10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2014

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, 49th 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of October 24, 2014, there were 112,030,366 shares of the registrant’s common stock, par value $0.01, outstanding.

 

 

 


Table of Contents

MSCI INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

          Page  
   Part I   
Item 1.    Condensed Consolidated Financial Statements      4   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      39   
Item 4.    Controls and Procedures      40   
   Part II   
Item 1.    Legal Proceedings      40   
Item 1A.    Risk Factors      40   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      40   
Item 3.    Defaults Upon Senior Securities      41   
Item 4.    Mine Safety Disclosures      41   
Item 5.    Other Information      41   
Item 6.    Exhibits      41   

 

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Table of Contents

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 webpage at http://ir.msci.com. MSCI Inc. makes available free of charge, on or through its Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. MSCI Inc. also makes available, through its Investor Relations webpage, via a link to the SEC’s 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.

MSCI Inc. has a Corporate Governance webpage. You can access information about MSCI Inc.’s corporate governance at http://ir.msci.com/governance.cfm. MSCI Inc. posts the following documents, among others, on its Corporate Governance webpage:

 

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

 

    Corporate Governance Policies;

 

    Procedures for Submission of Ethical 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, Inc. on its website. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 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.

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 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, 2013 filed with the SEC on February 28, 2014, and in quarterly reports on Form 10-Q and current reports on Form 8-K filed 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.

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 subscribe to the notification service available through MSCI Inc.’s website by visiting the “Email Alert Subscription” webpage 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.

 

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PART I

 

Item  1. Condensed Consolidated Financial Statements

MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per share data)

 

     As of  
     September 30,
2014
    December 31,
2013
 
     (unaudited)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 448,193      $ 358,434   

Accounts receivable (net of allowances of $789 and $1,280 at September 30, 2014 and December 31, 2013, respectively)

     191,806        169,490   

Deferred taxes

     52,124        52,888   

Prepaid taxes

     35,027        14,568   

Prepaid and other assets

     31,439        28,890   
  

 

 

   

 

 

 

Total current assets

     758,589        624,270   

Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $93,011 and $75,371 at September 30, 2014 and December 31, 2013, respectively)

     93,787        85,588   

Goodwill

     1,567,443        1,813,164   

Intangible assets (net of accumulated amortization of $360,927 and $374,377 at September 30, 2014 and December 31, 2013, respectively)

     445,034        595,707   

Other non-current assets

     15,426        17,386   
  

 

 

   

 

 

 

Total assets

   $ 2,880,279      $ 3,136,115   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 1,695      $ 1,198   

Accrued compensation and related benefits

     91,840        121,124   

Other accrued liabilities

     64,298        41,212   

Current maturities of long-term debt

     19,781        19,772   

Deferred revenue

     321,025        319,735   
  

 

 

   

 

 

 

Total current liabilities

     498,639        503,041   

Long-term debt, net of current maturities

     773,173        788,010   

Deferred taxes

     171,681        234,649   

Other non-current liabilities

     40,252        46,068   
  

 

 

   

 

 

 

Total liabilities

     1,483,745        1,571,768   
  

 

 

   

 

 

 

Commitments and Contingencies (see Note 8)

    

Shareholders’ equity:

    

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

     —          —     

Common stock (par value $0.01; 750,000,000 common shares authorized; 126,586,553 and 125,555,268 common shares issued and 112,027,156 and 118,083,111 common shares outstanding at September 30, 2014 and December 31, 2013, respectively)

     1,266        1,256   

Treasury shares, at cost (14,559,397 and 7,472,157 common shares held at September 30, 2014 and December 31, 2013, respectively)

     (588,119     (268,391

Additional paid in capital

     1,017,305        1,073,157   

Retained earnings

     978,358        758,975   

Accumulated other comprehensive income (loss)

     (12,276     (650
  

 

 

   

 

 

 

Total shareholders’ equity

     1,396,534        1,564,347   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,880,279      $ 3,136,115   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    
     2014     2013     2014     2013  
     (unaudited)  

Operating revenues

   $ 251,661      $ 228,608      $ 745,575      $ 676,500   

Operating expenses:

        

Cost of services

     78,876        68,151        231,119        203,147   

Selling, general and administrative

     70,833        59,917        210,007        168,274   

Amortization of intangible assets

     11,574        11,193        34,286        33,581   

Depreciation and amortization of property, equipment and leasehold improvements

     6,342        5,443        18,091        14,814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     167,625        144,704        493,503        419,816   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     84,036        83,904        252,072        256,684   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     (277 )     (227 )     (625 )     (650 )

Interest expense

     5,604        5,828        16,029        19,343   

Other expense (income)

     (1,287 )     563        (942 )     2,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense (income), net

     4,040        6,164        14,462        20,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before provision for income taxes

     79,996        77,740        237,610        235,834   

Provision for income taxes

     28,272        27,804        81,937        76,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     51,724        49,936        155,673        159,035   

Income (loss) from discontinued operations, net of income taxes

     (10     5,374        84,100        16,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 51,714      $ 55,310      $ 239,773      $ 175,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share:

        

Earnings per basic common share from continuing operations

   $ 0.44      $ 0.42      $ 1.33      $ 1.32   

Earnings per basic common share from discontinued operations

     —          0.04        0.72        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share

   $ 0.44      $ 0.46      $ 2.05      $ 1.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share:

        

Earnings per diluted common share from continuing operations

   $ 0.44      $ 0.42      $ 1.32      $ 1.31   

Earnings per diluted common share from discontinued operations

     —          0.04        0.71        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share

   $ 0.44      $ 0.46      $ 2.03      $ 1.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding used in computing earnings per share:

        

Basic

     116,251        119,607        116,840        120,497   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     117,163        120,578        117,803        121,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (unaudited)  

Net income

   $ 51,714      $ 55,310      $ 239,773      $ 175,300   

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     (10,266     6,522        (11,992 )     (1,252 )

Income tax effect

     (502     (2,519 )     163        479   
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments, net

     (10,768     4,003        (11,829 )     (773 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on cash flow hedges

     —          197        —          1,364   

Income tax effect

     —          (77 )     —          (524 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on cash flow hedges, net

     —          120        —          840   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities

     —          —          —          (5 )

Income tax effect

     —          —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities, net

     —          —          —          (3 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other post-retirement adjustments

     53        (68 )     219        47   

Income tax effect

     (18     17        (16 )     (16 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other post-retirement adjustments, net

     35        (51     203        31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (10,733     4,072        (11,626 )     95   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 40,981      $ 59,382      $ 228,147      $ 175,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months Ended
September 30,
 
     2014     2013  
     (unaudited)  

Cash flows from operating activities

    

Net income

   $ 239,773      $ 175,300   

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

    

Amortization of intangible assets

     37,026        43,443   

Stock-based compensation expense

     20,116        19,150   

Depreciation and amortization of property, equipment and leasehold improvements

     18,310        16,260   

Amortization of debt origination fees

     1,328        2,179   

Deferred taxes

     996        (2,125

Amortization of discount on long-term debt

     359        699   

Excess tax benefits from stock-based compensation

     (3,197     (1,766

Gain on disposition of subsidiary, net of costs

     (84,620     —     

Other non-cash adjustments

     1,764        (748

Changes in assets and liabilities, net of assets and liabilities acquired:

    

Accounts receivable

     (38,635     (26,762

Prepaid income taxes

     (20,552     (13,067

Prepaid and other assets

     (7,343     (3,393

Accounts payable

     973        (2,017

Deferred revenue

     50,304        25,454   

Accrued compensation and related benefits

     (19,581     (16,161

Other accrued liabilities

     6,552        3,147   

Other

     (1,954     6,444   
  

 

 

   

 

 

 

Net cash provided by operating activities

     201,619        226,037   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from redemption of short-term investments

     —          70,900   

Acquisitions, net of cash acquired

     (14,880     (23,268

Dispositions, net of cash provided

     362,811        —     

Proceeds from the sale of capital equipment

     8        29   

Capitalized software development costs

     (6,063     (1,829

Capital expenditures

     (36,174     (20,899
  

 

 

   

 

 

 

Net cash provided by investing activities

     305,702        24,933   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Repayment of long-term debt

     (15,187     (48,000

Repurchase of treasury shares

     (409,396     (109,928

Proceeds from exercise of stock options

     9,009        9,308   

Excess tax benefits from stock-based compensation

     3,197        1,766   
  

 

 

   

 

 

 

Net cash used in financing activities

     (412,377     (146,854
  

 

 

   

 

 

 

Effect of exchange rate changes

     (5,185     (3,675
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     89,759        100,441   

Cash and cash equivalents, beginning of period

     358,434        183,309   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     448,193        283,750   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 14,387      $ 15,099   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 101,421      $ 99,642   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash investing activities:

    

Property, equipment and leasehold improvements in other accrued liabilities

   $ 3,929      $ 5,219   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. INTRODUCTION AND BASIS OF PRESENTATION

MSCI Inc., together with its wholly-owned subsidiaries (the “Company” or “MSCI”), is a global provider of investment decision support tools, including indexes, portfolio risk and performance analytics. The Company’s flagship products are its global equity indexes and environmental, social and governance (“ESG”) products marketed under the MSCI and MSCI ESG Research brands, its private real estate benchmarks marketed under the IPD brand, its portfolio risk and performance analytics covering global equity and fixed income markets marketed under the Barra brand, its market and credit risk analytics marketed under the RiskMetrics and Barra brands, its performance reporting products and services offered to the investment consultant community marketed under the InvestorForce brand and its valuation models and risk management software for the energy and commodities markets marketed under the FEA brand.

On March 17, 2014, MSCI entered into a definitive agreement to sell Institutional Shareholder Services Inc. (“ISS”). As a result, the Company reported the operating results of ISS in “Income from discontinued operations, net of income taxes” in the Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013. As a result of this change, the Company now operates as one segment. Unless otherwise indicated, the disclosures accompanying these unaudited condensed consolidated financial statements reflect the Company’s continuing operations.

The Company completed the sale of ISS on April 30, 2014. See Note 3, “Dispositions and Discontinued Operations,” for further details.

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 September 30, 2014 and December 31, 2013, the results of operations and comprehensive income for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014 and 2013. 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, 2013. The unaudited condensed consolidated financial statement information as of December 31, 2013 has been derived from the 2013 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, the allowance for doubtful accounts, 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. Certain prior period amounts have been reclassified to conform to the current year financial statement presentation.

Revision

In connection with the preparation of the Company’s unaudited condensed consolidated financial statements for the three months ended June 30, 2014, the Company determined that it had understated its net tax liabilities in certain years prior to December 31, 2012. As a result of these errors, the Company has recorded the following corrections as of December 31, 2013: (i) an $11.3 million decrease to beginning retained earnings, (ii) a $0.7 million decrease to additional paid in capital, (iii) a $12.8 million decrease to prepaid taxes, (iv) a $13.6 million increase to long-term deferred tax liabilities and (v) a $14.3 million increase to goodwill. In accordance with the accounting guidance found in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 250-10, “Accounting Changes and Error Corrections,” the Company has revised its Unaudited Condensed Consolidated Statements of Financial Condition as of December 31, 2013 to reflect these corrections. The Company will revise all other previously reported results as such financial information is included in future filings.

In accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” the Company assessed the materiality of the adjustments and concluded that these corrections were not material to any of its previously issued financial statements. The Company also concluded that its compliance with debt covenants would not have been affected by these adjustments.

 

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Accordingly, the Company has revised the Unaudited Condensed Consolidated Statement of Financial Condition as of December 31, 2013 from amounts previously reported as follows:

 

     (in thousands)  
     As Previously
Reported
     Adjustment     As Revised  

Prepaid taxes

   $ 27,333       $ (12,765   $ 14,568   

Total current assets

   $ 637,035       $ (12,765   $ 624,270   

Goodwill

   $ 1,798,821       $ 14,343      $ 1,813,164   

Total assets

   $ 3,134,537       $ 1,578      $ 3,136,115   

Deferred taxes

   $ 221,054       $ 13,595      $ 234,649   

Total liabilities

   $ 1,558,173       $ 13,595      $ 1,571,768   

Additional paid in capital

   $ 1,073,893       $ (736   $ 1,073,157   

Retained earnings

   $ 770,256       $ (11,281   $ 758,975   

Total shareholders’ equity

   $ 1,576,364       $ (12,017   $ 1,564,347   

Total liabilities and shareholders’ equity

   $ 3,134,537       $ 1,578      $ 3,136,115   

Concentrations

Financial instruments that may potentially subject the Company to concentration risk consist principally of cash deposits. At September 30, 2014 and December 31, 2013, cash and cash equivalent amounts were $448.2 million and $358.4 million, respectively. The Company receives interest at prevailing money market fund rates on its cash deposits.

For the nine months ended September 30, 2014, BlackRock, Inc. accounted for 10.6% of the Company’s operating revenues. For the nine months ended September 30, 2013, no single customer accounted for 10.0% or more of the Company’s operating revenues.

2. RECENT ACCOUNTING STANDARDS UPDATES

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” or ASU 2013-11. The amendments in this update require that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except under a few limited circumstances. The amendments in this update do not require new recurring disclosures. This new guidance has been applied prospectively for interim and annual periods beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” or ASU 2014-08. The amendments in this update change the requirements for reporting discontinued operations under ASC Subtopic 205-20, “Presentation of Financial Statements – Discontinued Operations,” such as limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments in this update also require expanded disclosures in order to provide users of financial statements with more information about the assets, liabilities, revenues and expenses of discontinued operations. Further, the amendments require an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. This new guidance is to be applied prospectively for annual periods beginning on or after December 15, 2014, and interim periods within those years, with early adoption permitted. The Company has elected not to early adopt ASU 2014-08 and is evaluating the potential impact that the update will have on its unaudited condensed consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers,” 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. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies.

 

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Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is evaluating the potential impact that the update will have on its unaudited condensed consolidated financial statements.

3. DISPOSITIONS AND DISCONTINUED OPERATIONS

Disposition of CFRA

On March 31, 2013, MSCI completed the sale of its CFRA product line. The value of the disposed assets and liabilities and the resulting gain on disposal were not material to the Company.

Disposition of ISS

On March 17, 2014, MSCI entered into a definitive agreement to sell ISS. The results of operations from ISS and the CFRA product line are reflected in “Income from discontinued operations, net of income taxes” in the Unaudited Condensed Consolidated Statements of Income.

The sale of ISS was completed on April 30, 2014 for $367.4 million. The value of the assets and liabilities of ISS that were disposed, directly attributable transaction costs and the resulting gain on disposal that has been reported in “Income from discontinued operations, net of income taxes” for the three and nine months ended September 30, 2014 are as follows:

 

(in thousands)       

Cash proceeds

   $ 367,355   

Less: Working capital adjustments

     (311
  

 

 

 

Total proceeds

     367,044   

Less assets sold and liabilities relieved resulting from disposal:

  

Cash and cash equivalents

     (4,544 )

Accounts receivable

     (15,765

Deferred taxes (current)

     (3,174 )

Prepaid taxes

     (617

Prepaid and other assets

     (4,500

Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $4,213)

     (8,544

Goodwill

     (254,233

Intangible assets (net of accumulated amortization of $50,283)

     (121,269

Other non-current assets

     (1,645 )

Accounts payable

     574   

Accrued compensation and related benefits

     6,783   

Other accrued liabilities

     4,034   

Deferred revenue

     51,767   

Deferred taxes (non-current)

     59,129   

Other non-current liabilities

     5,576   

Other comprehensive income including currency translation adjustments and pension and other post-retirement adjustments

     4,004   
  

 

 

 

Net assets sold

     (282,424

Less: Transaction costs

     (5,946
  

 

 

 

Gain on sale of ISS

   $ 78,674   
  

 

 

 

Income (loss) from discontinued operations. Amounts associated with discontinued operations reflected in the Unaudited Condensed Consolidated Statements of Income for the three months ended September 30, 2014 and 2013 are as follows:

 

     Three Months Ended
September 30,
 
     2014     2013  
     (in thousands)  

Revenue from discontinued operations

   $ —        $ 29,630   
  

 

 

   

 

 

 

Income (loss) from discontinued operations before provision (benefit) for income taxes

   $ (110 )   $ 8,507   

Provision (benefit) for income taxes

     (100     3,133   
  

 

 

   

 

 

 

Income (loss) from discontinued operations, net of income taxes

   $ (10   $ 5,374   
  

 

 

   

 

 

 

 

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Amounts associated with discontinued operations reflected in the Unaudited Condensed Consolidated Statements of Income for the nine months ended September 30, 2014 and 2013 are as follows:

 

     Nine Months Ended
September 30,
 
     2014      2013  
     (in thousands)  

Revenue from discontinued operations

   $ 43,122       $ 91,545   
  

 

 

    

 

 

 

Income from discontinued operations before provision for income taxes

   $ 86,254       $ 25,223   

Provision for income taxes

     2,154         8,958   
  

 

 

    

 

 

 

Income from discontinued operations, net of income taxes

   $ 84,100       $ 16,265   
  

 

 

    

 

 

 

The three months ended March 31, 2014 included a $30.6 million income tax benefit associated with establishing a net deferred tax asset on the difference between the ISS tax basis and book basis. This net deferred tax asset was realized in the three months ended June 30, 2014 upon the closing of the sale, which reflects the tax basis capital loss realized on this book gain.

4. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

As required by FASB’s ASC Subtopic 220-10, “Comprehensive Income—Overall,” the following tables present the amounts reclassified from Accumulated other comprehensive income (loss) by the respective line item in the Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013.

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)(1)

(in thousands)

 

Details about Accumulated Other

Comprehensive Income (Loss)

Components

   Amount Reclassified from Accumulated Other
Comprehensive Income (Loss)
    Affected Line Item in the
Unaudited Condensed
Consolidated Statements of

Income
     Three Months Ended      Three Months Ended      
     September 30,
2014
     September 30,
2013
     

Unrealized losses on cash flow hedges Interest rate contracts

   $ —         $ (197   Interest expense
     —           77      Tax benefit
  

 

 

    

 

 

   
   $ —         $ (120   Net of tax
  

 

 

    

 

 

   

Unrealized gains on available-for-sale securities

       

Short-term investments

   $  —         $ —        Interest income
     —           —        Tax expense
  

 

 

    

 

 

   
   $ —         $ —        Net of tax
  

 

 

    

 

 

   

Defined benefit pension plans

       

Amount recognized as a component of net periodic benefit expense for curtailments and settlements

   $ —         $ —        (2)
     —           —        Tax expense
  

 

 

    

 

 

   
   $ —         $ —        Net of tax
  

 

 

    

 

 

   

Foreign currency translation adjustment

   $ —         $ —        (2)
  

 

 

    

 

 

   

Total reclassifications for the period, net of tax

   $ —         $ (120  
  

 

 

    

 

 

   

 

(1)  Amounts in parentheses indicate expenses or losses moved to the Unaudited Condensed Consolidated Statements of Income.
(2)  These accumulated other comprehensive income components were reclassified to “Income from discontinued operations, net of taxes” as part of the gain on the disposition of ISS.

 

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Reclassifications Out of Accumulated Other Comprehensive Income (Loss)(1)

(in thousands)

 

Details about Accumulated Other

Comprehensive Income (Loss)

Components

   Amount Reclassified from Accumulated Other
Comprehensive Income (Loss)
    Affected Line Item in the
Unaudited Condensed
Consolidated Statements of
Income
     Nine Months Ended     Nine Months Ended      
     September 30,
2014
    September 30,
2013
     

Unrealized losses on cash flow hedges Interest rate contracts

   $ —        $ (1,364   Interest expense
     —          524      Tax benefit
  

 

 

   

 

 

   
   $ —        $ (840   Net of tax
  

 

 

   

 

 

   

Unrealized gains on available-for-sale securities

      

Short-term investments

   $ —        $ 5      Interest income
     —          (2   Tax expense
  

 

 

   

 

 

   
   $ —        $ 3      Net of tax
  

 

 

   

 

 

   

Defined benefit pension plans

      

Amount recognized as a component of net periodic benefit expense for curtailments and settlements

   $ (186   $ —        (2)
     6        —        Tax expense
  

 

 

   

 

 

   
   $ (180   $ —        Net of tax
  

 

 

   

 

 

   

Foreign currency translation adjustment

   $ 4,184      $ —        (2)
  

 

 

   

 

 

   

Total reclassifications for the period, net of tax

   $ 4,004      $ (837  
  

 

 

   

 

 

   

 

(1)  Amounts in parentheses indicate expenses or losses moved to the Unaudited Condensed Consolidated Statements of Income.
(2)  These accumulated other comprehensive income components were reclassified to “Income from discontinued operations, net of taxes” as part of the gain on the disposition of ISS.

5. 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 104,494 and 104,346 stock options excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2014, respectively, because of their anti-dilutive effect. There were 1,133 and 453 anti-dilutive securities excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2013, respectively.

 

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The Company computes EPS using the two-class method and determines whether instruments granted in share-based payment transactions are participating securities. The following table presents the computation of basic and diluted EPS:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
(in thousands, except per share data)                         

Income from continuing operations, net of income taxes

   $ 51,724      $ 49,936      $ 155,673      $ 159,035   

Income (loss) from discontinued operations, net of income taxes

     (10     5,374        84,100        16,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 51,714      $ 55,310      $ 239,773      $ 175,300   

Less: Allocations of earnings to unvested restricted stock units (1)

     (69 )     (211 )     (320 )     (668 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available to MSCI common shareholders

   $ 51,645      $ 55,099      $ 239,453      $ 174,632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     116,251        119,607        116,840        120,497   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of dilutive securities:

        

Stock options and restricted stock units

     912        971        963        949   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     117,163        120,578        117,803        121,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share from continuing operations

   $ 0.44      $ 0.42      $ 1.33      $ 1.32   

Earnings per basic common share from discontinued operations

     —          0.04        0.72        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share

   $ 0.44      $ 0.46      $ 2.05      $ 1.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share from continuing operations

   $ 0.44      $ 0.42      $ 1.32      $ 1.31   

Earnings per diluted common share from discontinued operations

            0.04        0.71        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share

   $ 0.44      $ 0.46      $ 2.03      $ 1.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Restricted stock units granted to employees prior to 2013 and all restricted stock units granted to independent directors of the Company have a right to participate in all of the earnings of the Company in the computation of basic EPS and, therefore, these restricted stock units are not included as incremental shares in the diluted EPS computation.

6. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements at September 30, 2014 and December 31, 2013 consisted of the following:

 

     As of  

Type

   September 30,
2014(1)
    December 31,
2013
 
     (in thousands)  

Computer & related equipment

   $ 112,185      $ 86,384   

Furniture & fixtures

     9,734        9,108   

Leasehold improvements

     54,277        52,776   

Work-in-process

     10,602        12,691   
  

 

 

   

 

 

 

Subtotal

     186,798        160,959   

Accumulated depreciation and amortization

     (93,011     (75,371
  

 

 

   

 

 

 

Property, equipment and leasehold improvements, net

   $ 93,787      $ 85,588   
  

 

 

   

 

 

 

 

(1)  Property, equipment and leasehold improvements as of September 30, 2014 reflects the disposition and addition of property, equipment and leasehold improvements associated with the sale of ISS and acquisition of Governance Holdings Co. (“GMI Ratings”), respectively. See Note 3, “Dispositions and Discontinued Operations,” and Note 11, “Acquisitions,” for additional information.

 

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Depreciation and amortization expense of property, equipment and leasehold improvements was $6.3 million and $5.4 million for the three months ended September 30, 2014 and 2013, respectively. Depreciation and amortization expense of property, equipment and leasehold improvements was $18.1 million and $14.8 million for the nine months ended September 30, 2014 and 2013, respectively.

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company carries goodwill reflected in the table below:

 

     Goodwill  
(in thousands)       

Goodwill at December 31, 2013

   $ 1,813,164   

Changes to goodwill(1)

     (244,288

Foreign exchange translation adjustment

     (1,433
  

 

 

 

Goodwill at September 30, 2014

   $ 1,567,443   
  

 

 

 

 

(1)  Changes to goodwill reflect the disposition and addition of goodwill associated with the sale of ISS and acquisition of GMI Ratings, respectively. See Note 3, “Dispositions and Discontinued Operations,” and Note 11, “Acquisitions,” for additional information.

Intangible Assets

Amortization expense related to intangible assets for the three months ended September 30, 2014 and 2013 was $11.6 million and $11.2 million, respectively. Amortization expense related to intangible assets for the nine months ended September 30, 2014 and 2013 was $34.3 million and $33.6 million, respectively.

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

 

     As of  
(in thousands)    September 30,
2014(1)
    December 31,
2013
 

Gross intangible assets:

    

Customer relationships

   $ 360,835      $ 478,735   

Trademarks/trade names

     223,382        257,282   

Technology/software

     191,540        199,778   

Proprietary process

     —          3,800   

Proprietary data

     28,627        28,527   

Covenants not to compete

     900        —     
  

 

 

   

 

 

 

Subtotal

     805,284        968,122   

Foreign exchange translation adjustment

     677        1,962   
  

 

 

   

 

 

 

Total gross intangible assets

   $ 805,961      $ 970,084   
  

 

 

   

 

 

 

Accumulated amortization:

    

Customer relationships

   $ (112,986   $ (125,359

Trademarks/trade names

     (78,548     (75,696

Technology/software

     (165,220     (168,481

Proprietary process

     —          (2,269

Proprietary data

     (4,043     (2,326

Covenants not to compete

     (75     —     
  

 

 

   

 

 

 

 

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Subtotal

     (360,872     (374,131

Foreign exchange translation adjustment

     (55     (246
  

 

 

   

 

 

 

Total accumulated amortization

   $ (360,927   $ (374,377
  

 

 

   

 

 

 

Net intangible assets:

    

Customer relationships

   $ 247,849      $ 353,376   

Trademarks/trade names

     144,834        181,586   

Technology/software

     26,320        31,297   

Proprietary process

     —          1,531   

Proprietary data

     24,584        26,201   

Covenants not to compete

     825        —     
  

 

 

   

 

 

 

Subtotal

     444,412        593,991   

Foreign exchange translation adjustment

     622        1,716   
  

 

 

   

 

 

 

Total net intangible assets

   $ 445,034      $ 595,707   
  

 

 

   

 

 

 

 

(1)  Intangible assets and the associated accumulated amortization as of September 30, 2014 reflect the disposition and addition of intangible assets associated with the sale of ISS and acquisition of GMI Ratings, respectively. See Note 3, “Dispositions and Discontinued Operations,” and Note 11, “Acquisitions,” for additional information.

The estimated amortization expense for the remainder of 2014 and succeeding years is presented below:

 

Fiscal Year

   Amortization Expense  
     (in thousands)  

Remainder 2014

   $ 11,647   

2015

     46,929   

2016

     46,413   

2017

     41,186   

2018

     38,436   

Thereafter

     260,423   
  

 

 

 

Total

   $ 445,034   
  

 

 

 

8. 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 September 30, 2014 and 2013 was $6.3 million and $6.1 million, respectively. Rent expense for the nine months ended September 30, 2014 and 2013 was $19.7 million and $17.6 million, respectively.

Return of capital. On December 13, 2012, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock beginning immediately and continuing through December 31, 2014 (the “2012 Repurchase Program”).

 

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On December 13, 2012, as part of the 2012 Repurchase Program, the Company entered into its first accelerated share repurchase (“ASR”) agreement to initiate a repurchase aggregating $100.0 million (the “December 2012 ASR Program”). As a result of the December 2012 ASR Program, the Company received 2.2 million shares on December 14, 2012 and 0.8 million shares on July 31, 2013 for a combined average purchase price of $33.47 per share.

On August 1, 2013, MSCI entered into a second ASR agreement to initiate share repurchases aggregating $100.0 million (the “August 2013 ASR Program”). As a result of the August 2013 ASR Program, the Company received 1.9 million shares on August 2, 2013 and 0.5 million shares on December 30, 2013 for a combined average purchase price of $41.06 per share.

On February 6, 2014, MSCI utilized the remaining repurchase authorization provided by the 2012 Repurchase Program by entering into a third ASR agreement to initiate share repurchases aggregating $100.0 million (the “February 2014 ASR Program”). As a result of the February 2014 ASR Program, the Company received 1.7 million shares on February 7, 2014 and 0.6 million shares on May 5, 2014 for a combined average purchase price of $43.10 per share.

On February 4, 2014, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock which will be available from time to time at management’s discretion (the “2014 Repurchase Program”). On September 17, 2014, the Board of Directors increased the approval under the 2014 Repurchase Program from $300.0 million to $850.0 million. Share repurchases made pursuant to the authority remaining under the 2014 Repurchase Program may take place through December 31, 2016 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, terminated or extended by the Board of Directors at any time without prior notice.

On September 18, 2014, as part of the 2014 Repurchase Program, the Company entered into a fourth ASR agreement to initiate share repurchases aggregating $300.0 million (the “September 2014 ASR Program”). As a result of the September 2014 ASR Program, on September 19, 2014, the Company paid $300.0 million in cash and received approximately 4.5 million shares of MSCI’s common stock. The Company may also receive additional shares at or prior to maturity of the ASR Agreement in May 2015.

The $300.0 million payment for the September 2014 ASR Program was initially split and recorded as a $210.0 million increase to “Treasury stock” and a $90.0 million decrease to “Additional paid in capital” on the Company’s Unaudited Condensed Consolidated Statement of Financial Condition to reflect the initial estimate of the value of shares received.

On September 17, 2014, the Board of Directors approved a plan to initiate a regular quarterly cash dividend. Accordingly, the Board of Directors declared the Company’s first regular quarterly dividend of $0.18 per share of common stock that will be paid on October 31, 2014 to shareholders of record as of the close of trading on October 15, 2014. The Company expects the initial annual dividend rate to be $0.72 per share. As of September 30, 2014, the Company accrued for the declared cash dividend of $20.4 million in “Other accrued liabilities” on the Company’s Unaudited Condensed Consolidated Statement of Financial Condition which will be paid on October 31, 2014.

Long-term debt. On June 1, 2010, the Company entered into a senior secured credit facility (the “2010 Credit Facility”). On March 14, 2011, the Company completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, the Company amended and restated its 2010 Credit Facility (the credit agreement as so amended and restated, the “Amended and Restated Credit Facility”). The Amended and Restated Credit Facility provided for the incurrence of a new senior secured five-year Term Loan A Facility in an aggregate amount of $880.0 million (the “2012 Term Loan”) and a $100.0 million senior secured revolving facility (the “2012 Revolving Credit Facility”). The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, the Company made a $15.0 million prepayment on the 2012 Term Loan.

On December 12, 2013, the Company entered into an agreement that extended the maturity of the Amended and Restated Credit Facility from May 2017 to December 2018 (the “New Amended and Restated Credit Facility”). The Company also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the New Amended and Restated Credit Facility, the Company is required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which will be $658.1 million (assuming no further prepayments). As of September 30, 2014, no such prepayments have been made.

The 2012 Term Loan bears interest equal to LIBOR plus a margin. As of September 30, 2014, the 2012 Term Loan bore interest at LIBOR plus a margin of 2.25%, or 2.40%.

Current maturities of long-term debt at September 30, 2014 were $19.8 million, net of a $0.5 million discount. Long-term debt, net of current maturities at September 30, 2014 was $773.2 million, net of a $1.4 million discount.

 

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Current maturities of long-term debt at December 31, 2013 were $19.8 million, net of a $0.5 million discount. Long-term debt, net of current maturities at December 31, 2013 was $788.0 million, net of a $1.7 million discount.

In connection with entering into the New Amended and Restated Credit Facility, certain fees were paid and are being amortized over the life of the New Amended and Restated Credit Facility. At September 30, 2014, $7.0 million of the deferred financing fees remain unamortized, $1.7 million of which is included in “Prepaid and other assets” and $5.3 million of which is included in “Other non-current assets” on the Company’s Unaudited Condensed Consolidated Statement of Financial Condition.

The Company amortized $0.4 million and $0.7 million of deferred financing fees in interest expense during the three months ended September 30, 2014 and 2013, respectively. The Company amortized $1.3 million and $2.2 million of deferred financing fees in interest expense during the nine months ended September 30, 2014 and 2013, respectively. Approximately $0.1 million and $0.2 million of debt discount was amortized in interest expense during the three months ended September 30, 2014 and 2013, respectively. Approximately $0.4 million and $0.7 million of debt discount were amortized in interest expense during the nine months ended September 30, 2014 and 2013, respectively.

At September 30, 2014 and December 31, 2013, the fair market value of the Company’s debt obligations was $782.9 million and $812.0 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. 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.

As of September 30, 2014, the Company’s retained earnings of $978.4 million were restricted as to the payments of dividends. As outlined in the New Amended and Restated Credit Facility, the Company cannot pay or declare any dividends except out of amounts available for restricted payments. As of September 30, 2014, the amount available for restricted payments was $161.6 million, after taking into account dividends declared, reflecting the Company’s cumulative retained excess cash flows (“CRECF”), as defined in the New Amended and Restated Credit Facility, through December 31, 2013 and adjusted for, among other things, any restricted payments made during the nine months ended September 30, 2014. To the extent the CRECF is utilized for other actions restricted under the New Amended and Restated Credit Facility, including stock repurchases, the amount available for restricted payments will be reduced.

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 obligations 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 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 September 30, 2014, the Company had one outstanding foreign currency forward with a notional amount of $12.0 million that was not designated as a hedge in a qualifying hedging relationship.

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

 

(in thousands)

   Location in the Unaudited
Condensed
Consolidated Statements of
Financial Condition
   As of
September 30, 2014
     As of
December 31, 2013
 

Non-designated hedging instruments:

        

Liability derivatives:

        

Foreign exchange contracts

   Other accrued liabilities    $ (236)       $ (156)   

The Company’s foreign exchange forward contracts were classified within Level 2, 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.

 

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The following tables present 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 Financial Condition and Unaudited Condensed Consolidated Statements of Income:

 

Derivatives Not Designated as Hedging Instruments

(in thousands)

   Location of Gain or
(Loss) Recognized in
Income on Derivatives
   Amount of Gain or (Loss) Recognized
in Income on Derivatives for the
Three Months  Ended September 30,
 
      2014     2013  

Foreign exchange contracts

   Other expense    $ (258   $ (1,472

 

Derivatives Not Designated as Hedging Instruments

(in thousands)

   Location of Gain or
(Loss) Recognized in
Income on Derivatives
   Amount of Gain or (Loss) Recognized
in Income on Derivatives for the
Nine Months  Ended September 30,
 
      2014     2013  

Foreign exchange contracts

   Other expense    $ (825   $ (185

9. INCOME TAXES

The Company’s provision for income taxes was $81.9 million and $76.8 million for the nine months ended September 30, 2014 and 2013, respectively. These amounts reflect effective tax rates of 34.5% and 32.6% for the nine months ended September 30, 2014 and 2013, respectively.

The effective tax rate of 34.5% for the nine months ended September 30, 2014 reflects the Company’s estimate of the effective tax rate for the period and is impacted by certain discrete items totaling $3.4 million related to state taxes, the release of reserves associated with certain IRS examinations and certain federal and foreign discrete items related to the filing of related tax returns, the effect of which was to decrease the Company’s effective tax rate by 1.4 percentage points. The effective tax rate of 32.6% for the nine months ended September 30, 2013 reflects the Company’s estimate of the effective tax rate for the period and is impacted by certain discrete items totaling $3.5 million, the effect of which was to decrease the Company’s effective tax rate by 1.5 percentage points.

The Company is under examination by the Internal Revenue Service and other tax authorities in certain jurisdictions, including foreign jurisdictions, such as the United Kingdom, and states in which the Company has significant business operations, such as New York. The tax years currently under examination vary by jurisdiction but include years ranging from 2005 through 2013. As a result of having previously been a member of the Morgan Stanley consolidated group, the Company may have future settlements with Morgan Stanley related to the ultimate disposition of their New York State and New York City examination relating to the tax years 2007 through 2008 and their IRS examination relating to the tax years 2006 through 2008. The Company does not believe it has any material exposure to the New York State and New York City examination. Additionally, the Company believes it has adequate reserves for any tax issues that may arise out of the IRS examination relating to the tax years 2006 through 2008 and therefore does not believe any related settlement with Morgan Stanley will have a material impact.

The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions in which it files income tax returns. The Company has established unrecognized tax benefits that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change. As part of the Company’s periodic review of unrecognized tax benefits and based on new information regarding the status of federal and state examinations, the Company’s unrecognized tax benefits were remeasured. It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the effective tax rate over the next 12 months.

10. SEGMENT INFORMATION

ASC Subtopic 280-10, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or CODM, in deciding how to allocate resources and in assessing performance. MSCI’s Chief Executive Officer, who is considered to be its CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.

MSCI operated as two segments in the year ended December 31, 2013, the Performance and Risk business and the Governance business. These designations were made as the discrete operating results of these segments were reviewed by the Company’s CODM for purposes of making operating decisions and assessing financial performance.

 

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On March 17, 2014, MSCI entered into a definitive agreement to sell ISS, which, together with the previously disposed of CFRA product line, made up the Company’s Governance segment and are now reflected in “Income from discontinued operations, net of income taxes” in the Unaudited Condensed Consolidated Statements of Income. The Company completed the sale of ISS on April 30, 2014. As a result, the Company now operates and reports as a single business segment (see Note 3, “Dispositions and Discontinued Operations,” for further details).

Revenue by geography is based on the shipping address of the customer. The following table sets forth revenue for the periods indicated by geographic area:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  
     (in thousands)  

Revenues

           

Americas:

           

United States

   $ 118,721       $ 104,917       $ 347,779       $ 308,341   

Other

     9,171         8,993         27,961         24,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Americas

     127,892         113,910         375,740         332,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

EMEA:

           

United Kingdom

     40,104         35,758         115,961         103,485   

Other

     52,067         49,418         160,695         152,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total EMEA

     92,171         85,176         276,656         256,311   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia & Australia:

           

Japan

     11,573         11,919         35,385         35,156   

Other

     20,025         17,603         57,794         52,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Asia & Australia

     31,598         29,522         93,179         87,319   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251,661       $ 228,608       $ 745,575       $ 676,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-lived assets consist of property, equipment, leasehold improvements, goodwill and intangible assets, net of accumulated depreciation and amortization.

The following table sets forth long-lived assets on the dates indicated by geographic area:

 

     As of  
     September 30,
2014(1)
     December 31,
2013
 
     (in thousands)  

Long-lived assets

     

Americas:

     

United States

   $ 1,953,113       $ 2,338,124   

Other

     3,719         4,082   
  

 

 

    

 

 

 

Total Americas

     1,956,832         2,342,206   
  

 

 

    

 

 

 

EMEA:

     

United Kingdom

     126,749         133,411   

Other

     11,933         11,871   
  

 

 

    

 

 

 

Total EMEA

     138,682         145,282   
  

 

 

    

 

 

 

Asia & Australia:

     

Japan

     987         1,543   

Other

     9,763         5,428   
  

 

 

    

 

 

 

Total Asia & Australia

     10,750         6,971   
  

 

 

    

 

 

 

Total

   $ 2,106,264       $ 2,494,459   
  

 

 

    

 

 

 

 

(1) Long-lived assets as of September 30, 2014 reflect the disposition and addition of long-lived assets with the sale of ISS and acquisition of GMI Ratings, respectively. See Note 3, “Dispositions and Discontinued Operations,” and Note 11, “Acquisitions,” for additional information.

 

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11. ACQUISITIONS

The acquisition method of accounting is based on ASC Subtopic 805-10, “Business Combinations,” and uses the fair value concepts defined in ASC Subtopic 820-10, “Fair Value Measurements and Disclosures,” which the Company has adopted as required. The total purchase price is allocated to the net tangible and intangible assets based upon their fair values as of the acquisition dates. The excess of the purchase price over the fair values of the net tangible assets and intangible assets was recorded as goodwill. The allocation of the purchase price was based upon a valuation and is subject to change within the one-year measurement period following the acquisition. MSCI expects to continue to obtain information to assist it in determining the fair value of the net assets acquired at the acquisition date during the measurement period.

Acquisition of GMI Ratings

On August 11, 2014, the Company completed the acquisition of GMI Ratings for $15.5 million through its subsidiary MSCI ESG Research Inc., subject to final working capital adjustments. GMI Ratings is a provider of corporate governance research and ratings on over 6,000 companies worldwide. Clients of GMI Ratings include leading institutional investors, banks, insurers, auditors, regulators and corporations seeking to incorporate ESG factors into risk assessment and decision-making.

As of September 30, 2014, the preliminary purchase price allocations for the GMI Ratings acquisition were $9.9 million for goodwill, $3.6 million for identifiable intangible assets, $8.1 million for assets other than identifiable intangible assets and $6.1 million for other liabilities.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of MSCI Inc.

We have reviewed the accompanying condensed consolidated statement of financial condition of MSCI Inc. and its subsidiaries as of September 30, 2014, and the related condensed consolidated statements of income and of comprehensive income for the three and nine-month periods ended September 30, 2014 and the condensed consolidated statement of cash flows for the nine-month period ended September 30, 2014. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

October 30, 2014

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of MSCI Inc.:

We have reviewed the accompanying condensed consolidated statements of income and comprehensive income of MSCI Inc. and subsidiaries (the “Company”) for the three and nine-month periods ended September 30, 2013 and the related condensed consolidated statements of cash flows for the nine-month period ended September 30, 2013. These interim financial statements are the responsibility of the Company’s management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).

A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of MSCI Inc. and subsidiaries as of December 31, 2013 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the fiscal year then ended prior to retrospective adjustment for the change in discontinued operations discussed in Note 3 to the interim financial information and the revision discussed in Note 1 to the interim financial information (not presented herein); and in our report dated February 28, 2014, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments discussed in Note 1 that were applied to revise the December 31, 2013 consolidated statement of financial condition of MSCI Inc. and subsidiaries (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated statement of financial condition in deriving the accompanying revised adjusted consolidated statement of financial condition as of December 31, 2013.

/s/ Deloitte & Touche LLP

New York, New York

February 28, 2014 (August 6, 2014 as to the effects of the revision as discussed in Note 1 and October 30, 2014 as to the effects of the discontinued operations as discussed in Note 3)

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and audited condensed consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Item 1A.—Risk Factors,” in our Form 10-K for the fiscal year ended December 31, 2013.

Overview

We are a leading global provider of investment decision support tools, including indexes and portfolio risk and performance analytics. Our products and services address multiple markets, asset classes and geographies and are sold to a diverse client base, including asset owners such as pension funds, endowments, foundations, central banks, family offices and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, exchange traded funds (“ETFs”), real estate, hedge funds and private wealth; financial intermediaries such as banks, broker-dealers, exchanges, custodians and investment consultants; and corporate clients. As of September 30, 2014, we had more than 6,750 clients across 86 countries. We had offices in 36 cities in 22 countries in order to help serve our diverse client base, with 50.4% of our revenue from clients in the Americas, 37.1% from clients in Europe, the Middle East and Africa (“EMEA”) and 12.5% from clients in Asia and Australia based on revenues for the nine months ended September 30, 2014.

Our principal sales model is to license annual, recurring subscriptions to our products and services for use at specified locations, often by a given number of users or for a certain volume of services for an annual fee paid up front. Additionally, our recurring subscriptions are increasingly related to our managed services offering whereby we oversee the production of risk and performance reports on behalf of our clients. Fees attributable to annual, recurring subscriptions are recorded as deferred revenues on our Unaudited Condensed Consolidated Statement of Financial Condition and are recognized on our Unaudited Condensed Consolidated Statement of Income as the service is rendered. Additionally, a portion of our revenues comes from clients who use our indexes as the basis for index-linked investment products such as ETFs or as the basis for passively managed funds and separate accounts. These clients commonly pay us a license fee for the use of our intellectual property based on the investment product’s assets. We generate a limited amount of our revenues from certain exchanges that use our indexes as the basis for futures and options contracts and pay us a license fee for the use of our intellectual property based on their volume of trades. We also receive revenues from one-time fees related to implementation, historical or customized reports, advisory and consulting services and from certain products and services that are designed for one-time usage.

In evaluating our financial performance, we focus on revenue growth for the Company in total and by product category as well as operating profit growth. In addition, we focus on operating metrics, including Run Rates and retention rates to manage the business. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our operating profits into excess cash in the future. Our revenue growth strategy includes: (a) expanding and deepening our relationships with investment institutions worldwide; (b) developing new and enhancing existing product offerings, including combining existing product features or data derived from our products to create new products; and (c) actively seeking to acquire products, technologies and companies that will enhance, complement or expand our client base and our product offerings.

To maintain and accelerate our revenue and operating income growth, we expect to continue to invest in and expand our operating functions and infrastructure, including additional product management, sales and client support staff and facilities in locations around the world and additional staff and supporting technology for our research and our data operations and technology functions. At the same time, managing and controlling our operating expenses is very important to us and a distinct part of our culture.

The purpose of these investments is to maximize our medium-term revenue and operating income growth, while at the same time ensuring that we will remain a leading provider of investment decision support tools into the future. As a result, the rate of growth of our investments may from time to time exceed that of our revenues, which would slow the growth of, or even reduce, our operating profit. For example, for the nine months ended September 30, 2014, our revenues grew by 10.2% but our operating income decreased by 1.8% compared to the nine months ended September 30, 2013, due, in part, to increased investment in our business. While we anticipate that our increases in spending in areas such as sales, client service, information technology and product development will continue to exceed the rate of growth of our revenues, we expect the rate of growth of these expenses to be lower in 2015 than in 2014. We also believe these investments will result in higher operating income growth in 2015 and over the medium-term.

Changes in Presentation

On March 17, 2014, we entered into a definitive agreement to sell Institutional Shareholder Services Inc. (“ISS”) which, together with the previously disposed of CFRA product line, made up our Governance segment. As a result, we now operate as a single business segment and the operating results of ISS and the CFRA product line are reported as discontinued operations for all periods presented. Prior to March 31, 2014, we operated under two segments: the Performance and Risk business and the Governance business. Our Performance and Risk business is a leading global provider of investment decision support tools, including indexes and

 

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portfolio risk and performance analytics, credit analytics and environmental, social and governance (“ESG”) products. We completed the sale of ISS on April 30, 2014. Our Governance business was a leading provider of corporate governance products and services and specialized financial research and analysis services to institutional investors and corporations around the world.

In addition, for periods prior to March 31, 2014, we reported energy and commodity analytics products separately as its own product category for disclosures related to operating revenues, Run Rate and Aggregate and Core Retention Rates. Beginning with the three months ended March 31, 2014, we reported the results of energy and commodity analytics products as part of the risk management analytics product category, as we view the product offerings and customer base of the energy and commodities analytics products to be similar in nature to those in the risk management analytics product category. Prior periods have also been presented to reflect this change in categorization.

Factors Affecting the Comparability of Results

Term Loan Amendment

On June 1, 2010, we entered into a senior secured credit facility (the “2010 Credit Facility”). On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, we amended and restated our 2010 Credit Facility (the credit agreement as so amended and restated, the “Amended and Restated Credit Facility”). The Amended and Restated Credit Facility provided for the incurrence of a new senior secured five-year Term Loan A Facility in an aggregate amount of $880.0 million (the “2012 Term Loan”) and a $100.0 million senior secured revolving facility (the “2012 Revolving Credit Facility”). The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, we made a $15.0 million prepayment on the 2012 Term Loan.

On December 12, 2013, we entered into an agreement that extended the maturity of the Amended and Restated Credit Facility from May 2017 to December 2018 (“New Amended and Restated Credit Facility”). We also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the New Amended and Restated Credit Facility, we are required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which will be $658.1 million (assuming no further prepayments). As of September 30, 2014, no such prepayments have been made.

The 2012 Term Loan bears interest equal to LIBOR plus a margin. As of September 30, 2014, the 2012 Term Loan bore interest at LIBOR plus a margin of 2.25%, or 2.40%. This amendment has decreased the interest expense on our outstanding 2012 Term Loan and 2012 Revolving Credit Facility.

Share Repurchases

On December 13, 2012, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock beginning immediately and continuing through December 31, 2014 (the “2012 Repurchase Program”).

On December 13, 2012, as part of the 2012 Repurchase Program, we entered into our first accelerated share repurchase (“ASR”) agreement to initiate share repurchases aggregating $100.0 million (the “December 2012 ASR Program”). As a result of the December 2012 ASR Program, we received 2.2 million shares on December 14, 2012 and 0.8 million shares on July 31, 2013 for a combined average purchase price of $33.47 per share.

On August 1, 2013, we entered into a second ASR agreement to initiate share repurchases aggregating $100.0 million (the “August 2013 ASR Program”). As a result of the August 2013 ASR Program, we received 1.9 million shares on August 2, 2013 and 0.5 million shares on December 30, 2013 for a combined average purchase price of $41.06 per share.

On February 6, 2014, we utilized the remaining repurchase authorization provided by the 2012 Repurchase Program by entering into a third ASR agreement to initiate share repurchases aggregating $100.0 million (the “February 2014 ASR Program”). As a result of the February 2014 ASR Program, we received 1.7 million shares on February 7, 2014 and 0.6 million shares on May 5, 2014 for a combined average purchase price of $43.10 per share.

On February 4, 2014, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock which will be available from time to time at management’s discretion (the “2014 Repurchase Program”). On September 17, 2014, the Board of Directors increased the approval under the 2014 Repurchase Program from $300.0 million to $850.0 million. Share repurchases made pursuant to the authority remaining under the 2014 Repurchase Program may take place through December 31, 2016 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, terminated or extended by the Board of Directors at any time without prior notice.

 

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On September 18, 2014, as part of the 2014 Repurchase Program, we entered into a fourth ASR agreement to initiate share repurchases aggregating $300.0 million (the “September 2014 ASR Program”). As a result of the September 2014 ASR Program, on September 19, 2014, we paid $300.0 million in cash and received approximately 4.5 million shares of MSCI’s common stock. The total number of shares to be repurchased will be based primarily on an arithmetic average of the volume-weighted average prices of our common stock on each trading day during the repurchase period. This average price will be capped such that only under limited circumstances will we be required to deliver shares or pay cash at settlement. We may also receive additional shares at or prior to maturity of the ASR Agreement in May 2015.

The effect of these share repurchase programs has decreased the weighted average shares used in calculating our basic and diluted earnings per share.

The discussion of our results of operations for the three and nine months ended September 30, 2014 and 2013 are presented below. The results of operations for interim periods may not be indicative of future results.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Results of Operations

The following table presents the results of operations for the periods indicated:

 

     Three Months Ended        
     September 30,        
     2014     2013     Increase/(Decrease)  
     (in thousands, except per share data)  

Operating revenues

   $ 251,661      $ 228,608      $ 23,053        10.1

Operating expenses:

        

Cost of services

     78,876        68,151        10,725        15.7

Selling, general and administrative

     70,833        59,917        10,916        18.2

Amortization of intangible assets

     11,574        11,193        381        3.4

Depreciation and amortization of property, equipment, and leasehold improvements

     6,342        5,443        899        16.5
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     167,625        144,704        22,921        15.8
  

 

 

   

 

 

   

 

 

   

Operating income

     84,036        83,904        132        0.2

Other expense (income), net

     4,040        6,164        (2,124     (34.5 %) 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before provision for income taxes

     79,996        77,740        2,256        2.9

Provision for income taxes

     28,272        27,804        468        1.7
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     51,724        49,936        1,788        3.6

Income (loss) from discontinued operations, net of income taxes

     (10     5,374        (5,384     n/m   
  

 

 

   

 

 

   

 

 

   

Net income

   $ 51,714      $ 55,310      $ (3,596     (6.5 %) 
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share:

        

From continuing operations

   $ 0.44      $ 0.42      $ 0.02        4.8

From discontinued operations

     —          0.04        (0.04     n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share

   $ 0.44      $ 0.46      $ (0.02     (4.3 %) 
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share:

        

From continuing operations

   $ 0.44      $ 0.42      $ 0.02        4.8

From discontinued operations

     —          0.04        (0.04     n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share

   $ 0.44      $ 0.46      $ (0.02     (4.3 %) 
  

 

 

   

 

 

   

 

 

   

Operating margin

     33.4     36.7    
  

 

 

   

 

 

     

n/m: not meaningful

 

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Operating Revenues

Our revenues are grouped into the following three product and/or service categories:

 

    Index and ESG

 

    Risk management analytics

 

    Portfolio management analytics

The following table summarizes revenue by product category for the periods indicated:

 

     Three Months Ended
September 30,
               
     2014      2013      Increase/(Decrease)  
            (in thousands)                

Index and ESG:

           

Subscriptions

   $ 101,757       $ 92,815       $ 8,942         9.6

Asset-based fees

     46,657         36,801         9,856         26.8
  

 

 

    

 

 

    

 

 

    

Total index and ESG products

     148,414         129,616         18,798         14.5

Risk management analytics

     76,978         72,779         4,199         5.8

Portfolio management analytics

     26,269         26,213         56         0.2
  

 

 

    

 

 

    

 

 

    

Total operating revenues

   $ 251,661       $ 228,608       $ 23,053         10.1
  

 

 

    

 

 

    

 

 

    

Recurring subscriptions

   $ 199,858       $ 189,175       $ 10,683         5.6

Asset-based fees

     46,657         36,801         9,856         26.8

Non-recurring revenue

     5,146         2,632         2,514         95.5
  

 

 

    

 

 

    

 

 

    

Total operating revenues

   $ 251,661       $ 228,608       $ 23,053         10.1
  

 

 

    

 

 

    

 

 

    

Our index and ESG products primarily consist of equity and real estate index subscriptions, equity index asset-based fees products and ESG products. Our index and ESG products are used to benchmark investment performance, as a basis for index-linked investment products, the assessment of corporate management of ESG risks and opportunities, investment manager selection and investment research. We derive revenues from our index and ESG products through index data and ESG subscriptions, fees based on assets in investment products linked to our indexes and non-recurring licenses of our historical index data. Revenues related to index and ESG products increased $18.8 million, or 14.5%, to $148.4 million for the three months ended September 30, 2014 compared to $129.6 million for the three months ended September 30, 2013.

Subscription revenues from the index and ESG products increased 9.6% to $101.8 million for the three months ended September 30, 2014 compared to $92.8 million for the three months ended September 30, 2013. The increase was primarily driven by growth in revenues from our equity index benchmark and ESG products.

Asset-based fee revenues attributable to index and ESG products increased $9.9 million, or 26.8%, to $46.7 million for the three months ended September 30, 2014 compared to $36.8 million for the three months ended September 30, 2013. The increase was primarily driven by an increase of $99.7 billion, or 34.8%, in the average value of assets in ETFs linked to MSCI indexes and a growth in assets from non-ETF passive funds.

As of September 30, 2014, the value of assets in ETFs linked to MSCI indexes was $377.9 billion, representing an increase of $75.3 billion, or 24.9%, from $302.6 billion as of September 30, 2013. Of the $377.9 billion of assets in ETFs linked to MSCI indexes as of September 30, 2014, 51.1% were linked to non-U.S. developed market indexes, 26.7% were linked to emerging market indexes, 17.0% were linked to U.S. market indexes and 5.2% were linked to other global indexes.

 

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The following table sets forth the value of assets in ETFs linked to MSCI indexes and the sequential change of such assets under management (“AUM”) as of the periods indicated:

 

     Period Ended  

(in billions)

   March 31,
2013
    June 30,
2013
    September 30,
2013
     December 31,
2013
     March 31,
2014
     June 30,
2014
     September 30,
2014
 

AUM in ETFs linked to MSCI Indexes

   $ 357.3      $ 269.7      $ 302.6       $ 332.9       $ 340.8       $ 378.7       $ 377.9   

Sequential Change ($ in Billions)

                  

Market Appreciation/(Depreciation)

   $ 16.0      $ (13.2   $ 20.2       $ 10.9       $ 1.3       $ 15.2       $ (17.2

Cash Inflow/(Outflow)

     (61.0 )(1)      (74.4 )(1)      12.7         19.4         6.6         22.7         16.4   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Change

   $ (45.0 )   $ (87.6 )   $ 32.9       $ 30.3       $ 7.9       $ 37.9       $ (0.8
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sources: Bloomberg and MSCI

 

(1)  Includes $82.8 billion and $74.8 billion of AUM related to certain Vanguard ETFs as of March 31, 2013 and June 30, 2013, respectively.

The following table sets forth the average value of assets in ETFs linked to MSCI indexes for the periods indicated:

 

     Quarterly Average  
     2013      2014  
(in billions)    March      June      September      December      March      June      September  

AUM in ETFs linked to MSCI Indexes

   $ 369.0       $ 324.1       $ 286.2       $ 321.5       $ 330.8       $ 359.6       $ 385.9   

Sources: Bloomberg and MSCI

The historical values of the assets in ETFs linked to our indexes as of the last day of the month and the monthly average balance can be found under the link “AUM in ETFs Linked to MSCI Indexes” on our website at http://ir.msci.com. This information is updated on the second U.S. business day of each month. Information contained on our website is not incorporated by reference into this Quarterly Report on Form 10-Q or any other report filed by us with the SEC.

Our risk management analytics products offer risk and performance assessment frameworks for managing and monitoring investments in organizations globally. These products allow clients to analyze investments in a variety of asset classes and are based on our proprietary integrated fundamental multi-factor risk models, value-at-risk methodologies, performance attribution frameworks and asset valuation models. We also offer products for monitoring, analyzing and reporting on institutional assets. Additionally, we provide products consisting of software applications which help users value, model and hedge physical assets and derivatives across a number of market segments including energy and commodity assets.

Revenues related to risk management analytics products increased $4.2 million, or 5.8%, to $77.0 million for the three months ended September 30, 2014 compared to $72.8 million for the three months ended September 30, 2013. The increase in risk management analytics revenues was driven primarily by higher revenues from our RiskManager products, as well as from our HedgePlatform, BarraOne and InvestorForce products.

Our portfolio management analytics products consist of equity portfolio analytics tools and fixed income portfolio analytics tools. Revenues related to portfolio management analytics products increased $0.1 million, or 0.2%, to $26.3 million for the three months ended September 30, 2014 compared to $26.2 million for the three months ended September 30, 2013.

Run Rate

At the end of any period, we generally have subscription and investment product license agreements in place for a large portion of total revenues for the following 12 months. We measure the fees related to these agreements and refer to this as “Run Rate.” The Run Rate at a particular point in time represents the forward-looking revenues for the next 12 months from all subscriptions and investment product licenses we currently provide to our clients under renewable contracts or agreements assuming all contracts or agreements that come up for renewal are renewed and assuming then-current currency exchange rates. For any license where fees are linked to an investment product’s assets or trading volume, the Run Rate calculation reflects, for ETF fees, the market value on the last trading day of the period, and for non-ETF funds and futures and options, the most recent periodic fee earned under such license or subscription. The Run Rate does not include fees associated with “one-time” and other non-recurring transactions. In addition, we remove from the Run Rate the fees associated with any subscription or investment product license agreement with respect to which we have received a notice of termination or non-renewal during the period and determined that such notice evidences the client’s final decision to terminate or not renew the applicable subscription or agreement, even though such notice is not effective until a later date.

 

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Because the Run Rate represents potential future revenues, there is typically a delayed impact on our operating revenues from changes in our Run Rate. In addition, the actual amount of revenues we will realize over the following 12 months will differ from the Run Rate because of:

 

    revenues associated with new subscriptions and non-recurring sales;

 

    modifications, cancellations and non-renewals of existing agreements, subject to specified notice requirements;

 

    fluctuations in asset-based fees, which may result from changes in certain investment products’ total expense ratios, market movements or from investment inflows into and outflows from investment products linked to our indexes;

 

    fluctuations in fees based on trading volumes of futures and options contracts linked to our indexes;

 

    fluctuations in the number of hedge funds for which we provide investment information and risk analysis to hedge fund investors;

 

    price changes;

 

    revenue recognition differences under U.S. GAAP, including timing of implementation and report deliveries;

 

    fluctuations in foreign exchange rates; and

 

    the impact of acquisitions and dispositions.

The following table sets forth the Run Rates as of the dates indicated and the growth percentages over the periods indicated:

 

     As of               
     September 30,      September 30,      June 30,      Year-Over-
Year
    Sequential  
     2014      2013      2014      Comparison     Comparison  
     (in thousands)               

Run Rates

             

Index and ESG products:

             

Subscription

   $ 405,434       $ 360,042       $ 393,848         12.6     2.9

Asset-based fees

     177,774         146,979         176,554         21.0     0.7
  

 

 

    

 

 

    

 

 

      

Index and ESG products total

     583,208         507,021         570,402         15.0     2.2

Risk management analytics

     311,019         300,945         309,619         3.3     0.5

Portfolio management analytics

     106,993         104,938         106,486         2.0     0.5
  

 

 

    

 

 

    

 

 

      

Total Run Rate

   $ 1,001,220       $ 912,904       $ 986,507         9.7     1.5
  

 

 

    

 

 

    

 

 

      

Subscription total

   $ 823,446       $ 765,925       $ 809,953         7.5     1.7

Asset-based fees total

     177,774         146,979         176,554         21.0     0.7
  

 

 

    

 

 

    

 

 

      

Total Run Rate

   $ 1,001,220       $ 912,904       $ 986,507         9.7     1.5
  

 

 

    

 

 

    

 

 

      

Total Run Rate grew by $88.3 million, or 9.7%, to $1,001.2 million as of September 30, 2014 compared to $912.9 million as of September 30, 2013. Total subscription Run Rate grew by $57.5 million, or 7.5%, to $823.4 million as of September 30, 2014 compared to $765.9 million as of September 30, 2013. The negative impact of changes in foreign currency was offset by the acquisition of Governance Holdings Co. (“GMI Ratings”), which contributed $7.5 million of Run Rate as of September 30, 2014.

 

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Total index and ESG Run Rate grew by $76.2 million, or 15.0%, to $583.2 million as of September 30, 2014 compared to $507.0 million as of September 30, 2013. Subscription Run Rate from the index and ESG products grew by $45.4 million, or 12.6%, to $405.4 million at September 30, 2014 from $360.0 million at September 30, 2013, driven primarily by growth in our equity index benchmark and data products and aided by growth in our ESG and real estate products. The acquisition of GMI Ratings, together with the negative impact of foreign currency rate changes, had the effect of increasing the Subscription Run Rate from the index and ESG products by 1.5%.

Asset-based fee Run Rate from index and ESG products increased by $30.8 million, or 21.0%, to $177.8 million at September 30, 2014 from $147.0 million at September 30, 2013. The increase was primarily driven by higher inflows into ETFs linked to MSCI indexes.

As of September 30, 2014, AUM in ETFs linked to MSCI indexes were $377.9 billion, up $75.3 billion, or 24.9%, from September 30, 2013 and down $0.8 billion, or 0.2%, from June 30, 2014. During the three months ended September 30, 2014, MSCI-linked ETFs were impacted by market declines of $17.2 billion and net inflows of $16.4 billion. Since September 30, 2013, MSCI-linked ETFs were impacted by market increases of $10.2 billion and net inflows of $65.1 billion.

Risk management analytics products Run Rate increased $10.1 million, or 3.3%, to $311.0 million at September 30, 2014 compared to $300.9 million at September 30, 2013, primarily driven by growth from our RiskManager, InvestorForce and HedgePlatform products. Partially offsetting this growth was the negative impact of foreign currency rate changes, which had the effect of decreasing the risk management analytics products Run Rate by 1.5%.

Portfolio management analytics products Run Rate increased $2.1 million, or 2.0%, to $107.0 million at September 30, 2014 from $104.9 million at September 30, 2013. The increase was driven primarily by an increase in sales of analytics products and higher retention rates. Partially offsetting this growth was the negative impact of foreign currency rate changes, which had the effect of decreasing the portfolio management analytics products Run Rate by 1.4%.

Aggregate and Core Retention Rates

The following table sets forth our Aggregate Retention Rates by product category for the indicated three months ended:

 

     September 30,     September 30,  
     2014     2013  

Index and ESG products

     95.1     94.7

Risk management analytics

     94.4     91.7

Portfolio management analytics

     93.6     89.1

Total

     94.6     92.7

The following table sets forth our Core Retention Rates by product category for the indicated three months ended:

 

     September 30,     September 30,  
     2014     2013  

Index and ESG products

     95.2     94.8

Risk management analytics

     94.6     91.7

Portfolio management analytics

     94.8     90.3

Total

     94.9     92.9

The Aggregate Retention Rates for a period are calculated by annualizing the cancellations for which we have received a notice of termination or for which we believe there is an intention to not renew during the period and we believe that such notice or intention evidences the client’s final decision to terminate or not renew the applicable agreement, even though such notice is not effective until a later date. This annualized cancellation figure is then divided by the subscription Run Rate at the beginning of the year to calculate a cancellation rate. This cancellation rate is then subtracted from 100% to derive the annualized Aggregate Retention Rate for the period. The Aggregate Retention Rate is computed on a product-by-product basis. Therefore, if a client reduces the number of products to which it subscribes or switches between our products, we treat it as a cancellation. In addition, we treat any reduction in fees resulting from renegotiated contracts as a cancellation in the calculation to the extent of the reduction.

 

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For the calculation of the Core Retention Rate, the same methodology is used except the cancellations in the period are reduced by the amount of product swaps. We do not calculate Aggregate or Core Retention Rates for that portion of our Run Rate attributable to assets in investment products linked to our indexes or to trading volumes of futures and options contracts linked to our indexes.

In our businesses, Aggregate and Core Retention Rates are generally higher during the first half and lower in the second half of the year.

Operating Expenses

We group our operating expenses into four categories:

 

    Cost of services

 

    Selling, general and administrative (“SG&A”)

 

    Amortization of intangible assets

 

    Depreciation and amortization of property, equipment and leasehold improvements

In both the cost of services and SG&A expense categories, compensation and benefits represent the majority of our expenses. Other costs associated with the number of employees, such as office space, are included in both the cost of services and SG&A expense categories and are consistent with the allocation of employees to those respective areas.

The following table shows operating expenses by each of the categories for the periods indicated:

 

     Three Months Ended                
     September 30,                
     2014      2013      Increase/(Decrease)  
     (in thousands)                

Cost of services:

           

Compensation and benefits

   $ 59,546       $ 49,300       $ 10,246         20.8

Non-compensation expenses

     19,330         18,851         479         2.5
  

 

 

    

 

 

    

 

 

    

Total cost of services

     78,876         68,151         10,725         15.7

Selling, general and administrative:

           

Compensation and benefits

     46,342         40,534         5,808         14.3

Non-compensation expenses

     24,491         19,383         5,108         26.4
  

 

 

    

 

 

    

 

 

    

Total selling, general and administrative

     70,833         59,917         10,916         18.2

Amortization of intangible assets

     11,574         11,193         381         3.4

Depreciation and amortization of property, equipment, and leasehold improvements

     6,342         5,443         899         16.5
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 167,625       $ 144,704       $ 22,921         15.8
  

 

 

    

 

 

    

 

 

    

Compensation and benefits

   $ 105,888       $ 89,834       $ 16,054         17.9

Non-compensation expenses

     43,821         38,234         5,587         14.6

Amortization of intangible assets

     11,574         11,193         381         3.4

Depreciation and amortization of property, equipment, and leasehold improvements

     6,342         5,443         899         16.5
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 167,625       $ 144,704       $ 22,921         15.8
  

 

 

    

 

 

    

 

 

    

Operating expenses were $167.6 million for the three months ended September 30, 2014, an increase of $22.9 million, or 15.8%, compared to $144.7 million for the three months ended September 30, 2013.

Compensation and benefits expenses represent the majority of our expenses across all of our operating functions and typically have represented approximately 60% of total operating expenses. These costs generally contribute to the majority of our expense increases from period to period, reflecting increased staffing levels along with increased compensation and benefits expenses for current staff. We had 2,876 and 2,480 employees not related to the ISS operations as of September 30, 2014 and 2013, respectively. Continued growth of our emerging market centers around the world is an important factor in our ability to manage and control the growth of our compensation and benefit expenses. As of September 30, 2014, 49.6% of our employees were located in emerging market centers compared to 44.7% of our employees who did not leave as part of the ISS disposition as of September 30, 2013.

During the three months ended September 30, 2014, compensation and benefits costs were $105.9 million, an increase of $16.1 million, or 17.9%, compared to $89.8 million for the three months ended September 30, 2013. The increase in compensation and benefits costs was driven primarily by an increase in overall headcount of 16.0%.

 

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Non-compensation expenses for the three months ended September 30, 2014 increased $5.6 million, or 14.6%, to $43.8 million compared to $38.2 million for the three months ended September 30, 2013. The increase reflects higher costs related to professional services, information technology and occupancy, among other items.

Cost of Services

Cost of services includes costs related to our research, data management and production, software engineering and product management functions. Costs in these areas include staff compensation and benefits, occupancy costs, market data fees and information technology services. Compensation and benefits generally contribute to a majority of our expense increases from period to period, reflecting increased staffing levels and increased compensation and benefits for existing staff. For the three months ended September 30, 2014, total cost of services increased $10.7 million, or 15.7%, to $78.9 million compared to $68.2 million for the three months ended September 30, 2013.

Compensation and benefits expenses for the three months ended September 30, 2014 increased $10.2 million, or 20.8%, to $59.5 million compared to $49.3 million for the three months ended September 30, 2013. The increase in compensation and benefits expenses was primarily impacted by increased staffing levels and increased compensation and benefits related to current staff.

Non-compensation expenses for the three months ended September 30, 2014 increased 2.5% to $19.3 million compared to $18.9 million for the three months ended September 30, 2013. The increase was primarily driven by higher costs related to professional services, occupancy and information technology, among other items.

Selling, General and Administrative

SG&A includes expenses for our sales and marketing staff and our finance, human resources, legal and compliance, information technology infrastructure and corporate administration personnel. As with cost of services, the largest expense in this category relates to compensation and benefits. Other significant expenses are for occupancy costs, third-party professional fees and information technology costs. For the three months ended September 30, 2014, SG&A increased $10.9 million, or 18.2%, to $70.8 million compared to $59.9 million for the three months ended September 30, 2013.

Compensation and benefits expenses increased 14.3% to $46.3 million for the three months ended September 30, 2014 compared to $40.5 million for the three months ended September 30, 2013. Similar to compensation and benefits expenses in cost of services, the increase was primarily impacted by increased staffing levels and increased compensation and benefits related to current staff.

Non-compensation expenses for the three months ended September 30, 2014 increased 26.4% to $24.5 million compared to $19.4 million for the three months ended September 30, 2013. The increase was primarily driven by higher costs related to professional services, information technology and recruiting, among other items.

Amortization of Intangible Assets

Amortization of intangible assets expense relates to the intangible assets arising from the acquisitions of Barra, LLC in June 2004, RiskMetrics Group, LLC in June 2010, Measurisk, LLC in July 2010, IPD Group Limited in November 2012, Investor Force Holdings, Inc. in January 2013 and GMI Ratings in August 2014, as well as capitalized software development costs. Amortization of intangible assets expense totaled $11.6 million and $11.2 million for the three months ended September 30, 2014 and 2013, respectively.

Depreciation and Amortization of Property, Equipment and Leasehold Improvements

Depreciation and amortization of property, equipment and leasehold improvements was $6.3 million and $5.4 million for the three months ended September 30, 2014 and 2013, respectively. The increase was related to higher depreciation associated with continued investment in information technology infrastructure.

Other Expense (Income), Net

Other expense (income), net for the three months ended September 30, 2014 was $4.0 million, a decrease of 34.5% compared to $6.2 million for the three months ended September 30, 2013, primarily driven by an increase in non-recurring income.

Provision For Income Taxes

The provision for income tax expense for the three months ended September 30, 2014 was $28.3 million, an increase of $0.5 million, or 1.7%, compared to $27.8 million for the three months ended September 30, 2013. These amounts reflect effective tax rates of 35.3% and 35.8% for the three months ended September 30, 2014 and 2013, respectively.

 

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The provision for income tax expense for the three months ended September 30, 2014 included a benefit of $0.7 million related to certain federal and foreign discrete items related to the filing of related tax returns.

Income (loss) from Discontinued Operations, Net of Income Taxes

On April 30, 2014, MSCI completed the sale of ISS for cash consideration of $367.4 million, subject to final working capital adjustments. ISS, together with the previously sold CFRA product line, is reflected as discontinued operations in our unaudited condensed consolidated financial statements.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Results of Operations

The following table presents the results of operations for the periods indicated:

 

     Nine Months Ended        
     September 30,        
     2014     2013     Increase/(Decrease)  
     (in thousands, except per share data)  

Operating revenues

   $ 745,575      $ 676,500      $ 69,075        10.2

Operating expenses:

        

Cost of services

     231,119        203,147        27,972        13.8

Selling, general and administrative

     210,007        168,274        41,733        24.8

Amortization of intangible assets

     34,286        33,581        705        2.1

Depreciation and amortization of property, equipment, and leasehold improvements

     18,091        14,814        3,277        22.1
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     493,503        419,816        73,687        17.6
  

 

 

   

 

 

   

 

 

   

Operating income

     252,072        256,684        (4,612     (1.8 %) 

Other expense (income), net

     14,462        20,850        (6,388     (30.6 %) 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before provision for income taxes

     237,610        235,834        1,776        0.8

Provision for income taxes

     81,937        76,799        5,138        6.7
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     155,673        159,035        (3,362     (2.1 %) 

Income from discontinued operations, net of income taxes

     84,100        16,265        67,835        n/m   
  

 

 

   

 

 

   

 

 

   

Net income

   $ 239,773      $ 175,300      $ 64,473        36.8
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share:

        

From continuing operations

   $ 1.33      $ 1.32      $ 0.01        0.8

From discontinued operations

     0.72        0.13        0.59        n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share

   $ 2.05      $ 1.45      $ 0.60        41.4
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share:

        

From continuing operations

   $ 1.32      $ 1.31      $ 0.01        0.8

From discontinued operations

     0.71        0.13        0.58        n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share

   $ 2.03      $ 1.44      $ 0.59        41.0
  

 

 

   

 

 

   

 

 

   

Operating margin

     33.8     37.9    
  

 

 

   

 

 

     

n/m: not meaningful

 

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Operating Revenues

The following table summarizes the revenue by product category for the periods indicated:

 

     Nine Months Ended
September 30,
     Increase/  
     2014      2013      (Decrease)  
            (in thousands)               

Index and ESG:

          

Subscriptions

   $ 305,262       $ 272,903       $ 32,359        11.9

Asset-based fees

     131,652         110,286         21,366        19.4
  

 

 

    

 

 

    

 

 

   

Total index and ESG products

     436,914         383,189         53,725        14.0

Risk management analytics

     230,224         213,363         16,861        7.9

Portfolio management analytics

     78,437         79,948         (1,511     (1.9 %) 
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 745,575       $ 676,500       $ 69,075        10.2
  

 

 

    

 

 

    

 

 

   

Recurring subscriptions

   $ 600,095       $ 555,171       $ 44,924        8.1

Asset-based fees

     131,652         110,286         21,366        19.4

Non-recurring revenue

     13,828         11,043         2,785        25.2
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 745,575       $ 676,500       $ 69,075        10.2
  

 

 

    

 

 

    

 

 

   

Total operating revenues for the nine months ended September 30, 2014 increased $69.1 million, or 10.2%, to $745.6 million compared to $676.5 million for the nine months ended September 30, 2013.

Revenues related to our index and ESG products increased $53.7 million, or 14.0%, to $436.9 million for the nine months ended September 30, 2014 compared to $383.2 million for the nine months ended September 30, 2013.

Subscription revenues from our index and ESG products were up $32.4 million, or 11.9%, to $305.3 million for the nine months ended September 30, 2014 compared to $272.9 million for the nine months ended September 30, 2013, driven primarily by growth in revenues from our equity index benchmark products.

Asset-based fee revenues attributable to our index and ESG products increased $21.4 million, or 19.4%, to $131.7 million for the nine months ended September 30, 2014 compared to $110.3 million for the nine months ended September 30, 2013. The increase was primarily driven by an increase of $32.5 billion, or 10.0%, in the average value of assets in ETFs linked to MSCI indexes and a growth in assets from non-ETF passive funds.

The following table sets forth the average value of assets in ETFs linked to MSCI indexes for the year-to-date periods indicated:

 

     Year-to-Date Average  
     2013      2014  
$ in Billions    March      June      September      December      March      June      September  

AUM in ETFs linked to MSCI Indexes

   $ 369.0       $ 346.6       $ 326.4       $ 325.0       $ 330.8       $ 345.4       $ 358.9   

Sources: Bloomberg and MSCI

Revenues related to risk management analytics products increased 7.9% to $230.2 million for the nine months ended September 30, 2014 compared to $213.4 million for the nine months ended September 30, 2013. The increase was primarily driven by higher revenues from our RiskManager products, as well as from our HedgePlatform, BarraOne and InvestorForce products.

Revenues related to portfolio management analytics products decreased 1.9% to $78.4 million for the nine months ended September 30, 2014 compared to $79.9 million for the nine months ended September 30, 2013. The decrease in revenues was the result of lower sales of our equity analytics products in prior periods, as well as lower revenues from our fixed income analytics products.

 

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Aggregate and Core Retention Rates

The following table sets forth our Aggregate Retention Rates by product category for the indicated nine months ended:

 

     September 30,     September 30,  
     2014     2013  

Index and ESG products

     94.7     94.6

Risk management analytics

     92.3     92.4

Portfolio management analytics

     93.0     85.9

Total

     93.6     92.4

The following table sets forth our Core Retention Rates by product category for the indicated nine months ended:

 

     September 30,     September 30,  
     2014     2013  

Index and ESG products

     94.8     94.7

Risk management analytics

     92.4     92.7

Portfolio management analytics

     94.7     86.9

Total

     93.8     92.7

Operating Expenses

The following table shows operating expenses by each of the categories for the periods indicated:

 

     Nine Months Ended                
     September 30,                
     2014      2013      Increase/(Decrease)  
     (in thousands)                

Cost of services:

           

Compensation and benefits

   $ 172,496       $ 150,373       $ 22,123         14.7

Non-compensation expenses

     58,623         52,774         5,849         11.1
  

 

 

    

 

 

    

 

 

    

Total cost of services

     231,119         203,147         27,972         13.8

Selling, general and administrative:

           

Compensation and benefits

     138,490         116,835         21,655         18.5

Non-compensation expenses

     71,517         51,439         20,078         39.0
  

 

 

    

 

 

    

 

 

    

Total selling, general and administrative

     210,007         168,274         41,733         24.8

Amortization of intangible assets

     34,286         33,581         705         2.1

Depreciation and amortization of property, equipment, and leasehold improvements

     18,091         14,814         3,277         22.1
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 493,503       $ 419,816       $ 73,687         17.6
  

 

 

    

 

 

    

 

 

    

Compensation and benefits

   $ 310,986       $ 267,208       $ 43,778         16.4

Non-compensation expenses

     130,140         104,213         25,927         24.9

Amortization of intangible assets

     34,286         33,581         705         2.1

Depreciation and amortization of property, equipment, and leasehold improvements

     18,091         14,814         3,277         22.1
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 493,503       $ 419,816       $ 73,687         17.6
  

 

 

    

 

 

    

 

 

    

Operating expenses were $493.5 million for the nine months ended September 30, 2014, an increase of $73.7 million, or 17.6%, compared to $419.8 million for the nine months ended September 30, 2013.

During the nine months ended September 30, 2014, compensation and benefits costs were $311.0 million, an increase of $43.8 million, or 16.4%, compared to $267.2 million for the nine months ended September 30, 2013, primarily driven by an increase in overall headcount.

 

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Non-compensation expenses for the nine months ended September 30, 2014 were $130.1 million, an increase of $25.9 million, or 24.9%, compared to $104.2 million for the nine months ended September 30, 2013, reflecting increases in professional services, information technology and occupancy, among other items.

Cost of Services

For the nine months ended September 30, 2014, total cost of services increased $28.0 million, or 13.8%, to $231.1 million compared to $203.1 million for the nine months ended September 30, 2013. Compensation and benefits expenses for the nine months ended September 30, 2014 increased $22.1 million to $172.5 million compared to $150.4 million for the nine months ended September 30, 2013. The increase in compensation and benefits expenses was driven by increased staffing levels and increased compensation and benefits related to current staff.

Non-compensation expenses for the nine months ended September 30, 2014 increased $5.8 million to $58.6 million compared to $52.8 million for the nine months ended September 30, 2013. The increase was primarily driven by higher costs related to occupancy, market data, information technology and professional services, among other items.

Selling, General and Administrative

For the nine months ended September 30, 2014, SG&A was $210.0 million, an increase of $41.7 million, or 24.8%, compared to $168.3 million for the nine months ended September 30, 2013. Compensation and benefits expenses increased $21.7 million to $138.5 million for the nine months ended September 30, 2014 compared to $116.8 million for the nine months ended September 30, 2013. The increase in compensation and benefits expenses was driven by increased staffing levels and increased compensation and benefits related to current staff.

Non-compensation expenses for the nine months ended September 30, 2014 increased $20.1 million, or 39.0%, to $71.5 million compared to $51.4 million for the nine months ended September 30, 2013. The increase was primarily driven by higher costs related to professional services, information technology and recruiting, among other items.

Amortization of Intangible Assets

Amortization of intangible assets expense totaled $34.3 million and $33.6 million for the nine months ended September 30, 2014 and 2013, respectively.

Depreciation and Amortization of Property, Equipment and Leasehold Improvements

Depreciation and amortization of property, equipment, and leasehold improvements totaled $18.1 million and $14.8 million for the nine months ended September 30, 2014 and 2013, respectively. The increase was related to higher depreciation associated with continued investment in information technology infrastructure.

Other Expense (Income), Net

Other expense (income), net for the nine months ended September 30, 2014 was $14.5 million, a decrease of $6.4 million, or 30.6%, compared to $20.9 million for the nine months ended September 30, 2013, primarily driven by lower interest rates and lower average outstanding principal on our debt.

Provision for Income Taxes

The provision for income tax expense for the nine months ended September 30, 2014 was $81.9 million, an increase of $5.1 million, or 6.7%, compared to $76.8 million for the nine months ended September 30, 2013. These amounts reflect effective tax rates of 34.5% and 32.6% for the nine months ended September 30, 2014 and 2013, respectively.

The provision for income tax expense for the nine months ended September 30, 2014 included a benefit of $3.4 million related to state taxes, the release of reserves associated with certain IRS examinations and certain federal and foreign discrete items related to the filing of related tax returns, the effect of which was to decrease our effective tax rate by 1.4 percentage points.

Income from Discontinued Operations, Net of Income Taxes

Income from discontinued operations, net of income taxes was $84.1 million for the nine months ended September 30, 2014 compared to $16.3 million for the nine months ended September 30, 2013. The results for the nine months ended September 30, 2014 included a net gain of $78.7 million resulting from the disposition of ISS.

 

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Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, “Introduction and Basis of Presentation,” of the Notes to Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, 2013 and also in Note 2, “Recent Accounting Standards Updates,” in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended December 31, 2013. There have been no significant changes in our accounting policies or critical accounting estimates since the end of the fiscal year ended December 31, 2013.

Liquidity and Capital Resources

On June 1, 2010, we entered into the 2010 Credit Facility. On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, we entered into the Amended and Restated Credit Facility. The Amended and Restated Credit Facility provides for the incurrence of the 2012 Term Loan in an aggregate amount of $880.0 million and the 2012 Revolving Credit Facility in an aggregate amount of $100.0 million. The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, we made a $15.0 million prepayment on the 2012 Term Loan.

On December 12, 2013, we entered into the New Amended and Restated Credit Facility. We also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the New Amended and Restated Credit Facility, we are required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which will be $658.1 million (assuming no further prepayments).

We require capital to fund ongoing operations, internal growth initiatives and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, existing cash and cash equivalents and credit capacity under our credit facilities. We intend to use these sources of liquidity to service our existing and future debt obligations and fund our working capital requirements, capital expenditures, investments, acquisitions and repurchases of our common stock. In connection with our business strategy, we regularly evaluate acquisition opportunities. We believe our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth.

The effective combined rate on our debt was 2.40% at September 30, 2014.

The obligations under the New Amended and Restated Credit Facility are guaranteed by each of our material direct and indirect wholly-owned domestic subsidiaries, subject to limited exceptions. The obligations under the New Amended and Restated Credit Facility are secured by a lien on substantially all of the equity interests of our present and future material domestic subsidiaries, up to 65% of the equity interests of our first-tier foreign subsidiaries, and substantially all of our and our domestic subsidiaries’ present and future property and assets, subject to certain exceptions.

The New Amended and Restated Credit Facility contains affirmative and restrictive covenants that, among other things, limit our ability and the ability of our existing or future subsidiaries to:

 

    incur liens and further negative pledges;

 

    incur additional indebtedness or prepay, redeem or repurchase indebtedness;

 

    make loans or hold investments;

 

    merge, dissolve, liquidate, consolidate with or into another person;

 

    enter into acquisition transactions;

 

    make capital expenditures;

 

    issue disqualified capital stock;

 

    sell, transfer or dispose of assets;

 

    pay dividends or make other distributions in respect of our capital stock or engage in stock repurchases, redemptions and other restricted payments;

 

    create new subsidiaries;

 

    permit certain restrictions affecting our subsidiaries;

 

    change the nature of our business, accounting policies or fiscal periods;

 

    enter into any transactions with affiliates other than on an arm’s length basis; and

 

    amend our organizational documents or amend, modify or change the terms of certain agreements relating to our indebtedness.

 

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The New Amended and Restated Credit Facility also contains customary events of default, including those relating to non-payment, breach of representations, warranties or covenants, cross-default and cross-acceleration, bankruptcy and insolvency events, invalidity or impairment of loan documentation or collateral, change of control and customary ERISA defaults. None of the restrictions above are expected to impact our ability to effectively operate the business.

The New Amended and Restated Credit Facility also requires us and our subsidiaries to achieve financial and operating results sufficient to maintain compliance with the following financial ratios on a consolidated basis through the termination of the New Amended and Restated Credit Facility: (1) the maximum Consolidated Leverage Ratio (as defined in the New Amended and Restated Credit Facility) measured quarterly on a rolling four-quarter basis shall not exceed 3.25:1.00 and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the New Amended and Restated Credit Facility) measured quarterly on a rolling four-quarter basis shall be at least 5.00:1.00. As of September 30, 2014, our Consolidated Leverage Ratio (as defined in the New Amended and Restated Credit Facility) was 1.84:1.00 and our Consolidated Interest Coverage Ratio (as defined in the New Amended and Restated Credit Facility) was 21.91:1.00.

On February 6, 2014, we entered into the February 2014 ASR Program to initiate share repurchases aggregating $100.0 million. As a result, we received 1.7 million shares on February 7, 2014 and 0.6 million shares on May 5, 2014 for a combined average purchase price of $43.10 per share.

On September 18, 2014, we entered into the September 2014 ASR Program. As a result, on September 19, 2014, we paid $300.0 million in cash and received approximately 4.5 million shares of MSCI’s common stock. The total number of shares to be repurchased will be based primarily on an arithmetic average of the volume-weighted average prices of our common stock on each trading day during the repurchase period. This average price will be capped such that only under limited circumstances will we be required to deliver shares or pay cash at settlement. We may also receive additional shares at or prior to maturity of the ASR Agreement in May 2015.

Cash Dividend

On September 17, 2014, the Board of Directors approved a plan to initiate a regular quarterly cash dividend. Accordingly, the Board of Directors declared our first regular quarterly dividend of $0.18 per share of common stock that will be paid on October 31, 2014 to shareholders of record as of the close of trading on October 15, 2014. We expect the initial annual dividend rate to be $0.72 per share. As of September 30, 2014, we accrued for the declared cash dividend of $20.4 million in “Other accrued liabilities” on our Unaudited Condensed Consolidated Statement of Financial Condition which will be payable on October 31, 2014.

Potential Refinancing of Existing Debt

In connection with our recently announced enhanced capital return plan, we are currently exploring potential options for refinancing our existing secured credit facilities. We believe that any such refinancing will improve our financing terms and debt structure by increasing our financial flexibility and allowing us to take advantage of the current low interest rate environment.

Assuming current market rates and that we complete the potential refinancing of all of our outstanding debt, we expect interest expense to increase significantly from the third quarter 2014 annualized expense of $21.5 million. Any such refinancing is subject to market and other conditions, and there can be no assurance that we will be able to refinance on terms and conditions acceptable to us.

Cash Flows

Cash and cash equivalents

 

     As of  
     September 30,      December 31,  
     2014      2013  
     (in thousands)  

Cash and cash equivalents

   $ 448,193       $ 358,434   

Cash and cash equivalents were $448.2 million and $358.4 million as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014 and December 31, 2013, $87.0 million and $95.6 million, respectively, of the cash and cash equivalents were held by foreign subsidiaries, which could be subject to U.S. federal income taxation on repatriation to the U.S. and some of which could be subject to local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash is further restricted by local laws.

 

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We believe that domestic cash flows from operations, together with existing cash and cash equivalents, will continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as scheduled debt repayments and material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect existing foreign cash flows from operations, together with existing cash and cash equivalents, will continue to be sufficient to fund our foreign operating activities for at least the next 12 months and for the foreseeable future thereafter.

Cash provided by (used in) operating, investing and financing activities

 

     Nine Months Ended  
     September 30,  
     2014     2013  
     (in thousands)  

Cash provided by operating activities

   $ 201,619      $ 226,037   

Cash provided by investing activities

     305,702        24,933   

Cash used in financing activities

     (412,377     (146,854

Effect of exchange rates on cash and cash equivalents

     (5,185     (3,675
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 89,759      $ 100,441   
  

 

 

   

 

 

 

Cash flows from operating activities

Cash flows from operating activities consist of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $201.6 million and $226.0 million for the nine months ended September 30, 2014 and 2013, respectively. The year-over-year decrease reflects increased expenses and a related increase in cash payments as well as increased payments for income taxes.

Our primary uses of cash from operating activities are for the payment of cash compensation expenses, office rent, technology costs, market data costs, interest expenses and income taxes. The payment of cash for compensation and benefits is historically at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year.

Cash flows from investing activities

Cash provided by investing activities was $305.7 million for the nine months ended September 30, 2014 compared to cash provided by investing activities of $24.9 million for the nine months ended September 30, 2013. The year-over-year increase in cash provided by investing activities primarily reflects net cash inflows resulting from the disposition of ISS during the nine months ended September 30, 2014. Partially offsetting this were the final cash inflows from the maturation of short-term investments in the nine months ended September 30, 2013. In the nine months ended September 30, 2013 we began investing excess cash in money market funds and other similar cash equivalents rather than U.S. Treasury securities and other short-term investments as we had in prior periods.

On August 11, 2014, we completed the acquisition of GMI Ratings. Cash provided by investing activities for the nine months ended September 30, 2014 includes net cash outflows of $14.9 million, net of cash received, used to acquire GMI Ratings.

Cash flows from financing activities

Cash used in financing activities was $412.4 million and $146.9 million for the nine months ended September 30, 2014 and 2013, respectively. The year-over-year change primarily reflects higher repurchases of treasury shares, partially offset by lower repayments on our debt.

Balance Sheet Items

Total current assets increased 21.5% to $758.6 million as of September 30, 2014 from $624.3 million as of December 31, 2013. The increase was primarily driven by an increase in cash resulting from the disposition of ISS during the nine months ended September 30, 2014. Total current liabilities decreased 0.9% to $498.6 million as of September 30, 2014 from $503.0 million as of December 31, 2013. The decrease was primarily driven by a decrease in accrued compensation and benefits.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

We are subject to foreign currency exchange fluctuation risk. Exchange rate movements can impact the U.S. dollar-reported value of our revenues, expenses, assets and liabilities denominated in non-U.S. dollar currencies or where the currency of such items is different than the functional currency of the entity where these items were recorded.

A significant portion of our revenues from our index-linked investment products are based on fees earned on the value of assets invested in securities denominated in currencies other than the U.S. dollar. For all operations outside the United States where the Company has designated the local non-U.S. dollar currency as the functional currency, revenues and expenses are translated using average monthly exchange rates and assets and liabilities are translated into U.S. dollars using month-end exchange rates. For these operations, currency translation adjustments arising from a change in the rate of exchange between the functional currency and the U.S. dollar are accumulated in a separate component of shareholders’ equity. In addition, transaction gains and losses arising from a change in exchange rates for transactions denominated in a currency other than the functional currency of the entity are reflected in “Other expense (income), net” in our Unaudited Condensed Consolidated Statements of Income.

Revenues from index-linked investment products represented approximately $131.7 million, or 17.7%, and $110.3 million, or 14.4%, of our total revenues for the nine months ended September 30, 2014 and 2013, respectively. While our fees for index-linked investment products are generally invoiced in U.S. dollars, the fees are based on the investment product’s assets, a large majority of which are invested in securities denominated in currencies other than the U.S. dollar. Accordingly, declines in such other currencies against the U.S. dollar will decrease the fees payable to us under such licenses. In addition, declines in such currencies against the U.S. dollar could impact the attractiveness of such investment products resulting in net fund outflows, which would further reduce the fees payable under such licenses.

We generally invoice our clients in U.S. dollars; however, we invoice a portion of our clients in Euros, British pounds sterling, Japanese yen and a limited number of other non-U.S. dollar currencies. For the nine months ended September 30, 2014 and 2013, approximately 15.0% and 14.8% of our total revenues, respectively, were invoiced in currencies other than U.S. dollars. For the nine months ended September 30, 2014, 54.5% of our foreign currency revenues were in Euros, 24.0% were in British pounds sterling and 12.0% were in Japanese yen. For the nine months ended September 30, 2013, 54.3% of our foreign currency revenues were in Euros, 21.9% were in British pounds sterling and 13.5% were in Japanese yen.

We are exposed to additional foreign currency risk in certain of our operating costs. Approximately $231.4 million, or 43.7%, and $207.3 million, or 42.5%, of our total operating costs for the nine months ended September 30, 2014 and 2013, respectively, were denominated in foreign currencies, the significant majority of which were denominated in British pounds sterling, Euros, Indian rupees, Swiss francs, Hungarian forints, Hong Kong dollars, and Mexican pesos. Expenses incurred in foreign currency may increase as we expand our business outside the U.S.

We have certain monetary assets and liabilities denominated in currencies other than local functional amounts and when these balances were remeasured into their local functional currency, either a gain or a loss resulted from the change of the value of the functional currency as compared to the originating currencies. We manage foreign currency exchange rate risk, in part, through the use of derivative financial instruments comprised principally of forward contracts on foreign currency which are not designated as hedging instruments for accounting purposes. The objective of the derivative instruments is to minimize the income statement impact associated with intercompany loans that are denominated in certain foreign currencies. As a result of these positions, we recognized total foreign currency exchange losses of $2.2 million in each of the nine months ended September 30, 2014 and 2013. These amounts were recorded in “Other expense (income), net” in our Unaudited Condensed Consolidated Statements of Income.

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling $448.2 million at September 30, 2014 and $358.4 million at December 31, 2013, respectively. These amounts were held primarily in checking and money market accounts in the countries where we maintain banking relationships. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.

Borrowings under the 2012 Term Loan bear interest at a rate equal to the sum of LIBOR and a margin of 2.25%, which margin will be subject to adjustment based on our leverage ratio. As of September 30, 2014, the 2012 Term Loan, as amended, bore interest at 2.40%. Assuming an average of $787.2 million of variable rate debt outstanding, a hypothetical 100 basis point increase in LIBOR for a one year period would result in approximately $7.9 million of additional interest rate expense.

 

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Item 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of September 30, 2014, and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 

Item 1. Legal Proceedings

Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company, which arise in the ordinary course of business. While the amounts claimed could be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that MSCI’s business, operating results, financial condition or cash flows in a particular period could be materially affected by certain contingencies. However, based on facts currently available, management believes that the disposition of matters that are currently pending or asserted will not, individually or in the aggregate, have a material effect on MSCI’s business, operating results, financial condition or cash flows.

 

Item 1A. Risk Factors

There have been no material changes since December 31, 2013 to the significant risk factors and uncertainties known to the Company that, if they were to materialize or occur, would individually or in the aggregate, have a material effect on MSCI’s business, operating results, financial condition or cash flows.

For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There have been no unregistered sales of equity securities.

The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common shares during the three months ended September 30, 2014.

 

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Issuer Purchases of Equity Securities

 

Period

   Total Number of
Shares Purchased(1)
     Average Price
Paid Per
Share
     Total Number of
Shares Purchased As
Part of Publicly
Announced Plans or
Programs
     Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (2)
 

Month #1

(July 1, 2014-July 31, 2014)

     7,134       $ 46.43         —         $ 300,000,000   

Month #2

(August 1, 2014-August 31, 2014)

     2,826       $ 44.15         —         $ 300,000,000   

Month #3

(September 1, 2014-September 30, 2014) (3)

     4,537,424         N/A         4,536,617       $ 550,000,000   
  

 

 

          

Total

     4,547,384         N/A         4,536,617       $ 550,000,000   
  

 

 

          

 

(1)  Includes (i) shares withheld to satisfy tax withholding obligations on behalf of employees that occur upon vesting and delivery of outstanding shares underlying restricted stock units and (ii) shares repurchased pursuant to the 2012 Repurchase Program. The value of the shares withheld were determined using the fair market value of the Company’s common stock on the date of withholding, using a valuation methodology established by the Company.
(2)  See Note 8, “Commitments And Contingencies” of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information regarding our stock repurchase programs.
(3)  Average price paid per share information will not be available for the September 2014 ASR Program until final settlement.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

An exhibit index has been filed as part of this report on page EX-1.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: October 30, 2014

 

MSCI INC.

(Registrant)

 

By:  

/s/ Robert Qutub

 

Robert Qutub

Chief Financial Officer,

Principal Financial Officer and Duly Authorized Signatory

 

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EXHIBIT INDEX

MSCI INC.

QUARTER ENDED SEPTEMBER 30, 2014

 

Exhibit
Number

  

Description

    3.1    Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Form 10-Q (File No. 001-33812), filed with the SEC on May 4, 2012 and incorporated by reference herein)
    3.2    Amended and Restated By-laws (filed as Exhibit 3.2 to the Company’s Form 10-Q (File No. 001-33812), filed with the SEC on May 4, 2012 and incorporated by reference herein)
*  10.1    Master and Supplemental Confirmations regarding Accelerated Stock Buyback, dated September 18, 2014, between MSCI Inc. and Goldman, Sachs & Co.
    11    Statement Re: Computation of Earnings Per Common Share (The calculation of per share earnings is in Part I, Item 1, Note 5 to the Condensed Consolidated Financial Statements (Earnings Per Common Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K)
*  15.1    Letter of awareness from PricewaterhouseCoopers LLP, dated October 30, 2014, concerning unaudited interim financial information
*  15.2    Letter of awareness from Deloitte & Touche LLP, dated October 30, 2014, concerning unaudited interim financial information
*   31.1    Rule 13a-14(a) Certification of the Chief Executive Officer
*  31.2    Rule 13a-14(a) Certification of the Chief Financial Officer
** 32.1    Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer
*  101.INS    XBRL Instance Document
*  101.SCH    XBRL Taxonomy Extension Schema Document
*  101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
*  101.LAB    XBRL Taxonomy Extension Label Linkbase Document
*  101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
*  101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

* Filed herewith.
** Furnished herewith.

 

EX-1