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MSCI Inc. - Quarter Report: 2014 June (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-33812

 

 

MSCI INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   13-4038723
(State of Incorporation)  

(I.R.S. Employer

Identification Number)

 

7 World Trade Center

250 Greenwich Street, 49th Floor

New York, New York

  10007
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (212) 804-3900

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 28, 2014, there were 116,536,867 shares of the registrant’s common stock, par value $0.01, outstanding.

 

 

 


Table of Contents

MSCI INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS

 

         Page  
  Part I   

Item 1.

 

Financial Statements

     4   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     37   

Item 4.

 

Controls and Procedures

     38   
  Part II   

Item 1.

 

Legal Proceedings

     38   

Item 1A.

 

Risk Factors

     38   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     38   

Item 3.

 

Defaults Upon Senior Securities

     39   

Item 4.

 

Mine Safety Disclosures

     39   

Item 5.

 

Other Information

     39   

Item 6.

 

Exhibits

     39   

 

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Table of Contents

AVAILABLE INFORMATION

MSCI Inc. files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document MSCI Inc. files with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a website that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including MSCI Inc.) file electronically with the SEC. MSCI Inc.’s electronic SEC filings are available to the public at the SEC’s website, www.sec.gov.

MSCI Inc.’s website is www.msci.com. You can access MSCI Inc.’s Investor Relations webpage at http://ir.msci.com. MSCI Inc. makes available free of charge, on or through its Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. MSCI Inc. also makes available, through its Investor Relations webpage, via a link to the SEC’s website, statements of beneficial ownership of MSCI Inc.’s equity securities filed by its directors, officers, 5% or greater shareholders and others under Section 16 of the Exchange Act.

MSCI Inc. has a Corporate Governance webpage. You can access information about MSCI Inc.’s corporate governance at http://ir.msci.com/governance.cfm. MSCI Inc. posts the following on its Corporate Governance webpage:

 

    Charters for MSCI Inc.’s Audit Committee, Compensation Committee and Nominating and Governance Committee;

 

    Corporate Governance Policies;

 

    Procedures for Submission of Ethical Accounting-Related Complaints; and

 

    Code of Ethics and Business Conduct.

MSCI Inc.’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer and its Chief Financial Officer. MSCI Inc. will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, Inc. on its website. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 7 World Trade Center, 250 Greenwich Street, 49th Floor, New York, NY 10007; (212) 804-1583. The information on MSCI Inc.’s website is not incorporated by reference into this report.

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties and other factors that may cause MSCI Inc.’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond MSCI Inc.’s control and that could materially affect actual results, levels of activity, performance, or achievements.

Other factors that could materially affect actual results, levels of activity, performance or achievements can be found in MSCI Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on February 28, 2014, and in quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC, and may also include the risks and uncertainties associated with a failure to consummate or a delay in the consummation of the acquisition of GMI Ratings, including as a result of a failure to satisfy the conditions to closing in a timely manner or at all. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what MSCI Inc. projected. Any forward-looking statement in this report reflects MSCI Inc.’s current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to MSCI Inc.’s operations, results of operations, growth strategy and liquidity. MSCI Inc. assumes no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise, except as required by law.

WEBSITE AND SOCIAL MEDIA DISCLOSURE

MSCI Inc. uses its website and corporate Twitter account (@MSCI_Inc) as channels of distribution of company information. The information MSCI Inc. posts through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following MSCI Inc.’s press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about MSCI Inc. when you enroll your email address by visiting the “Email Alert Subscription” section at http://ir.msci.com/alerts.cfm?. The contents of MSCI Inc.’s website and social media channels are not, however, incorporated by reference into this report.

 

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PART I

 

Item 1. Condensed Consolidated Financial Statements

MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per share data)

 

     As of  
     June 30,
2014
    December 31,
2013
 
     (unaudited)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 683,239      $ 358,434   

Accounts receivable (net of allowances of $790 and $1,280 at June 30, 2014 and December 31, 2013, respectively)

     213,432        169,490   

Deferred taxes

     46,023        52,888   

Prepaid taxes

     33,570        14,568   

Prepaid and other assets

     30,629        28,890   
  

 

 

   

 

 

 

Total current assets

     1,006,893        624,270   

Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $92,279 and $75,371 at June 30, 2014 and December 31, 2013, respectively)

     94,803        85,588   

Goodwill

     1,561,120        1,813,164   

Intangible assets (net of accumulated amortization of $349,747 and $374,377 at June 30, 2014 and December 31, 2013, respectively)

     454,525        595,707   

Other non-current assets

     15,894        17,386   
  

 

 

   

 

 

 

Total assets

   $ 3,133,235      $ 3,136,115   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 1,859      $ 1,198   

Accrued compensation and related benefits

     69,171        121,124   

Other accrued liabilities

     60,720        41,212   

Current maturities of long-term debt

     19,778        19,772   

Deferred revenue

     323,963        319,735   
  

 

 

   

 

 

 

Total current liabilities

     475,491        503,041   

Long-term debt, net of current maturities

     778,119        788,010   

Deferred taxes

     172,241        234,649   

Other non-current liabilities

     40,706        46,068   
  

 

 

   

 

 

 

Total liabilities

     1,466,557        1,571,768   
  

 

 

   

 

 

 

Commitments and Contingencies (see Note 8)

    

Shareholders’ equity:

    

Preferred stock (par value $0.01; 100,000,000 shares authorized; no shares issued)

     —          —     

Common stock (par value $0.01; 750,000,000 common shares authorized; 126,377,635 and 125,555,268 common shares issued and 116,365,622 and 118,083,111 common shares outstanding at June 30, 2014 and December 31, 2013, respectively)

     1,264        1,256   

Treasury shares, at cost (10,012,013 and 7,472,157 common shares held at June 30, 2014 and December 31, 2013, respectively)

     (377,626     (268,391

Additional paid in capital

     1,097,549        1,073,157   

Retained earnings

     947,034        758,975   

Accumulated other comprehensive income (loss)

     (1,543     (650
  

 

 

   

 

 

 

Total shareholders’ equity

     1,666,678        1,564,347   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,133,235      $ 3,136,115   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (unaudited)  

Operating revenues

   $ 254,226      $ 228,423      $ 493,914     $ 447,892  

Operating expenses:

        

Cost of services

     76,816       69,696       152,243       134,996  

Selling, general and administrative

     71,516       52,842       139,174       108,357  

Amortization of intangible assets

     11,442       11,222       22,712       22,388  

Depreciation and amortization of property, equipment and leasehold improvements

     5,921       4,774       11,749       9,371  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     165,695        138,534        325,878       275,112  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     88,531        89,889        168,036       172,780  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     (192 )     (186 )     (348 )     (423 )

Interest expense

     5,366       6,499       10,425       13,515  

Other expense (income)

     (726 )     (328 )     345       1,594  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense (income), net

     4,448        5,985        10,422       14,686  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before provision for income taxes

     84,083        83,904        157,614       158,094  

Provision for income taxes

     27,280        27,763        53,665       48,995  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     56,803        56,141        103,949        109,099   

Income from discontinued operations, net of income taxes

     50,857        4,912        84,110        10,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 107,660      $ 61,053      $ 188,059     $ 119,990  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share:

        

Earnings per basic common share from continuing operations

   $ 0.48      $ 0.46      $ 0.89      $ 0.90   

Earnings per basic common share from discontinued operations

     0.44        0.04        0.71        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share

   $ 0.92      $ 0.50      $ 1.60     $ 0.99  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share:

        

Earnings per diluted common share from continuing operations

   $ 0.48      $ 0.46      $ 0.88      $ 0.89   

Earnings per diluted common share from discontinued operations

     0.43        0.04        0.71        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share

   $ 0.91      $ 0.50      $ 1.59     $ 0.98  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding used in computing earnings per share:

        

Basic

     116,702        121,149        117,140        120,949  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     117,664        122,069        118,128       121,887  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (unaudited)  

Net income

   $ 107,660     $ 61,053      $ 188,059      $ 119,990   

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     (2,758 )     (2,312 )     (1,726 )     (7,774 )

Income tax effect

     1,065       888       665       2,998  
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments, net

     (1,693 )     (1,424 )     (1,061 )     (4,776 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on cash flow hedges

     —          574        —         1,167  

Income tax effect

     —         (221 )     —         (447 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on cash flow hedges, net

     —         353       —          720   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities

     —         —         —         (5 )

Income tax effect

     —         —         —         2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities, net

     —          —          —         (3 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other post-retirement adjustments

     173       23       166       115  

Income tax effect

     (2 )     (2 )     2       (33 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other post-retirement adjustments, net

     171        21        168        82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (1,522     (1,050 )     (893 )     (3,977 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 106,138     $ 60,003      $ 187,166      $ 116,013   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Six Months Ended
June 30,
 
     2014     2013  
     (unaudited)  

Cash flows from operating activities

    

Net income

   $ 188,059      $ 119,990   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of intangible assets

     25,452        28,995   

Stock-based compensation expense

     12,457        12,829   

Depreciation and amortization of property, equipment and leasehold improvements

     11,968        10,326   

Amortization of debt origination fees

     888        1,474   

Deferred taxes

     3,475        3,356   

Amortization of discount on long-term debt

     240        474   

Excess tax benefits from stock-based compensation

     (2,773     (1,402

Gain on disposition of subsidiary, net of costs

     (84,615     —     

Other non-cash adjustments

     548        (857

Changes in assets and liabilities, net of assets and liabilities acquired:

    

Accounts receivable

     (59,081     (7,936

Prepaid income taxes

     (19,578     (11,555

Prepaid and other assets

     (6,181     1,198   

Accounts payable

     1,229        (2,343

Deferred revenue

     54,484        41,319   

Accrued compensation and related benefits

     (42,237     (42,399

Other accrued liabilities

     11,790        (3,779

Other

     (2,073     6,986   
  

 

 

   

 

 

 

Net cash provided by operating activities

     94,052        156,676   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from redemption of short-term investments

     —          70,900   

Acquisitions, net of cash acquired

     —          (23,268

Dispositions, net of cash provided

     362,811        —     

Proceeds from the sale of capital equipment

     8        —     

Capitalized software development costs

     (3,478     (806

Capital expenditures

     (18,486     (7,685
  

 

 

   

 

 

 

Net cash provided by investing activities

     340,855        39,141   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Repayment of long-term debt

     (10,125     (37,000

Repurchase of treasury shares

     (108,903     (9,639

Proceeds from exercise of stock options

     5,406        6,880   

Excess tax benefits from stock-based compensation

     2,773        1,402   
  

 

 

   

 

 

 

Net cash used in financing activities

     (110,849     (38,357
  

 

 

   

 

 

 

Effect of exchange rate changes

     747        (6,068
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     324,805        151,392   

Cash and cash equivalents, beginning of period

     358,434        183,309   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     683,239        334,701   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 9,346      $ 10,297   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 71,896      $ 62,145   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash investing activities:

    

Property, equipment and leasehold improvements in other accrued liabilities

   $ 14,576      $ 4,568   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. INTRODUCTION AND BASIS OF PRESENTATION

MSCI Inc., together with its wholly-owned subsidiaries (the “Company” or “MSCI”), is a global provider of investment decision support tools, including indexes, portfolio risk and performance analytics. The Company’s flagship products are its global equity indexes and environmental, social and governance (“ESG”) products marketed under the MSCI and MSCI ESG Research brands, its private real estate benchmarks marketed under the IPD brand, its portfolio risk and performance analytics covering global equity and fixed income markets marketed under the Barra brand, its market and credit risk analytics marketed under the RiskMetrics and Barra brands, its performance reporting products and services offered to the investment consultant community marketed under the InvestorForce brand and its valuation models and risk management software for the energy and commodities markets marketed under the FEA brand.

On March 17, 2014, MSCI entered into a definitive agreement to sell Institutional Shareholder Services Inc. (“ISS”). As a result, the Company reported the operating results of ISS in “Income from discontinued operations, net of income taxes” in the Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013. As a result of this change, the Company now operates as one segment. Unless otherwise indicated, the disclosures accompanying these unaudited condensed consolidated financial statements reflect the Company’s continuing operations.

Basis of Presentation and Use of Estimates

These unaudited condensed consolidated financial statements include the accounts of MSCI Inc. and its subsidiaries and include all adjustments of a normal, recurring nature necessary to present fairly the financial condition as of June 30, 2014 and December 31, 2013, the results of operations and comprehensive income for the three and six months ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014 and 2013. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in MSCI’s Annual Report on Form 10-K for the year ended December 31, 2013. The unaudited condensed consolidated financial statement information as of December 31, 2013 has been derived from the 2013 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year.

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require the Company to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the deferral and recognition of revenue, research and development and software capitalization, the allowance for doubtful accounts, impairment of long-lived assets, accrued compensation, income taxes and other matters that affect the unaudited condensed consolidated financial statements and related disclosures. The Company believes that estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates.

Intercompany balances and transactions are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year financial statement presentation.

Revision

In connection with the preparation of the Company’s unaudited condensed consolidated financial statements for the three months ended June 30, 2014, the Company determined that it had understated its net tax liabilities in certain years prior to December 31, 2012. As a result of these errors, the Company has recorded the following corrections as of December 31, 2013: (i) an $11.3 million decrease to beginning retained earnings, (ii) a $0.7 million decrease to additional paid in capital, (iii) a $12.8 million decrease to prepaid taxes, (iv) a $13.6 million increase to long-term deferred tax liabilities and (v) a $14.3 million increase to goodwill. In accordance with the accounting guidance found in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 250-10, “Accounting Changes and Error Corrections,” the Company has revised its Unaudited Condensed Consolidated Statements of Financial Condition as of December 31, 2013 to reflect these corrections. The Company will revise all other previously reported results as such financial information is included in future filings.

In accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” the Company assessed the materiality of the adjustments and concluded that these corrections were not material to any of its previously issued financial statements. The Company also concluded that its compliance with debt covenants would not have been affected by these adjustments.

 

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Accordingly, the Company has revised the Unaudited Condensed Consolidated Statement of Financial Condition as of December 31, 2013 from amounts previously reported as follows:

 

     December 31, 2013  
     As Previously
Reported
     Adjustment     As Revised  

Prepaid taxes

   $ 27,333       $ (12,765   $ 14,568   

Total current assets

   $ 637,035       $ (12,765   $ 624,270   

Goodwill

   $ 1,798,821       $ 14,343      $ 1,813,164   

Total assets

   $ 3,134,537       $ 1,578      $ 3,136,115   

Deferred taxes

   $ 221,054       $ 13,595      $ 234,649   

Total liabilities

   $ 1,558,173       $ 13,595      $ 1,571,768   

Additional paid in capital

   $ 1,073,893       $ (736   $ 1,073,157   

Retained earnings

   $ 770,256       $ (11,281   $ 758,975   

Total shareholders’ equity

   $ 1,576,364       $ (12,017   $ 1,564,347   

Total liabilities and shareholders’ equity

   $ 3,134,537       $ 1,578      $ 3,136,115   

Concentrations

Financial instruments that may potentially subject the Company to concentration risk consist principally of cash deposits. At June 30, 2014 and December 31, 2013, cash and cash equivalent amounts were $683.2 million and $358.4 million, respectively. The Company held no short-term investments at June 30, 2014 or December 31, 2013. The Company receives interest at prevailing money market fund rates on its cash deposits.

For the six months ended June 30, 2014, BlackRock, Inc. accounted for 10.4% of the Company’s operating revenues. For the six months ended June 30, 2013, no single customer accounted for 10.0% or more of the Company’s operating revenues.

2. RECENT ACCOUNTING STANDARDS UPDATES

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” or ASU 2013-11. The amendments in this update require that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except under a few limited circumstances. The amendments in this update do not require new recurring disclosures. This new guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” or ASU 2014-08. The amendments in this update change the requirements for reporting discontinued operations under ASC Subtopic 205-20, “Presentation of Financial Statements – Discontinued Operations,” such as limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments in this update also require expanded disclosures in order to provide users of financial statements with more information about the assets, liabilities, revenues and expenses of discontinued operations. Further, the amendments require an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. This new guidance is to be applied prospectively for annual periods beginning on or after December 15, 2014, and interim periods within those years, with early adoption permitted. The Company has elected not to early adopt ASU 2014-08 and is evaluating the potential impact that the update will have on its unaudited condensed consolidated financial statements.

        In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers,” or ASU 2014-09. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The new guidance is effective for

 

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annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is evaluating the potential impact that the update will have on its unaudited condensed consolidated financial statements.

3. DISPOSITIONS AND DISCONTINUED OPERATIONS

Disposition of CFRA

On March 31, 2013, MSCI completed the sale of its CFRA product line. The value of the disposed assets and liabilities and the resulting gain on disposal were not material to the Company.

Disposition of ISS

On March 17, 2014, MSCI entered into a definitive agreement to sell ISS. The results of operations from ISS and the CFRA product line are reflected in “Income from discontinued operations, net of income taxes” in the Unaudited Condensed Consolidated Statements of Income.

The sale of ISS was completed on April 30, 2014 for $367.4 million, subject to final working capital adjustments. The value of the assets and liabilities of ISS that were disposed, directly attributable transaction costs and the resulting gain on disposal that has been reported in “Income from discontinued operations, net of income taxes” for the three and six months ended June 30, 2014 are as follows:

 

(in thousands)       

Cash proceeds

   $ 367,355   

Less: Initial working capital adjustments

     (316
  

 

 

 

Total proceeds

     367,039   

Less assets sold and liabilities relieved resulting from disposal:

  

Cash and cash equivalents

     (4,544 )

Accounts receivable

     (15,765

Deferred taxes (current)

     (3,174 )

Prepaid taxes

     (617

Prepaid and other assets

     (4,500

Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $4,213)

     (8,544

Goodwill

     (254,233

Intangible assets (net of accumulated amortization of $50,283)

     (121,269

Other non-current assets

     (1,645 )

Accounts payable

     574   

Accrued compensation and related benefits

     6,783   

Other accrued liabilities

     4,034   

Deferred revenue

     51,767   

Deferred taxes (non-current)

     59,129   

Other non-current liabilities

     5,576   

Other comprehensive income including currency translation adjustments and pension and other post-retirement adjustments

     4,004   
  

 

 

 

Net assets sold

     (282,424

Less: Transaction costs

     (5,946
  

 

 

 

Gain on sale of ISS

   $ 78,669   
  

 

 

 

 

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Income from discontinued operations. Amounts associated with discontinued operations reflected in the Unaudited Condensed Consolidated Statements of Income for the three months ended June 30, 2014 and 2013 are as follows:

 

     Three Months Ended
June 30,
 
     2014      2013  
     (in thousands)  

Revenue from discontinued operations

   $ 10,912      $ 29,475   
  

 

 

    

 

 

 

Income from discontinued operations before provision for income taxes

   $ 80,147      $ 7,355   

Provision for income taxes

     29,290         2,443  
  

 

 

    

 

 

 

Income from discontinued operations, net of income taxes

   $ 50,857       $ 4,912   
  

 

 

    

 

 

 

Amounts associated with discontinued operations reflected in the Unaudited Condensed Consolidated Statements of Income for the six months ended June 30, 2014 and 2013 are as follows:

 

     Six Months Ended
June 30,
 
     2014      2013  
     (in thousands)  

Revenue from discontinued operations

   $ 43,122       $ 61,915   
  

 

 

    

 

 

 

Income from discontinued operations before provision for income taxes

   $ 86,364       $ 16,716   

Provision for income taxes

     2,254         5,825   
  

 

 

    

 

 

 

Income from discontinued operations, net of income taxes

   $ 84,110       $ 10,891   
  

 

 

    

 

 

 

The three months ended March 31, 2014 included a $30.6 million income tax benefit associated with establishing a net deferred tax asset on the difference between the ISS tax basis and book basis. This net deferred tax asset was realized in the three months ended June 30, 2014 upon the closing of the sale, which reflects the tax basis capital loss realized on this book gain.

4. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

As required by FASB’s ASC Subtopic 220-10, “Comprehensive Income—Overall,” the following tables present the amounts reclassified from Accumulated other comprehensive income (loss) by the respective line item in the Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013.

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)(1)

(in thousands)

 

Details about Accumulated Other Comprehensive Income
(Loss) Components

  Amount Reclassified from Accumulated Other
Comprehensive Income (Loss)
   

Affected Line Item in the

Unaudited Condensed
Consolidated Statements of

Income

    Three Months Ended     Three Months Ended      
    June 30,
2014
    June 30,
2013
     

Unrealized losses on cash flow hedges

     

Interest rate contracts

  $ —        $ (574   Interest expense
    —         221     Tax benefit
 

 

 

   

 

 

   
  $ —        $ (353   Net of tax
 

 

 

   

 

 

   

Unrealized gains on available-for-sale securities

     

Short-term investments

  $ —        $ —        Interest income
    —         —       Tax expense
 

 

 

   

 

 

   
  $ —        $ —        Net of tax
 

 

 

   

 

 

   

Defined benefit pension plans

     

Amount recognized as a component of net periodic benefit expense for curtailments and settlements

  $ (186   $ —   (2)   
    6        —        Tax expense
 

 

 

   

 

 

   
  $ (180   $ —        Net of tax
 

 

 

   

 

 

   

Foreign currency translation adjustment

  $ 4,184      $ —   (2)   
 

 

 

   

 

 

   

Total reclassifications for the period, net of tax

  $ 4,004     $ (353 )  
 

 

 

   

 

 

   

 

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(1)  Amounts in parentheses indicate expenses or losses moved to the Unaudited Condensed Consolidated Statements of Income.
(2)  These accumulated other comprehensive income components were reclassified to “Income from discontinued operations, net of taxes” as part of the gain on the disposition of ISS.

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)(1)

(in thousands)

 

Details about Accumulated Other Comprehensive
Income (Loss) Components

   Amount Reclassified from Accumulated Other
Comprehensive Income (Loss)
    Affected Line Item in the
Unaudited Condensed
Consolidated Statements of
Income
     Six Months Ended     Six Months Ended      
     June 30,
2014
    June 30,
2013
     

Unrealized losses on cash flow hedges

      

Interest rate contracts

   $ —        $ (1,167   Interest expense
     —         447      Tax benefit
  

 

 

   

 

 

   
   $ —        $ (720   Net of tax
  

 

 

   

 

 

   

Unrealized gains on available-for-sale securities

      

Short-term investments

   $ —        $ 5      Interest income
     —         (2   Tax expense
  

 

 

   

 

 

   
   $ —        $ 3     Net of tax
  

 

 

   

 

 

   

Defined benefit pension plans

      

Amount recognized as a component of net periodic benefit expense for curtailments and settlements

   $ (186   $ —   (2)   
     6        —        Tax expense
  

 

 

   

 

 

   
   $ (180   $ —        Net of tax
  

 

 

   

 

 

   

Foreign currency translation adjustment

   $ 4,184      $ —   (2)   
  

 

 

   

 

 

   

Total reclassifications for the period, net of tax

   $ 4,004     $ (717  
  

 

 

   

 

 

   

 

(1)  Amounts in parentheses indicate expenses or losses moved to the Unaudited Condensed Consolidated Statements of Income.
(2)  These accumulated other comprehensive income components were reclassified to “Income from discontinued operations, net of taxes” as part of the gain on the disposition of ISS.

5. EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is computed by dividing income available to MSCI common shareholders by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and vested restricted stock unit awards where recipients have satisfied either the explicit vesting terms or retirement-eligible requirements. Diluted EPS reflects the assumed conversion of all dilutive securities. There were 104,272 stock options excluded from the calculation of diluted EPS for the three and six months ended June 30, 2014, because of their anti-dilutive effect. There were 224 and 112 stock options excluded from the calculation of diluted EPS for the three and six months ended June 30, 2013, because of their anti-dilutive effect.

 

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The Company computes EPS using the two-class method and determines whether instruments granted in share-based payment transactions are participating securities. The following table presents the computation of basic and diluted EPS:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
(in thousands, except per share data)                         

Income from continuing operations, net of income taxes

   $ 56,803      $ 56,141      $ 103,949      $ 109,099   

Income from discontinued operations, net of income taxes

     50,857        4,912        84,110        10,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 107,660      $ 61,053      $ 188,059      $ 119,990   

Less: Allocations of earnings to unvested restricted stock units (1)

     (153 )     (239 )     (268 )     (469 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available to MSCI common shareholders

   $ 107,507      $ 60,814      $ 187,791      $ 119,521   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     116,702        121,149        117,140        120,949   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of dilutive securities:

        

Stock options and restricted stock units

     962        920        988        938   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     117,664        122,069        118,128        121,887   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share from continuing operations

   $ 0.48      $ 0.46      $ 0.89      $ 0.90   

Earnings per basic common share from discontinued operations

     0.44        0.04        0.71        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share

   $ 0.92      $ 0.50      $ 1.60      $ 0.99   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share from continuing operations

   $ 0.48      $ 0.46      $ 0.88      $ 0.89   

Earnings per diluted common share from discontinued operations

     0.43        0.04        0.71        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share

   $ 0.91      $ 0.50      $ 1.59      $ 0.98   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Restricted stock units granted to employees prior to 2013 and all restricted stock units granted to independent directors of the Company have a right to participate in all of the earnings of the Company in the computation of basic EPS and, therefore, these restricted stock units are not included as incremental shares in the diluted EPS computation.

6. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements at June 30, 2014 and December 31, 2013 consisted of the following:

 

          As of  

Type

  

Estimated

Useful Lives

   June 30,
2014(1)
    December 31,
2013
 
          (in thousands)  

Computer & related equipment

   3 to 5 years    $ 97,858      $ 86,384   

Furniture & fixtures

   7 years      9,377        9,108   

Leasehold improvements

   3 to 21 years      52,678        52,776   

Work-in-process

        27,169        12,691   
     

 

 

   

 

 

 

Subtotal

        187,082        160,959   

Accumulated depreciation and amortization

        (92,279     (75,371
     

 

 

   

 

 

 

Property, equipment and leasehold improvements, net

      $ 94,803      $ 85,588   
     

 

 

   

 

 

 

 

(1) Property, equipment and leasehold improvements as of June 30, 2014 reflects the disposal of the property, equipment and leasehold improvements associated with the sale of ISS. See Note 3, “Dispositions and Discontinued Operations,” for additional information.

 

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Depreciation and amortization expense of property, equipment and leasehold improvements was $5.9 million and $4.8 million for the three months ended June 30, 2014 and 2013, respectively. Depreciation and amortization expense of property, equipment and leasehold improvements was $11.7 million and $9.4 million for the six months ended June 30, 2014 and 2013, respectively.

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company carries goodwill reflected in the table below:

 

     Goodwill  
(in thousands)       

Goodwill at December 31, 2013

   $ 1,813,164   

Changes to goodwill (1)

     (254,233

Foreign exchange translation adjustment

     2,189   
  

 

 

 

Goodwill at June 30, 2014

   $ 1,561,120   
  

 

 

 

 

(1)  Changes to goodwill reflect the disposal of the goodwill associated with the sale of ISS. See Note 3, “Dispositions and Discontinued Operations,” for additional information.

Intangible Assets

Amortization expense related to intangible assets for the three months ended June 30, 2014 and 2013 was $11.4 million and $11.2 million, respectively. Amortization expense related to intangible assets for the six months ended June 30, 2014 and 2013 was $22.7 million and $22.4 million, respectively.

The gross carrying amounts and accumulated amortization totals related to the Company’s identifiable intangible assets are as follows:

 

     As of  
(in thousands)    June 30,
2014(1)
    December 31,
2013
 

Gross intangible assets:

    

Customer relationships

   $ 359,235      $ 478,735   

Trademarks/trade names

     223,182        257,282   

Technology/software

     189,405        199,778   

Proprietary process

     —          3,800   

Proprietary data

     28,527        28,527   
  

 

 

   

 

 

 

Subtotal

     800,349        968,122   

Foreign exchange translation adjustment

     3,923        1,962   
  

 

 

   

 

 

 

Total gross intangible assets

   $ 804,272      $ 970,084   
  

 

 

   

 

 

 

Accumulated amortization:

    

Customer relationships

   $ (107,075   $ (125,359

Trademarks/trade names

     (75,518     (75,696

Technology/software

     (163,236     (168,481

Proprietary process

     —          (2,269

Proprietary data

     (3,469     (2,326
  

 

 

   

 

 

 

Subtotal

     (349,298     (374,131

Foreign exchange translation adjustment

     (449     (246
  

 

 

   

 

 

 

Total accumulated amortization

   $ (349,747   $ (374,377
  

 

 

   

 

 

 

Net intangible assets:

    

Customer relationships

   $ 252,160      $ 353,376   

Trademarks/trade names

     147,664        181,586   

Technology/software

     26,169        31,297   

Proprietary process

     —          1,531   

Proprietary data

     25,058        26,201   
  

 

 

   

 

 

 

Subtotal

     451,051        593,991   

Foreign exchange translation adjustment

     3,474        1,716   
  

 

 

   

 

 

 

Total net intangible assets

   $ 454,525      $ 595,707   
  

 

 

   

 

 

 

 

(1)  Intangible assets and the associated accumulated amortization as of June 30, 2014 reflect the disposal of the amounts associated with the sale of ISS. See Note 3, “Dispositions and Discontinued Operations,” for additional information.

 

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The estimated amortization expense for succeeding years is presented below:

 

Fiscal Year

   Amortization Expense  
     (in thousands)  

Remainder 2014

   $ 23,053   

2015

     46,590   

2016

     46,070   

2017

     40,572   

2018

     37,824   

Thereafter

     260,416   
  

 

 

 

Total

   $ 454,525   
  

 

 

 

8. COMMITMENTS AND CONTINGENCIES

Legal matters. From time to time, the Company is party to various litigation matters incidental to the conduct of its business. The Company is not presently party to any legal proceedings the resolution of which the Company believes would have a material effect on its business, operating results, financial condition or cash flows.

Leases. The Company leases facilities under non-cancelable operating lease agreements. The terms of certain lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on the straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Rent expense for the three months ended June 30, 2014 and 2013 was $6.8 million and $5.7 million, respectively. Rent expense for the six months ended June 30, 2014 and 2013 was $13.4 million and $11.5 million, respectively.

Share repurchase. On December 13, 2012, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock beginning immediately and continuing through December 31, 2014 (the “2012 Repurchase Program”).

On December 13, 2012, as part of the 2012 Repurchase Program, the Company entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to initiate a repurchase aggregating $100.0 million (the “December 2012 ASR Program”). As a result of the December 2012 ASR Program, the Company received 2.2 million shares on December 14, 2012 and 0.8 million shares on July 31, 2013 for a combined average purchase price of $33.47 per share.

 

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On August 1, 2013, MSCI entered into a second ASR agreement to initiate share repurchases aggregating $100.0 million (the “August 2013 ASR Program”). As a result of the August 2013 ASR Program, the Company received 1.9 million shares on August 2, 2013 and 0.5 million shares on December 30, 2013 for a combined average purchase price of $41.06 per share.

On February 6, 2014, MSCI utilized the remaining repurchase authorization provided by the 2012 Repurchase Program by entering into a new ASR agreement to initiate share repurchases aggregating $100.0 million (the “February 2014 ASR Program”). As a result of the February 2014 ASR Program, the Company received 1.7 million shares on February 7, 2014 and 0.6 million shares on May 5, 2014 for a combined average purchase price of $43.10 per share.

On February 4, 2014, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock which will be available from time to time at management’s discretion (the “2014 Repurchase Program”). The 2014 Repurchase Program may be modified, suspended or terminated by the Company at any time without prior notice.

Acquisition of GMI Ratings. On June 27, 2014, the Company announced that it plans to acquire GMI Ratings, a provider of ESG ratings and research to institutional investors, for a total cash consideration of $15.0 million, subject to customary closing conditions. The deal is expected to close during the quarter ending September 30, 2014.

Long-term debt. On June 1, 2010, the Company entered into a senior secured credit facility (the “2010 Credit Facility”). On March 14, 2011, the Company completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, the Company amended and restated its 2010 Credit Facility (the credit agreement as so amended and restated, the “Amended and Restated Credit Facility”). The Amended and Restated Credit Facility provides for the incurrence of a new senior secured five-year Term Loan A Facility in an aggregate amount of $880.0 million (the “2012 Term Loan”) and a $100.0 million senior secured revolving facility (the “2012 Revolving Credit Facility”). The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, the Company made a $15.0 million prepayment on the 2012 Term Loan.

On December 12, 2013, the Company entered into an agreement that extended the maturity of the Amended and Restated Credit Facility from May 2017 to December 2018 (the “New Amended and Restated Credit Facility”). The Company also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the New Amended and Restated Credit Facility, the Company is required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which will be $658.1 million (assuming no further prepayments).

The 2012 Term Loan bears interest equal to LIBOR plus a margin. As of June 30, 2014, the 2012 Term Loan bore interest at LIBOR plus a margin of 2.25%, or 2.40%.

Current maturities of long-term debt at June 30, 2014 were $19.8 million, net of a $0.5 million discount. Long-term debt, net of current maturities at June 30, 2014 was $778.1 million, net of a $1.5 million discount.

Current maturities of long-term debt at December 31, 2013 were $19.8 million, net of a $0.5 million discount. Long-term debt, net of current maturities at December 31, 2013 was $788.0 million, net of a $1.7 million discount.

In connection with entering into the New Amended and Restated Credit Facility, certain fees were paid and are being amortized over the life of the New Amended and Restated Credit Facility. At June 30, 2014, $7.4 million of the deferred financing fees remain unamortized, $1.7 million of which is included in “Prepaid and other assets” and $5.7 million of which is included in “Other non-current assets” on the Company’s Unaudited Condensed Consolidated Statement of Financial Condition.

The Company amortized $0.4 million and $0.7 million of deferred financing fees in interest expense during the three months ended June 30, 2014 and 2013, respectively. The Company amortized $0.9 million and $1.5 million of deferred financing fees in interest expense during the six months ended June 30, 2014 and 2013, respectively. Approximately $0.1 million and $0.2 million of debt discount was amortized in interest expense during the three months ended June 30, 2014 and 2013, respectively. Approximately $0.2 million and $0.5 million of debt discount were amortized in interest expense during the six months ended June 30, 2014 and 2013, respectively.

At June 30, 2014 and December 31, 2013, the fair market value of the Company’s debt obligations were $801.9 million and $812.0 million, respectively. The fair market value is determined in accordance with accounting standards related to the determination of fair value and represents Level 2 valuations. The Company utilizes the market approach and obtains security pricing from a vendor who uses broker quotes and third-party pricing services to determine fair values.

 

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As of June 30, 2014, the Company’s retained earnings of $947.0 million were restricted as to the payments of dividends. As outlined in the New Amended and Restated Credit Facility, the Company cannot pay or declare any dividends except out of amounts available for restricted payments. As of June 30, 2014, the amount available for restricted payments was $482.0 million, reflecting the Company’s cumulative retained excess cash flows (“CRECF”), as defined in the New Amended and Restated Credit Facility, through December 31, 2013 and adjusted for, among other things, any restricted payments made during the six months ended June 30, 2014. To the extent the CRECF is utilized for other actions restricted under the New Amended and Restated Credit Facility, including stock repurchases, the amount available for restricted payments will be reduced.

Derivatives and Hedging Activities. The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments.

Certain of the Company’s foreign operations expose the Company to fluctuations of foreign exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency, the U.S. dollar. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency.

Non-designated Hedges of Foreign Exchange Risk. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rate movements but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of June 30, 2014, the Company had one outstanding foreign currency forward with a notional amount of $13.0 million that was not designated as a hedge in a qualifying hedging relationship.

The following table presents the fair values of the Company’s derivative instruments and the location in which they are presented on the Company’s Unaudited Condensed Consolidated Statements of Financial Condition:

 

(in thousands)

   Location in the Unaudited
Condensed
Consolidated Statements of
Financial Condition
   As of
June 30, 2014
    As of
December 31, 2013
 

Non-designated hedging instruments:

       

Liability derivatives:

       

Foreign exchange contracts

   Other accrued liabilities    $ (154   $ (156

The Company’s foreign exchange forward contracts were classified within Level 2, as they were valued using pricing models that took into account the contract terms as well as multiple observable inputs where applicable, such as prevailing spot rates and forward points.

The following tables present the effect of the Company’s financial derivatives and the location in which they are presented on the Company’s Unaudited Condensed Consolidated Statements of Financial Condition and Unaudited Condensed Consolidated Statements of Income:

 

Derivatives Not Designated as Hedging Instruments

(in thousands)

   Location of Gain or
(Loss) Recognized in
Income on Derivatives
   Amount of Gain or (Loss) Recognized
in Income on Derivatives for the
Three Months Ended June 30,
 
      2014     2013  

Foreign exchange contracts

   Other expense    $ (407   $ 159   

Derivatives Not Designated as Hedging Instruments

(in thousands)

   Location of Gain or
(Loss) Recognized in
Income on Derivatives
   Amount of Gain or (Loss) Recognized
in Income on Derivatives for the
Six Months Ended June 30,
 
      2014     2013  

Foreign exchange contracts

   Other expense    $ (567   $ 1,657   

9. INCOME TAXES

The Company’s provision for income taxes was $53.7 million and $49.0 million for the six months ended June 30, 2014 and 2013, respectively. These amounts reflect effective tax rates of 34.0% and 31.0% for the six months ended June 30, 2014 and 2013, respectively.

 

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The effective tax rate of 34.0% for the six months ended June 30, 2014 reflects the Company’s estimate of the effective tax rate for the period and is impacted by certain discrete items totaling $2.7 million related to state taxes and the release of reserves associated with certain IRS examinations, the effect of which was to decrease the Company’s effective tax rate by 1.8 percentage points. The effective tax rate of 31.0% for the six months ended June 30, 2013 reflects the Company’s estimate of the effective tax rate for the period and is impacted by certain discrete items totaling $3.9 million, the effect of which was to decrease the Company’s effective tax rate by 2.5 percentage points.

The Company is under examination by the Internal Revenue Service and other tax authorities in certain countries, such as the United Kingdom, and states in which the Company has significant business operations, such as New York. The tax years currently under examination vary by jurisdiction. As a result of having previously been a member of the Morgan Stanley consolidated group, the Company may have future settlements with Morgan Stanley related to the ultimate disposition of their New York State and New York City examination relating to the tax years 2007 through 2008 and their IRS examination relating to the tax years 2006 through 2008. The Company does not believe it has any material exposure to the New York State and New York City examination. Additionally, the Company believes it has adequate reserves for any tax issues that may arise out of the IRS examination relating to the tax years 2006 through 2008 and therefore does not believe any related settlement with Morgan Stanley will have a material impact.

The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions in which it files income tax returns. The Company has established unrecognized tax benefits that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change. As part of the Company’s periodic review of unrecognized tax benefits and based on new information regarding the status of federal and state examinations, the Company’s unrecognized tax benefits were remeasured. It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the effective tax rate over the next 12 months.

The following table summarizes the major taxing jurisdictions in which the Company and its affiliates operate and the open tax years for each major jurisdiction:

 

Tax Jurisdiction

   Tax Years

United States

   2005-2012

California

   2009-2012

New York State

   2007-2012

New York City

   2007-2012

Hong Kong

   2008-2013

United Kingdom

   2012

Canada

   2006-2013

Japan

   2009-2013

India

   2008-2013

10. SEGMENT INFORMATION

Prior to March 31, 2014, MSCI operated as two segments, the Performance and Risk business and the Governance business. These designations were made as the discrete operating results of these segments were reviewed by the Company’s CODM for purposes of making operating decisions and assessing financial performance.

On March 17, 2014, MSCI entered into a definitive agreement to sell ISS, which, together with the previously disposed of CFRA product line, made up the Company’s Governance segment and are now reflected in “Income from discontinued operations, net of income taxes” in the Unaudited Condensed Consolidated Statements of Income. As a result, the Company now operates and reports as a single business segment (see Note 3, “Dispositions and Discontinued Operations,” for further details).

 

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Revenue by geography is based on the shipping address of the customer. The following table sets forth revenue for the periods indicated by geographic area:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
     (in thousands)  

Revenues

  

Americas:

           

United States

   $ 118,226      $ 102,156      $ 229,058      $ 203,424   

Other

     9,363        7,769        18,790        15,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Americas

     127,589        109,925        247,848        218,960   
  

 

 

    

 

 

    

 

 

    

 

 

 

EMEA:

           

United Kingdom

     38,381        33,709        75,857        67,727   

Other

     57,500        56,968        108,628        103,408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total EMEA

     95,881        90,677        184,485        171,135   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia & Australia:

           

Japan

     11,852        11,121        23,812        23,237   

Other

     18,904        16,700        37,769        34,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Asia & Australia

     30,756        27,821        61,581        57,797   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 254,226      $ 228,423      $ 493,914      $ 447,892   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-lived assets consist of property, equipment, leasehold improvements, goodwill and intangible assets, net of accumulated depreciation and amortization.

The following table sets forth long-lived assets on the dates indicated by geographic area:

 

     As of  
     June 30,
2014(1)
     December 31,
2013
 
     (in thousands)  

Long-lived assets

  

Americas:

     

United States

   $ 1,948,596       $ 2,338,124   

Other

     3,952         4,082   
  

 

 

    

 

 

 

Total Americas

     1,952,548         2,342,206   
  

 

 

    

 

 

 

EMEA:

     

United Kingdom

     134,977         133,411   

Other

     12,926         11,871   
  

 

 

    

 

 

 

Total EMEA

     147,903         145,282   
  

 

 

    

 

 

 

Asia & Australia:

     

Japan

     1,127         1,543   

Other

     8,870         5,428   
  

 

 

    

 

 

 

Total Asia & Australia

     9,997         6,971   
  

 

 

    

 

 

 

Total

   $ 2,110,448       $ 2,494,459   
  

 

 

    

 

 

 

 

(1)  Long-lived assets as of June 30, 2014 reflects the disposal of the amounts associated with the sale of ISS. See Note 3, “Dispositions and Discontinued Operations,” for additional information.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of MSCI Inc.

We have reviewed the accompanying condensed consolidated balance sheet of MSCI Inc. and its subsidiaries as of June 30, 2014, and the related condensed consolidated statements of income and of comprehensive income for the three and six-month period ended June 30, 2014 and the condensed consolidated statement of cash flows for the six-month period ended June 30, 2014. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

/s/ PricewaterhouseCoopers LLP
August 6, 2014

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of MSCI Inc.:

We have reviewed the accompanying condensed consolidated statements of income and comprehensive income of MSCI Inc. and subsidiaries (the “Company”) for the three and six-month period ended June 30, 2013 and the related condensed consolidated statements of cash flows for the six-month period ended June 30, 2013. These interim financial statements are the responsibility of the Company’s management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).

A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of MSCI Inc. and subsidiaries as of December 31, 2013 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the fiscal year then ended prior to retrospective adjustment for the change in discontinued operations (not presented herein); and in our report dated February 28, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of December 31, 2013 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

/s/ Deloitte & Touche LLP

New York, New York

February 28, 2014 (August 6, 2014 as to the effects of the revision as discussed in Note 1 and discontinued operations as discussed in Note 3)

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Item 1A.—Risk Factors,” in our Form 10-K for the fiscal year ended December 31, 2013.

Overview

We are a leading global provider of investment decision support tools, including indexes, portfolio risk and performance analytics. Our products and services address multiple markets, asset classes and geographies and are sold to a diverse client base, including asset owners such as pension funds, endowments, foundations, central banks, family offices and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, exchange traded funds (“ETFs”), real estate, hedge funds and private wealth; financial intermediaries such as banks, broker-dealers, exchanges, custodians and investment consultants; and corporate clients. As of June 30, 2014, we had offices related to continuing operations in 35 cities in 22 countries in order to help serve our diverse client base, with 50.2% of our revenue from clients in the Americas, 37.3% in Europe, the Middle East and Africa (“EMEA”) and 12.5% in Asia and Australia based on revenues for the six months ended June 30, 2014.

Our principal sales model is to license annual, recurring subscriptions to our products and services for use at specified locations, often by a given number of users or for a certain volume of services for an annual fee paid up front. Additionally, our recurring subscriptions are increasingly related to our managed services offering whereby we oversee the production of risk and performance reports on behalf of our clients. Fees attributable to annual, recurring subscriptions are recorded as deferred revenues on our Unaudited Condensed Consolidated Statement of Financial Condition and are recognized on our Unaudited Condensed Consolidated Statement of Income as the service is rendered. Additionally, a portion of our revenues comes from clients who use our indexes as the basis for index-linked investment products such as ETFs or as the basis for passively managed funds and separate accounts. These clients commonly pay us a license fee for the use of our intellectual property based on the investment product’s assets. We generate a limited amount of our revenues from certain exchanges that use our indexes as the basis for futures and options contracts and pay us a license fee for the use of our intellectual property based on their volume of trades. We also receive revenues from one-time fees related to implementation, historical or customized reports, advisory and consulting services and from certain products and services that are designed for one-time usage.

In evaluating our financial performance, we focus on revenue growth for the Company in total and by product category as well as operating profit growth. In addition, we focus on operating metrics, including Run Rates and retention rates to manage the business. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our operating profits into excess cash in the future. Our revenue growth strategy includes: (a) expanding and deepening our relationships with investment institutions worldwide; (b) developing new and enhancing existing product offerings, including combining existing product features or data derived from our products to create new products; and (c) actively seeking to acquire products, technologies and companies that will enhance, complement or expand our client base and our product offerings.

To maintain and accelerate our revenue and operating income growth, we expect to continue to invest in and expand our operating functions and infrastructure, including additional product management, sales and client support staff and facilities in locations around the world and additional staff and supporting technology for our research and our data operations and technology functions. At the same time, managing and controlling our operating expenses is very important to us and a distinct part of our culture.

The purpose of these investments is to maximize our medium-term revenue and operating income growth, while at the same time ensuring that we will remain a leading provider of investment decision support tools into the future. As a result, the rate of growth of our investments may from time to time exceed that of our revenues, which would slow the growth of, or even reduce, our operating profit. For example, for the six months ended June 30, 2014, our revenues grew by 10.3% but our operating income decreased by 2.7% compared to 2013, due, in part, to increased investment in our business. We anticipate that our increases in spending in areas such as sales, client service, information technology and product development in 2014 will continue to exceed the rate of growth of our revenues and will again slow the growth of our operating profit. However, we believe these investments will result in higher revenue and operating profit growth over the medium-term.

Changes in Presentation

        On March 17, 2014, we entered into a definitive agreement to sell Institutional Shareholder Services Inc. (“ISS”) which, together with the previously disposed of CFRA product line, made up our Governance segment. As a result, we now operate as a single business segment and the operating results of ISS and the CFRA product line are reported as discontinued operations for all periods presented. Prior to March 31, 2014, we operated under two segments: the Performance and Risk business and the Governance business. Our Performance and Risk business is a leading global provider of investment decision support tools, including indexes and portfolio risk and performance analytics, credit analytics and environmental, social and governance (“ESG”) products. Our Governance business was a leading provider of corporate governance products and services and specialized financial research and analysis services to institutional investors and corporations around the world.

 

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In addition, for periods prior to March 31, 2014, we reported energy and commodity analytics products separately as its own product category for disclosures related to operating revenues, Run Rate and Aggregate and Core Retention Rates. Beginning with the three months ended March 31, 2014, we reported the results of energy and commodity analytics products as part of the risk management analytics product category as we view the product offerings and customer base of the energy and commodities analytics products to be similar in nature to those in the risk management analytics product category. Prior periods have also been presented to reflect this change in categorization.

Factors Affecting the Comparability of Results

Term Loan Amendment

On June 1, 2010, we entered into a senior secured credit facility (the “2010 Credit Facility”). On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, we amended and restated our 2010 Credit Facility (the credit agreement as so amended and restated, the “Amended and Restated Credit Facility”). The Amended and Restated Credit Facility provides for the incurrence of a new senior secured five-year Term Loan A Facility in an aggregate amount of $880.0 million (the “2012 Term Loan”) and a $100.0 million senior secured revolving facility (the “2012 Revolving Credit Facility”). The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, we made a $15.0 million prepayment on the 2012 Term Loan.

On December 12, 2013, we entered into an agreement that extended the maturity of the Amended and Restated Credit Facility from May 2017 to December 2018 (“New Amended and Restated Credit Facility”). We also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the New Amended and Restated Credit Facility, we are required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which will be $658.1 million (assuming no further prepayments).

The 2012 Term Loan bears interest equal to LIBOR plus a margin. As of June 30, 2014, the 2012 Term Loan bore interest at LIBOR plus a margin of 2.25%, or 2.40%. This amendment has decreased the interest expense on our outstanding 2012 Term Loan and 2012 Revolving Credit Facility.

Share Repurchases

On December 13, 2012, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock beginning immediately and continuing through December 31, 2014 (the “2012 Repurchase Program”).

On December 13, 2012, as part of the 2012 Repurchase Program, we entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to initiate share repurchases aggregating $100.0 million (the “December 2012 ASR Program”). As a result of the December 2012 ASR Program, we received 2.2 million shares on December 14, 2012 and 0.8 million shares on July 31, 2013 for a combined average purchase price of $33.47 per share.

On August 1, 2013, we entered into a second ASR agreement to initiate share repurchases aggregating $100.0 million (the “August 2013 ASR Program”). As a result of the August 2013 ASR Program, we received 1.9 million shares on August 2, 2013 and 0.5 million shares on December 30, 2013 for a combined average purchase price of $41.06 per share.

On February 6, 2014, we utilized the remaining repurchase authorization provided by the 2012 Repurchase Program by entering into a new ASR agreement to initiate share repurchases aggregating $100.0 million (the “February 2014 ASR Program”). As a result of the February 2014 ASR Program, we received 1.7 million shares on February 7, 2014 and 0.6 million shares on May 5, 2014 for a combined average purchase price of $43.10 per share.

The effect of these share repurchase programs has decreased the weighted average shares used in calculating our basic and diluted earnings per share.

The discussion of our results of operations for the three and six months ended June 30, 2014 and 2013 are presented below. The results of operations for interim periods may not be indicative of future results.

 

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Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Results of Operations

The following table presents the results of operations for the three months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
       
     2014     2013     Increase/(Decrease)  
     (in thousands, except per share data)  

Operating revenues

   $ 254,226      $ 228,423     $ 25,803        11.3

Operating expenses:

        

Cost of services

     76,816        69,696       7,120        10.2

Selling, general and administrative

     71,516        52,842       18,674        35.3

Amortization of intangible assets

     11,442        11,222       220        2.0

Depreciation and amortization of property, equipment, and leasehold improvements

     5,921        4,774       1,147        24.0
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     165,695        138,534       27,161        19.6
  

 

 

   

 

 

   

 

 

   

Operating income

     88,531        89,889       (1,358     (1.5 %) 

Other expense (income), net

     4,448        5,985       (1,537     (25.7 %) 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before provision for income taxes

     84,083        83,904        179        0.2

Provision for income taxes

     27,280        27,763       (483     (1.7 %) 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     56,803        56,141        662        1.2

Income from discontinued operations, net of income taxes

     50,857        4,912        45,945        n/m   
  

 

 

   

 

 

   

 

 

   

Net income

   $ 107,660      $ 61,053     $ 46,607        76.3
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share:

        

From continuing operations

   $ 0.48      $ 0.46     $ 0.02        4.3

From discontinued operations

     0.44        0.04        0.40        n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share

   $ 0.92      $ 0.50      $ 0.42        84.0
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share:

        

From continuing operations

   $ 0.48      $ 0.46     $ 0.02        4.3

From discontinued operations

     0.43        0.04        0.39        n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share

   $ 0.91      $ 0.50      $ 0.41        82.0
  

 

 

   

 

 

   

 

 

   

Operating margin

     34.8     39.4    
  

 

 

   

 

 

     

n/m: not meaningful

Operating Revenues

Our revenues are grouped into the following three product and/or service categories:

 

    Index and ESG

 

    Risk management analytics

 

    Portfolio management analytics

 

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The following table summarizes the revenue by product category for the three months ended June 30, 2014 compared to the three months ended June 30, 2013:

 

     Three Months Ended
June 30,
              
   2014      2013      Increase/
(Decrease)
 
     (in thousands)        

Index and ESG:

    

Subscriptions

   $ 106,162       $ 95,200       $ 10,962        11.5

Asset-based fees

     44,095         36,970         7,125        19.3
  

 

 

    

 

 

    

 

 

   

Total index and ESG products

     150,257         132,170         18,087        13.7

Risk management analytics

     77,666         70,164         7,502        10.7

Portfolio management analytics

     26,303         26,089         214        0.8
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 254,226       $ 228,423       $ 25,803        11.3
  

 

 

    

 

 

    

 

 

   

Recurring subscriptions

   $ 205,265       $ 186,333       $ 18,932        10.2

Asset-based fees

     44,095         36,970         7,125        19.3

Non-recurring revenue

     4,866         5,120         (254     (5.0 %) 
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 254,226       $ 228,423       $ 25,803        11.3
  

 

 

    

 

 

    

 

 

   

Our index and ESG products primarily consist of equity and real estate index subscriptions, equity index asset-based fees products and ESG products. Our index and ESG products are used to benchmark investment performance, as a basis for index-linked investment products, the assessment of corporate management of ESG risks and opportunities, investment manager selection and investment research. We derive revenues from our index and ESG products through index data and ESG subscriptions, fees based on assets in investment products linked to our indexes and non-recurring licenses of our historical index data. Revenues related to index and ESG products increased $18.1 million, or 13.7%, to $150.3 million for the three months ended June 30, 2014 compared to $132.2 million for the three months ended June 30, 2013.

Subscription revenues from the index and ESG products increased 11.5% to $106.2 million for the three months ended June 30, 2014 compared to $95.2 million for the three months ended June 30, 2013. The increase was primarily driven by growth in revenues from our equity index benchmark, real estate and ESG products.

Asset-based fee revenues attributable to index and ESG products increased $7.1 million, or 19.3%, to $44.1 million for the three months ended June 30, 2014 compared to $37.0 million for the three months ended June 30, 2013. The increase was primarily driven by an increase of $35.5 billion, or 11.0%, in the average value of assets in ETFs linked to MSCI indexes and a growth in assets from non-ETF passive funds. The growth rate of asset-based fee revenues relative to the growth in the average value of assets in ETFs linked to MSCI indexes also benefited from a shift in the overall mix toward higher fee products that resulted from the transition of certain Vanguard ETFs away from MSCI benchmarks (the “Vanguard ETFs”) during the three months ended June 30, 2013.

As of June 30, 2014, the value of assets in ETFs linked to MSCI indexes was $378.7 billion, representing an increase of $109.0 billion, or 40.4%, from $269.7 billion as of June 30, 2013. Of the $378.7 billion of assets in ETFs linked to MSCI indexes as of June 30, 2014, 52.7% were linked to non-U.S. developed market indexes, 26.3% were linked to emerging market indexes, 16.2% were linked to U.S. market indexes and 4.8% were linked to other global indexes.

The following table sets forth the value of assets in ETFs linked to MSCI indexes and the sequential change of such assets under management (“AUM”) as of the periods indicated:

 

     Period Ended  

(in billions)

   March 31,
2013
    June 30,
2013
    September 30,
2013
     December 31,
2013
     March 31,
2014
     June 30,
2014
 

AUM in ETFs linked to MSCI Indexes

   $ 357.3      $ 269.7      $ 302.6       $ 332.9       $ 340.8       $ 378.7   

Sequential Change ($ in Billions)

                                       

Market Appreciation/(Depreciation)

   $ 16.0      $ (13.2   $ 20.2       $ 10.9       $ 1.3       $ 15.2   

Cash Inflow/(Outflow)

     (61.0 )(1)      (74.4 )(1)      12.7         19.4         6.6         22.7   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total Change

   $ (45.0 )   $ (87.6 )   $ 32.9       $ 30.3       $ 7.9       $ 37.9   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Source: Bloomberg and MSCI

 

(1)  Includes $82.8 billion and $74.8 billion of AUM related to certain Vanguard ETFs as of March 31, 2013 and June 30, 2013, respectively.

 

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The following table sets forth the average value of assets in ETFs linked to MSCI indexes for the periods indicated:

 

     Quarterly Average  
     2013      2014  
(in billions)    March      June      September      December      March      June  

AUM in ETFs linked to MSCI Indexes

   $ 369.0       $ 324.1       $ 286.2       $ 321.5       $ 330.8       $ 359.6   

Source: Bloomberg and MSCI

The historical values of the assets in ETFs linked to our indexes as of the last day of the month and the monthly average balance can be found under the link “AUM in ETFs Linked to MSCI Indexes” on our website at http://ir.msci.com. This information is updated on the second U.S. business day of each month. Information contained on our website is not incorporated by reference into this Quarterly Report on Form 10-Q or any other report filed with the Securities and Exchange Commission.

Our risk management analytics products offer risk and performance assessment frameworks for managing and monitoring investments in organizations globally. These products allow clients to analyze investments in a variety of asset classes and are based on our proprietary integrated fundamental multi-factor risk models, value-at-risk methodologies, performance attribution frameworks and asset valuation models. We also offer products for monitoring, analyzing and reporting on institutional assets. Additionally, we provide products consisting of software applications which help users value, model and hedge physical assets and derivatives across a number of market segments including energy and commodity assets.

Revenues related to risk management analytics products increased $7.5 million, or 10.7%, to $77.7 million for the three months ended June 30, 2014 compared to $70.2 million for the three months ended June 30, 2013. The increase in risk management analytics revenues was driven primarily by higher revenues from our RiskManager and BarraOne products and the timing of client implementations, in addition to higher revenues from our hedge fund transparency and InvestorForce products.

Our portfolio management analytics products consist of equity portfolio analytics tools and fixed income portfolio analytics tools. Revenues related to portfolio management analytics products increased $0.2 million, or 0.8%, to $26.3 million for the three months ended June 30, 2014 compared to $26.1 million for three months ended June 30, 2013.

Run Rate

At the end of any period, we generally have subscription and investment product license agreements in place for a large portion of total revenues for the following 12 months. We measure the fees related to these agreements and refer to this as “Run Rate.” The Run Rate at a particular point in time represents the forward-looking revenues for the next 12 months from all subscriptions and investment product licenses we currently provide to our clients under renewable contracts or agreements assuming all contracts or agreements that come up for renewal are renewed and assuming then-current currency exchange rates. For any license where fees are linked to an investment product’s assets or trading volume, the Run Rate calculation reflects, for ETF fees, the market value on the last trading day of the period, and for non-ETF funds and futures and options, the most recent periodic fee earned under such license or subscription. The Run Rate does not include fees associated with “one-time” and other non-recurring transactions. In addition, we remove from the Run Rate the fees associated with any subscription or investment product license agreement with respect to which we have received a notice of termination or non-renewal during the period and determined that such notice evidences the client’s final decision to terminate or not renew the applicable subscription or agreement, even though such notice is not effective until a later date.

Because the Run Rate represents potential future revenues, there is typically a delayed impact on our operating revenues from changes in our Run Rate. In addition, the actual amount of revenues we will realize over the following 12 months will differ from the Run Rate because of:

 

    revenues associated with new subscriptions and non-recurring sales;

 

    modifications, cancellations and non-renewals of existing agreements, subject to specified notice requirements;

 

    fluctuations in asset-based fees, which may result from changes in certain investment products’ total expense ratios, market movements or from investment inflows into and outflows from investment products linked to our indexes;

 

    fluctuations in fees based on trading volumes of futures and options contracts linked to our indexes;

 

    fluctuations in the number of hedge funds for which we provide investment information and risk analysis to hedge fund investors;

 

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    price changes;

 

    revenue recognition differences under U.S. GAAP, including timing of implementation and report deliveries;

 

    fluctuations in foreign exchange rates; and

 

    the impact of acquisitions and dispositions.

The following table sets forth the Run Rates as of the dates indicated and the growth percentage over the periods indicated:

 

     As of         
     June 30,      June 30,      March 31,      Year-Over-
Year
    Sequential  
     2014      2013      2014      Comparison     Comparison  
     (in thousands)               

Run Rates

             

Index and ESG products

             

Subscription

   $ 393,848       $ 350,833      $ 382,383        12.3 %     3.0

Asset-based fees

     176,554         131,716        161,882        34.0 %     9.1
  

 

 

    

 

 

    

 

 

      

Index and ESG products total

     570,402         482,549        544,265        18.2 %     4.8

Risk management analytics

     309,619         293,816        307,460        5.4 %     0.7

Portfolio management analytics

     106,486         104,524        103,531        1.9 %     2.9
  

 

 

    

 

 

    

 

 

      

Total Run Rate

   $ 986,507       $ 880,889      $ 955,256        12.0 %     3.3
  

 

 

    

 

 

    

 

 

      

Subscription total

   $ 809,953       $ 749,173      $ 793,374        8.1 %     2.1

Asset-based fees total

     176,554         131,716        161,882        34.0 %     9.1
  

 

 

    

 

 

    

 

 

      

Total Run Rate

   $ 986,507       $ 880,889      $ 955,256        12.0 %     3.3
  

 

 

    

 

 

    

 

 

      

Total Run Rate grew by $105.6 million, or 12.0%, to $986.5 million as of June 30, 2014 compared to $880.9 million as of June 30, 2013. Changes in foreign currency rates positively impacted Run Rate by $7.2 million relative to June 30, 2013.

Subscription Run Rate from the index and ESG products grew by $43.0 million, or 12.3%, to $393.8 million at June 30, 2014 from $350.8 million at June 30, 2013, driven primarily by growth in our equity index benchmark and data products and aided by strong growth in our IPD real estate and ESG products. Changes in foreign currency rates positively impacted Run Rate by $3.8 million relative to June 30, 2013.

Asset-based fee Run Rate from index and ESG products increased by 34.0% to $176.6 million at June 30, 2014 from $131.7 million at June 30, 2013. The increase was primarily driven by higher inflows into ETFs linked to MSCI indexes and, to a lesser extent, higher market performance.

As of June 30, 2014, AUM in ETFs linked to MSCI indexes were $378.7 billion, up $109.0 billion, or 40.4%, from June 30, 2013 and up $37.9 billion, or 11.1%, from March 31, 2014. During the three months ended June 30, 2014, MSCI-linked ETFs were impacted by market increases of $15.2 billion and net inflows of $22.7 billion.

Risk management analytics products Run Rate increased $15.8 million, or 5.4%, to $309.6 million at June 30, 2014 compared to $293.8 million at June 30, 2013, primarily driven by strong growth from RiskManager products. Changes in foreign currency positively benefited Run Rate by $3.2 million compared to Run Rate at June 30, 2013.

 

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Portfolio management analytics products Run Rate increased $2.0 million, or 1.9%, to $106.5 million at June 30, 2014 from $104.5 million at June 30, 2013. The increase was driven primarily by an increase in sales of our equity analytics products and higher retention rates. Changes in foreign currency rates had only a modest impact on Run Rate compared to Run Rate at June 30, 2013.

Aggregate and Core Retention Rates

The following table sets forth our Aggregate Retention Rates by product category for the indicated three months ended:

 

     June 30,     June 30,  
     2014     2013  

Index and ESG products

     94.1     94.0

Risk management analytics

     91.6     92.2

Portfolio management analytics

     94.8     87.0

Total

     93.2     92.3

The following table sets forth our Core Retention Rates by product category for the indicated three months ended:

 

     June 30,     June 30,  
     2014     2013  

Index and ESG products

     94.1     94.1

Risk management analytics

     91.6     92.8

Portfolio management analytics

     95.8     87.5

Total

     93.3     92.6

The Aggregate Retention Rates for a period are calculated by annualizing the cancellations for which we have received a notice of termination or we believe there is an intention to not renew during the period and we believe that such notice or intention evidences the client’s final decision to terminate or not renew the applicable agreement, even though such notice is not effective until a later date. This annualized cancellation figure is then divided by the subscription Run Rate at the beginning of the year to calculate a cancellation rate. This cancellation rate is then subtracted from 100% to derive the annualized Aggregate Retention Rate for the period. The Aggregate Retention Rate is computed on a product-by-product basis. Therefore, if a client reduces the number of products to which it subscribes or switches between our products, we treat it as a cancellation. In addition, we treat any reduction in fees resulting from renegotiated contracts as a cancellation in the calculation to the extent of the reduction.

For the calculation of the Core Retention Rate, the same methodology is used except the cancellations in the period are reduced by the amount of product swaps. We do not calculate Aggregate or Core Retention Rates for that portion of our Run Rate attributable to assets in investment products linked to our indexes or to trading volumes of futures and options contracts linked to our indexes.

In our businesses, Aggregate and Core Retention Rates are generally higher during the first half and lower in the second half of the year.

Operating Expenses

We group our operating expenses into four categories:

 

    Cost of services

 

    Selling, general and administrative (“SG&A”)

 

    Amortization of intangible assets

 

    Depreciation and amortization of property, equipment and leasehold improvements

In both the cost of services and SG&A expense categories, compensation and benefits represent the majority of our expenses. Other costs associated with the number of employees, such as office space, are included in both the cost of services and SG&A expense categories and are consistent with the allocation of employees to those respective areas.

 

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The following table shows operating expenses by each of the categories:

 

     Three Months Ended
June 30,
               
     2014      2013      Increase/(Decrease)  
     (in thousands)                

Cost of services:

           

Compensation and benefits

   $ 56,668      $ 51,669      $ 4,999        9.7

Non-compensation expenses

     20,148        18,027        2,121        11.8
  

 

 

    

 

 

    

 

 

    

Total cost of services

     76,816        69,696        7,120        10.2

Selling, general and administrative:

           

Compensation and benefits

     46,015        35,951        10,064        28.0

Non-compensation expenses

     25,501        16,891        8,610        51.0
  

 

 

    

 

 

    

 

 

    

Total selling, general and administrative

     71,516        52,842        18,674        35.3

Amortization of intangible assets

     11,442        11,222        220        2.0

Depreciation and amortization of property, equipment, and leasehold improvements

     5,921         4,774         1,147         24.0
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 165,695      $ 138,534      $ 27,161        19.6
  

 

 

    

 

 

    

 

 

    

Compensation and benefits

   $ 102,683       $ 87,620       $ 15,063         17.2

Non-compensation expenses

     45,649         34,918         10,731         30.7

Amortization of intangible assets

     11,442        11,222        220         2.0

Depreciation and amortization of property, equipment, and leasehold improvements

     5,921         4,774         1,147         24.0
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 165,695      $ 138,534      $ 27,161        19.6
  

 

 

    

 

 

    

 

 

    

Operating expenses were $165.7 million for the three months ended June 30, 2014, an increase of $27.2 million, or 19.6%, compared to $138.5 million for the three months ended June 30, 2013.

Compensation and benefits expenses represent the majority of our expenses across all of our operating functions and typically have represented approximately 60% of total operating expenses. These costs generally contribute to the majority of our expense increases from period to period, reflecting increased staffing levels along with increased compensation and benefits expenses for current staff. We had 2,762 and 2,346 employees not related to the ISS operations as of June 30, 2014 and 2013, respectively. Continued growth of our emerging market centers around the world is an important factor in our ability to manage and control the growth of our compensation and benefit expenses. As of June 30, 2014, 49.2% of our employees were located in emerging market centers compared to 43.1% of our employees who did not leave as part of the ISS disposition as of June 30, 2013.

During the three months ended June 30, 2014, compensation and benefits costs were $102.7 million, an increase of $15.1 million, or 17.2%, compared to $87.6 million for the three months ended June 30, 2013. The increase in compensation and benefits costs was driven primarily by an increase in overall headcount of 17.7%.

Non-compensation expenses for the three months ended June 30, 2014 increased $10.7 million, or 30.7%, to $45.6 million compared to $34.9 million for the three months ended June 30, 2013. The increase reflected higher information technology, professional services, occupancy and recruiting costs, among other items.

Cost of Services

Cost of services includes costs related to our research, data management and production, software engineering and product management functions. Costs in these areas include staff compensation and benefits, occupancy costs, market data fees and information technology services. Compensation and benefits generally contribute to a majority of our expense increases from period to period, reflecting increased staffing levels and increased compensation and benefits for existing staff. For the three months ended June 30, 2014, total cost of services increased $7.1 million, or 10.2%, to $76.8 million compared to $69.7 million for the three months ended June 30, 2013.

Compensation and benefits expenses for the three months ended June 30, 2014 increased $5.0 million, or 9.7%, to $56.7 million compared to $51.7 million for the three months ended June 30, 2013. The increase in compensation and benefits expenses was primarily impacted by increased staffing levels and increased compensation and benefits related to current staff.

Non-compensation expenses for the three months ended June 30, 2014 increased $2.1 million, or 11.8%, to $20.1 million compared to $18.0 million for the three months ended June 30, 2013. The increase was primarily driven by higher costs related to occupancy, information technology and market data.

 

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Selling, General and Administrative

SG&A includes expenses for our sales and marketing staff and our finance, human resources, legal and compliance, information technology infrastructure and corporate administration personnel. As with cost of services, the largest expense in this category relates to compensation and benefits. Other significant expenses are for occupancy costs, third-party professional fees and information technology costs. For the three months ended June 30, 2014, SG&A increased $18.7 million, or 35.3%, to $71.5 million compared to $52.8 million for the three months ended June 30, 2013.

Compensation and benefits expenses increased 28.0% to $46.0 million for the three months ended June 30, 2014 compared to $36.0 million for the three months ended June 30, 2013. Similar to compensation and benefits expenses in cost of services, the increase was primarily impacted by increased staffing levels and increased compensation and benefits related to current staff.

Non-compensation expenses for the three months ended June 30, 2014 increased 51.0% to $25.5 million compared to $16.9 million for the three months ended June 30, 2013. The increase was primarily driven by higher costs related to professional services, information technology and recruiting.

Amortization of Intangible Assets

Amortization of intangible assets expense relates to the intangible assets arising from the acquisitions of Barra, LLC in June 2004, RiskMetrics Group, LLC in June 2010, Measurisk, LLC in July 2010, IPD Group Limited in November 2012 and Investor Force Holdings, Inc. in January 2013, as well as capitalized software development costs. Amortization of intangible assets expense totaled $11.4 million and $11.2 million for the three months ended June 30, 2014 and 2013, respectively.

Depreciation and Amortization of Property, Equipment and Leasehold Improvements

Depreciation and amortization of property, equipment and leasehold improvements was $5.9 million and $4.8 million for the three months ended June 30, 2014 and 2013, respectively. The increase was related to higher depreciation associated with continued investment in information technology infrastructure.

Other Expense (Income), Net

Other expense (income), net for the three months ended June 30, 2014 was $4.4 million, a decrease of 25.7% compared to $6.0 million for the three months ended June 30, 2013, primarily driven by lower interest rates and lower average outstanding principal on our debt.

Provision For Income Taxes

The provision for income tax expense for the three months ended June 30, 2014 was $27.3 million, a decrease of $0.5 million, or 1.7%, compared to $27.8 million for the three months ended June 30, 2013. These amounts reflect effective tax rates of 32.4% and 33.1% for the three months ended June 30, 2014 and 2013, respectively.

The provision for income tax expense for the three months ended June 30, 2014 included a benefit of $2.6 million related to state taxes and the release of reserves associated with certain IRS examinations. Excluding the impact of these items, the effective tax rate was 35.6% for the three months ended June 30, 2014.

Income from Discontinued Operations, Net of Income Taxes

On April 30, 2014, MSCI completed the sale of ISS for cash consideration of $367.4 million, subject to final working capital adjustments. ISS, together with the previously sold CFRA product line, is reflected as discontinued operations in our unaudited condensed consolidated financial statements.

Income from discontinued operations, net of income taxes was $50.9 million for the three months ended June 30, 2014 compared to $4.9 million for the three months ended June 30, 2013. The three months ended June 30, 2014 included a net gain of $48.1 million resulting from the disposition of ISS.

 

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Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

Results of Operations

The following table presents the results of operations for the six months ended June 30, 2014 and 2013:

 

     Six Months Ended
June 30,
       
     2014     2013     Increase/(Decrease)  
     (in thousands, except per share data)  

Operating revenues

   $ 493,914      $ 447,892     $ 46,022        10.3

Operating expenses:

        

Cost of services

     152,243        134,996       17,247        12.8

Selling, general and administrative

     139,174        108,357       30,817        28.4

Amortization of intangible assets

     22,712        22,388       324        1.4

Depreciation and amortization of property, equipment, and leasehold improvements

     11,749        9,371       2,378        25.4
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     325,878        275,112       50,766        18.5
  

 

 

   

 

 

   

 

 

   

Operating income

     168,036        172,780       (4,744     (2.7 %) 

Other expense (income), net

     10,422        14,686       (4,264     (29.0 %) 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before provision for income taxes

     157,614        158,094        (480     (0.3 %) 

Provision for income taxes

     53,665        48,995       4,670        9.5
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     103,949        109,099        (5,150     (4.7 %) 

Income from discontinued operations, net of income taxes

     84,110        10,891        73,219        n/m   
  

 

 

   

 

 

   

 

 

   

Net income

   $ 188,059      $ 119,990     $ 68,069        56.7
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share:

        

From continuing operations

   $ 0.89      $ 0.90     $ (0.01     (1.1 %) 

From discontinued operations

     0.71        0.09        0.62        n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per basic common share

   $ 1.60      $ 0.99      $ 0.61        61.6
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share:

        

From continuing operations

   $ 0.88      $ 0.89     $ (0.01     (1.1 %) 

From discontinued operations

     0.71        0.09        0.62        n/m   
  

 

 

   

 

 

   

 

 

   

Earnings per diluted common share

   $ 1.59      $ 0.98      $ 0.61        62.2
  

 

 

   

 

 

   

 

 

   

Operating margin

     34.0     38.6    
  

 

 

   

 

 

     

n/m: not meaningful

Operating Revenues

The following table summarizes the revenue by product category for the six months ended June 30, 2014 compared to the six months ended June 30, 2013:

 

     Six Months Ended
June 30,
        
   2014      2013      Increase/
(Decrease)
 
     (in thousands)        

Index and ESG:

          

Subscriptions

   $ 203,505       $ 180,088       $ 23,417        13.0

Asset-based fees

     84,995         73,485         11,510        15.7
  

 

 

    

 

 

    

 

 

   

Total index and ESG products

     288,500         253,573         34,927        13.8

Risk management analytics

     153,246         140,584         12,662        9.0

Portfolio management analytics

     52,168         53,735         (1,567     (2.9 %) 
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 493,914       $ 447,892       $ 46,022        10.3
  

 

 

    

 

 

    

 

 

   

Recurring subscriptions

   $ 400,237       $ 365,996       $ 34,241        9.4

Asset-based fees

     84,995         73,485         11,510        15.7

Non-recurring revenue

     8,682         8,411         271        3.2
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 493,914       $ 447,892       $ 46,022        10.3
  

 

 

    

 

 

    

 

 

   

 

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Total operating revenues for the six months ended June 30, 2014 increased $46.0 million, or 10.3%, to $493.9 million compared to $447.9 million for the six months ended June 30, 2013.

Revenues related to our index and ESG products increased 13.8% to $288.5 million for the six months ended June 30, 2014 compared to $253.6 million for the six months ended June 30, 2013.

Subscription revenues from the index and ESG products were up $23.4 million, or 13.0%, to $203.5 million for the six months ended June 30, 2014 compared to $180.1 million for the six months ended June 30, 2013, driven primarily by growth in revenues from our equity index benchmark products.

Asset-based fee revenues attributable to the index and ESG products increased $11.5 million, or 15.7%, to $85.0 million for the six months ended June 30, 2014 compared to $73.5 million for the six months ended June 30, 2013. The increase in asset-based fee revenues resulted from a shift in the overall mix toward higher fee products, which more than offset a decline of $1.2 billion, or 0.3%, in the average value of assets in the ETFs linked to MSCI indexes. The decrease in the average value of assets in ETFs linked to MSCI indexes was primarily related to the transition of the Vanguard ETFs, which had an average value of assets of $60.5 billion for the six months ended June 30, 2013. Excluding the $60.5 billion related to the Vanguard ETFs, the average value of assets in ETFs linked to MSCI indexes would have increased by 20.7%.

The following table sets forth the average value of assets in ETFs linked to MSCI indexes for the year-to-date periods indicated:

 

     Year-to-Date Average  
     2013      2014  
$ in Billions    March      June      September      December      March      June  

AUM in ETFs linked to MSCI Indexes

   $ 369.0       $ 346.6       $ 326.4       $ 325.0       $ 330.8       $ 345.4   

Source: Bloomberg and MSCI

Revenues related to risk management analytics products increased 9.0% to $153.2 million for the six months ended June 30, 2014 compared to $140.6 million for the six months ended June 30, 2013. The increase was primarily driven by higher revenues from our RiskManager and BarraOne products.

Revenues related to portfolio management analytics products decreased 2.9% to $52.2 million for the six months ended June 30, 2014 compared to $53.7 million for six months ended June 30, 2013. The decrease in revenues was the result of lower sales of our equity analytics products in prior periods, as well as lower revenues from our fixed income analytics products.

Aggregate and Core Retention Rates

The following table sets forth our Aggregate Retention Rates by product category for the indicated six months ended:

 

     June 30,
2014
    June 30,
2013
 

Index and ESG products

     94.5     94.5

Risk management analytics

     91.3     92.8

Portfolio management analytics

     92.7     84.3

Total

     93.0     92.3

 

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The following table sets forth our Core Retention Rates by product category for the indicated six months ended:

 

     June 30,
2014
    June 30,
2013
 

Index and ESG products

     94.5     94.6

Risk management analytics

     91.3     93.3

Portfolio management analytics

     94.6     85.1

Total

     93.3     92.6

Operating Expenses

The following table shows operating expenses by each of the categories:

 

     Six Months Ended
June 30,
               
     2014      2013      Increase/(Decrease)  
     (in thousands)                

Cost of services:

     

Compensation and benefits

   $ 112,950      $ 101,073      $ 11,877        11.8

Non-compensation expenses

     39,293        33,923        5,370        15.8
  

 

 

    

 

 

    

 

 

    

Total cost of services

     152,243        134,996        17,247        12.8

Selling, general and administrative:

     

Compensation and benefits

     92,148        76,301        15,847        20.8

Non-compensation expenses

     47,026        32,056        14,970        46.7
  

 

 

    

 

 

    

 

 

    

Total selling, general and administrative

     139,174        108,357        30,817        28.4

Amortization of intangible assets

     22,712        22,388        324        1.4

Depreciation and amortization of property, equipment, and leasehold improvements

     11,749         9,371         2,378         25.4
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 325,878      $ 275,112      $ 50,766        18.5
  

 

 

    

 

 

    

 

 

    

Compensation and benefits

   $ 205,098       $ 177,374       $ 27,724         15.6

Non-compensation expenses

     86,319         65,979         20,340         30.8

Amortization of intangible assets

     22,712        22,388        324         1.4

Depreciation and amortization of property, equipment, and leasehold improvements

     11,749         9,371         2,378         25.4
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 325,878      $ 275,112      $ 50,766        18.5
  

 

 

    

 

 

    

 

 

    

Operating expenses were $325.9 million for the six months ended June 30, 2014, an increase of $50.8 million, or 18.5%, compared to $275.1 million for the six months ended June 30, 2013.

During the six months ended June 30, 2014, compensation and benefits costs were $205.1 million, an increase of $27.7 million, or 15.6%, compared to $177.4 million for the six months ended June 30, 2013, primarily driven by an increase in overall headcount.

Non-compensation expenses for the six months ended June 30, 2014 were $86.3 million, an increase of $20.3 million, or 30.8%, compared to $66.0 million for the six months ended June 30, 2013, reflecting increases in professional services, information technology, occupancy, recruiting, marketing and market data fees.

Cost of Services

For the six months ended June 30, 2014, total cost of services increased 12.8% to $152.2 million compared to $135.0 million for the six months ended June 30, 2013. Compensation and benefits expenses for the six months ended June 30, 2014 increased $11.9 million to $113.0 million compared to $101.1 million for the six months ended June 30, 2013. The increase in compensation and benefits expenses was primarily impacted by increased staffing levels and increased compensation and benefits related to current staff.

 

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Non-compensation expenses for the six months ended June 30, 2014 increased $5.4 million to $39.3 million compared to $33.9 million for the six months ended June 30, 2013. The increase was primarily driven by higher costs related to occupancy, market data, information technology and professional services.

Selling, General and Administrative

For the six months ended June 30, 2014, SG&A was $139.2 million, an increase of $30.8 million, or 28.4%, compared to $108.4 million for the six months ended June 30, 2013. Compensation and benefits expenses increased $15.8 million to $92.1 million for the six months ended June 30, 2014 compared to $76.3 million for the six months ended June 30, 2013. The increase in compensation and benefits expenses was primarily impacted by increased staffing levels and increased compensation and benefits related to current staff.

Non-compensation expenses for the six months ended June 30, 2014 increased 46.7% to $47.0 million compared to $32.1 million for the six months ended June 30, 2013. The increase was primarily driven by higher costs related to professional services, information technology, recruiting and marketing.

Amortization of Intangible Assets

Amortization of intangible assets expense totaled $22.7 million and $22.4 million for the six months ended June 30, 2014 and 2013, respectively.

Depreciation and Amortization of Property, Equipment and Leasehold Improvements

Depreciation and amortization of property, equipment, and leasehold improvements totaled $11.7 million and $9.4 million for the six months ended June 30, 2014 and 2013, respectively. The increase was related to higher depreciation associated with continued investment in information technology infrastructure.

Other Expense (Income), Net

Other expense (income), net for the six months ended June 30, 2014 was $10.4 million, a decrease of 29.0% compared to $14.7 million for the six months ended June 30, 2013, primarily driven by lower interest rates and lower average outstanding principal on our debt.

Provision for Income Taxes

The provision for income tax expense for the six months ended June 30, 2014 was $53.7 million, an increase of $4.7 million, or 9.5%, compared to $49.0 million for the six months ended June 30, 2013. These amounts reflect effective tax rates of 34.0% and 31.0% for the six months ended June 30, 2014 and 2013, respectively. Excluding $2.7 million of benefit related to state taxes and the release of reserves, the effective tax rate was 35.8% for the six months ended June 30, 2014.

Income from Discontinued Operations, Net of Income Taxes

Income from discontinued operations, net of income taxes was $84.1 million for the six months ended June 30, 2014 compared to $10.9 million for six months ended June 30, 2013. The six months ended June 30, 2014 included a net gain of $78.7 million resulting from the disposition of ISS.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, “Introduction and Basis of Presentation,” of the Notes to Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, 2013 and also in Note 2, “Recent Accounting Standards Updates,” in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended December 31, 2013. There have been no significant changes in our accounting policies or critical accounting estimates since the end of the fiscal year ended December 31, 2013.

Liquidity and Capital Resources

On June 1, 2010, we entered into the 2010 Credit Facility. On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, we entered into the Amended and Restated Credit Facility. The Amended and Restated Credit Facility provides for the incurrence of the 2012 Term Loan in an aggregate amount of $880.0 million and the 2012 Revolving Credit Facility in an aggregate amount of $100.0 million. The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, we made a $15.0 million prepayment on the 2012 Term Loan.

 

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On December 12, 2013, we entered into the New Amended and Restated Credit Facility. We also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the New Amended and Restated Credit Facility, we are required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which will be $658.1 million (assuming no further prepayments).

We require capital to fund ongoing operations, internal growth initiatives and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, existing cash and cash equivalents and credit capacity under our credit facilities. We intend to use these sources of liquidity to service our existing and future debt obligations and fund our working capital requirements, capital expenditures, investments, acquisitions and repurchases of our common stock. In connection with our business strategy, we regularly evaluate acquisition opportunities. We believe our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth.

The effective combined rate on our debt was 2.30% at June 30, 2014.

The obligations under the New Amended and Restated Credit Facility are guaranteed by each of our material direct and indirect wholly-owned domestic subsidiaries, subject to limited exceptions. The obligations under the New Amended and Restated Credit Facility are secured by a lien on substantially all of the equity interests of our present and future material domestic subsidiaries, up to 65% of the equity interests of our first-tier foreign subsidiaries, and substantially all of our and our domestic subsidiaries’ present and future property and assets, subject to certain exceptions.

The New Amended and Restated Credit Facility contains affirmative and restrictive covenants that, among other things, limit our ability and the ability of our existing or future subsidiaries to:

 

    incur liens and further negative pledges;

 

    incur additional indebtedness or prepay, redeem or repurchase indebtedness;

 

    make loans or hold investments;

 

    merge, dissolve, liquidate, consolidate with or into another person;

 

    enter into acquisition transactions;

 

    make capital expenditures;

 

    issue disqualified capital stock;

 

    sell, transfer or dispose of assets;

 

    pay dividends or make other distributions in respect of our capital stock or engage in stock repurchases, redemptions and other restricted payments;

 

    create new subsidiaries;

 

    permit certain restrictions affecting our subsidiaries;

 

    change the nature of our business, accounting policies or fiscal periods;

 

    enter into any transactions with affiliates other than on an arm’s length basis; and

 

    amend our organizational documents or amend, modify or change the terms of certain agreements relating to our indebtedness.

The New Amended and Restated Credit Facility also contains customary events of default, including those relating to non-payment, breach of representations, warranties or covenants, cross-default and cross-acceleration, bankruptcy and insolvency events, invalidity or impairment of loan documentation or collateral, change of control and customary ERISA defaults. None of the restrictions above are expected to impact our ability to effectively operate the business.

The New Amended and Restated Credit Facility also requires us and our subsidiaries to achieve financial and operating results sufficient to maintain compliance with the following financial ratios on a consolidated basis through the termination of the New Amended and Restated Credit Facility: (1) the maximum Consolidated Leverage Ratio (as defined in the New Amended and Restated Credit Facility) measured quarterly on a rolling four-quarter basis shall not exceed 3.25:1.00 and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the New Amended and Restated Credit Facility) measured quarterly on a rolling four-quarter basis shall be at least 5.00:1.00. As of June 30, 2014, our Consolidated Leverage Ratio (as defined in the New Amended and Restated Credit Facility) was 1.88:1.00 and our Consolidated Interest Coverage Ratio (as defined in the New Amended and Restated Credit Facility) was 21.90:1.00.

 

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On February 6, 2014, we entered into a new ASR agreement to initiate share repurchases aggregating $100.0 million. As a result, we received 1.7 million shares on February 7, 2014 and 0.6 million shares on May 5, 2014 for a combined average purchase price of $43.10 per share.

Cash Flows

Cash and cash equivalents

 

     As of  
     June 30,
2014
     December 31,
2013
 
     (in thousands)  

Cash and cash equivalents

   $ 683,239       $ 358,434   

Cash and cash equivalents were $683.2 million and $358.4 million as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013, $71.4 million and $95.6 million, respectively, of the cash and cash equivalents were held by foreign subsidiaries, which could be subject to U.S. federal income taxation on repatriation to the U.S. and some of which could be subject to local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash is further restricted by local laws.

We believe that domestic cash flows from operations, together with existing cash and cash equivalents, will continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as scheduled debt repayments and material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect existing foreign cash flows from operations, together with existing cash and cash equivalents, will continue to be sufficient to fund our foreign operating activities for at least the next 12 months and for the foreseeable future thereafter.

Cash provided by (used in) operating, investing and financing activities

 

     For the Six Months Ended
June 30,
 
     2014     2013  
     (in thousands)  

Cash provided by operating activities

   $ 94,052      $ 156,676   

Cash provided by investing activities

     340,855        39,141   

Cash used in financing activities

     (110,849     (38,357

Effect of exchange rates on cash and cash equivalents

     747        (6,068
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 324,805      $ 151,392   
  

 

 

   

 

 

 

Cash flows from operating activities

Cash flows from operating activities consist of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $94.1 million and $156.7 million for the six months ended June 30, 2014 and 2013, respectively. The year-over-year decrease reflects increased expenses and a related increase in cash payments as well as increased payments for income taxes.

Our primary uses of cash from operating activities are for the payment of cash compensation expenses, office rent, technology costs, market data costs, interest expenses and income taxes. The payment of cash for compensation and benefits is historically at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year.

Cash flows from investing activities

Cash provided by investing activities was $340.9 million for the six months ended June 30, 2014 compared to $39.1 million for the six months ended June 30, 2013. The year-over-year increase in cash provided by investing activities primarily reflects net cash inflows resulting from the disposition of ISS during the six months ended June 30, 2014. Partially offsetting this were the final cash inflows from the maturation of short-term investments in the six months ended June 30, 2013. In the six months ended June 30, 2013 we began investing excess cash in money market funds and other similar cash equivalents rather than U.S. Treasury securities and other short-term investments as we had in prior periods.

 

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Cash flows from financing activities

Cash used in financing activities was $110.8 million and $38.4 million for the six months ended June 30, 2014 and 2013, respectively. The year-over-year change primarily reflects higher purchases of treasury shares, partially offset by lower repayments on our debt.

Balance Sheet Items

Total current assets increased 61.3% to $1,006.9 million as of June 30, 2014 from $624.3 million as of December 31, 2013. The increase was primarily driven by an increase in cash resulting from the disposition of ISS during the six months ended June 30, 2014. Total current liabilities decreased 5.5% to $475.5 million as of June 30, 2014 from $503.0 million as of December 31, 2013. The decrease was primarily driven by a decrease in accrued compensation and benefits, partially offset by an increase in other accrued liabilities.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

We are subject to foreign currency exchange fluctuation risk. Exchange rate movements can impact the U.S. dollar-reported value of our revenues, expenses, assets and liabilities denominated in non-U.S. dollar currencies or where the currency of such items is different than the functional currency of the entity where these items were recorded.

A significant portion of our revenues from our index-linked investment products are based on fees earned on the value of assets invested in securities denominated in currencies other than the U.S. dollar. For all operations outside the United States where the Company has designated the local non-U.S. dollar currency as the functional currency, revenues and expenses are translated using average monthly exchange rates and assets and liabilities are translated into U.S. dollars using month-end exchange rates. For these operations, currency translation adjustments arising from a change in the rate of exchange between the functional currency and the U.S. dollar are accumulated in a separate component of shareholders’ equity. In addition, transaction gains and losses arising from a change in exchange rates for transactions denominated in a currency other than the functional currency of the entity are reflected in non-operating “Other expense (income), net” in our Unaudited Condensed Consolidated Statements of Income.

Revenues from index-linked investment products represented approximately $85.0 million, or 17.2%, and $73.5 million, or 14.4%, of our total revenues for the six months ended June 30, 2014 and 2013, respectively. While our fees for index-linked investment products are generally invoiced in U.S. dollars, the fees are based on the investment product’s assets, a large majority of which are invested in securities denominated in currencies other than the U.S. dollar. Accordingly, declines in such other currencies against the U.S. dollar will decrease the fees payable to us under such licenses. In addition, declines in such currencies against the U.S. dollar could impact the attractiveness of such investment products resulting in net fund outflows, which would further reduce the fees payable under such licenses.

We generally invoice our clients in U.S. dollars; however, we invoice a portion of our clients in Euros, British pounds sterling, Japanese yen and a limited number of other non-U.S. dollar currencies. For the six months ended June 30, 2014 and 2013, approximately 15.5% and 15.7% of our total revenues, respectively, were invoiced in currencies other than U.S. dollars. For the six months ended June 30, 2014, 53.8% of our foreign currency revenues were in Euros, 24.1% were in British pounds sterling and 11.5% were in Japanese yen. For the six months ended June 30, 2013, 55.0% of our foreign currency revenues were in Euros, 21.7% were in Japanese yen and 13.0% were in British pounds sterling.

We are exposed to additional foreign currency risk in certain of our operating costs. Approximately $159.5 million, or 44.2%, and $137.9 million, or 42.8%, of our total operating costs for the six months ended June 30, 2014 and 2013, respectively, were denominated in foreign currencies, the significant majority of which were denominated in British pounds sterling, Euros, Indian rupees, Swiss francs, Hungarian forints, Hong Kong dollars, and Mexican pesos. Expenses incurred in foreign currency may increase as we expand our business outside the U.S.

We have certain monetary assets and liabilities denominated in currencies other than local functional amounts and when these balances were remeasured into their local functional currency, either a gain or a loss resulted from the change of the value of the functional currency as compared to the originating currencies. We manage foreign currency exchange rate risk, in part, through the use of derivative financial instruments comprised principally of forward contracts on foreign currency which are not designated as hedging instruments for accounting purposes. The objective of the derivative instruments is to minimize the income statement impact

 

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associated with intercompany loans that are denominated in certain foreign currencies. As a result of these positions, we recognized total foreign currency exchange losses of $1.6 million for the six months ended June 30, 2014 and 2013. These amounts were recorded in “Other expense (income), net” in our Unaudited Condensed Consolidated Statements of Income.

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling $683.2 million at June 30, 2014 and $358.4 million at December 31, 2013, respectively. These amounts were held primarily in checking and money market accounts in the countries where we maintain banking relationships. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.

Borrowings under the 2012 Term Loan bear interest at a rate equal to the sum of LIBOR and a margin of 2.25%, which margin will be subject to adjustment based on our leverage ratio. As of June 30, 2014, the 2012 Term Loan, as amended, bore interest at 2.40%. Assuming an average of $792.3 million of variable rate debt outstanding, a hypothetical 100 basis point increase in LIBOR for a one year period would result in approximately $7.9 million of additional interest rate expense.

 

Item 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of June 30, 2014, and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 

Item 1. Legal Proceedings

Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company, which arise in the ordinary course of business. While the amounts claimed could be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that MSCI’s business, operating results, financial condition or cash flows in a particular period could be materially affected by certain contingencies. However, based on facts currently available, management believes that the disposition of matters that are currently pending or asserted will not, individually or in the aggregate, have a material effect on MSCI’s business, operating results, financial condition or cash flows.

 

Item 1A. Risk Factors

For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There have been no unregistered sales of equity securities.

 

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The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common shares during the three months ended June 30, 2014.

Issuer Purchases of Equity Securities

 

Period

   Total Number of
Shares Purchased(1)
     Average Price Paid
Per Share
     Total Number of
Shares Purchased As
Part of Publicly
Announced Plans or
Programs
     Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans  or
Programs (2)
 

Month #1

(April 1, 2014-April 30, 2014)

     40,111       $ 41.72         —         $ 300,000,000   

Month #2

(May 1, 2014-May 31, 2014)

     603,680       $ 43.10         602,035       $ 300,000,000   

Month #3

(June 1, 2014-June 30, 2014)

     55       $ 44.41         —         $ 300,000,000   
  

 

 

          

Total

     643,846       $ 43.01         602,035       $ 300,000,000   
  

 

 

          

 

(1)  Includes (i) shares withheld to satisfy tax withholding obligations on behalf of employees that occur upon vesting and delivery of outstanding shares underlying restricted stock units and (ii) shares repurchased pursuant to the 2012 Repurchase Program. The value of the shares withheld were determined using the fair market value of the Company’s common stock on the date of withholding, using a valuation methodology established by the Company.
(2)  See Note 8, “Commitments And Contingencies” of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information regarding our stock repurchase programs.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

An exhibit index has been filed as part of this report on page EX-1.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 6, 2014

 

MSCI INC.

(Registrant)

By:  

/s/ Robert Qutub

 

Robert Qutub

Chief Financial Officer,

Principal Financial Officer and Duly Authorized Signatory

 

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EXHIBIT INDEX

MSCI INC.

QUARTER ENDED JUNE 30, 2014

 

      3.1    Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Form 10-Q (File No. 001-33812), filed with the SEC on May 4, 2012 and incorporated by reference herein)
      3.2    Amended and Restated By-laws (filed as Exhibit 3.2 to the Company’s Form 10-Q (File No. 001-33812), filed with the SEC on May 4, 2012 and incorporated by reference herein)
    11    Statement Re: Computation of Earnings Per Common Share (The calculation of per share earnings is in Part I, Item 1, Note 5 to the Condensed Consolidated Financial Statements (Earnings Per Common Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K)
  *        15.1    Letter of awareness from PricewaterhouseCoopers LLP, dated August 6, 2014, concerning unaudited interim financial information
  *        15.2    Letter of awareness from Deloitte & Touche LLP, dated August 6, 2014, concerning unaudited interim financial information
  *        31.1    Rule 13a-14(a) Certification of the Chief Executive Officer
  *        31.2    Rule 13a-14(a) Certification of the Chief Financial Officer
  *     32.1    Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer
  *      101.INS    XBRL Instance Document
  *      101.SCH    XBRL Taxonomy Extension Schema Document
  *      101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
  *      101.LAB    XBRL Taxonomy Extension Label Linkbase Document
  *      101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
  *      101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

* Filed herewith.
** Furnished herewith.

 

EX-1