MSCI Inc. — 2012 Form 10-K Summary
Business context and reporting period
MSCI provides investment indices, portfolio risk and performance analytics, and corporate governance and financial research services. Its two segments are Performance and Risk and Governance; about 82.5% of 2012 revenue came from recurring annual subscriptions. This 10-K covers the fiscal year ended December 31, 2012. Quarterly figures are included below for Q4. The company changed its fiscal year-end to December 31 in 2011, so earlier comparisons may use a different reporting period.
Financial performance and liquidity
| Metric | FY 2012 | Comparison |
|---|---|---|
| Operating revenue | $950.1 million | Up 5.5% from FY 2011 |
| Operating income / margin | $346.9 million / 36.5% | Income up 7.7%; margin was 35.7% in 2011 |
| Net income | $184.2 million | Up 6.2% |
| Diluted EPS | $1.48 | Up from $1.41 |
| Operating cash flow | $347.1 million | Up from $255.0 million |
| Investing / financing cash flow | $(94.4) million / $(323.0) million | Financing outflow included debt activity and a $100 million accelerated share repurchase |
Q4 2012 revenue was $247.1 million, operating income $95.3 million, net income $54.5 million and diluted EPS $0.44. Q4 2011 figures were $226.1 million, $81.6 million, $44.5 million and $0.36, respectively.
At year-end, cash and cash equivalents were $183.3 million and short-term investments $70.9 million, down from $252.2 million and $140.5 million, respectively, a year earlier. Balance-sheet debt was $854.7 million, including current maturities; principal outstanding was $858.0 million. The $880 million senior secured term facility and $100 million revolver mature in May 2017. The term loan’s stated interest rate was 2.46% at year-end and is variable. Leverage and interest coverage ratios were 1.81x and 12.90x, within covenant limits of 3.25x maximum and 5.00x minimum. Management said available liquidity and expected operating cash flows would fund commitments for at least the next 12 months.
Material changes and drivers
- Recurring subscriptions increased 7.1% to $784.3 million; asset-based fees were $140.9 million, up 3.6% on the revenue presentation. Total run rate rose 9.7% to $967.4 million, while net new recurring subscription sales fell to $40.3 million from $60.0 million.
- Index and ESG revenue rose 9.1% to $441.5 million, driven by subscriptions. Risk management analytics increased 6.9% to $260.3 million. Governance rose 3.0% to $123.2 million.
- Portfolio management analytics declined 2.3% to $116.1 million; energy and commodity analytics declined 36.4% to $9.1 million. The latter would have been approximately flat excluding the accounting correction described below.
- Operating expenses increased 4.2% to $603.2 million, primarily due to compensation costs. Revenue growth outpaced expense growth, lifting operating margin by 0.8 percentage points.
- MSCI acquired IPD, a real estate benchmarking and analytics provider, on November 30, 2012 for $124.8 million cash. It contributed $3.6 million revenue and a $0.9 million loss in 2012. InvestorForce was acquired for $23.5 million cash in January 2013.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no quantified earnings or revenue guidance. Management’s stated strategy is to grow through client expansion, product development and acquisitions, while aiming over time for expense growth below revenue growth. It also noted that investment needs or variable revenue could cause expenses to grow faster in some periods.
- Index licensing and concentration: Vanguard planned to move 22 funds from MSCI indices beginning in 2013, reducing the reported year-end asset-based-fee run rate by about $24.8 million. BlackRock generated 7.6% of 2012 revenue; most of MSCI’s BlackRock revenue was asset-based. Index-linked fees are exposed to market levels, flows, fee negotiations and license changes.
- Governance and regulatory exposure: MSCI received an SEC Wells Notice in September 2012 concerning allegations that an ISS employee disclosed confidential proxy-voting information to proxy solicitors in exchange for cash and gifts. The filing also discusses potential U.S. and European regulation of proxy advisers and benchmarks, with business effects uncertain.
- Accounting correction: MSCI recorded a one-time $5.2 million cumulative revenue reduction in 2012 for an immaterial prior-period error in energy and commodity software revenue recognition. It changed recognition to ratable over contract terms and did not restate prior statements.
- Other exposures: Floating-rate debt creates interest expense sensitivity; a 100-basis-point LIBOR increase was estimated to add about $8.4 million annual interest expense. The company also cites customer and supplier concentration, data and cyber risks, foreign exchange exposure, competition, acquisition integration, and possible impairment of substantial goodwill and intangibles ($2.42 billion at year-end).
- Capital allocation and contingencies: The board authorized up to $300 million in repurchases through 2014; the company initiated a $100 million capped accelerated repurchase in December. No dividends were intended. Management said pending legal matters were not expected to be material based on available information, while acknowledging uncertainty. The company paid $12.0 million related to a Morgan Stanley tax settlement and recorded additional tax expense.
Important facts for investors to verify
- Track the timing and realized revenue impact of Vanguard’s index changes, and any changes in BlackRock-related asset-based fees.
- Review subsequent developments regarding the SEC Wells Notice, ISS controls, and any proxy-adviser or benchmark regulation.
- Compare subscription run rate and retention trends with realized revenue; FY 2012 aggregate retention was 89.7%, versus 89.8% in 2011, and Q4 2012 aggregate retention was 84.9%.
- Confirm debt repayment, floating-rate exposure, covenant headroom and cash available for repurchases or acquisitions.
- Assess IPD and InvestorForce integration, acquisition returns, and the sensitivity of goodwill and intangible assets to performance assumptions.
- Review the $5.2 million revenue correction and the company’s subsequent revenue-recognition disclosures for consistency.