MSCI Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended August 31, 2010; balance-sheet comparison is with November 30, 2009. Interim statements are unaudited. MSCI provides investment indices, analytics and governance services. All financial amounts below are in U.S. dollars; “million” is used for figures reported in thousands.
Financial performance and position
| Metric | Three months ended Aug. 31, 2010 | Three months ended Aug. 31, 2009 | Nine months ended Aug. 31, 2010 | Nine months ended Aug. 31, 2009 |
|---|---|---|---|---|
| Revenue | $202.7m | $108.9m | $449.6m | $324.2m |
| Operating income | $41.4m | $37.8m | $135.4m | $107.2m |
| Operating margin | 20.4% | 34.7% | 30.1% | 33.1% |
| Net income | $10.3m | $20.9m | $61.9m | $57.3m |
| Diluted EPS | $0.08 | $0.20 | $0.55 | $0.55 |
- Cash flow: Nine-month operating cash flow was $121.2m, compared with $120.8m. Investing cash outflow was $854.6m, primarily reflecting acquisitions; financing cash inflow was $755.9m. Cash increased by $21.7m to $197.7m.
- Liquidity: At August 31, cash and cash equivalents were $197.7m and short-term investments were $42.6m. Current assets were $445.7m versus current liabilities of $409.3m.
- Debt: Long-term debt, including current maturities, was approximately $1.266bn, versus approximately $379.7m at November 30, 2009. The new facility comprises a $1.275bn term loan and a $100m revolving facility; the filing does not state a revolver draw. The term loan matures in June 2016. The company reported a 3.31:1.0 consolidated leverage ratio and 6.50:1.0 interest coverage ratio at quarter-end.
Material changes versus prior period
- Quarterly revenue rose 86.2%, but MSCI attributed approximately $78.1m of the increase to acquisitions, principally RiskMetrics, acquired June 1. Excluding acquisitions, reported growth included higher subscriptions and asset-based fees. Nine-month revenue rose 38.7%.
- Quarterly net income fell 50.7%, despite higher operating income. Interest and other expense increased to $20.8m from $4.1m, largely because of acquisition financing and accelerated amortization of financing and debt costs. Operating margin contracted to 20.4%, reflecting acquisition-related expenses, restructuring, and higher amortization and operating costs.
- For the nine-month period, net income increased 8.1%, while diluted EPS was unchanged at $0.55. The acquisition’s results are included only from the acquisition dates, limiting comparability with prior periods. MSCI also began reporting two segments: Performance and Risk, and Governance.
- At August 31, Run Rate was $792.4m, up 10.1% year over year; total nine-month aggregate retention was 88.1%, compared with 84.2% on a pro forma comparable basis.
Outlook, risks and unusual items
- Acquisitions: RiskMetrics’ preliminary purchase price was approximately $1.572bn, including $1.147bn cash and MSCI shares and assumed awards. Preliminary allocation included $1.241bn goodwill and $628.1m of identifiable intangibles. Purchase accounting valuations and assumed contingencies remained subject to change. Measurisk was acquired July 30.
- Integration and restructuring: MSCI initiated a plan to eliminate overlapping positions and costs and discontinue a planned product integration. It recorded $7.0m of restructuring expense in the quarter and nine months. Certain lease-exit costs are estimated at $3m–$4m, expected in fiscal 2011; the company could not estimate total future restructuring costs. Completion was expected over 12–18 months.
- Management commentary: MSCI said it aims over time to grow operating expenses more slowly than revenue, while noting that investment in growth opportunities may take priority over near-term margin expansion. It provided no specific numerical earnings or revenue guidance in the supplied filing text.
- Debt and rate exposure: The new secured facility has restrictive covenants and mandatory repayments, including payments tied to excess cash flow. A hypothetical 220-basis-point increase in LIBOR was estimated to add about $8.3m of annual interest expense, based on average variable-rate debt of $826.7m. Interest-rate swaps covered $446.3m of notional debt.
- Other risks and contingencies: Foreign exchange movements affect reported revenue and expenses; MSCI reported a $5.6m revenue headwind for the nine-month period from dollar strength. Tax authorities were examining several years and jurisdictions; management said a resolution could materially affect a particular period’s income statement, though it did not expect a material effect on consolidated financial condition. MSCI reported no litigation expected to have a material adverse effect. It was still integrating RiskMetrics’ internal controls, which were excluded from management’s period-end internal-control assessment under SEC guidance for recent acquisitions.
Investor verification points
- Separate organic growth from acquired revenue and confirm post-acquisition segment and pro forma trends.
- Track integration progress, realized savings, and total restructuring cash costs against the preliminary estimates.
- Assess debt service, covenant headroom, mandatory repayments, and sensitivity to interest rates and foreign exchange.
- Monitor renewal and retention trends, particularly Governance pricing and portfolio-management analytics revenue.
- Review final RiskMetrics purchase accounting, goodwill and intangible-asset assumptions, and the status of open tax examinations.