MSCI Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless noted otherwise, financial figures are in millions of dollars. MSCI provides investment decision-support tools, including indexes, ESG products, and risk and portfolio analytics. Following the April 30, 2014 sale of ISS, MSCI reports one continuing operating segment; ISS results are presented as discontinued operations.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $251.7 | $228.6 | $745.6 | $676.5 |
| Operating income | $84.0 | $83.9 | $252.1 | $256.7 |
| Operating margin | 33.4% | 36.7% | 33.8% | 37.9% |
| Continuing-operations income | $51.7 | $49.9 | $155.7 | $159.0 |
| Net income | $51.7 | $55.3 | $239.8 | $175.3 |
| Diluted EPS, continuing operations | $0.44 | $0.42 | $1.32 | $1.31 |
| Diluted EPS, total | $0.44 | $0.46 | $2.03 | $1.44 |
- Q3 revenue increased 10.1%, but operating expenses rose 15.8%; operating income was nearly flat. For the nine-month period, revenue grew 10.2% while operating expenses rose 17.6%, reducing operating income 1.8% and compressing margin.
- Q3 revenue growth was strongest in Index and ESG products, up 14.5% to $148.4 million, including asset-based fees up 26.8%. Risk management analytics grew 5.8% to $77.0 million; portfolio management analytics was nearly unchanged at $26.3 million. Nine-month portfolio management analytics revenue declined 1.9%.
- Nine-month net income included $84.1 million from discontinued operations, including a $78.7 million gain on the ISS sale. Continuing-operations income declined 2.1%; total net income increased 36.8%. Q3 total net income declined as the prior-year quarter included discontinued-operations income.
- Cash from operations was $201.6 million for the first nine months, down from $226.0 million. Investing cash inflow was $305.7 million, largely reflecting ISS sale proceeds; financing cash outflow was $412.4 million, mainly reflecting share repurchases. Cash and cash equivalents ended at $448.2 million, versus $358.4 million at year-end 2013.
- At September 30, cash was $448.2 million and reported debt was approximately $793.0 million, including current maturities. Total current assets were $758.6 million and current liabilities $498.6 million. The term loan interest rate was 2.40%; the facility matures in December 2018, with a final scheduled payment of $658.1 million assuming no further prepayments.
Material changes and capital allocation
- ISS was sold for $367.4 million in April; the sale generated a reported $78.7 million gain. MSCI acquired GMI Ratings in August for $15.5 million, subject to final working-capital adjustments.
- MSCI paid $300 million under a September accelerated share repurchase and initially received approximately 4.5 million shares. The board increased the 2014 repurchase authorization to $850 million, available through December 31, 2016.
- The company declared its first regular quarterly dividend of $0.18 per share, with an initial annualized rate of $0.72; the first payment was scheduled for October 31, 2014. The credit agreement restricted dividends and other capital returns; the company reported $161.6 million available for restricted payments at quarter-end.
- A correction to the December 31, 2013 balance sheet reduced retained earnings by $11.3 million and increased long-term deferred tax liabilities by $13.6 million, among other adjustments. Management said the corrections were not material to previously issued statements and did not affect debt-covenant compliance.
Outlook, risks and unusual items
- Management said investment in staffing, sales, client service, technology and product development was expected to continue to outpace revenue growth, but expense growth was expected to be lower in 2015 than in 2014. Management expected those investments to support higher operating-income growth in 2015 and over the medium term; this is forward-looking and not a quantified forecast.
- MSCI was exploring refinancing its secured credit facilities. Management expected interest expense to increase significantly from the third-quarter 2014 annualized level of $21.5 million if all debt were refinanced at then-current market rates; refinancing was subject to market conditions and no outcome was assured.
- Facility covenants require a maximum consolidated leverage ratio of 3.25:1 and minimum interest coverage of 5.00:1. Reported ratios were 1.84:1 and 21.91:1, respectively. A hypothetical 100-basis-point increase in LIBOR was estimated to add about $7.9 million in annual interest expense.
- Risks include foreign-currency exposure, market-driven volatility in index-linked fees, and tax examinations. BlackRock accounted for 10.6% of nine-month 2014 operating revenue. Management said no pending legal matters were expected to have a material effect based on information then available, while noting outcomes remain uncertain.
- The nine-month effective tax rate was 34.5%, versus 32.6% a year earlier. The filing says significant changes in unrecognized tax benefits could occur within 12 months, but the amount and rate impact could not be estimated. The interim financial statements received review, not an audit.
Important facts for investors to verify
- Underlying continuing-operations growth and operating-margin trajectory, separating recurring performance from the ISS disposal gain and other discontinued operations.
- Whether higher staffing and other operating costs translate into the operating-income growth management anticipated for 2015 and beyond.
- How refinancing plans affect interest expense, debt maturity structure, covenant headroom and capacity for dividends or repurchases.
- Whether index-linked assets, net fund flows, market levels, foreign exchange and customer concentration sustain asset-based fee growth.
- Final settlement of the September 2014 accelerated repurchase, tax examination developments, and the effects of the prior-period tax-balance-sheet correction.