Item 2.
|
Managements 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, 2012 (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, 2012.
Overview
We are a leading global provider of investment decision support
tools, including indices, portfolio risk and performance analytics and corporate governance products and services. 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, 2013, we had offices in 37 cities in 24 countries to
help serve our diverse client base, with 52.3% of our revenue from clients in the Americas, 36.0% in Europe, the Middle East and Africa (EMEA) and 11.7% in Asia and Australia based on revenues for the six months ended June 30, 2013.
Our principal sales model in both of our business segments 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, in most cases, up-front. Additionally, we have increasing recurring subscriptions to our managed services offering
whereby we oversee the production of risk and performance reports on behalf of our clients. Our revenues also come from clients who use our indices as the basis for index-linked investment products such as ETFs. We also derive revenues from certain
institutional clients that use our indices 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 products assets. We
generate a limited amount of our revenues from certain exchanges that use our indices 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 overages relating to the proxy research and voting services, fees relating to recovery of securities class action
settlements and from certain products and services that are designed for one-time usage.
In evaluating our financial
performance, we focus on revenue growth in total and by product category as well as operating profit growth and the level of profitability as measured by our operating margin in total. 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 adding product management, sales and client support staff and facilities in locations around the world and adding staff and
supporting technology for our research and our data operations and our technology functions. At the same time, managing and controlling our operating expenses is very important to us and a distinct part of our culture. Over time, our goal is to keep
the rate of growth of our operating expenses below the rate of growth of our revenues, allowing us to expand our operating margins. However, at times, because of significant market opportunities, it may be more important for us to invest in our
business in order to support increased efforts to attract new clients and to develop new product offerings, rather than emphasize short-term operating margin expansion. Furthermore, in some periods our operating expense growth may exceed our
operating revenue growth due to the variability of revenues from several of our products, including our equity indices licensed as the basis of ETFs, IPD products that are recognized primarily upon delivery of reports to clients and non-recurring
fees.
Operating Segments
We operate under two segments: the Performance and Risk business and the Governance business. See Note 12, Segment Information, for further information about MSCIs operating segments.
25
Our Performance and Risk business is a leading global provider of investment decision
support tools, including indices and portfolio risk and performance analytics, credit analytics and environmental, social and governance (ESG) products. Our Performance and Risk products are used in many areas of the investment process,
including portfolio construction and rebalancing, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, assessment of social responsibility, environmental stewardship and
the effects of climate change on investments, investment manager selection and investment research. The flagship products within our Performance and Risk business are our global equity indices and ESG products marketed under the MSCI and MSCI ESG
brands, our market and credit risk analytics marketed under the RiskMetrics and Barra brands, our portfolio risk and performance analytics covering global equity and fixed income markets marketed under the Barra brand and our valuation models and
risk management software for the energy and commodities markets marketed under the FEA brand, our real estate indices and analytics marketed under the IPD brand and our products for monitoring, analyzing and reporting on institutional assets for
institutional investment consultants marketed under the InvestorForce brand.
Our Governance business is a leading provider of
corporate governance and specialized financial research and analysis services to institutional investors and corporations around the world. Among other things, the Governance business facilitates the voting of proxies by institutional investors and
provides in-depth research and analysis to help inform voting decisions and identify issuer-specific risk. The Governance business offers both global security coverage and fully integrated products and services, including proxy voting, policy
creation, research, vote recommendations, vote execution, post-vote disclosure and reporting and analytical tools. It also provides class action monitoring and claims filing services to aid institutional investors in the recovery of funds from
securities class action settlements. Within a firewall designed to separate it from the rest of the Governance business, ISS Corporate Services also provides products and services to corporate clients who may use those products and services to learn
about and improve their governance practices. The flagship products within our Governance business are our governance research and outsourced proxy voting and reporting services and our executive compensation analytics tools marketed under the ISS
brand. On March 31, 2013, we sold our CFRA product line, which offered clients specialized financial research and analytic services.
Revenues and expenses directly associated with each respective segment are included in determining its operating results. Other expenses that are not directly attributable to a particular segment are
allocated based upon allocation methodologies, including time estimates, headcount, net revenues and other relevant usage measures.
Factors Affecting the Comparability of Results
Term Loan Repricing
On June 1, 2010, we entered into a senior secured
credit agreement comprised of (i) a six-year term loan facility (the 2010 Term Loan) and (ii) a five-year revolving credit facility (the 2010 Revolving Credit Facility, together with the 2010 Term Loan, 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 (Amendment No. 2). Amendment No. 2 provided for the incurrence of a new senior secured term loan (the 2011 Term Loan). The proceeds of the 2011 Term Loan, together
with cash on hand, were used to repay the remaining outstanding balance of the 2010 Term Loan in full. The 2011 Term Loan would have matured in March 2017.
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 (the 2012 Term Loan) in an aggregate amount of $880.0 million and a $100.0 million senior secured revolving facility (the 2012
Revolving Credit Facility). The proceeds of the Amended and Restated Credit Facility, together with cash on hand, were used to repay the remaining outstanding principal of the then-existing 2011 Term Loan. The 2012 Term Loan and the 2012
Revolving Credit Facility mature on May 4, 2017. In connection with the repayment of the 2011 Term Loan, we terminated our then-existing interest rate swaps and have not entered into new interest rate swaps to hedge our debt as such swaps are
not required under the Amended and Restated Credit Facility. We incurred $20.6 million in expense related to the accelerated amortization of existing fees and the immediate recognition of new fees associated with this transaction in Interest
expense on our Condensed Consolidated Statement of Income for the six months ended June 30, 2012.
At June 30,
2013, the 2012 Term Loan bore interest of LIBOR plus 2.00%, or 2.20%.
26
Acquisitions
On November 30, 2012, we completed the acquisition of IPD Group Limited (IPD) by paying $124.8 million in cash. The acquisition of IPD expands our multi-asset class offering by
facilitating the integration of private real estate assets into our models, as well as adding a family of real estate indices to our family of equity indices.
On January 29, 2013, we completed the acquisition of Investor Force Holdings, Inc. (InvestorForce) by paying $23.6 million in cash. The acquisition of InvestorForce enhances our position
as a leader in performance analysis and risk transparency and furthers our goal of providing investment decision support tools to institutional investors across all client segments and asset classes.
The results of IPD and InvestorForce were not included in our results of operations until their acquisition dates. Since their respective
acquisition dates, the results of IPD and InvestorForce have been included as components of our Performance and Risk business.
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 MSCIs common stock beginning immediately and continuing through the year ended 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 a repurchase aggregating $100.0 million. On December 14, 2012, we received approximately 2.2 million shares representing the minimum number of common shares to be repurchased based on a
calculation using a specific capped price per share. On a time-weighted basis, these shares were no longer considered outstanding as of December 14, 2012. No additional shares were received under the ASR agreement through June 30, 2013.
See Note 14, Subsequent EventsCompletion of the December 2012 ASR Program, of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding the settlement of this ASR agreement.
The discussion of our unaudited results of operations for the three and six months ended June 30, 2013 and 2012 are
presented below. The results of operations for interim periods may not be indicative of future results.
Three Months Ended
June 30, 2013 Compared to the Three Months Ended June 30, 2012
Results of Operations
The following table presents the results of operations for the three months ended June 30, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Increase/
(Decrease)
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
257,898
|
|
|
$
|
238,565
|
|
|
$
|
19,333
|
|
|
|
8.1
|
%
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
83,359
|
|
|
|
73,243
|
|
|
|
10,116
|
|
|
|
13.8
|
%
|
Selling, general and administrative
|
|
|
57,612
|
|
|
|
57,602
|
|
|
|
10
|
|
|
|
|
%
|
Restructuring
|
|
|
|
|
|
|
(22
|
)
|
|
|
22
|
|
|
|
(100.0
|
%)
|
Amortization of intangible assets
|
|
|
14,509
|
|
|
|
15,959
|
|
|
|
(1,450
|
)
|
|
|
(9.1
|
%)
|
Depreciation and amortization of property, equipment, and leasehold improvements
|
|
|
5,246
|
|
|
|
4,662
|
|
|
|
584
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
160,726
|
|
|
|
151,444
|
|
|
|
9,282
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
97,172
|
|
|
|
87,121
|
|
|
|
10,051
|
|
|
|
11.5
|
%
|
Other expense (income), net
|
|
|
5,913
|
|
|
|
29,860
|
|
|
|
(23,947
|
)
|
|
|
(80.2
|
%)
|
Provision for income taxes
|
|
|
30,206
|
|
|
|
19,715
|
|
|
|
10,491
|
|
|
|
53.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
61,053
|
|
|
$
|
37,546
|
|
|
$
|
23,507
|
|
|
|
62.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
$
|
0.50
|
|
|
$
|
0.31
|
|
|
$
|
0.19
|
|
|
|
61.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share
|
|
$
|
0.50
|
|
|
$
|
0.30
|
|
|
$
|
0.20
|
|
|
|
66.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
37.7
|
%
|
|
|
36.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Operating Revenues
We operate under two segments: the Performance and Risk business and the Governance business. Our revenues are grouped into the following five product and/or service categories:
|
|
|
Risk management analytics
|
|
|
|
Portfolio management analytics
|
|
|
|
Energy and commodity analytics
|
The Performance and Risk business is comprised of index and ESG, risk management analytics, portfolio management analytics and energy and
commodity analytics products.
The following table summarizes the revenue by product category for the three months ended
June 30, 2013 compared to the three months ended June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Increase/
(Decrease)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Index and ESG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
$
|
95,200
|
|
|
$
|
75,829
|
|
|
$
|
19,371
|
|
|
|
25.5
|
%
|
Asset-based fees
|
|
|
36,970
|
|
|
|
34,094
|
|
|
|
2,876
|
|
|
|
8.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total index and ESG products
|
|
|
132,170
|
|
|
|
109,923
|
|
|
|
22,247
|
|
|
|
20.2
|
%
|
Risk management analytics
|
|
|
67,099
|
|
|
|
64,547
|
|
|
|
2,552
|
|
|
|
4.0
|
%
|
Portfolio management analytics
|
|
|
26,089
|
|
|
|
29,326
|
|
|
|
(3,237
|
)
|
|
|
(11.0
|
%)
|
Energy and commodity analytics
|
|
|
3,065
|
|
|
|
3,780
|
|
|
|
(715
|
)
|
|
|
(18.9
|
%)
|
Governance
|
|
|
29,475
|
|
|
|
30,989
|
|
|
|
(1,514
|
)
|
|
|
(4.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
257,898
|
|
|
$
|
238,565
|
|
|
$
|
19,333
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring subscriptions
|
|
$
|
213,502
|
|
|
$
|
198,104
|
|
|
$
|
15,398
|
|
|
|
7.8
|
%
|
Asset-based fees
|
|
|
36,970
|
|
|
|
34,094
|
|
|
|
2,876
|
|
|
|
8.4
|
%
|
Non-recurring revenue
|
|
|
7,426
|
|
|
|
6,367
|
|
|
|
1,059
|
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
257,898
|
|
|
$
|
238,565
|
|
|
$
|
19,333
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues for the three months ended June 30, 2013 increased $19.3 million, or 8.1%,
to $257.9 million compared to $238.6 million for the three months ended June 30, 2012. Subscription revenues consist of revenues related to our index and ESG subscriptions, risk management analytics, portfolio management analytics, energy and
commodity analytics and governance products. Excluding the impact of revenues attributable to IPD, InvestorForce and CFRA, revenues grew by 1.0%.
Our index and ESG products primarily consist of equity 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 to assess social responsibility, environmental stewardship and the effects of climate change on
28
investments, for research and for investment manager selection. 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 indices and non-recurring licenses of our index historical data. Revenues related to index and ESG products increased 20.2% to $132.2 million for the three months ended June 30, 2013 compared to $109.9 million for the
three months ended June 30, 2012. Excluding the impact of revenues attributable to IPD, revenues grew by 4.8%.
IPD
products contributed $17.0 million to our index and ESG product revenues during the three months ended June 30, 2013. Revenue from IPD products is substantially recognized based upon the delivery of products to clients. The second quarter is
expected to be the highest for revenues from IPD products, reflecting when a substantial portion of the IPD annual report product is delivered to clients.
Subscription revenues from the index and ESG products were up $19.4 million, or 25.5%, to $95.2 million for the three months ended June 30, 2013 compared to $75.8 million for the three months ended
June 30, 2012. Excluding the impact of revenues attributable to IPD, revenues grew by $2.4 million, or 3.1%, primarily attributable to growth in our benchmark products.
Asset-based fee revenues attributable to index and ESG products increased $2.9 million, or 8.4%, to $37.0 million for the three months ended June 30, 2013 compared to $34.1 million for the three
months ended June 30, 2012. The year-over-year difference resulted from higher fees from non-ETF passive funds and a change in the mix of ETFs linked to MSCI indices. Included in the three months ended June 30, 2013 and 2012 were
revenues of $0.8 million and $5.2 million, respectively, related to certain Vanguard ETFs that have switched away from MSCI indices as of June 30, 2013 (the Vanguard ETFs).
The average value of assets in ETFs linked to MSCI equity indices in the aggregate decreased 2.3% to $324.1 billion for the three months
ended June 30, 2013 compared to $331.6 billion for the three months ended June 30, 2012. The average value of assets related to the Vanguard ETFs was $35.7 billion for the three months ended June 30, 2013 compared to $116.4
billion for the three months ended June 30, 2012.
As of June 30, 2013, the value of assets in ETFs linked to MSCI
equity indices was $269.7 billion, representing a decrease of 17.6% from $327.4 billion as of June 30, 2012. Of the $269.7 billion of assets in ETFs linked to MSCI equity indices as of June 30, 2013, 47.5% were linked to indices related to
developed markets outside of the U.S., 31.4% were linked to emerging market indices, 16.4% were linked to U.S. market indices and 4.7% were linked to other global indices.
The following table sets forth the value of assets in ETFs linked to MSCI indices and the sequential change of such assets as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in billions
|
|
March 31,
2012
|
|
|
June 30,
2012
|
|
|
September 30,
2012
|
|
|
December 31,
2012
|
|
|
March 31,
2013
|
|
|
June 30,
2013
|
|
AUM in ETFs linked to MSCI Indices
|
|
$
|
354.7
|
|
|
$
|
327.4
|
|
|
$
|
363.7
|
|
|
$
|
402.3
|
|
|
$
|
357.3
|
|
|
$
|
269.7
|
|
|
|
|
|
|
|
|
Sequential Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Appreciation/(Depreciation)
|
|
$
|
37.9
|
|
|
$
|
(27.6
|
)
|
|
$
|
21.1
|
|
|
$
|
12.7
|
|
|
$
|
16.0
|
|
|
$
|
(13.2
|
)
|
Cash Inflow/(Outflow)
|
|
|
15.2
|
|
|
|
0.3
|
|
|
|
15.2
|
|
|
|
25.9
|
|
|
|
(61.0
|
)
(1)
|
|
|
(74.4
|
)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Change
|
|
$
|
53.1
|
|
|
$
|
(27.3
|
)
|
|
$
|
36.3
|
|
|
$
|
38.6
|
|
|
$
|
(45.0
|
)
|
|
$
|
(87.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes the loss of $82.8 billion and $74.8 billion of AUM related to certain Vanguard ETFs as of March 31, 2013 and June 30, 2013,
respectively.
|
Source: Bloomberg and MSCI
The following table sets forth the average value of assets in ETFs linked to MSCI indices for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Average
|
|
|
|
2012
|
|
|
2013
|
|
in billions
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
March
|
|
|
June
|
|
AUM in ETFs linked to MSCI Indices
|
|
$
|
341.0
|
|
|
$
|
331.6
|
|
|
$
|
344.7
|
|
|
$
|
376.6
|
|
|
$
|
369.0
|
|
|
$
|
324.1
|
|
Source: Bloomberg and MSCI
29
The historical values of the assets in ETFs linked to our indices 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 Indices 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.
Revenues related to risk management analytics products increased
$2.6 million, or 4.0%, to $67.1 million for the three months ended June 30, 2013 compared to $64.5 million for the three months ended June 30, 2012. The increase in risk management analytics revenues was driven primarily by the impact of
revenues attributable to InvestorForce. Excluding the impact of revenues attributable to InvestorForce, revenues grew by 0.5%.
Our portfolio management analytics products consist of equity portfolio analytics tools and fixed income portfolio analytics tools.
Revenues related to portfolio management analytics products decreased 11.0% to $26.1 million for the three months ended June 30, 2013 compared to $29.3 million for three months ended June 30, 2012. The decrease in revenues was the result
of lower sales and elevated cancellations of equity analytics products in prior periods.
Our energy and commodity analytics
products consist 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 from energy and commodity analytics products
decreased 18.9% to $3.1 million for the three months ended June 30, 2013 compared to $3.8 million for the three months ended June 30, 2012.
Our governance products consist of corporate governance products and services, including proxy research, recommendation and voting services for institutional investors as well as governance advisory
services and compensation data and analytics for corporations. They also include class action monitoring and claims filing services to aid institutional investors in the recovery of funds from class action securities litigation as well as equity
research based on forensic accounting research related to the CFRA product line which was sold on March 31, 2013. Revenues from governance products decreased $1.5 million, or 4.9%, to $29.5 million for the three months ended June 30, 2013
compared to $31.0 million for the three months ended June 30, 2012 as the loss of CFRA product revenues more than offset the growth in advisory compensation data and analytics products. Excluding the impact of revenues attributable to the CFRA
product line, revenues from governance products grew by 3.0%.
Run Rate
At the end of any period, we generally have subscription and investment product license agreements in place for a large portion of our
total revenues for the following 12 months. We measure the fees related to these agreements and refer to this as our 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 products assets or trading volume, the Run Rate calculation reflects an annualization of the most recent periodic fee earned under such license or subscription. The Run Rate for IPD
products was approximated using the trailing 12 months of revenues primarily adjusted for estimates for non-recurring sales, new sales and cancellations. 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 clients 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;
|
30
|
|
|
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 indices;
|
|
|
|
fluctuations in fees based on trading volumes of futures and options contracts linked to our indices;
|
|
|
|
fluctuations in the number of hedge funds for which we provide investment information and risk analysis to hedge fund investors;
|
|
|
|
revenue recognition differences under U.S. GAAP;
|
|
|
|
fluctuations in foreign exchange rates; and
|
|
|
|
the impact of acquisitions and dispositions.
|
The following table sets forth our Run Rates as of the dates indicated and the percentage growth over the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
June 30,
2013
|
|
|
June 30,
2012
|
|
|
March 31,
2013
|
|
|
Year-Over-
Year
Comparison
|
|
|
Sequential
Comparison
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Run Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index and ESG products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
350,833
|
|
|
$
|
285,604
|
|
|
$
|
344,267
|
|
|
|
22.8
|
%
|
|
|
1.9
|
%
|
Asset-based fees
|
|
|
131,716
|
|
|
|
129,045
|
|
|
|
134,186
|
|
|
|
2.1
|
%
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index and ESG products total
|
|
|
482,549
|
|
|
|
414,649
|
|
|
|
478,453
|
|
|
|
16.4
|
%
|
|
|
0.9
|
%
|
Risk management analytics
|
|
|
281,022
|
|
|
|
258,995
|
|
|
|
274,524
|
|
|
|
8.5
|
%
|
|
|
2.4
|
%
|
Portfolio management analytics
|
|
|
104,524
|
|
|
|
117,153
|
|
|
|
106,091
|
|
|
|
(10.8
|
)%
|
|
|
(1.5
|
)%
|
Energy and commodity analytics
|
|
|
12,794
|
|
|
|
14,839
|
|
|
|
13,030
|
|
|
|
(13.8
|
)%
|
|
|
(1.8
|
)%
|
Governance
|
|
|
111,686
|
|
|
|
113,976
|
|
|
|
110,174
|
|
|
|
(2.0
|
)%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Run Rate
|
|
$
|
992,575
|
|
|
$
|
919,612
|
|
|
$
|
982,272
|
|
|
|
7.9
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription total
|
|
$
|
860,859
|
|
|
$
|
790,567
|
|
|
$
|
848,086
|
|
|
|
8.9
|
%
|
|
|
1.5
|
%
|
Asset-based fees total
|
|
|
131,716
|
|
|
|
129,045
|
|
|
|
134,186
|
|
|
|
2.1
|
%
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Run Rate
|
|
$
|
992,575
|
|
|
$
|
919,612
|
|
|
$
|
982,272
|
|
|
|
7.9
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Run Rate grew by $73.0 million, or 7.9%, to $992.6 million as of June 30, 2013 compared to
June 30, 2012. Changes in foreign currency rates negatively impacted Run Rate by $6.0 million relative to June 30, 2012. Excluding the impact of the acquisitions of IPD and InvestorForce as well as the disposition of the CFRA product line,
total subscription Run Rate grew by 3.7%.
31
Subscription Run Rate from the index and ESG products grew by $65.2 million, or 22.8%, to
$350.8 million at June 30, 2013 from $285.6 million at June 30, 2012. Excluding the impact of subscription Run Rate attributable to IPD products, index and ESG products Run Rate grew by 8.7%, driven by growth in equity index
benchmark and data products.
Asset-based fee Run Rate from index and ESG products increased by $2.7 million, or 2.1%, to
$131.7 million at June 30, 2013, from $129.0 million at June 30, 2012. The increase was primarily driven by higher market performance and inflows into ETFs linked to MSCI indices, offset in part, by the impact of the Vanguard ETFs.
Excluding the Run Rate attributable to the Vanguard ETFs at June 30, 2012, asset-based fee Run Rate grew by $24.3 million, or 22.6%.
As of June 30, 2013, AUM in ETFs linked to MSCI indices were $269.7 billion, down $57.7 billion, or 17.6%, from June 30, 2012 and down $87.6 billion, or 24.5%, from March 31, 2013.
Excluding the Vanguard ETFs that completed their transition during the three months ended June 30, 2013, AUM in MSCI-linked ETFs rose $59.6 billion, or 28.4%, from June 30, 2012 and decreased $15.7 billion, or 5.5%, from March 31,
2013.
During the three months ended June 30, 2013, MSCI-linked ETFs were impacted by market declines of $13.2 billion and net
outflows of $74.4 billion, which included a loss of $74.8 billion of AUM in the period in connection with the transition of the remaining Vanguard ETFs.
Risk management analytics products Run Rate increased 8.5% to $281.0 million at June 30, 2013 compared to $259.0 million at June 30, 2012. Excluding the impact on risk management analytics
products Run Rate attributable to InvestorForce, Run Rate grew by 4.6%. We continued to benefit from solid growth in BarraOne and RiskManager risk management and reporting systems.
Portfolio management analytics products Run Rate declined 10.8% to $104.5 million at June 30, 2013 from $117.2 million at
June 30, 2012. Year-over-year Run Rate was negatively impacted by product swaps totaling $2.6 million and by changes in foreign currency exchange rates, which lowered Run Rate by an additional $3.3 million.
Energy and commodity analytics products Run Rate declined to $12.8 million at June 30, 2013, down $2.0 million, or 13.8%, from $14.8
million at June 30, 2012.
Governance products Run Rate declined by $2.3 million, or 2.0%, to $111.7 million at
June 30, 2013 compared to $114.0 million at June 30, 2012. Excluding the impact of the sale of the CFRA product line from the June 30, 2012 period, Run Rate grew by 6.0%, reflecting strong growth in the sales of our advisory
compensation data and analytics products as well as modest growth in our proxy research and voting products.
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,
2013
|
|
|
June 30,
2012
|
|
|
|
|
Index and ESG products
|
|
|
94.0
|
%
|
|
|
94.9
|
%
|
Risk management analytics
|
|
|
92.5
|
%
|
|
|
90.0
|
%
|
Portfolio management analytics
|
|
|
87.0
|
%
|
|
|
84.2
|
%
|
Energy and commodity analytics
|
|
|
86.0
|
%
|
|
|
85.5
|
%
|
Governance
|
|
|
92.9
|
%
|
|
|
92.1
|
%
|
Total
|
|
|
92.3
|
%
|
|
|
91.0
|
%
|
The following table sets forth our Core Retention Rates by product category for the indicated three
months ended:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
June 30,
2012
|
|
|
|
|
Index and ESG products
|
|
|
94.1
|
%
|
|
|
95.0
|
%
|
Risk management analytics
|
|
|
93.1
|
%
|
|
|
92.0
|
%
|
Portfolio management analytics
|
|
|
87.5
|
%
|
|
|
87.0
|
%
|
Energy and commodity analytics
|
|
|
86.0
|
%
|
|
|
85.5
|
%
|
Governance
|
|
|
92.9
|
%
|
|
|
92.2
|
%
|
Total
|
|
|
92.6
|
%
|
|
|
92.2
|
%
|
32
The quarterly Aggregate Retention Rates are calculated by annualizing the cancellations for
which we have received a notice of termination or non-renewal during the quarter and have determined that such notice evidences the clients final decision to terminate or not renew the applicable subscription or 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 quarter. 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 quarter 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 indices or to trading volumes of futures and options contracts linked to our
indices.
In our businesses, Aggregate and Core Retention Rates are generally higher during the first three fiscal quarters
and lower in the fourth fiscal quarter.
Operating Expenses
We group our operating expenses into five categories:
|
|
|
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 and professional services 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.
The following table shows operating expenses by each of the categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Increase/
(Decrease)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
61,768
|
|
|
$
|
55,586
|
|
|
$
|
6,182
|
|
|
|
11.1
|
%
|
Non-compensation expenses
|
|
|
21,591
|
|
|
|
17,657
|
|
|
|
3,934
|
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services
|
|
|
83,359
|
|
|
|
73,243
|
|
|
|
10,116
|
|
|
|
13.8
|
%
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
39,890
|
|
|
|
38,123
|
|
|
|
1,767
|
|
|
|
4.6
|
%
|
Non-compensation expenses
|
|
|
17,722
|
|
|
|
19,479
|
|
|
|
(1,757
|
)
|
|
|
(9.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
|
57,612
|
|
|
|
57,602
|
|
|
|
10
|
|
|
|
|
%
|
Restructuring
|
|
|
|
|
|
|
(22
|
)
|
|
|
22
|
|
|
|
(100.0
|
)%
|
Amortization of intangible assets
|
|
|
14,509
|
|
|
|
15,959
|
|
|
|
(1,450
|
)
|
|
|
(9.1
|
)%
|
Depreciation and amortization of property, equipment and leasehold improvements
|
|
|
5,246
|
|
|
|
4,662
|
|
|
|
584
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
160,726
|
|
|
$
|
151,444
|
|
|
$
|
9,282
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
101,658
|
|
|
$
|
93,709
|
|
|
$
|
7,949
|
|
|
|
8.5
|
%
|
Non-compensation expenses
|
|
|
39,313
|
|
|
|
37,136
|
|
|
|
2,177
|
|
|
|
5.9
|
%
|
Restructuring
|
|
|
|
|
|
|
(22
|
)
|
|
|
22
|
|
|
|
(100.0
|
)%
|
Amortization of intangible assets
|
|
|
14,509
|
|
|
|
15,959
|
|
|
|
(1,450
|
)
|
|
|
(9.1
|
)%
|
Depreciation and amortization of property, equipment and leasehold improvements
|
|
|
5,246
|
|
|
|
4,662
|
|
|
|
584
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
160,726
|
|
|
$
|
151,444
|
|
|
$
|
9,282
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Operating expenses were $160.7 million for the three months ended June 30, 2013, an
increase of $9.3 million, or 6.1%, compared to $151.4 million for the three months ended June 30, 2012.
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 compensation and benefits expenses for current staff and increased staffing levels from increased hiring and the impact of the addition of IPD and InvestorForce. 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, 2013, 43.9% of our employees were located in emerging market centers compared to 41.7% as
of June 30, 2012.
During the three months ended June 30, 2013, compensation and benefits costs were $101.7 million,
an increase of 8.5% compared to $93.7 million for the three months ended June 30, 2012. The increase in compensation and benefits expenses were primarily impacted by the addition of IPD and InvestorForce and, to a lesser extent, an overall
increase related to current staff. We had 2,957 and 2,384 employees as of June 30, 2013 and 2012, respectively, with the increase primarily relating to the impact of the acquisitions. Stock-based compensation expense was $5.8 million for both
of the three months ended June 30, 2013 and 2012.
Non-compensation expenses for the three months ended June 30,
2013 increased $2.2 million, or 5.9%, to $39.3 million compared to $37.1 million for the three months ended June 30, 2012. The increased costs associated with the acquisitions, in addition to increased marketing and travel and entertainment
costs, exceeded the lower costs recognized across the majority of the other non-compensation costs, including lower information technology and occupancy costs and lower third-party professional fees.
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, information technology services and voting fees. Compensation and benefits generally contribute to a majority of our expense increases from
period to period, reflecting increases for existing staff and increased staffing levels. For the three months ended June 30, 2013, total cost of services increased $10.1 million, or 13.8%, to $83.4 million compared to $73.2 million for the
three months ended June 30, 2012.
Compensation and benefits expenses for the three months ended June 30, 2013
increased $6.2 million to $61.8 million compared to $55.6 million for the three months ended June 30, 2012. The increase reflects higher costs related to current staff and increased staffing levels, primarily related to the IPD and
InvestorForce acquisitions, partially offset by lower severance and post-retirement benefit costs.
Non-compensation expenses
for the three months ended June 30, 2013 increased $3.9 million to $21.6 million compared to $17.7 million for the three months ended June 30, 2012. The increased costs are associated with the IPD and InvestorForce acquisitions, as well as
higher travel and entertainment, marketing and market data costs.
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. SG&A was unchanged year over year, at $57.6 million for each of the three months ended June 30, 2013 and 2012.
Compensation and benefits expenses increased $1.8 million to $39.9 million for the three months ended June 30, 2013 compared to $38.1 million for the three months ended June 30, 2012. The
increase reflects higher costs related to current staff and increased staffing levels, primarily related to the IPD and InvestorForce acquisitions, partially offset by lower severance costs.
34
Non-compensation expenses for the three months ended June 30, 2013 decreased $1.8
million to $17.7 million compared to $19.5 million for the three months ended June 30, 2012. The increased costs related to the IPD and InvestorForce acquisitions were more than offset by decreased costs for information technology, occupancy
and other non-income taxes.
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 in November 2012 and InvestorForce in January 2013. Amortization of intangible assets expense totaled $14.5 million and $16.0 million for the three months ended June 30, 2013
and 2012, respectively. The decrease primarily resulted from a portion of the intangible assets becoming fully amortized since the prior period, partially offset by the increased amortization associated with the intangible assets arising from the
IPD and InvestorForce acquisitions.
Depreciation and Amortization of Property, Equipment and Leasehold Improvements
Depreciation and amortization of property, equipment and leasehold improvements was $5.2 million and $4.7 million for the three months
ended June 30, 2013 and 2012, respectively. The increase was related to the impact of increased depreciation from the IPD and InvestorForce acquisitions, as well as the depreciation of hardware and software assets acquired to build out
data centers in the second half of the year ended December 31, 2012.
Other Expense (Income), Net
Other expense (income), net for the three months ended June 30, 2013 was $5.9 million, a decrease of $24.0 million compared to
$29.9 million for the three months ended June 30, 2012. In the three months ended June 30, 2012, $20.6 million of expense was recognized related to the accelerated amortization of existing fees and the immediate recognition of new fees
associated with our May 2012 debt refinancing with no similar expense recognized in the three months ended June 30, 2013. The remaining difference was primarily the result of the impact on interest expense of lower average outstanding
principal on our debt and lower associated interest rates.
Provision For Income Taxes
The provision for income tax expense for the three months ended June 30, 2013 was $30.2 million, an increase of $10.5 million, or
53.2%, compared to $19.7 million for the three months ended June 30, 2012. These amounts reflect effective tax rates of 33.1% and 34.4% for the three months ended June 30, 2013 and 2012, respectively. The effective tax rate of 33.1%
for the three months ended June 30, 2013 reflects our estimate of the effective tax rate for the period and is lower than the prior year because of the impact of certain discrete items.
Segment Results of Operations
The results of operations by segment for the
three months ended June 30, 2013 and June 30, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
2013
|
|
|
Three Months Ended
June 30,
2012
|
|
|
Percentage Change
|
|
|
|
Performance
and Risk
|
|
|
Governance
|
|
|
Total
|
|
|
Performance
and Risk
|
|
|
Governance
|
|
|
Total
|
|
|
Performance
and Risk
|
|
|
Governance
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
228,423
|
|
|
$
|
29,475
|
|
|
$
|
257,898
|
|
|
$
|
207,576
|
|
|
$
|
30,989
|
|
|
$
|
238,565
|
|
|
|
10.0
|
%
|
|
|
(4.9
|
)%
|
|
|
8.1
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
69,273
|
|
|
|
14,086
|
|
|
|
83,359
|
|
|
|
56,462
|
|
|
|
16,781
|
|
|
|
73,243
|
|
|
|
22.7
|
%
|
|
|
(16.1
|
)%
|
|
|
13.8
|
%
|
Selling, general and administrative
|
|
|
50,026
|
|
|
|
7,586
|
|
|
|
57,612
|
|
|
|
48,691
|
|
|
|
8,911
|
|
|
|
57,602
|
|
|
|
2.7
|
%
|
|
|
(14.9
|
)%
|
|
|
|
%
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(9
|
)
|
|
|
(22
|
)
|
|
|
(100.0
|
)%
|
|
|
(100.0
|
)%
|
|
|
(100.0
|
)%
|
Amortization of intangible assets
|
|
|
11,221
|
|
|
|
3,288
|
|
|
|
14,509
|
|
|
|
12,639
|
|
|
|
3,320
|
|
|
|
15,959
|
|
|
|
(11.2
|
)%
|
|
|
(1.0
|
)%
|
|
|
(9.1
|
)%
|
Depreciation and amortization of property, equipment and leasehold improvements
|
|
|
4,329
|
|
|
|
917
|
|
|
|
5,246
|
|
|
|
3,817
|
|
|
|
845
|
|
|
|
4,662
|
|
|
|
13.4
|
%
|
|
|
8.5
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
134,849
|
|
|
|
25,877
|
|
|
|
160,726
|
|
|
|
121,596
|
|
|
|
29,848
|
|
|
|
151,444
|
|
|
|
10.9
|
%
|
|
|
(13.3
|
)%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
93,574
|
|
|
|
3,598
|
|
|
|
97,172
|
|
|
|
85,980
|
|
|
|
1,141
|
|
|
|
87,121
|
|
|
|
8.8
|
%
|
|
|
215.3
|
%
|
|
|
11.5
|
%
|
Other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
5,913
|
|
|
|
|
|
|
|
|
|
|
|
29,860
|
|
|
|
|
|
|
|
|
|
|
|
(80.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
91,259
|
|
|
|
|
|
|
|
|
|
|
|
57,261
|
|
|
|
|
|
|
|
|
|
|
|
59.4
|
%
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
30,206
|
|
|
|
|
|
|
|
|
|
|
|
19,715
|
|
|
|
|
|
|
|
|
|
|
|
53.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
61,053
|
|
|
|
|
|
|
|
|
|
|
$
|
37,546
|
|
|
|
|
|
|
|
|
|
|
|
62.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Performance and Risk
Total operating revenues for the Performance and Risk business increased $20.8 million, or 10.0%, to $228.4 million for the three months ended June 30, 2013. Excluding the impact of the revenues
derived from the IPD and InvestorForce acquisitions, revenues grew by $1.6 million, or 0.8%. The increase was primarily driven by higher asset-based fees from our index and ESG products, higher revenues in our benchmark index products and growth
within our risk management analytics products, partially offset by lower revenues from portfolio management analytics and energy and commodity analytics products.
Cost of services for the Performance and Risk business increased $12.8 million, or 22.7%, to $69.3 million for the three months ended June 30, 2013. Within cost of services, compensation and benefits
expenses increased $8.0 million to $51.6 million as a result of higher costs related to current staff and increased staffing levels, primarily related to the IPD and InvestorForce acquisitions, partially offset by lower severance costs.
Non-compensation expenses increased $4.8 million to $17.7 million. The increased costs are associated with the IPD and InvestorForce acquisitions as well as higher travel and entertainment and marketing costs.
SG&A expense for the Performance and Risk business increased $1.3 million, or 2.7%, to $50.0 million for the three months ended
June 30, 2013. Within SG&A, compensation and benefits expenses increased $2.3 million to $34.6 million as a result of higher costs related to current staff and increased staffing levels, primarily related to the IPD and InvestorForce
acquisitions, partially offset by lower severance costs. Non-compensation expenses decreased $1.0 million to $15.4 million. The increased costs related to the IPD and InvestorForce acquisitions were more than offset by decreased costs for
information technology, occupancy and other non-income taxes.
Amortization of intangible assets expense totaled $11.2 million
and $12.6 million for the three months ended June 30, 2013 and 2012, respectively. The decrease primarily resulted from a portion of the intangible assets becoming fully amortized since the prior period, partially offset by the increased
amortization associated with the intangible assets arising from the IPD and InvestorForce acquisitions.
Depreciation and
amortization of property, equipment, and leasehold improvements for the Performance and Risk business totaled $4.3 million and $3.8 million for the three months ended June 30, 2013 and 2012, respectively. The increase was related to the impact
of increased depreciation from the IPD and InvestorForce acquisitions, as well as the depreciation of hardware and software assets acquired to build out data centers in the second half of the year ended December 31, 2012.
Governance
Total
operating revenues for the Governance business decreased $1.5 million, or 4.9%, to $29.5 million for the three months ended June 30, 2013. The loss of CFRA product revenues resulting from its sale on March 31, 2013 more than offset the
growth in advisory compensation data and analytics products. Excluding the impact of revenues attributable to the CFRA product line, revenues from governance products grew by 3.0%.
Cost of services for the Governance business decreased $2.7 million to $14.1 million for the three months ended June 30, 2013.
Compensation and benefits expenses decreased $1.8 million to $10.2 million, primarily as a result of the disposition of the CFRA product line as well as lower severance costs. Non-compensation expenses decreased $0.9 million to $3.9 million as a
result of disposition of the CFRA product line as well as lower occupancy costs and third-party professional fees.
SG&A
expense for the Governance business decreased $1.3 million to $7.6 million for the three months ended June 30, 2013. Within SG&A, compensation and benefits expenses decreased $0.6 million to $5.3 million, primarily as a result of
disposition of the CFRA product line. Non-compensation expenses decreased $0.7 million to $2.3 million as a result of disposition of the CFRA product line as well as lower information and occupancy costs.
Amortization of intangible assets expense for the Governance business totaled $3.3 million for both the three months ended
June 30, 2013 and 2012.
Depreciation and amortization of property, equipment, and leasehold improvements for the
Governance business totaled $0.9 million and $0.8 million for the three months ended June 30, 2013 and 2012, respectively.
36
Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012
Results of Operations
The following table presents the results of operations for the six months ended June 30, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Increase/
(Decrease)
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
509,807
|
|
|
$
|
467,617
|
|
|
$
|
42,190
|
|
|
|
9.0
|
%
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
163,544
|
|
|
|
145,534
|
|
|
|
18,010
|
|
|
|
12.4
|
%
|
Selling, general and administrative
|
|
|
119,243
|
|
|
|
113,038
|
|
|
|
6,205
|
|
|
|
5.5
|
%
|
Restructuring
|
|
|
|
|
|
|
(51
|
)
|
|
|
51
|
|
|
|
(100.0
|
%)
|
Amortization of intangible assets
|
|
|
28,995
|
|
|
|
31,918
|
|
|
|
(2,923
|
)
|
|
|
(9.2
|
%)
|
Depreciation and amortization of property, equipment, and leasehold improvements
|
|
|
10,326
|
|
|
|
9,078
|
|
|
|
1,248
|
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
322,108
|
|
|
|
299,517
|
|
|
|
22,591
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
187,699
|
|
|
|
168,100
|
|
|
|
19,599
|
|
|
|
11.7
|
%
|
Other expense (income), net
|
|
|
12,889
|
|
|
|
42,600
|
|
|
|
(29,711
|
)
|
|
|
(69.7
|
%)
|
Provision for income taxes
|
|
|
54,820
|
|
|
|
43,988
|
|
|
|
10,832
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
119,990
|
|
|
$
|
81,512
|
|
|
$
|
38,478
|
|
|
|
47.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
$
|
0.99
|
|
|
$
|
0.66
|
|
|
$
|
0.33
|
|
|
|
50.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share
|
|
$
|
0.98
|
|
|
$
|
0.66
|
|
|
$
|
0.32
|
|
|
|
48.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
36.8
|
%
|
|
|
35.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
The following table summarizes the revenue by product category for the six months ended June 30, 2013 compared to the six months ended June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Increase/
(Decrease)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Index and ESG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
$
|
180,088
|
|
|
$
|
147,468
|
|
|
$
|
32,620
|
|
|
|
22.1
|
%
|
Asset-based fees
|
|
|
73,485
|
|
|
|
68,703
|
|
|
|
4,782
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total index and ESG products
|
|
|
253,573
|
|
|
|
216,171
|
|
|
|
37,402
|
|
|
|
17.3
|
%
|
Risk management analytics
|
|
|
134,373
|
|
|
|
128,624
|
|
|
|
5,749
|
|
|
|
4.5
|
%
|
Portfolio management analytics
|
|
|
53,735
|
|
|
|
58,389
|
|
|
|
(4,654
|
)
|
|
|
(8.0
|
%)
|
Energy and commodity analytics
|
|
|
6,211
|
|
|
|
2,481
|
|
|
|
3,730
|
|
|
|
150.3
|
%
|
Governance
|
|
|
61,915
|
|
|
|
61,952
|
|
|
|
(37
|
)
|
|
|
(0.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
509,807
|
|
|
$
|
467,617
|
|
|
$
|
42,190
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring subscriptions
|
|
$
|
422,127
|
|
|
$
|
384,740
|
|
|
$
|
37,387
|
|
|
|
9.7
|
%
|
Asset-based fees
|
|
|
73,485
|
|
|
|
68,703
|
|
|
|
4,782
|
|
|
|
7.0
|
%
|
Non-recurring revenue
|
|
|
14,195
|
|
|
|
14,174
|
|
|
|
21
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
509,807
|
|
|
$
|
467,617
|
|
|
$
|
42,190
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Total operating revenues for the six months ended June 30, 2013 increased $42.2
million, or 9.0%, to $509.8 million compared to $467.6 million for the six months ended June 30, 2012. During the six months ended June 30, 2012, as a result of a one-time non-cash adjustment, we recorded a $5.2 million cumulative revenue
reduction to correct an immaterial error related to revenues previously reported through December 31, 2011. See Note 1, Introduction and Basis of Presentation, of the Notes to the Unaudited Condensed Consolidated Financial
Statements for further information. The effect of recording this adjustment in the first quarter of 2012 resulted in a one-time decrease to the energy and commodity analytics products revenues and an increase in deferred revenues. Previously,
our policy resulted in the immediate recognition of a substantial portion of the revenue for certain energy and commodity analytics product related contracts, the terms of which were generally one year. However, it was determined that the entire
license fee related to these contracts should be recognized ratably over the term of the license. As such, we made the cumulative adjustment effective January 1, 2012 and started recognizing revenue for all contracts still in effect as of this
date ratably over the remainder of the term and began recognizing revenue ratably over the contract term for any new contracts entered into on or after January 1, 2012.
Revenues related to index and ESG products increased 17.3% to $253.6 million for the six months ended June 30, 2013 compared to $216.2 million for the six months ended June 30, 2012. Excluding
the impact of revenues attributable to IPD, revenues grew by 5.7%. IPD products contributed $25.0 million to our index and ESG product revenues during the six months ended June 30, 2013.
Subscription revenues from the index and ESG products were up 22.1% to $180.1 million for the six months ended June 30, 2013
compared to $147.5 million for the six months ended June 30, 2012. Excluding the impact of revenues attributable to IPD, revenues grew by $7.6 million, or 5.2%, primarily attributable to growth in our benchmark products.
Asset-based fee revenues attributable to the index and ESG products increased 7.0% to $73.5 million for the six months ended
June 30, 2013 compared to $68.7 million for the six months ended June 30, 2012. The difference resulted from higher fees from non-ETF passive funds and a change in the mix of ETF funds linked to MSCI indices. Included in the six
months ended June 30, 2013 and 2012 were revenues of $3.3 million and $10.4 million, respectively, related to certain Vanguard ETFs that have switched away from MSCI indices as of June 30, 2013.
The average value of assets in ETFs linked to MSCI equity indices in the aggregate increased 3.0% to $346.6 billion for the six months
ended June 30, 2013 compared to $336.4 billion for the six months ended June 30, 2012. The average value of assets related to the Vanguard ETFs was $60.5 billion for the six months ended June 30, 2013 compared to $115.7 billion
for the six months ended June 30, 2012.
The following table sets forth the average value of assets in ETFs linked to
MSCI indices for the year-to-date periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Average
|
|
|
|
2012
|
|
|
2013
|
|
in billions
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
March
|
|
|
June
|
|
AUM in ETFs linked to MSCI Indices
|
|
$
|
341.0
|
|
|
$
|
336.4
|
|
|
$
|
339.2
|
|
|
$
|
349.1
|
|
|
$
|
369.0
|
|
|
$
|
346.6
|
|
Source: Bloomberg and MSCI
Revenues related to risk management analytics products increased 4.5% to $134.4 million for the six months ended June 30, 2013 compared to $128.6 million for the six months ended June 30, 2012.
The increase in risk management analytics revenues was driven primarily by the impact of revenues attributable to InvestorForce as well as by increases in revenues attributable to our BarraOne and RiskManager products. Excluding the impact of
revenues attributable to InvestorForce, revenues grew by 1.5%.
Revenues related to portfolio management analytics products
decreased 8.0% to $53.7 million for the six months ended June 30, 2013 compared to $58.4 million for the six months ended June 30, 2012. The decrease in revenues was the result of lower sales and elevated cancellations of equity analytics
products in prior periods.
As a result of the revenue adjustment made in 2012 that was discussed earlier, revenues from
energy and commodity analytics products increased $3.7 million to $6.2 million for the six months ended June 30, 2013 compared to $2.5 million for
38
the six months ended June 30, 2012. Excluding the impact of the revenue adjustment recorded during the six months ended June 30, 2012, revenues from our energy and commodity analytics
products would have been lower by $1.5 million compared to the six months ended June 30, 2012.
Revenue related to
governance products remained relatively flat at $61.9 million for the six months ended June 30, 2013 compared to $62.0 million for the six months ended June 30, 2012. The loss of the CFRA product line revenues was offset by the growth in
advisory compensation data and analytics products. Excluding the impact of revenues attributable to the CFRA product line, revenues from governance products grew by 4.0%.
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,
2013
|
|
|
June 30,
2012
|
|
|
|
|
Index and ESG products
|
|
|
94.5
|
%
|
|
|
94.7
|
%
|
Risk management analytics
|
|
|
93.0
|
%
|
|
|
91.9
|
%
|
Portfolio management analytics
|
|
|
84.3
|
%
|
|
|
88.0
|
%
|
Energy and commodity analytics
|
|
|
88.0
|
%
|
|
|
87.8
|
%
|
Governance
|
|
|
91.5
|
%
|
|
|
90.4
|
%
|
Total
|
|
|
92.2
|
%
|
|
|
92.0
|
%
|
The following table sets forth our Core Retention Rates by product category for the indicated six months
ended:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
June 30,
2012
|
|
|
|
|
Index and ESG products
|
|
|
94.6
|
%
|
|
|
94.8
|
%
|
Risk management analytics
|
|
|
93.5
|
%
|
|
|
92.9
|
%
|
Portfolio management analytics
|
|
|
85.1
|
%
|
|
|
89.6
|
%
|
Energy and commodity analytics
|
|
|
88.0
|
%
|
|
|
88.1
|
%
|
Governance
|
|
|
91.6
|
%
|
|
|
90.4
|
%
|
Total
|
|
|
92.5
|
%
|
|
|
92.6
|
%
|
The Aggregate Retention Rates for any six-month period are calculated by annualizing the cancellations
for which we have received a notice of termination or non-renewal during the six-month period and have determined that such notice evidences the clients final decision to terminate or not renew the applicable subscription or 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 six-month 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 quarter 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 indices or to trading volumes of futures and options contracts linked to our
indices.
In our businesses, Aggregate and Core Retention Rates are generally higher during the first half and lower in the
second half of the year.
39
Operating Expenses
The following table shows operating expenses by each of the categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Increase/
(Decrease)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
122,917
|
|
|
$
|
109,403
|
|
|
$
|
13,514
|
|
|
|
12.4
|
%
|
Non-compensation expenses
|
|
|
40,627
|
|
|
|
36,131
|
|
|
|
4,496
|
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services
|
|
|
163,544
|
|
|
|
145,534
|
|
|
|
18,010
|
|
|
|
12.4
|
%
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
85,546
|
|
|
|
76,929
|
|
|
|
8,617
|
|
|
|
11.2
|
%
|
Non-compensation expenses
|
|
|
33,697
|
|
|
|
36,109
|
|
|
|
(2,412
|
)
|
|
|
(6.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
|
119,243
|
|
|
|
113,038
|
|
|
|
6,205
|
|
|
|
5.5
|
%
|
Restructuring
|
|
|
|
|
|
|
(51
|
)
|
|
|
51
|
|
|
|
(100.0
|
)%
|
Amortization of intangible assets
|
|
|
28,995
|
|
|
|
31,918
|
|
|
|
(2,923
|
)
|
|
|
(9.2
|
)%
|
Depreciation and amortization of property, equipment and leasehold improvements
|
|
|
10,326
|
|
|
|
9,078
|
|
|
|
1,248
|
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
322,108
|
|
|
$
|
299,517
|
|
|
$
|
22,591
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
208,463
|
|
|
$
|
186,332
|
|
|
$
|
22,131
|
|
|
|
11.9
|
%
|
Non-compensation expenses
|
|
|
74,324
|
|
|
|
72,240
|
|
|
|
2,084
|
|
|
|
2.9
|
%
|
Restructuring
|
|
|
|
|
|
|
(51
|
)
|
|
|
51
|
|
|
|
(100.0
|
)%
|
Amortization of intangible assets
|
|
|
28,995
|
|
|
|
31,918
|
|
|
|
(2,923
|
)
|
|
|
(9.2
|
)%
|
Depreciation and amortization of property, equipment and leasehold improvements
|
|
|
10,326
|
|
|
|
9,078
|
|
|
|
1,248
|
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
322,108
|
|
|
$
|
299,517
|
|
|
$
|
22,591
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2013, compensation and benefits costs were $208.5 million, an
increase of 11.9% compared to $186.3 million for the six months ended June 30, 2012. The increase in compensation and benefits expenses were primarily impacted by the addition of IPD and InvestorForce and, to a lesser extent, an overall
increase related to current staff. Partially offsetting this were lower severance costs and lower post-retirement and other expenses. Stock-based compensation expense for the six months ended June 30, 2013 was $12.5 million, an increase of $1.1
million compared to $11.4 million for the six months ended June 30, 2012.
Non-compensation expenses for the six months
ended June 30, 2013 were $74.3 million, an increase of $2.1 million, or 2.9%, compared to $72.2 million for the six months ended June 30, 2012. The increased costs associated with the IPD and InvestorForce acquisitions, in addition to
increased marketing and travel and entertainment costs, exceeded the lower costs recognized across the majority of the other non-compensation costs, including lower third-party professional fees, information technology costs and occupancy costs.
Cost of Services
For the six months ended June 30, 2013, total cost of services increased 12.4% to $163.5 million compared to $145.5 million for the six months ended June 30, 2012. Compensation and benefits
expenses for the six months ended June 30, 2013 increased $13.5 million to $122.9 million compared to $109.4 million for the six months ended June 30, 2012. The increase in compensation and benefits expenses were primarily impacted by the
acquisitions of IPD and InvestorForce and, to a lesser extent, an overall increase related to current staff. Partially offsetting this was lower severance costs and lower post-retirement and other expenses.
Non-compensation expenses for the six months ended June 30, 2013 increased $4.5 million to $40.6 million compared to $36.1 million
for the six months ended June 30, 2012. The increase was primarily driven by the acquisitions of IPD and InvestorForce.
Selling,
General and Administrative
For the six months ended June 30, 2013, SG&A was $119.2 million, an increase of
$6.2 million, or 5.5%, compared to $113.0 million for the six months ended June 30, 2012. Compensation and benefits expenses increased $8.6 million to $85.5
40
million for the six months ended June 30, 2013, compared to $76.9 million for the six months ended June 30, 2012. Similar to compensation and benefits expenses in cost of services, the
increase was primarily impacted by the addition of IPD and InvestorForce and, to a lesser extent, an overall increase related to current staff.
Non-compensation expenses for the six months ended June 30, 2013 decreased $2.4 million, or 6.7%, to $33.7 million compared to $36.1 million for the six months ended June 30, 2012. The lower
expenses recognized for third-party professional fees, information technology costs and occupancy costs more than offset the increased costs associated with the IPD and InvestorForce acquisitions.
Amortization of Intangible Assets
Amortization of intangible assets expense totaled $29.0 million and $31.9 million for the six months ended June 30, 2013 and 2012, respectively. The decrease primarily resulted from a portion of the
intangible assets becoming fully amortized since the prior period, partially offset by the increased amortization of intangible assets resulting from the IPD and InvestorForce acquisitions.
Depreciation and Amortization of Property, Equipment and Leasehold Improvements
Depreciation and amortization of property, equipment and leasehold improvements totaled $10.3 million and $9.1 million for the six months ended June 30, 2013 and 2012, respectively. The increase
was related to the impact of increased depreciation from the IPD and InvestorForce acquisitions, as well as the depreciation of hardware and software assets acquired to build out data centers in the second half of the year ended December 31, 2012.
Other Expense (Income), Net
Other expense (income), net for the six months ended June 30, 2013 was $12.9 million, a decrease of 69.7% compared to $42.6 million for the six months ended June 30, 2012. In the six
months ended June 30, 2012, $20.6 million of expense was recognized related to the accelerated amortization of existing fees and the immediate recognition of new fees associated with our May 2012 debt refinancing with no similar expense
recognized in the six months ended June 30, 2013. The remaining difference was primarily the result of the impact on interest expense of lower average outstanding principal on our debt and lower associated interest rates.
Provision For Income Taxes
The provision for income tax expense for the six months ended June 30, 2013 was $54.8 million, an increase of $10.8 million, or 24.6%, compared to $44.0 million for the six months ended June 30,
2012. These amounts reflect effective tax rates of 31.4% and 35.1% for the six months ended June 30, 2013 and 2012, respectively. The effective tax rate of 31.4% for the six months ended June 30, 2013 reflects our estimate of the
effective tax rate for the period and is lower than the prior year because of the impact of the difference in certain discrete items year over year, the effect of which was to decrease our effective tax rate by 2.7 percentage points, the benefit
associated with the federal research and development credit which was reinstated into law as of January 2, 2013, as well as an increase in non-U.S. earnings and decreases in certain effective tax rates applicable to those earnings, the effect
of which was to decrease our effective tax rate by 1.0 percentage points.
Segment Results of Operations
The results of operations by segment for the six months ended June 30, 2013 and June 30, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
2013
|
|
|
Six Months Ended
June 30,
2012
|
|
|
Percentage Change
|
|
|
|
Performance
and Risk
|
|
|
Governance
|
|
|
Total
|
|
|
Performance
and Risk
|
|
|
Governance
|
|
|
Total
|
|
|
Performance
and Risk
|
|
|
Governance
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
447,892
|
|
|
$
|
61,915
|
|
|
$
|
509,807
|
|
|
$
|
405,665
|
|
|
$
|
61,952
|
|
|
$
|
467,617
|
|
|
|
10.4
|
%
|
|
|
(0.1
|
)%
|
|
|
9.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
134,134
|
|
|
|
29,410
|
|
|
|
163,544
|
|
|
|
113,385
|
|
|
|
32,149
|
|
|
|
145,534
|
|
|
|
18.3
|
%
|
|
|
(8.5
|
%)
|
|
|
12.4
|
%
|
Selling, general and administrative
|
|
|
102,680
|
|
|
|
16,563
|
|
|
|
119,243
|
|
|
|
96,197
|
|
|
|
16,841
|
|
|
|
113,038
|
|
|
|
6.7
|
%
|
|
|
(1.7
|
)%
|
|
|
5.5
|
%
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(19
|
)
|
|
|
(51
|
)
|
|
|
(100.0
|
)%
|
|
|
(100.0
|
)%
|
|
|
(100.0
|
)%
|
Amortization of intangible assets
|
|
|
22,387
|
|
|
|
6,608
|
|
|
|
28,995
|
|
|
|
25,278
|
|
|
|
6,640
|
|
|
|
31,918
|
|
|
|
(11.4
|
)%
|
|
|
(0.5
|
)%
|
|
|
(9.2
|
)%
|
Depreciation and amortization of property, equipment and leasehold improvements
|
|
|
8,418
|
|
|
|
1,908
|
|
|
|
10,326
|
|
|
|
7,382
|
|
|
|
1,696
|
|
|
|
9,078
|
|
|
|
14.0
|
%
|
|
|
12.5
|
%
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
267,619
|
|
|
|
54,489
|
|
|
|
322,108
|
|
|
|
242,210
|
|
|
|
57,307
|
|
|
|
299,517
|
|
|
|
10.5
|
%
|
|
|
(4.9
|
)%
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
180,273
|
|
|
|
7,426
|
|
|
|
187,699
|
|
|
|
163,455
|
|
|
|
4,645
|
|
|
|
168,100
|
|
|
|
10.3
|
%
|
|
|
59.9
|
%
|
|
|
11.7
|
%
|
Other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
12,889
|
|
|
|
|
|
|
|
|
|
|
|
42,600
|
|
|
|
|
|
|
|
|
|
|
|
(69.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
174,810
|
|
|
|
|
|
|
|
|
|
|
|
125,500
|
|
|
|
|
|
|
|
|
|
|
|
39.3
|
%
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
54,820
|
|
|
|
|
|
|
|
|
|
|
|
43,988
|
|
|
|
|
|
|
|
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
119,990
|
|
|
|
|
|
|
|
|
|
|
$
|
81,512
|
|
|
|
|
|
|
|
|
|
|
|
47.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Performance and Risk
Total operating revenues for the Performance and Risk business increased $42.2 million, or 10.4%, to $447.9 million for the six months ended June 30, 2013. Excluding the impact of the revenues
derived from the IPD and InvestorForce acquisitions, revenues grew by $13.5 million, or 3.3%. The increase was primarily driven by higher asset-based fees from our index and ESG products, higher revenues in our benchmark index products, growth
within our risk management analytics products and energy and commodity analytics products, partially offset by lower revenues from portfolio management analytics.
Cost of services for the Performance and Risk business increased $20.8 million, or 18.3%, to $134.1 million for the six months ended June 30, 2013. Within cost of services, compensation and benefits
expenses increased $14.5 million to $101.0 million as a result of higher costs related to current staff and increased staffing levels, primarily related to the IPD and InvestorForce acquisitions, partially offset by lower severance costs and
post-retirement and other expenses. Non-compensation expenses increased $6.3 million to $33.1 million. The increased costs are associated with the acquisitions, as well as higher travel and entertainment, and marketing costs.
SG&A expense for the Performance and Risk business increased $6.5 million, or 6.7%, to $102.7 million for the six months ended
June 30, 2013. Within SG&A, compensation and benefits expenses increased $8.1 million to $73.7 million as a result of higher costs related to current staff and increased staffing levels, primarily related to the IPD and InvestorForce
acquisitions, partially offset by lower severance costs. Non-compensation expenses decreased $1.6 million to $29.0 million. The lower expenses recognized for third-party professional fees, information technology costs, occupancy costs and other
non-income taxes more than offset the increased costs associated with the acquisitions.
Amortization of intangible assets
expense totaled $22.4 million and $25.3 million for the six months ended June 30, 2013 and 2012, respectively. The decrease primarily resulted from a portion of intangible assets becoming fully amortized since the prior period, partially offset
by the increased amortization associated with the intangible assets arising from the IPD and InvestorForce acquisitions.
Depreciation and amortization of property, equipment and leasehold improvements for the Performance and Risk business totaled $8.4
million and $7.4 million for the six months ended June 30, 2013 and 2012, respectively. The increase was related to the impact of increased depreciation from the IPD and InvestorForce acquisitions, as well as the depreciation of hardware
and software assets acquired to build out data centers in the second half of the year ended December 31, 2012.
Governance
On March 31, 2013, we completed the sale of our CFRA product line, which was a component of the Governance
business segment. The sale was a driver of some of the year-over-year changes in the Governance business segments results of operations.
Total operating revenues for the Governance business remained relatively flat compared to the prior year at $61.9 million for the six months ended June 30, 2013. The loss of the CFRA product line
revenues within the Governance business more than offset the growth in advisory compensation data and analytics products. Excluding the impact of revenues attributable to the CFRA product line, revenues from governance products grew by 4.0%.
Cost of services for the Governance business decreased $2.7 million, or 8.5%, to $29.4 million for the six months ended
June 30, 2013. Compensation and benefits expenses decreased $1.0 million to $21.9 million primarily as a result of disposition of the CFRA product line as well as lower severance costs while non-compensation expenses decreased $1.7 million to
$7.5 million primarily resulting from lower third-party professional fees, information technology costs and occupancy costs.
SG&A expense for the Governance business decreased $0.3 million to $16.6 million for the six months ended June 30, 2013. Within
SG&A, compensation and benefits expenses increased $0.5 million to $11.9 million, with higher costs related to current staff and increased staffing levels more than offsetting the impact of the disposition of the CFRA product line.
Non-compensation expenses decreased $0.8 million to $4.7 million primarily resulting from lower third-party professional fees, informational technology and occupancy costs.
Amortization of intangible assets expense for the Governance business totaled $6.6 million for each of the six months ended June 30, 2013 and 2012.
42
Depreciation and amortization of property, equipment, and leasehold improvements for the
Governance business totaled $1.9 million and $1.7 million for the six months ended June 30, 2013 and 2012, respectively.
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, 2012 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 Managements Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended
December 31, 2012. There have been no significant changes in our accounting policies or critical accounting estimates since the end of the fiscal year ended December 31, 2012.
Liquidity and Capital Resources
We require capital to fund ongoing
operations, internal growth initiatives and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, proceeds from the maturity and sale of our short-term investments, 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 share repurchases.
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.
On June 1, 2010, we entered into the 2010 Credit Facility which was comprised of (i) the 2010 Term Loan and
(ii) the 2010 Revolving Credit Facility. On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2. Amendment No. 2 provided for the incurrence of the 2011 Term Loan. The proceeds of
the 2011 Term Loan, together with cash on hand, were used to repay the remaining outstanding balance of the 2010 Term Loan in full.
On May 4, 2012, we amended and restated our existing senior credit facilities by entering into the Amended and Restated Credit Facility, which consists of the 2012 Term Loan in an aggregate amount of
$880.0 million and the $100.0 million 2012 Revolving Credit Facility. The proceeds of the Amended and Restated Credit Facility, together with cash on hand, were used to repay the remaining outstanding principal of the then-existing 2011 Term Loan.
The 2012 Term Loan and the 2012 Revolving Credit Facility mature on May 4, 2017. We are required to repay 5.00% per annum of the 2012 Term Loan in quarterly payments over the first two years, 10.00% per annum of the 2012 Term Loan in
quarterly payments over the next two years, and 70.00% of the 2012 Term Loan in quarterly payments over the final year. In connection with the repayment of the 2011 Term Loan, we terminated our then-existing interest rate swaps and are not required
to enter into new interest rate swaps to hedge our debt under the Amended and Restated Credit Facility.
In March 2013, we
made a $15.0 million prepayment on the 2012 Term Loan.
The effective combined rate on our debt was 2.39% for the six months
ended June 30, 2013.
The obligations under the Amended and Restated Credit Facility are guaranteed by each of our direct
and indirect wholly-owned domestic subsidiaries, subject to limited exceptions. The obligations under the Amended and Restated Credit Facility are secured by a lien on substantially all of the equity interests of our present and future 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 Amended and Restated Credit Facility contains affirmative and restrictive covenants that, among other things, limit our ability and
our existing or future subsidiaries abilities 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;
|
43
|
|
|
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 arms length basis; and
|
|
|
|
amend our organizational documents or amend, modify or change the terms of certain agreements relating to our indebtedness.
|
The 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 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 Amended and
Restated Credit Facility: (1) the maximum Consolidated Leverage Ratio (as defined in the 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 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, 2013, our Consolidated Leverage Ratio (as defined in the
Amended and Restated Credit Facility) was 1.71:1.00 and our Consolidated Interest Coverage Ratio (as defined in the Amended and Restated Credit Facility) was 20.69:1.00.
On August 1, 2013, we entered into a new ASR agreement to initiate share repurchases aggregating $100.0 million. The new ASR agreement is structured as a capped ASR in which, on August 2, 2013, we
paid $100.0 million and received approximately 1.9 million shares representing the minimum number of common shares to be repurchased based on a calculation using a specific capped price per share. This price is capped such that only under
limited circumstances may we be required to deliver shares or pay cash at settlement. Additionally, depending on the average share price through the December 2013 completion date, we may receive additional shares under this ASR agreement. See
Accelerated Share Repurchase Program in Part II, Item 5 of this report for further information.
Cash Flows
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
334,701
|
|
|
$
|
183,309
|
|
Short-term investments
|
|
|
|
|
|
|
70,898
|
|
Cash and cash equivalents were $334.7 million and $183.3 million as of June 30, 2013 and
December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, $81.9 million and $83.5 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.
No short-term investments were held as of June 30, 2013. Short-term investments were $70.9 million as of December 31, 2012. All
of the short-term investments were held by U.S. corporations and were not subject to repatriation considerations at December 31, 2012.
We believe that domestic cash flows from operations, together with existing cash and cash equivalents and short-term investments, will continue to be sufficient to fund our domestic operating activities
and cash commitments for investing and financing activities, such as debt repayment schedules 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 and cash commitments for investing activities, such as material capital expenditures, for at least the
next 12 months and for the foreseeable future thereafter.
44
Cash provided by (used in) operating, investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Cash provided by operating activities
|
|
$
|
156,676
|
|
|
$
|
190,066
|
|
Cash provided by investing activities
|
|
|
39,141
|
|
|
|
34,157
|
|
Cash used in financing activities
|
|
|
(38,357
|
)
|
|
|
(202,615
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(6,068
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
151,392
|
|
|
$
|
21,096
|
|
|
|
|
|
|
|
|
|
|
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 $156.7 million and $190.1 million for the six months ended June 30, 2013 and 2012, respectively. The $33.4 million year-over-year decrease primarily reflects a change in the timing of collections of our
accounts receivable relative to the prior year, partially offset by higher net income adjusted for certain non-cash items.
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 $39.1 million for the six months ended June 30, 2013 compared to $34.2 million for the six months ended June 30, 2012. The year-over-year increase of
$4.9 million primarily reflects increased proceeds from the maturation of short-term investments without any corresponding reinvestments of the proceeds and lower capital expenditure costs, partially offset by the net cash outflows for the
InvestorForce acquisition during 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.
Cash flows from financing activities
Cash used in financing activities was $38.4 million and $202.6 million for the six months ended June 30, 2013 and 2012, respectively.
The year-over-year change primarily reflects decreased cash payments made to service our credit facility, partially offset by increased cash used to repurchase MSCI shares during the six months ended June 30, 2013.
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.