Clarifying the Definition of a Business ,” or ASU 2017-01. The amendments in ASU 2017-01 provide a screen to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Under ASU 2017-01, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it’s not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 also narrows the definition of outputs by more closely aligning it with how outputs are described in Topic 606. ASU 2017-01 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. The adoption of ASU 2017-01 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “ Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ,” or ASU 2017-04. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities. Instead, under the amendments in ASU 2017-04, an entity performs its annual, or interim, goodwill impairment test by comparing the

10


fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but not more than th e total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2017-04 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In February 2017, the FASB issued Accounting Standards Update No. 2017-07, “ Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ,” or ASU 2017-07. The FASB issued ASU 2017-07 in order to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. ASU 2017-07 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. Entities should apply these amendments retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The adoption of ASU 2017-07 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, “ Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting, ” or ASU 2017-09. The FASB issued ASU 2017-09 in order to reduce the diversity in practice, as well as the cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation , to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Compensation—Stock Compensation . ASU 2017-09 provides that an entity shall account for the effects of a modification of the terms or conditions of an equity award as an exchange of the original award for a new award, unless the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used), the vesting conditions and the classification of the modified award are the same as the original award immediately before the award is modified. ASU 2017-09 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 requires reporting organizations to apply the amendments prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In August 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-12, “ Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, ” or ASU 2017-12. The FASB issued ASU 2017-12 in order to expand and refine hedge accounting for both financial and non-financial risk components and align the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements. ASU 2017-12 also includes certain targeted improvements to simplify the application of current guidance related to the assessment of hedge accounting. ASU 2017-12 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-12 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

 

 

3. EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is computed by dividing income available to MSCI common shareholders by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and vested restricted stock unit awards where recipients have satisfied either the explicit vesting terms or retirement-eligible requirements. Diluted EPS reflects the assumed conversion of all dilutive securities. There were 946 and 1,593 anti-dilutive securities excluded from the calculation of diluted EPS for the three months ended September 30, 2017 and 2016, respectively. There were 1,316 and 531 anti-dilutive securities excluded from the calculation of diluted EPS for the nine months ended September 30, 2017 and 2016, respectively.

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The following table presents the computation of basic and diluted EPS:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

85,153

 

 

$

65,281

 

 

$

239,370

 

 

$

192,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

90,112

 

 

 

94,823

 

 

 

90,406

 

 

 

96,879

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock units

 

 

1,756

 

 

 

650

 

 

 

1,325

 

 

 

566

 

Diluted weighted average common shares outstanding

 

 

91,868

 

 

 

95,473

 

 

 

91,731

 

 

 

97,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per basic common share

 

$

0.94

 

 

$

0.69

 

 

$

2.65

 

 

$

1.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per diluted common share

 

$

0.93

 

 

$

0.68

 

 

$

2.61

 

 

$

1.98

 

 

 

 

4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements at September 30, 2017 and December 31, 2016 consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Computer & related equipment

 

$

186,487

 

 

$

162,306

 

Furniture & fixtures

 

 

10,316

 

 

 

9,724

 

Leasehold improvements

 

 

50,998

 

 

 

49,442

 

Work-in-process

 

 

2,683

 

 

 

10,954

 

Subtotal

 

 

250,484

 

 

 

232,426

 

Accumulated depreciation and amortization

 

 

(164,804

)

 

 

(136,841

)

Property, equipment and leasehold improvements, net

 

$

85,680

 

 

$

95,585

 

 

Depreciation and amortization expense of property, equipment and leasehold improvements was $9.3 million and $8.3 million for the three months ended September 30, 2017 and 2016, respectively. Depreciation and amortization expense of property, equipment and leasehold improvements was $27.3 million and $24.9 million for the nine months ended September 30, 2017 and 2016, respectively.

 

 

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table presents goodwill by reportable segment:

 

(in thousands)

 

Index

 

 

Analytics

 

 

All Other (1)

 

 

Total

 

Goodwill at December 31, 2016

 

$

1,202,448

 

 

$

302,611

 

 

$

50,791

 

 

$

1,555,850

 

Foreign exchange translation adjustment

 

 

2,672

 

 

 

 

 

 

1,647

 

 

 

4,319

 

Goodwill at September 30, 2017

 

$

1,205,120

 

 

$

302,611

 

 

$

52,438

 

 

$

1,560,169

 

 

(1) The goodwill in All Other at September 30, 2017, consisted of $31.6 million in the ESG segment and $20.8 million in the Real Estate segment and at December 31, 2016 consisted of $31.6 million in the ESG segment and $19.2 million in the Real Estate segment.  

 

The Company completed its annual goodwill impairment test as of July 1, 2017 on its four reporting units, which are the same as its four operating segments, and no impairments were noted.  The Company performed a step zero, qualitative impairment test on each of its Index, Analytics and ESG operating segments and determined that it was more likely than not that the fair value for each of the Index, Analytics and ESG operating segments was not less than the carrying value for each.  As revenues have been below

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management’s expectations for the Real Estate segment, the Company performed a step 1, quantitative impairment test for this segment and determined that the fair value substantially exceeded its carrying value.

Intangible Assets

Amortization expense related to intangible assets for the three months ended September 30, 2017 and 2016 was $10.6 million and $11.8 million, respectively. Amortization expense related to intangible assets for the nine months ended September 30, 2017 and 2016 was $33.0 million and $35.5 million, respectively.

The gross carrying and accumulated amortization amounts related to the Company’s identifiable intangible assets were as follows: 

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Gross intangible assets:

 

 

 

 

 

 

 

 

Customer relationships

 

$

361,199

 

 

$

361,199

 

Trademarks/trade names

 

 

223,382

 

 

 

223,382

 

Technology/software

 

 

220,575

 

 

 

210,013

 

Proprietary data

 

 

28,627

 

 

 

28,627

 

Covenant not to compete

 

 

1,225

 

 

 

1,225

 

Subtotal

 

 

835,008

 

 

 

824,446

 

Foreign exchange translation adjustment

 

 

(9,568

)

 

 

(13,946

)

Total gross intangible assets

 

$

825,440

 

 

$

810,500

 

Accumulated amortization:

 

 

 

 

 

 

 

 

Customer relationships

 

$

(183,562

)

 

$

(166,923

)

Trademarks/trade names

 

 

(113,784

)

 

 

(105,077

)

Technology/software

 

 

(190,460

)

 

 

(184,290

)

Proprietary data

 

 

(9,893

)

 

 

(8,571

)

Covenant not to compete

 

 

(1,211

)

 

 

(1,089

)

Subtotal

 

 

(498,910

)

 

 

(465,950

)

Foreign exchange translation adjustment

 

 

1,796

 

 

 

3,090

 

Total accumulated amortization

 

$

(497,114

)

 

$

(462,860

)

Net intangible assets:

 

 

 

 

 

 

 

 

Customer relationships

 

$

177,637

 

 

$

194,276

 

Trademarks/trade names

 

 

109,598

 

 

 

118,305

 

Technology/software

 

 

30,115

 

 

 

25,723

 

Proprietary data

 

 

18,734

 

 

 

20,056

 

Covenant not to compete

 

 

14

 

 

 

136

 

Subtotal

 

 

336,098

 

 

 

358,496

 

Foreign exchange translation adjustment

 

 

(7,772

)

 

 

(10,856

)

Total net intangible assets

 

$

328,326

 

 

$

347,640

 

 

The following table presents the estimated amortization expense for the remainder of the year ending December 31, 2017 and succeeding years:

 

Years Ending December 31,

 

Amortization

Expense

 

 

 

(in thousands)

 

Remainder 2017

 

$

10,784

 

2018

 

 

43,969

 

2019

 

 

42,233

 

2020