MSCI Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. MSCI provides investment decision-support tools, including indices, risk and portfolio analytics, and governance research and services. Its segments are Performance and Risk and Governance. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $238.6 million | $226.5 million | $467.6 million | $449.8 million |
| Operating income | $87.1 million | $82.7 million | $168.1 million | $158.1 million |
| Operating margin | 36.5% | 36.5% | 35.9% | 35.2% |
| Net income | $37.5 million | $45.7 million | $81.5 million | $79.2 million |
| Diluted EPS | $0.30 | $0.37 | $0.66 | $0.64 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $190.1 million | $80.2 million |
- Q2 revenue rose 5.3% year over year, while net income fell 17.8%; the principal factor was higher net interest and refinancing-related expense. H1 revenue increased 4.0% and net income increased 2.9%.
- At June 30, cash and cash equivalents were $273.3 million and short-term investments were $86.5 million. Current assets were $605.1 million and current liabilities $483.8 million.
- Debt, net of discounts, totaled approximately $876.2 million: $43.1 million current and $833.2 million long-term. The company reported $190.1 million of H1 operating cash flow, up from $80.2 million, primarily reflecting improved customer billings and collections. Investing activities provided $34.2 million and financing activities used $202.6 million.
- Q2 cost of services increased 6.4% and SG&A increased 8.0%, broadly tracking or exceeding revenue growth. Compensation and benefits rose 10.0% in Q2. The company attributed increases to staffing, severance, post-retirement costs, occupancy and technology expenses.
Material changes versus comparable periods
- Q2 Performance and Risk revenue grew 6.2% to $207.6 million; Governance revenue was essentially flat at $31.0 million. For H1, Performance and Risk revenue grew 4.7% to $405.7 million, while Governance revenue declined 0.4% to $62.0 million.
- Q2 index and ESG revenue rose 7.2%; subscription revenue increased 14.4%, partly offset by a 6.0% decline in asset-based fees. Risk management analytics grew 6.2%; portfolio analytics was nearly flat. Governance revenue was flat.
- For H1, index and ESG revenue grew 6.7% and risk analytics grew 7.5%. Asset-based index fees declined 7.4%, with lower average ETF assets and the prior-year comparison affecting results. Energy and commodity analytics revenue fell 63.6%, principally due to a revenue-recognition correction.
- Run Rate at June 30 was $919.6 million, up 3.6% year over year and essentially unchanged sequentially. Total retention was 91.0% for Q2 versus 91.9% a year earlier; H1 total retention was 92.0% versus 91.8%.
- Operating cash flow increased substantially year over year. Cash increased to $273.3 million from $252.2 million at year-end 2011, while short-term investments declined to $86.5 million from $140.5 million.
Outlook, management commentary, risks and unusual items
- The filing provides no quantified full-year revenue or earnings guidance. Management described liquidity as sufficient to meet operating needs, scheduled debt service and material capital expenditures for at least the next 12 months.
- On May 4, 2012, MSCI refinanced its prior term loan with an $880 million five-year Term Loan A and a $100 million revolving facility, both maturing May 4, 2017. The term loan bore interest at LIBOR plus 2.25% (2.49% at June 30). H1 effective combined borrowing rate was 3.45%. Debt refinancing and fee recognition contributed to a $20.6 million Q2/H1 interest-expense charge; total interest expense was $29.6 million in Q2 versus $12.9 million a year earlier.
- At June 30, the credit-agreement leverage ratio was 1.94:1, below the 3.25:1 maximum; interest coverage was 9.72:1, above the 5.00:1 minimum. The loan is floating-rate and secured, and the agreement imposes financial and operating covenants. Management estimated that a 1 percentage-point LIBOR increase, assuming average variable debt of $858 million, would add about $8.6 million of annual interest expense.
- MSCI recorded a one-time $5.2 million cumulative revenue reduction in Q1 2012 to correct prior revenue recognition for certain energy and commodity subscription licenses. The company said the error was immaterial to previously reported results and did not restate them; affected license fees are now recognized ratably over contract terms.
- MSCI began occupying its new 7 World Trade Center headquarters in July 2012. The lease has approximately $170.1 million of aggregate rent over its initial term; expected build-out costs were about $22 million, with a roughly $9 million lease inducement expected in 2012. The company anticipated up to $4.6 million of charges in H2 related to vacating 88 Pine Street.
- On August 2, 2012, CFO David M. Obstler agreed to cease serving as CFO upon filing and remain with the company through August 31. MSCI expected a $1.7 million charge in Q3; the agreement specifies $965,600 in severance and health-replacement payments, alongside equity-award provisions.
- Foreign-exchange exposure includes revenue tied to non-U.S.-dollar assets and costs denominated in foreign currencies. H1 foreign-currency remeasurement losses were $2.1 million. About $136.7 million of cash was held by foreign subsidiaries and may face tax or local-law restrictions on repatriation.
- Tax authorities, including the IRS and authorities in Japan, the U.K. and New York, are examining the company. MSCI maintains an $8.4 million reserve related to an indemnity for a Morgan Stanley tax settlement; the potential change in unrecognized tax benefits over the next 12 months could not be reasonably estimated.
- Management said pending legal matters were not expected, individually or collectively, to have a material effect based on information available, while noting that outcomes remain uncertain. The independent accountant performed an interim review, not an audit, and reported no material modifications needed to the interim statements.
Important facts for investors to verify
- Whether recurring subscription growth can offset weaker asset-based fees, market-linked ETF assets and slower Governance and portfolio analytics growth.
- How the revenue-recognition change affects energy and commodity analytics revenue and deferred revenue in subsequent quarters.
- Whether operating cash generation remains strong after compensation payments, capital expenditure and debt amortization, and how much foreign-held cash is practically available to the U.S.
- The impact of refinancing costs, variable interest rates, required loan amortization and covenant limits on earnings and financial flexibility.
- Actual costs and timing for the new headquarters, vacated-office charges and CFO transition, and developments in tax examinations and related contingencies.