MSCI Inc. — Q2 2011 Form 10-Q
Business context and reporting period. MSCI provides investment indices, portfolio and risk analytics, and governance research and services. This unaudited filing covers the three and six months ended June 30, 2011. MSCI changed its fiscal year-end from November 30 to December 31 beginning in 2011; comparisons are to periods ended May 31, 2010, not June 30, 2010. RiskMetrics was acquired June 1, 2010 and Measurisk July 30, 2010, so reported year-over-year growth includes acquired businesses not present in the prior-period results.
Key financial results
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Operating revenue | $226.5 million; up 80.9% | $449.8 million; up 82.2% |
| Operating income / margin | $82.7 million / 36.5% (37.3% prior comparison) | $158.1 million / 35.2% (38.1% prior comparison) |
| Net income | $45.7 million; up 89.7% | $79.2 million; up 53.5% |
| Diluted EPS | $0.37 (prior comparison $0.22) | $0.64 (prior comparison $0.48) |
| Operating cash flow | Not separately reported for the quarter | $80.2 million (prior comparison $55.1 million) |
Amounts are U.S. dollars. The filing’s year-over-year growth comparisons are not fully like-for-like: management estimates acquisitions contributed $84.3 million of quarterly revenue growth and $165.4 million of six-month growth. Against acquisition-adjusted pro forma comparisons, revenue increased 12.0% for the quarter and 12.3% for the six months; net income increased 48.2% and 33.4%, respectively.
- Revenue drivers: Q2 Index and ESG revenue was $102.6 million, up 28.3%; risk management analytics was $60.8 million, up 447.6%, mainly reflecting acquired revenue; Governance contributed $31.0 million. Portfolio management analytics declined 3.5% to $29.2 million, and energy and commodity analytics declined 23.9% to $2.9 million.
- Recurring business indicators: June 30 run rate was $887.9 million, up 17.1% year over year and 2.8% sequentially. Six-month aggregate retention was 91.8%, versus 88.4% in the comparable prior period.
- Cash and liquidity: At June 30, cash and equivalents were $175.9 million and short-term investments $111.2 million, down from $226.6 million and $73.9 million, respectively, at November 30, 2010. Current assets were $561.3 million and current liabilities $423.6 million.
- Cash flow and investment: Six-month investing activities used $45.0 million, including $6.7 million of capital expenditures. Financing activities used $133.0 million. Cash declined by $93.5 million during the six months.
- Debt: Carrying value was approximately $1.117 billion at June 30, including $10.3 million of current maturities; cash plus short-term investments totaled $287.1 million. In March 2011 MSCI refinanced the prior term loan with a $1.125 billion term loan due March 2017, lowering the spread to LIBOR plus 2.75% from 3.25% and the LIBOR floor to 1.00% from 1.50%. Repricing fees were $6.1 million.
Material changes and management commentary
- Reported revenue and expenses rose substantially because RiskMetrics and Measurisk were included in 2011 results but not in the May 2010 comparison. Acquisition-adjusted revenue growth was driven by core benchmark indices, index asset-based fees, and risk analytics.
- Operating margin declined 0.8 percentage points in Q2 and 2.9 points for the six-month period. Management attributed much of the expense increase to acquired operations; higher amortization of acquired intangibles, compensation, and restructuring also affected results. Six-month intangible amortization was $33.1 million, versus $8.6 million in the comparison period.
- Assets in ETFs linked to MSCI indices averaged $356.8 billion in Q2, up 41.4% from the May 2010 comparison; period-end assets were $360.5 billion. Asset-based revenue remains exposed to market movements and fund flows.
- Management says the business is not highly capital intensive and expects to convert a high percentage of operating profits into excess cash over time. It seeks to grow expenses more slowly than revenue over time, while noting that investment needs and variable revenue can affect margins. The filing provides no specific financial guidance.
Risks, contingencies and unusual items
- RiskMetrics integration restructuring produced $4.5 million of expense in the six months. Management estimated about $5 million of costs for exiting certain leases, expected by year-end 2011, and cautioned that further restructuring charges could arise.
- Debt is variable-rate. Two interest-rate swaps covered $421.9 million of notional principal at June 30. MSCI estimated that a 175-basis-point LIBOR increase, assuming average variable-rate debt of $700.3 million, would add about $7.0 million of annual interest expense. The credit facility imposes leverage and interest-coverage tests; reported ratios were 2.66x and 6.88x, respectively.
- Tax examinations are ongoing in several jurisdictions. A New York tax settlement related to 2002–2006 was expected in Q4 2011; management said the resolution could affect a particular period’s earnings and tax rate, though it did not expect a material effect on consolidated financial condition. The potential change in unrecognized tax benefits was not estimable.
- Ordinary-course legal matters are pending; management did not expect currently pending matters, individually or in aggregate, to have a material effect based on information then available. The filing notes that contingencies could nevertheless affect a particular period.
- Foreign exchange movements affect reported revenue and expenses. The filing also identifies customer, market-sensitive ETF asset, interest-rate, and acquisition-integration exposures. No customer represented at least 10% of 2011-period revenue.
Most important facts for investors to verify
- Separate organic growth from acquired revenue and compare reported performance with the filing’s pro forma figures.
- Track operating margin and expense growth as restructuring proceeds and acquired-intangible amortization continues.
- Monitor ETF-linked assets, fund flows, index subscription growth, run rate, and retention for durability of recurring and asset-based revenue.
- Review debt amortization, variable-rate exposure, swap coverage, covenant headroom, and cash available after required debt payments.
- Follow restructuring estimates, tax examinations and settlement timing, and any developments in legal contingencies.