MSCI Inc.
MSCI Inc. (Form: 10-Q, Received: 05/05/2017 11:12:51)

 

 

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 March 31, 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 April 28, 2017, there were 90,455,917 shares of the registrant’s common stock, par value $0.01, outstanding.

 

 

 

 


MSCI INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 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

 

21

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

 

 

Part II

 

 

Item 1.

 

Legal Proceedings

 

39

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

Item 3.

 

Defaults Upon Senior Securities

 

40

Item 4.

 

Mine Safety Disclosures

 

40

Item 5.

 

Other Information

 

40

Item 6.

 

Exhibits

 

40

 

 

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 MEDIA 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

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

696,972

 

 

$

791,834

 

Accounts receivable (net of allowances of $1,108 and $1,035 at March 31, 2017 and

    December 31, 2016, respectively)

 

 

262,289

 

 

 

221,504

 

Prepaid income taxes

 

 

 

 

 

12,389

 

Prepaid and other assets

 

 

29,390

 

 

 

29,943

 

Total current assets

 

 

988,651

 

 

 

1,055,670

 

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

    amortization of $146,219 and $136,841 at March 31, 2017 and December 31, 2016,

    respectively)

 

 

93,156

 

 

 

95,585

 

Goodwill

 

 

1,556,453

 

 

 

1,555,850

 

Intangible assets (net of accumulated amortization of $474,276 and $462,860 at March

    31, 2017 and December 31, 2016, respectively)

 

 

339,107

 

 

 

347,640

 

Deferred tax assets

 

 

9,687

 

 

 

9,531

 

Other non-current assets

 

 

18,084

 

 

 

18,302

 

Total assets

 

$

3,005,138

 

 

$

3,082,578

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,138

 

 

$

568

 

Income taxes payable

 

 

3,755

 

 

 

 

Accrued compensation and related benefits

 

 

41,823

 

 

 

119,113

 

Other accrued liabilities

 

 

71,210

 

 

 

82,531

 

Deferred revenue

 

 

378,422

 

 

 

334,358

 

Total current liabilities

 

 

496,348

 

 

 

536,570

 

Long-term debt

 

 

2,075,924

 

 

 

2,075,201

 

Deferred taxes

 

 

91,845

 

 

 

94,067

 

Other non-current liabilities

 

 

62,183

 

 

 

59,135

 

Total liabilities

 

 

2,726,300

 

 

 

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; 129,385,707

    and 128,996,344 common shares issued and 90,450,616 and 91,279,590 common

    shares outstanding at March 31, 2017 and December 31, 2016, respectively)

 

 

1,294

 

 

 

1,290

 

Treasury shares, at cost (38,935,091 and 37,716,754 common shares held at March 31,

    2017 and December 31, 2016, respectively)

 

 

(2,271,112

)

 

 

(2,170,739

)

Additional paid in capital

 

 

1,237,106

 

 

 

1,225,565

 

Retained earnings

 

 

1,369,406

 

 

 

1,322,224

 

Accumulated other comprehensive loss

 

 

(57,856

)

 

 

(60,735

)

Total shareholders' equity

 

 

278,838

 

 

 

317,605

 

Total liabilities and shareholders' equity

 

$

3,005,138

 

 

$

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

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

 

 

(unaudited)

Operating revenues

 

$

301,207

 

 

$

278,828

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

67,521

 

 

 

63,172

 

 

Selling and marketing

 

 

43,014

 

 

 

41,689

 

 

Research and development

 

 

18,977

 

 

 

18,928

 

 

General and administrative

 

 

21,004

 

 

 

21,890

 

 

Amortization of intangible assets

 

 

11,251

 

 

 

11,840

 

 

Depreciation and amortization of property, equipment and

   leasehold improvements

 

 

8,838

 

 

 

8,168

 

 

Total operating expenses

 

 

170,605

 

 

 

165,687

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

130,602

 

 

 

113,141

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(932

)

 

 

(621

)

 

Interest expense

 

 

29,024

 

 

 

22,904

 

 

Other expense (income)

 

 

885

 

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

 

28,977

 

 

 

22,364

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

101,625

 

 

 

90,777

 

 

Provision for income taxes

 

 

28,674

 

 

 

30,410

 

 

Net income

 

$

72,951

 

 

$

60,367

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per basic common share

 

$

0.80

 

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per diluted common share

 

$

0.80

 

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding used in computing

   earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

 

90,708

 

 

 

99,425

 

 

Diluted

 

 

91,624

 

 

 

99,998

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared per common share

 

$

0.28

 

 

$

0.22

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

6


MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

 

 

(unaudited)

Net income

 

$

72,951

 

 

$

60,367

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

2,941

 

 

 

304

 

 

Income tax effect

 

 

 

 

 

(67

)

 

Foreign currency translation adjustments, net

 

 

2,941

 

 

 

237

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other post-retirement adjustments

 

 

(99

)

 

 

(313

)

 

Income tax effect

 

 

37

 

 

 

82

 

 

Pension and other post-retirement adjustments, net

 

 

(62

)

 

 

(231

)

 

Other comprehensive (loss) income, net of tax

 

 

2,879

 

 

 

6

 

 

Comprehensive income

 

$

75,830

 

 

$

60,373

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

7


MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

72,951

 

 

$

60,367

 

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

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

11,251

 

 

 

11,840

 

Stock-based compensation expense

 

 

9,394

 

 

 

7,080

 

Depreciation and amortization of property, equipment and leasehold improvements

 

 

8,838

 

 

 

8,168

 

Amortization of debt origination fees

 

 

849

 

 

 

709

 

Deferred taxes

 

 

(2,035

)

 

 

(3,769

)

Other non-cash adjustments

 

 

25

 

 

 

359

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(40,582

)

 

 

(51,664

)

Prepaid income taxes

 

 

12,438

 

 

 

22,246

 

Prepaid and other assets

 

 

629

 

 

 

270

 

Accounts payable

 

 

561

 

 

 

(1,006

)

Income taxes payable

 

 

3,755

 

 

 

 

Accrued compensation and related benefits

 

 

(76,708

)

 

 

(62,258

)

Other accrued liabilities

 

 

(10,280

)

 

 

(1,325

)

Deferred revenue

 

 

43,247

 

 

 

42,039

 

Other

 

 

2,682

 

 

 

3,831

 

Net cash provided by operating activities

 

 

37,015

 

 

 

36,887

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,322

)

 

 

(3,135

)

Capitalized software development costs

 

 

(2,307

)

 

 

(2,325

)

Acquisitions, net of cash acquired

 

 

 

 

 

(60

)

Net cash used in investing activities

 

 

(9,629

)

 

 

(5,520

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

625

 

 

 

2,438

 

Repurchase of treasury shares

 

 

(100,362

)

 

 

(346,715

)

Payment of dividends

 

 

(25,489

)

 

 

(21,889

)

Net cash used in financing activities

 

 

(125,226

)

 

 

(366,166

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes

 

 

2,978

 

 

 

2,107

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

 

(94,862

)

 

 

(332,692

)

Cash and cash equivalent, beginning of period

 

 

791,834

 

 

 

777,706

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent, end of period

 

$

696,972

 

 

$

445,014

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

34,916

 

 

$

23,451

 

Cash paid for income taxes

 

$

13,294

 

 

$

11,242

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

 

Property, equipment and leasehold improvements in other accrued liabilities

 

$

2,944

 

 

$

5,077

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

Cash dividends declared, but not yet paid

 

$

269

 

 

$

157

 

 

 

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 present fairly the financial condition as of March 31, 2017 and December 31, 2016, the results of operations and comprehensive income for the three months ended March 31, 2017 and 2016 and cash flows for the three months ended March 31, 2017 and 2016. 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 unaudited condensed consolidated financial statement information as of December 31, 2016 has been derived from the 2016 audited consolidated financial statements. 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 accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require the Company to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the 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

BlackRock, Inc. accounted for 10.3% of the Company’s consolidated operating revenues for the three months ended March 31, 2017 while no single customer represented 10.0% or more of the Company’s consolidated operating revenues for the three months ended March 31, 2016. For the three months ended March 31, 2017 and 2016, BlackRock, Inc. accounted for 18.6% and 17.0% 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 three months ended March 31, 2017 and 2016.

 

 

2. RECENT ACCOUNTING STANDARDS UPDATES

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 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 ASU 2016-08, “ Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) .” In April 2016, the FASB issued ASU 2016-10, “ Identifying Performance Obligations and Licensing .” In May 2016, the FASB issued ASU 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 and clarification to ASU 2014-09 and must be adopted concurrently. The Company is currently evaluating the overall impact and the method of adoption of ASU 2014-09, including the latest developments from the Transition Resources Group. Areas most likely impacted may include, but not be limited to, the following: the timing of

9


revenue recognition and costs for implementation services; the timing of revenue recognition o f licenses for desktop applications; and the accounting for contract modifications. In addition, the new standard may require certain amounts in accounts receivable and deferred revenues to be netted on the balance sheet and enhanced disclosures in relatio n to (i) disaggregated revenue, (ii) reconciliations of contract balances, (iii) performance obligations, (iv) significant judgments and (v) cost to obtain or fulfill contracts. The Company’s final determination of the adoption methodology will depend on a number of factors, such as the significance of the impact of the new standard on the financial results, system readiness and the ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements and new disclosure requirements. The Company does not currently know or cannot reasonably estimate quantitative information related to the impact of the new standard on its condensed consolidated financial statements.

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 the 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 $3.1 million of excess tax benefits within income taxes rather than additional paid in capital for the three months ended March 31, 2017.  This increased diluted earnings per share by approximately $0.03 per share for the period.  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 $3.9 million in net cash provided by operating activities with a matching decrease in net cash used in financing activities for the three months ended March 31, 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 continue to estimate forfeitures as required by current guidance.  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 ASC 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 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 the total amount of goodwill allocated to the reporting unit. ASU

10


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 ASU 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.

 

 

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 3,002 anti-dilutive securities excluded from the calculation of diluted EPS for the three months ended March 31, 2017. There were no anti-dilutive securities excluded from the calculation of diluted EPS for the three months ended March 31, 2016.

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

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Net income

 

$

72,951

 

 

$

60,367

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

90,708

 

 

 

99,425

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and restricted stock units

 

 

916

 

 

 

573

 

 

Diluted weighted average common shares outstanding

 

 

91,624

 

 

 

99,998

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per basic common share

 

$

0.80

 

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per diluted common share

 

$

0.80

 

 

$

0.60

 

 

 

 

 

4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Computer & related equipment

 

$

168,516

 

 

$

162,306

 

Furniture & fixtures

 

 

9,879

 

 

 

9,724

 

Leasehold improvements

 

 

50,420

 

 

 

49,442

 

Work-in-process

 

 

10,560

 

 

 

10,954

 

Subtotal

 

 

239,375

 

 

 

232,426

 

Accumulated depreciation and amortization

 

 

(146,219

)

 

 

(136,841

)

Property, equipment and leasehold improvements, net

 

$

93,156

 

 

$

95,585

 

 

Depreciation and amortization expense of property, equipment and leasehold improvements was $8.8 million and $8.2 million for the three months ended March 31, 2017 and 2016, respectively.

11


 

 

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table presents goodwill by reportable segment:

 

(in thousands)

 

Index

 

 

Analytics

 

 

All Other

 

 

Total

 

Goodwill at December 31, 2016

 

$

1,202,448

 

 

$

302,611

 

 

$

50,791

 

 

$

1,555,850

 

Foreign exchange translation adjustment

 

 

373

 

 

 

 

 

 

230

 

 

 

603

 

Goodwill at March 31, 2017

 

$

1,202,821

 

 

$

302,611

 

 

$

51,021

 

 

$

1,556,453

 

 

Intangible Assets

Amortization expense related to intangible assets for the three months ended March 31, 2017 and 2016 was $11.3 million and $11.8 million, respectively. 

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Gross intangible assets:

 

 

 

 

 

 

 

 

Customer relationships

 

$

361,199

 

 

$

361,199

 

Trademarks/trade names

 

 

223,382

 

 

 

223,382

 

Technology/software

 

 

212,261

 

 

 

210,013

 

Proprietary data

 

 

28,627

 

 

 

28,627

 

Covenant not to compete

 

 

1,225

 

 

 

1,225

 

Subtotal

 

 

826,694

 

 

 

824,446

 

Foreign exchange translation adjustment

 

 

(13,311

)

 

 

(13,946

)

Total gross intangible assets

 

$

813,383

 

 

$

810,500

 

Accumulated amortization:

 

 

 

 

 

 

 

 

Customer relationships

 

$

(172,464

)

 

$

(166,923

)

Trademarks/trade names

 

 

(107,975

)

 

 

(105,077

)

Technology/software

 

 

(186,633

)

 

 

(184,290

)

Proprietary data

 

 

(8,999

)

 

 

(8,571

)

Covenant not to compete

 

 

(1,131

)

 

 

(1,089

)

Subtotal

 

 

(477,202

)

 

 

(465,950

)

Foreign exchange translation adjustment

 

 

2,926

 

 

 

3,090

 

Total accumulated amortization

 

$

(474,276

)

 

$

(462,860

)

Net intangible assets:

 

 

 

 

 

 

 

 

Customer relationships

 

$

188,735

 

 

$

194,276

 

Trademarks/trade names

 

 

115,407

 

 

 

118,305

 

Technology/software

 

 

25,628

 

 

 

25,723

 

Proprietary data

 

 

19,628

 

 

 

20,056

 

Covenant not to compete

 

 

94

 

 

 

136

 

Subtotal

 

 

349,492

 

 

 

358,496

 

Foreign exchange translation adjustment

 

 

(10,385

)

 

 

(10,856

)

Total net intangible assets

 

$

339,107

 

 

$

347,640

 

 

12


The following table presents the estimated amortization expense for the remainder of 2017 and succeeding years:

 

Years Ending December 31,

 

Amortization

Expense

 

 

 

(in thousands)

 

Remainder 2017

 

$

32,818

 

2018

 

 

42,074

 

2019

 

 

40,074

 

2020

 

 

37,889

 

2021

 

 

36,376

 

Thereafter

 

 

149,876

 

Total

 

$

339,107

 

 

 

6. COMMITMENTS AND CONTINGENCIES

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 effect on its business, operating results, financial condition or cash flows.

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 months ended March 31, 2017 and 2016 was $5.8 million and $6.1 million, respectively.

Senior Notes. The Company has issued an aggregate of $2.1 billion in senior unsecured notes (collectively, the “Senior Notes”) in the three discrete private offerings described below.

On November 20, 2014, the Company completed its private offering of $800.0 million aggregate principal amount of 5.25% senior unsecured notes due 2024 (the “2024 Senior Notes”). The Company used the net proceeds from the offering of the 2024 Senior Notes, together with cash on hand, to repay in full its then outstanding term loan indebtedness of $794.8 million.    

On August 13, 2015, the Company completed its private offering of $800.0 million aggregate principal amount of 5.75% senior unsecured notes due 2025 (the “2025 Senior Notes”). The $789.5 million of net proceeds from the offering of the 2025 Senior Notes were allocated for general corporate purposes.

On August 4, 2016, the Company completed its private offering of $500.0 million aggregate principal amount of 4.75% senior unsecured notes due 2026 (the “2026 Senior Notes”). The $493.3 million of net proceeds from the offering of the 2026 Senior Notes were allocated for general corporate purposes, including, without limitation, buybacks of its common stock and potential acquisitions.

The 2024 Senior Notes are scheduled to mature and be paid in full on November 15, 2024. At any time prior to November 15, 2019, the Company may redeem all or part of the 2024 Senior Notes upon not less than 30 nor more than 60 days’ prior notice at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest and additional interest, if any, thereon, to the date of redemption. In addition, the Company may redeem all or part of the 2024 Senior Notes, together with accrued and unpaid interest, on or after November 15, 2019, at redemption prices set forth in the indenture governing the 2024 Senior Notes. At any time prior to November 15, 2017, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2024 Senior Notes, including any permitted additional notes, at a redemption price equal to 105.25% of the principal amount.

The 2025 Senior Notes are scheduled to mature and be paid in full on August 15, 2025. At any time prior to August 15, 2020, the Company may redeem all or part of the 2025 Senior Notes upon not less than 30 nor more than 60 days’ prior notice at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest and additional interest, if any, thereon, to the date of redemption. In addition, the Company may redeem all or part of the 2025 Senior Notes, together with accrued and unpaid interest, on or after August 15, 2020, at redemption prices set forth in the indenture governing the 2025 Senior Notes. At any time prior to August 15, 2018, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2025 Senior Notes, including any permitted additional notes, at a redemption price equal to 105.75% of the principal amount.

The 2026 Senior Notes are scheduled to mature and be paid in full on August 1, 2026. At any time prior to August 1, 2021, the Company may redeem all or part of the 2026 Senior Notes upon not less than 30 nor more than 60 days’ prior notice at a redemption

13


price equal to th e sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest and additional interest, if any, thereon, to the date of redemption. In addition, the Company may redeem all or part of the 2026 Senior Notes, together with accrued and unpaid interest, on or after August 1, 2021, at redemption prices set forth in the indenture governing the 2026 Senior Notes. At any time prior to August 1, 2019, the Company may use the proce eds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2026 Senior Notes, including any permitted additional notes, at a redemption price equal to 104.75% of the principal amount.

Interest payments attributable to the 2024 Senior Notes are due on May 15 and November 15 of each year. The first interest payment was made on May 15, 2015. Interest payments attributable to the 2025 Senior Notes are due on February 15 and August 15 of each year. The first interest payment was made on February 16, 2016. Interest payments attributable to the 2026 Senior Notes are due on February 1 and August 1 of each year. The first interest payment was made on February 1, 2017.

Revolver. On November 20, 2014, the Company entered into a $200.0 million senior unsecured revolving credit agreement (the “2014 Revolving Credit Agreement”) with a syndicate of banks. The 2014 Revolving Credit Agreement had an initial term of five years with an option to extend for two additional one-year terms. On August 4, 2016, the Company entered into Amendment No. 1 (the “Amendment”) to the 2014 Revolving Credit Agreement (the 2014 Revolving Credit Agreement as so amended, the “Revolving Credit Agreement”). The Amendment, among other things, (i)  increased aggregate commitments available to be borrowed to $220.0 million, (ii) increased the maximum consolidated leverage ratio and (iii) extended the initial term to August 2021 with an option to extend for an additional one-year term.  No amounts have ever been drawn under the Revolving Credit Agreement.

     Long-term debt at March 31, 2017 was $2,075.9 million, net of $24.1 million in deferred financing fees. Long-term debt at December 31, 2016 was $2,075.2 million, net of $24.8 million in deferred financing fees.

In connection with the closings of the Senior Notes offerings and entry into the 2014 Revolving Credit Agreement and the Amendment, the Company paid certain fees which, together with the existing fees related to prior credit facilities, are being amortized over the related lives. At March 31, 2017, $26.3 million of the deferred financing fees remain unamortized, $0.5 million of which is included in “Prepaid and other assets,” $1.7 million of which is included in “Other non-current assets” and $24.1 million of which is grouped and presented as part of “Long-term debt” on the Unaudited Condensed Consolidated Statement of Financial Condition.

At March 31, 2017 and December 31, 2016, the fair market value of the Company’s debt obligations was $2,200.6 million and $2,192.5 million, respectively. The fair market value is determined in accordance with accounting standards related to the determination of fair value and represents Level 2 valuations, which are based on one or more quoted prices in markets that are not considered to be active or for which all significant inputs are observable, either directly or indirectly. The Company utilizes the market approach and obtains security pricing from a vendor who uses broker quotes and third-party pricing services to determine fair values.

Derivatives and Hedging Activities. The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments.

Certain of the Company’s foreign operations expose the Company to fluctuations of foreign exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency, the U.S. dollar. The Company enters into derivative financial instruments to protect the value or fix the amount of certain exposures in terms of its functional currency.

Non-designated Hedges of Foreign Exchange Risk. Derivatives not designated as hedges are not speculative and are used to manage the Company’s economic exposure to foreign exchange rate movements but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of March 31, 2017, the Company had outstanding foreign currency forwards with a notional amount of $38.9 million that were not designated as hedges in qualifying hedging relationships.

14


The following table presents the fair values of the C ompany’s derivative instruments and the location in which they are presented on the Company’s Unaudited Condensed Consolidated Statements of Financial Condition:

 

 

 

Unaudited Condensed

 

As of

 

 

 

Consolidated Statements of

 

March 31,

 

 

December 31,

 

(in thousands)

 

Financial Condition Location

 

2017

 

 

2016

 

Non-designated hedging instruments:

 

 

 

 

 

 

 

 

 

 

Asset derivatives:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Prepaid and other assets

 

$

151

 

 

$

27

 

Liability derivatives:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other accrued liabilities

 

$

(196

)

 

$

(124

)

 

The Company’s foreign exchange forward contracts represent Level 2 valuations, as they were valued using pricing models that took into account the contract terms as well as multiple observable inputs where applicable, such as prevailing spot rates and forward points.

The following table presents the effect of the Company’s financial derivatives and the location in which they are presented on the Company’s Unaudited Condensed Consolidated Statements of Income:

 

 

 

 

 

Amount of Gain or (Loss) Recognized

 

Derivatives Not Designated as

 

Location of Gain or

 

in Income on Derivatives for the

 

Hedging Instruments

 

(Loss) Recognized

 

Three Months Ended March 31,

 

(in thousands)

 

in Income on Derivatives

 

2017

 

 

2016

 

Foreign exchange contracts

 

Other expense (income)

 

$

(334

)

 

$

214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7. SHAREHOLDERS’ EQUITY

Return of capital .

On October 28, 2015, the Board of Directors of MSCI (the “Board of Directors”) approved a stock repurchase program authorizing the purchase of up to $1.0 billion worth of shares of MSCI’s common stock (the “2015 Repurchase Program”).

On October 26, 2016, the Board of Directors approved an additional stock repurchase program authorizing the purchase of up to $750.0 million worth of shares of the Company’s common stock (together with the $330.3 million remaining authorization under the 2015 Repurchase Program, the “2016 Repurchase Program”). Share repurchases made pursuant to the 2016 Repurchase Program may take place in the open market or in privately negotiated transactions from time to time based on market and other conditions. This authorization may be modified, suspended or terminated by the Board of Directors at any time without prior notice.  As of March 31, 2017, there was $781.2 million of available authorization remaining under the 2016 Repurchase Program.

The following table provides information with respect to repurchases of the Company’s common stock made on the open market:

Three Months Ended

 

Average

Price

Paid Per

Share

 

 

Total

Number of

Shares

Repurchased

 

 

Dollar

Value of Shares

Repurchased

 

 

 

 

 

 

 

(in thousands)

 

March 31, 2017

 

$

82.25

 

 

 

1,079

 

 

$

88,744

 

March 31, 2016

 

$

68.45

 

 

 

4,869

 

 

$

333,328

 

 

15


The following table presents cash dividends declared per common share as well as total amounts declared, distributed and deferred for the periods indicated:

 

 

 

Dividends

 

(in thousands, except per share amounts)

 

Per Share

 

 

Declared

 

 

Distributed

 

 

Deferred

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

$

0.28

 

 

$

25,769

 

 

$

25,500

 

 

$

269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

$

0.22

 

 

$

22,046

 

 

$

21,889

 

 

$

157

 

 

Common Stock.

The following table presents activity related to shares of common stock issued and repurchased during the three months ended March 31, 2017:

 

 

 

Common

 

 

Treasury

 

 

Common Stock

 

 

 

Stock Issued

 

 

Stock

 

 

Outstanding

 

Balance At December 31, 2016

 

 

128,996,344

 

 

 

(37,716,754

)

 

 

91,279,590

 

Dividend payable/paid

 

 

114

 

 

 

(114

)

 

 

 

Common stock issued and exercise of stock options

 

 

389,198

 

 

 

 

 

 

389,198

 

Shares withheld for tax withholding and exercises

 

 

 

 

 

(139,208

)

 

 

(139,208

)

Shares repurchased under stock repurchase programs

 

 

 

 

 

(1,079,005

)

 

 

(1,079,005

)

Shares issued to directors

 

 

51

 

 

 

(10

)

 

 

41

 

Balance At March 31, 2017

 

 

129,385,707

 

 

 

(38,935,091