UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-33812
MSCI INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
13-4038723
(State or other jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
7 World Trade Center
250 Greenwich Street, 49th Floor
New York, New York
10007
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (212) 804-3900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
MSCI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 19, 2021, there were 82,446,714 shares of the registrant’s common stock, par value $0.01, outstanding.
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
Page
Part I – Financial Information
Item 1.
Financial Statements
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
Item 4.
Controls and Procedures
43
Part II – Other Information
Legal Proceedings
44
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
45
2
AVAILABLE INFORMATION
Our corporate headquarters is located at 7 World Trade Center, 250 Greenwich Street, 49th Floor, New York, New York, 10007, and our telephone number is (212) 804-3900. We maintain a website on the internet at www.msci.com. The contents of our website are not a part of or incorporated by reference in this Quarterly Report on Form 10-Q.
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). The SEC maintains a website that contains reports, proxy and information statements and other information that we file electronically with the SEC at www.sec.gov. We also make available free of charge, on or through our website, these reports, proxy statements and other information as soon as reasonably practicable following the time they are electronically filed with or furnished to the SEC. To access these, click on the “SEC Filings” link found on our Investor Relations homepage (http://ir.msci.com).
We also use our Investor Relations homepage, Corporate Responsibility homepage and corporate Twitter account (@MSCI_Inc) as channels of distribution of Company information. The information we post through these channels may be deemed material.
Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about us when you enroll your email address by visiting the “Email Alert Subscription” section of our Investor Relations homepage at http://ir.msci.com/alerts.cfm. The contents of our website, including our Investor Relations homepage, Corporate Responsibility homepage and social media channels are not, however, a part of or incorporated by reference in this Quarterly Report on Form 10-Q.
FORWARD-LOOKING STATEMENTS
We have included in this Quarterly Report on Form 10-Q, and from time to time may make in our public filings, press releases or other public statements, certain statements that constitute forward-looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only MSCI’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control.
In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” or the negative of these terms or other comparable terminology. Statements concerning our financial position, business strategy and plans or objectives for future operations are forward-looking statements. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and that could materially affect our actual results, levels of activity, performance or achievements. Such risks and uncertainties include those set forth under “Risk Factors” in Part I, Item 1A of the 2020 Annual Report on Form 10-K filed with the SEC on February 12, 2021. Other factors that could materially affect actual results, levels of activity, performance or achievements can be found in quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished with the SEC. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or for any other reason. Therefore, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the SEC.
3
PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except per share and share data)
As of
September 30,
December 31,
2021
2020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
1,284,664
1,300,521
Accounts receivable, net of allowances
496,726
558,569
Prepaid income taxes
16,578
20,097
Prepaid and other assets
49,383
46,411
Total current assets
1,847,351
1,925,598
Property, equipment and leasehold improvements, net
70,543
80,446
Right of use assets
153,831
153,330
Goodwill
2,230,404
1,566,022
Intangible assets, net
597,644
234,748
Equity method investment
186,502
190,898
Deferred tax assets
28,720
23,627
Other non-current assets
27,674
23,978
Total assets
5,142,669
4,198,647
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable
9,884
14,253
Income taxes payable
36,642
26,195
Accrued compensation and related benefits
164,174
161,557
Other accrued liabilities
162,877
143,894
Deferred revenue
643,352
675,870
Total current liabilities
1,016,929
1,021,769
Long-term debt
4,160,379
3,366,777
Long-term operating lease liabilities
150,519
152,342
Deferred tax liabilities
3,292
12,774
Other non-current liabilities
91,575
88,219
Total liabilities
5,422,694
4,641,881
Commitments and Contingencies (see Note 8)
Shareholders' equity (deficit):
Preferred stock (par value $0.01, 100,000,000 shares authorized; no shares issued)
—
Common stock (par value $0.01; 750,000,000 common shares authorized; 133,160,230
and 132,829,175 common shares issued and 82,446,714 and 82,573,407 common
shares outstanding at September 30, 2021 and December 31, 2020, respectively)
1,332
1,328
Treasury shares, at cost (50,713,516 and 50,255,768 common shares held at September 30, 2021
and December 31, 2020, respectively)
(4,534,810
)
(4,342,535
Additional paid in capital
1,446,001
1,402,537
Retained earnings
2,869,127
2,554,295
Accumulated other comprehensive loss
(61,675
(58,859
Total shareholders' equity (deficit)
(280,025
(443,234
Total liabilities and shareholders' equity (deficit)
See Notes to Condensed Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
Operating revenues
517,099
425,333
1,493,702
1,251,729
Operating expenses:
Cost of revenues
89,674
70,704
262,781
215,769
Selling and marketing
59,819
52,668
174,477
159,834
Research and development
28,352
24,901
80,745
73,997
General and administrative
38,110
27,613
103,020
86,755
Amortization of intangible assets
14,105
14,333
59,569
42,171
Depreciation and amortization of property, equipment and
leasehold improvements
6,809
7,494
20,972
22,524
Total operating expenses
236,869
197,713
701,564
601,050
Operating income
280,230
227,620
792,138
650,679
Interest income
(396
(475
(1,129
(4,729
Interest expense
42,137
37,536
119,278
118,994
Other expense (income)
37,839
1,516
61,616
45,355
Other expense (income), net
79,580
38,577
179,765
159,620
Income before provision for income taxes
200,650
189,043
612,373
491,059
Provision for income taxes
30,774
6,685
80,255
45,453
Net income
169,876
182,358
532,118
445,606
Earnings per basic common share
2.06
2.18
6.45
5.30
Earnings per diluted common share
2.03
2.16
6.38
5.26
Weighted average shares outstanding used in computing
earnings per share
Basic
82,470
83,602
82,521
84,044
Diluted
83,554
84,479
83,446
84,789
5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive (loss) income:
Foreign currency translation adjustments
(3,226
7,058
(4,052
(3,743
Income tax effect
422
(1,124
999
965
Foreign currency translation adjustments, net
(2,804
5,934
(3,053
(2,778
Pension and other post-retirement adjustments
186
(245
383
(27
(48
83
(146
88
Pension and other post-retirement adjustments, net
138
(162
237
61
Other comprehensive (loss) income, net of tax
(2,666
5,772
(2,816
(2,717
Comprehensive income
167,210
188,130
529,302
442,889
6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
Accumulated
Additional
Other
Common
Treasury
Paid in
Retained
Comprehensive
Stock
Capital
Earnings
Income (Loss)
Total
Balance at December 31, 2020
196,819
Dividends declared ($0.78 per common share)
(65,947
Dividends paid in shares
66
Other comprehensive income (loss), net of tax
(957
Common stock issued
Shares withheld for tax withholding and exercises
(52,814
Compensation payable in common stock
18,842
Common stock repurchased and held in treasury
(134,340
Common stock issued to Directors and
(held in)/released from treasury
(20
Balance at March 31, 2021
1,331
(4,529,709
1,421,445
2,685,167
(59,816
(481,582
165,423
(64,863
20
807
(620
12,252
756
Balance at June 30, 2021
(4,529,573
1,433,717
2,785,727
(59,009
(367,807
Dividends declared ($1.04 per common share)
(86,476
21
1
(5,286
12,263
49
Balance at September 30, 2021
7
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT), CONT’D
Balance at December 31, 2019
1,324
(3,565,784
1,351,031
2,199,294
(62,579
(76,714
148,125
Cumulative-effect adjustment
631
Dividends declared ($0.68 per common share)
(59,233
78
(9,625
Shares withheld for tax withholding
(47,195
15,333
(325,699
(36
Balance at March 31, 2020
(3,938,714
1,366,442
2,288,817
(72,204
(354,331
115,123
(57,360
36
1,136
(603
14,294
(31,071
1,844
Balance at June 30, 2020
(3,968,544
1,380,772
2,346,580
(71,068
(310,932
(65,830
(2,433
11,045
(206,566
Balance at September 30, 2020
(4,177,563
1,391,837
2,463,108
(65,296
(386,586
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense
43,218
40,381
Depreciation and amortization of property, equipment and leasehold improvements
Amortization of right of use assets
18,255
18,061
Amortization of debt origination fees
3,658
3,338
Loss on extinguishment of debt
59,103
44,930
Deferred taxes
(101,840
(4,622
Other adjustments
5,706
1,680
Changes in assets and liabilities:
Accounts receivable
69,324
69,848
4,165
(31,923
(2,178
(2,854
(6,347
(1,882
(206
(33,532
11,981
6,607
7,201
9,801
(57,932
(43,186
(15,644
(17,017
5,282
5,250
Net cash provided by operating activities
656,405
575,181
Cash flows from investing activities
Acquisition of a business, net of cash acquired
(948,695
-
Acquisition of equity method investment
(77
(190,816
Capitalized software development costs
(29,078
(21,931
Capital expenditures
(7,119
(12,152
(910
Net cash used in investing activities
(985,879
(224,899
Cash flows from financing activities
Proceeds from borrowings, inclusive of premium
1,803,750
1,405,000
Repayment of borrowings
(1,051,810
(1,142,382
Repurchase of common stock held in treasury
(193,060
(613,566
Payment of dividends
(216,496
(181,843
Payment of debt issuance costs in connection with debt
(21,135
(16,693
Net cash provided by (used in) financing activities
321,249
(549,484
Effect of exchange rate changes
(7,632
(4,507
Net decrease in cash
(15,857
(203,709
Cash and cash equivalent, beginning of period
1,506,567
Cash and cash equivalent, end of period
1,302,858
Supplemental disclosure of cash flow information:
Cash paid for interest
101,631
109,834
Cash paid for income taxes, net of refunds received
163,732
73,311
Supplemental disclosure of non-cash investing activities
Property, equipment and leasehold improvements in other accrued liabilities
4,821
3,281
Supplemental disclosure of non-cash financing activities
Cash dividends declared, but not yet paid
2,096
1,505
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTRODUCTION AND BASIS OF PRESENTATION
MSCI Inc., together with its wholly owned subsidiaries (the “Company” or “MSCI”) is a leading provider of critical decision support tools and services for the global investment community. Our expertise in research, data and technology empower better investment decisions by enabling clients to understand and analyze key drivers of risk and return and confidently build more effective portfolios. We create industry-leading research-enhanced products and solutions including indexes; portfolio construction tools and risk-management services; environmental, social and governance (“ESG”) and climate solutions; and real estate data, return analytics services, market insights and climate solutions.
Basis of Presentation and Use of Estimates
These unaudited condensed consolidated financial statements include the accounts of MSCI and its wholly owned subsidiaries and include all adjustments of a normal, recurring nature necessary to state fairly the financial condition as of September 30, 2021 and December 31, 2020, the results of operations, comprehensive income and shareholders’ equity (deficit) for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 2021 and 2020. The unaudited condensed consolidated statement of financial condition and related financial statement information as of December 31, 2020 have been derived from the 2020 audited consolidated financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in MSCI’s Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for interim periods are not necessarily indicative of results for the entire year.
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The Company makes certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, as well as the reported amounts of operating revenues and expenses during the periods presented. Significant estimates and assumptions made by management include the deferral and recognition of revenue, research and development and software capitalization, assessment of impairment of long-lived assets, accrued compensation, income taxes, incremental borrowing rates, valuation of assets acquired and liabilities assumed in a business combination and other matters that affect the unaudited condensed consolidated financial statements and related disclosures. The Company believes that estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. Intercompany balances and transactions are eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current period presentation. Effective January 1, 2021, the ESG and Climate operating segment is being presented as a separate reportable segment. The operating segments of Real Estate and The Burgiss Group, LLC (“Burgiss”) do not individually meet the segment reporting thresholds and have been combined and presented as part of the All Other – Private Assets reportable segment. The Company’s ownership interest in Burgiss, a global provider of investment decision tools for private capital, is classified as an equity-method investment. Therefore, the All Other – Private Assets segment does not include the Company’s proportionate share of operating revenues and Adjusted EBITDA related to Burgiss. The Company’s proportionate share of the income or loss from its equity method investment in Burgiss is not a component of Adjusted EBITDA as it is reported as a component of other (expense) income, net.
Concentrations
For the nine months ended September 30, 2021 and 2020, BlackRock, Inc. accounted for 12.9% and 10.9% of the Company’s consolidated operating revenues, respectively. For the nine months ended September 30, 2021 and 2020, BlackRock, Inc. accounted for 20.6% and 17.8% of the Index segment operating revenues, respectively. No single customer represented 10.0% or more of operating revenues within the Analytics, ESG and Climate and All Other – Private Assets segments for the nine months ended September 30, 2021 and 2020.
Allowance for Credit Losses on Accounts Receivable
Following the adoption of Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” effective beginning January 1, 2020, the Company records an allowance on customer accounts at the time of billing based on the estimated amount of the billing that will not be collected.
10
Changes in the allowance for credit losses on doubtful accounts receivable from December 31, 2019 to September 30, 2021 were as follows:
Amount
Balance as of December 31, 2019
1,715
Addition (reduction) to credit loss expense
1,712
Write-offs, net of recoveries
(1,844
Balance as of December 31, 2020
1,583
1,051
Adjustments and write-offs, net of recoveries
Balance as of September 30, 2021
2,643
2. RECENT ACCOUNTING STANDARDS UPDATES
There are no pending accounting standards updates that are currently expected to have a material impact on the Company.
3. REVENUE RECOGNITION
MSCI’s revenues are characterized by product type, which broadly reflects the nature of how they are recognized. The Company’s revenue types are recurring subscription, asset-based fees and non-recurring revenues. The Company also reports revenues by segment.
The tables that follow present the disaggregated revenues for the periods indicated:
For the Three Months ended September 30, 2021
Segments
Index
Analytics
ESG and Climate
All Other - Private Assets
Revenue Types
Recurring subscriptions
165,310
134,320
42,592
15,418
357,640
Asset-based fees
141,745
Non-recurring
14,448
1,978
1,099
189
17,714
321,503
136,298
43,691
15,607
For the Nine Months ended September 30, 2021
480,488
399,360
115,299
48,355
1,043,502
404,593
34,876
6,857
2,450
1,424
45,607
919,957
406,217
117,749
49,779
For the Three Months ended September 30, 2020
146,387
126,251
28,152
12,400
313,190
100,371
8,933
2,086
399
354
11,772
255,691
128,337
28,551
12,754
11
For the Nine Months ended September 30, 2020
431,631
376,505
78,961
40,402
927,499
288,642
27,582
4,903
1,125
35,588
747,855
381,408
80,086
42,380
The tables that follow present the change in accounts receivable and current deferred revenue between the dates indicated:
Opening (December 31, 2020)
Closing (September 30, 2021)
Increase/(decrease)
(61,843
(32,518
Opening (December 31, 2019)
499,268
574,656
Closing (September 30, 2020)
429,804
531,487
(69,464
(43,169
The amounts of revenue recognized in the periods that were included in the opening current deferred revenue, which reflects contract liability amounts, were $145.2 million and $623.8 million for the three and nine months ended September 30, 2021, respectively and $108.8 million and $494.4 million for the three and nine months ended September 30, 2020, respectively. The difference between the opening and closing balances of the Company’s deferred revenue was primarily driven by an increase in the amortization of deferred revenue to operating revenues, partially offset by an increase in billings. MSCI had an insignificant long-term deferred revenue balance as of September 30, 2021, reflected as a part of “Other non-current liabilities” on its Unaudited Condensed Consolidated Statement of Financial Condition.
For contracts that have a duration of one year or less, the Company has not disclosed either the remaining performance obligation as of the end of the reporting period or when the Company expects to recognize the revenue. The remaining performance obligations for contracts that have a duration of greater than one year and the periods in which they are expected to be recognized are as follows:
First 12-month period
411,996
Second 12-month period
224,765
Third 12-month period
75,756
Periods thereafter
16,102
728,619
4. EARNINGS PER COMMON SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and vested restricted stock unit awards where recipients have satisfied the explicit vesting terms. Diluted EPS reflects the assumed conversion of all dilutive securities.
12
The following table presents the computation of basic and diluted EPS:
Basic weighted average common shares outstanding
Effect of dilutive securities:
Restricted stock units
1,084
877
925
745
Diluted weighted average common shares outstanding
5. ACQUISITIONS
On September 13, 2021, MSCI acquired all of the issued and outstanding preferred and common shares of Real Capital Analytics, Inc (“RCA”) for an aggregate cash purchase price of $948.7 million, subject to working capital adjustments. This acquisition expands MSCI’s suite of real estate solutions, providing the real estate industry with data, analytics, and support tools to manage investments and understand performance and risk, including climate risk, within their portfolios. RCA has been accounted for as a business combination using the acquisition method of accounting and will be integrated into the All Other – Private Assets reportable segment, as a component of the Real Estate operating segment. A portion of RCA’s client agreements do not have automatic renewal clauses at the end of the subscription period. Due to the historically high retention rate and expectation that a substantial portion of the client agreements will be renewed, the associated revenue is recorded as recurring subscription revenue.
The components of the preliminary purchase price allocation were as follows:
Estimated
Useful Life
Fair Value
9,751
Other current assets
3,553
Property, equipment and leasehold
improvements, net
1,392
6,441
3,215
(28,191
Other current liabilities
(13,935
(4,849
(87,513
Intangible Assets:
Customer relationships
20 years
175,800
Trademarks
2 years
890
Acquired technology and software
9 years
31,500
Proprietary data
11 years
185,500
665,141
Purchase price, net of cash acquired
948,695
The purchase price allocation is based on preliminary valuations and assessments, the estimates and assumptions used may be subject to change within the measurement period, particularly for acquired intangible assets, deferred taxes and certain operating assets and liabilities. The recorded goodwill is primarily attributable to the utilization of the acquired data as well as expanded market opportunities. Goodwill attributable to the acquisition is not deductible for income tax purposes.
Revenue of RCA recognized within the condensed consolidated financial statements subsequent to the acquisition date was $3.4 million.
13
6. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment and leasehold improvements, net consisted of the following as of the specified dates:
Computer & related equipment
183,688
186,786
Furniture & fixtures
14,936
15,276
Leasehold improvements
58,098
56,537
Work-in-process
1,729
2,996
Subtotal
258,451
261,595
Accumulated depreciation and amortization
(187,908
(181,149
Depreciation and amortization expense of property, equipment and leasehold improvements was $6.8 million and $7.5 million for the three months ended September 30, 2021 and 2020, respectively. Depreciation and amortization expense of property, equipment and leasehold improvements was $21.0 million and $22.5 million for the nine months ended September 30, 2021 and 2020, respectively.
7. GOODWILL AND INTANGIBLE ASSETS, NET
The following table presents goodwill by reportable segment:
Goodwill at December 31, 2020
1,205,758
290,976
48,047
21,241
Acquisitions
(1)
Foreign exchange translation adjustment
(469
(290
(759
Goodwill at September 30, 2021
1,205,289
686,092
Reflects the impact of the acquisition of RCA.
The Company completed its annual goodwill impairment test as of July 1, 2021 on its Index, Analytics, ESG and Climate and Real Estate reporting units, which are also the Company’s operating segments, and no impairments were noted. The Company performed a test for impairment and determined that it was more likely than not that the fair value for each was not less than the carrying value. See Note 12, “Segment Information,” for further descriptions of the operating segments.
Intangible Assets, Net
The following table presents the amount of amortization expense related to intangible assets by category for the periods indicated:
Amortization expense of acquired intangible assets
9,602
8,325
26,346
25,710
Amortization expense of internally developed
capitalized software
4,503
6,008
17,210
16,461
Write-off of internally developed
16,013
Total amortization of intangible assets expense
14
As a result of management’s decision to discontinue development and cease related sales activities of certain Analytics segment products and transition existing customers to other product offerings, the Company wrote off $16.0 million of certain internally developed capitalized software intangible assets (consisting of $46.3 million of gross intangible assets less $30.3 million of accumulated amortization) during the three months ended June 30, 2021. The non-cash charge is recorded as a component of “Amortization of intangible assets” on the Condensed Consolidated Statement of Income.
The gross carrying and accumulated amortization amounts related to the Company’s intangible assets were as follows:
Gross intangible assets:
532,500
356,700
208,190
207,300
209,220
177,720
Internally developed capitalized software
95,972
113,188
214,127
28,627
1,260,009
883,535
(6,026
(5,262
Total gross intangible assets
1,253,983
878,273
Accumulated amortization:
(270,212
(253,465
(150,074
(143,207
(174,690
(174,032
(44,284
(57,464
(17,855
(15,730
(657,115
(643,898
776
373
Total accumulated amortization
(656,339
(643,525
Net intangible assets:
262,288
103,235
58,116
64,093
34,530
3,688
51,688
55,724
196,272
12,897
602,894
239,637
(5,250
(4,889
Total net intangible assets
The following table presents the estimated amortization expense for the remainder of the year ending December 31, 2021 and succeeding years:
Years Ending December 31,
Amortization
Expense
Remainder of 2021
21,514
2022
83,721
2023
77,814
2024
69,965
2025
50,789
Thereafter
293,841
15
8. COMMITMENTS AND CONTINGENCIES
Senior Unsecured Notes. The Company had an aggregate of $4,200.0 million in senior unsecured notes (collectively, the “Senior Notes”) outstanding at September 30, 2021, as presented in the table below:
Principal
Outstanding
at
Carrying
Value at
Fair
Maturity Date
September 30, 2021
December 31, 2020
4.75% senior unsecured notes due 2026
August 1, 2026
496,257
522,325
5.375% senior unsecured notes due 2027
May 15, 2027
495,819
538,100
4.000% senior unsecured notes due 2029
November 15, 2029
1,000,000
991,182
990,364
1,059,890
1,073,040
3.625% senior unsecured notes due 2030
September 1, 2030
900,000
894,097
395,458
936,603
419,428
3.875% senior unsecured notes due 2031
February 15, 2031
989,700
988,879
1,050,000
1,063,430
3.625% senior unsecured notes due 2031
November 1, 2031
600,000
593,374
625,296
3.250% senior unsecured notes due 2033
August 15, 2033
700,000
692,026
709,268
Total long-term debt
4,200,000
4,381,057
3,616,323
Interest payments attributable to the Senior Notes are due as presented in the following table:
First semi-annual interest
payment date
Second semi-annual
interest payment date
Senior Notes
February 1
August 1
May 15
November 15
March 1
September 1
June 1
December 1
May 1
November 1
February 15
August 15
The fair market value of the Company’s debt obligations represent Level 2 valuations. The Company utilizes the market approach and obtains security pricing from a vendor who uses broker quotes and third-party pricing services to determine fair values.
On March 26, 2021, the Company issued $500.0 million aggregate principal amount of 3.625% Senior Unsecured Notes due 2030 (the “2030 Senior Notes”) in a private offering that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The 2030 Senior Notes constitute a further issuance of, are fully fungible with, rank equally with and form a single series with the $400.0 million aggregate principal amount of the 3.625% senior unsecured notes due 2030 issued on March 4, 2020. In connection with the completion of the offering, the Company announced that it intended to use a portion of the net proceeds from the offering, together with available cash, for the pre-maturity redemption of all $500.0 million aggregate principal amount outstanding of its 4.750% senior unsecured notes due 2026 (the “2026 Senior Notes”). On April 12, 2021 the Company completed the pre-maturity redemption of all of its 2026 Senior Notes. The pre-maturity redemption of the 2026 Senior Notes resulted in an approximately $21.8 million loss on extinguishment that was recorded in other expense (income) during the three months ended June 30, 2021, which includes an applicable premium of approximately $18.2 million (as set forth in the indenture governing the terms of the 2026 Senior Notes) and the write-off of approximately $3.6 million of unamortized debt issuance costs associated with the 2026 Senior Notes.
The 2030 Senior Notes are scheduled to mature and be paid in full on September 1, 2030. At any time prior to March 1, 2025, the Company may redeem all or part of the 2030 Senior Notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest and additional interest, if any, thereon, to the date of redemption. In addition, the Company may redeem all or part of the 2030 Senior Notes, together with accrued and unpaid interest, on or after March 1, 2025, at redemption prices set forth in the indenture governing the 2030 Senior
16
Notes. At any time prior to March 1, 2023, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2030 Senior Notes, including any permitted additional notes, at a redemption price equal to 103.625% of the principal amount plus accrued and unpaid interest, if any, to the redemption date.
On May 14, 2021, the Company issued $600.0 million aggregate principal amount of 3.625% Senior Unsecured Notes due 2031 (the “2031 Senior Notes”) in a private offering that was exempt from the registration requirements of the Securities Act. The 2031 Senior Notes are scheduled to mature and be paid in full on November 1, 2031. At any time prior to November 1, 2026, the Company may redeem all or part of the 2031 Senior Notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest, if any, thereon, to the date of redemption. In addition, the Company may redeem all or part of the 2031 Senior Notes, together with accrued and unpaid interest, on or after November 1, 2026, at redemption prices set forth in the indenture governing the 2031 Senior Notes. At any time prior to November 1, 2024, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2031 Senior Notes, including any permitted additional notes, at a redemption price equal to 103.625% of the principal amount plus accrued and unpaid interest, if any, to the redemption date.
On August 17, 2021, the Company issued $700.0 million aggregate principal amount of 3.250% Senior Unsecured Notes due 2033 (the “2033 Senior Notes”) in a private offering that was exempt from the registration requirements of the Securities Act. In connection with the completion of the offering, the Company announced that it intended to use a portion of the net proceeds from the offering for the pre-maturity redemption of all $500.0 million aggregate principal amount outstanding of its 5.375% senior unsecured notes due 2027 (the “2027 Senior Notes”). On September 2, 2021 the Company completed the pre-maturity redemption of all of its 2027 Senior Notes, which are reflected in the three months ended September 30, 2021. The pre-maturity redemption of the 2027 Senior Notes resulted in an approximately $37.3 million loss on extinguishment that was recorded in other expense (income) during the three months ended September 30, 2021, which includes an applicable premium of approximately $33.6 million (as set forth in the indenture governing the terms of the 2027 Senior Notes) and the write-off of approximately $3.7 million of unamortized debt issuance costs associated with the 2027 Senior Notes.
The 2033 Senior Notes are scheduled to mature and be paid in full on August 15, 2033. At any time prior to August 15, 2027, the Company may redeem all or part of the 2033 Senior Notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest and additional interest, if any, thereon, to the date of redemption. In addition, the Company may redeem all or part of the 2033 Senior Notes, together with accrued and unpaid interest, on or after August 15, 2027, at redemption prices set forth in the indenture governing the 2033 Senior Notes. At any time prior to August 15, 2024, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2033 Senior Notes, including any permitted additional notes, at a redemption price equal to 103.250% of the principal amount plus accrued and unpaid interest, if any, to the redemption date.
Revolver. Since November 20, 2014, the Company has maintained a revolving credit agreement with a syndicate of banks (as amended, the “Revolving Credit Agreement”). On March 29, 2021, the Company entered into Amendment No. 4 (the “Fourth Amendment”) to the Revolving Credit Agreement. The Fourth Amendment, among other things, (i) increased aggregate commitments available to be borrowed by $100.0 million to an aggregate of $500.0 million of availability thereunder until November 2024, at which point the aggregate commitments will be $467.5 million, and (ii) extended the term to March 2026. At September 30, 2021, the Revolving Credit Agreement was undrawn.
In connection with the closings of the Senior Notes offerings, entry into the Revolving Credit Agreement and the subsequent amendments, the Company paid certain financing fees which, together with the existing fees related to prior credit facilities, are being amortized over their related lives. At September 30, 2021, $41.8 million of the deferred financing fees and premium remain unamortized, $0.5 million of which is included in “Prepaid and other assets,” $1.7 million of which is included in “Other non-current assets” and $39.6 million of which is included in “Long-term debt” on the Unaudited Condensed Consolidated Statement of Financial Condition.
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9. LEASES
The Company recognized $7.6 million and $7.5 million of operating lease expenses for the three months ended September 30, 2021 and 2020, respectively. The Company recognized $22.7 million and $25.4 million of operating lease expenses for the nine months ended September 30, 2021 and 2020, respectively. The amounts associated with variable lease costs, short-term lease costs and sublease income were not material for any of the three and nine months ended September 30, 2021 and 2020.
Future minimum commitments for the Company’s operating leases in place as of September 30, 2021, the interest and other relevant line items in the Unaudited Condensed Consolidated Statement of Financial Condition are as follows:
Maturity of Lease Liabilities
Operating
Leases
6,010
29,889
28,985
23,101
21,623
90,206
Total lease payments
199,814
Less: Interest
(25,883
Present value of lease liabilities
173,931
23,412
Lease term and discount rate for the Company’s operating leases in place as of September 30, 2021 are as follows:
Lease Term and Discount Rate
Weighted-average remaining lease term (years)
8.27
Weighted-average discount rate
3.14
%
Other information for the Company’s operating leases in place for the nine months ended September 30, 2021 are as follows:
Other Information
Operating cash flows used for operating leases
23,038
22,735
Leased assets obtained in exchange for new
operating lease liabilities
20,109
7,491
10. SHAREHOLDERS’ EQUITY (DEFICIT)
Return of capital
On October 29, 2020, the Board of Directors authorized a stock repurchase program for the purchase of up to $1,000.0 million worth of shares of MSCI’s common stock in addition to the $804.5 million of authorization then remaining under a previously existing share repurchase program (the “2020 Repurchase Program”) for a total of $1,804.5 million of stock repurchase authorization.
Share repurchases made pursuant to the 2020 Repurchase Program may take place in the open market or in privately negotiated transactions from time to time based on market and other conditions. This authorization may be modified, suspended or terminated by the Board of Directors at any time without prior notice. As of September 30, 2021, there was $1,594.4 million of available authorization remaining under the 2020 Repurchase Program.
The following table provides information with respect to repurchases of the Company’s common stock made on the open market:
Average
Price
Paid Per
Share
Number of
Shares
Repurchased
Dollar
Value of
407.70
330
134,340
September 30, 2020
278.69
2,021
563,336
18
The following table presents dividends declared per common share as well as total amounts declared, distributed and deferred for the periods indicated:
Dividends
(in thousands, except per share amounts)
Per Share
Declared
Distributed
(Released)/Deferred
Three Months Ended March 31,
0.78
65,947
66,153
Three Months Ended June 30,
64,863
64,489
374
Three Months Ended September 30,
1.04
86,476
85,961
515
2.60
217,286
216,603
683
0.68
59,233
59,455
(222
57,360
57,068
292
65,830
65,454
376
2.14
182,423
181,977
446
Common Stock.
The following table presents activity related to shares of common stock issued and repurchased during the nine months ended September 30, 2021:
Common Stock
Issued
132,829,175
(50,255,768
82,573,407
Dividend payable/paid
160
112
301,227
(122,924
Shares repurchased under stock repurchase programs
(329,508
Shares issued to directors
133,130,562
(50,708,248
82,422,314
(43
10,692
(1,303
1,308
4,826
6,134
133,142,605
(50,704,768
82,437,837
33
(33
17,592
(9,092
377
133,160,230
(50,713,516
82,446,714
11. INCOME TAXES
The Company’s provision for income taxes was $80.3 million and $45.5 million for the nine months ended September 30, 2021 and 2020, respectively. These amounts reflect effective tax rates of 13.1% and 9.3% for the nine months ended September 30, 2021 and 2020, respectively.
The effective tax rate of 13.1% for the nine months ended September 30, 2021 reflects the Company’s estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $49.3 million, in relation to pretax income. For the nine months ended September 30, 2021, these discrete items primarily related to $22.7 million of excess tax benefits recognized on share-based compensation vested during the period and $15.2 million related to the tax impact of loss on debt extinguishment recognized during the period on the redemption of the 2027 Senior Notes and 2026 Senior Notes. Also included in the discrete items is a $5.1 million benefit related to prior year settlements, a $2.3 million benefit related to the revaluation of deferred taxes as a result of
19
the enactment of an increase in the UK corporate tax rate, a $2.0 million benefit related to the filing of prior year refund claims and $2.0 million of tax benefits related to other prior year items. In addition, the effective tax rate was impacted by the level of earnings.
The effective tax rate of 9.3% for the nine months ended September 30, 2020 reflects the Company’s estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $61.7 million. For the nine months ended September 30, 2020, these discrete items primarily related to $21.9 million of excess tax benefits recognized on share-based compensation vested during the period, $20.8 million related to the favorable impact on prior years of final regulations released during the three months ended September 30, 2020 clarifying certain provisions established in the Tax Cuts and Jobs Act that was enacted on December 22, 2017 (“2017 Tax Act”) and $11.5 million related to the tax impact of loss on debt extinguishment recognized during the period. The discrete items also included a $6.3 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings.
The Company is under examination by tax authorities in certain jurisdictions, including foreign jurisdictions, such as the United Kingdom, Switzerland and India, and states in which the Company has significant operations, such as New York and California. The tax years currently under examination vary by jurisdiction but include years ranging from 2008 through 2020.
The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions in which it files income tax returns. The Company has established unrecognized tax benefits that the Company believes are adequate in relation to the potential for additional assessments. During the nine months ended September 30, 2021, the Company’s unrecognized tax benefits increased by $12.6 million principally due to the filing of prior year refund claims, partially offset by the resolution of prior year items. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change. Based on the current status of income tax audits, the Company believes it is reasonably possible that the total amount of unrecognized benefits may decrease by approximately $26.7 million in the next twelve months as a result of the resolution of tax examinations.
12. SEGMENT INFORMATION
The Company has five operating segments: Index, Analytics, ESG and Climate, Real Estate and Burgiss, which are presented as the following four reportable segments: Index, Analytics, ESG and Climate and All Other – Private Assets.
Effective January 1, 2021, the Company began presenting four reportable segments with the ESG and Climate operating segment being presented as a separate reportable segment. The operating segments of Real Estate and Burgiss do not individually meet the segment reporting thresholds and have been combined and presented as part of All Other – Private Assets reportable segment. The Company’s ownership interest in Burgiss is classified as an equity-method investment. Therefore, the All Other – Private Assets segment does not include the Company’s proportionate share of operating revenues and Adjusted EBITDA related to Burgiss. The Company’s proportionate share of the income or loss from its equity-method investment in Burgiss is not a component of Adjusted EBITDA as it is reported as a component of other (expense) income, net. Prior period amounts have been recast to reflect the current presentation.
The Index operating segment offers equity and fixed income indexes. The indexes are used in many areas of the investment process, including index-linked product creation (e.g., Exchange Traded Funds (“ETFs”) and futures and options), performance benchmarking, portfolio construction and rebalancing, broker-dealer structured products and asset allocation.
The Analytics operating segment offers risk management, performance attribution and portfolio management content, applications and services that provide clients with an integrated view of risk and return and an analysis of market, credit, liquidity and counterparty risk across all major asset classes, spanning short-, medium- and long-term time horizons. Clients access Analytics content through MSCI’s own proprietary applications and application programming interfaces, third-party applications or directly through their own platforms. Additionally, the Analytics operating segment also provides various managed services to help clients operate more efficiently, including consolidation of client portfolio data from various sources, review and reconciliation of input data and results, and customized reporting.
The ESG and Climate operating segment offers products and services that help institutional investors understand how ESG and climate considerations can impact the long-term risk and return of their portfolio and individual security-level investments. In addition, MSCI ESG Research data and ratings, as well as climate solutions, are used in the construction of equity and fixed income indexes to help institutional investors more effectively benchmark ESG and climate investment performance, issue index-based investment products, as well as manage, measure and report on ESG and climate mandates.
The Real Estate operating segment offers research, reporting, market and transaction data and benchmarking and intelligence offerings that provide real estate performance analysis for funds, investors and managers. Real Estate performance and risk analytics, including climate solutions, range from enterprise-wide to property-specific analysis. The Real Estate operating segment also provides business intelligence and market simulation analysis to real estate owners, managers, developers and brokers worldwide. Financial
results related to the acquisition of RCA have been included prospectively as a component of the Real Estate operating segment, presented as a component of the All Other – Private Assets reportable segment, as of September 13, 2021.
The Burgiss operating segment represents the Company’s equity method investment in Burgiss, a global provider of investment decision support tools for private capital.
The change in reportable segments has not resulted in any changes to MSCI’s Chief Operating Decision Maker (“CODM”) or the basis for segment profitability from the information disclosed in our 2020 Annual Report on Form 10-K. The CODM continues to measure and evaluate reportable segments based on segment operating revenues as well as Adjusted EBITDA and other measures. The Company excludes the following items from segment Adjusted EBITDA: provision for income taxes, other expense (income), net, depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments, including certain non-recurring acquisition-related integration and transaction costs, that the CODM does not consider for the purposes of making decisions to allocate resources among segments or to assess segment performance. Although these amounts are excluded from segment Adjusted EBITDA, they are included in reported consolidated net income and are included in the reconciliation that follows.
The following table presents operating revenues by reportable segment for the periods indicated:
The following table presents segment profitability and a reconciliation to net income for the periods indicated:
Index Adjusted EBITDA
245,587
194,720
698,934
561,563
Analytics Adjusted EBITDA
50,291
45,056
145,836
127,540
ESG and Climate Adjusted EBITDA
9,820
7,658
20,585
16,783
All Other - Private Assets Adjusted
EBITDA
897
2,013
12,775
9,488
Total operating segment profitability
306,595
249,447
878,130
715,374
Acquisition-related integration and
transaction costs
5,451
Depreciation and amortization of property,
equipment and leasehold improvements
Operating revenues by geography are based on the shipping address of the ultimate customer utilizing the product. The following table presents revenue by geographic area for the periods indicated:
Americas:
United States
213,756
180,206
611,226
537,071
22,060
18,039
63,259
52,686
Total Americas
235,816
198,245
674,485
589,757
Europe, the Middle East and Africa ("EMEA"):
United Kingdom
87,101
65,155
250,984
193,042
113,102
90,539
332,554
268,677
Total EMEA
200,203
155,694
583,538
461,719
Asia & Australia:
Japan
23,384
19,885
68,019
59,002
57,696
51,509
167,660
141,251
Total Asia & Australia
81,080
71,394
235,679
200,253
Long-lived assets consist of property, equipment and leasehold improvements, right of use assets and internally developed capitalized software, net of accumulated depreciation and amortization. The following table presents long-lived assets by geographic area on the dates indicated:
Long-lived assets
172,207
182,776
13,854
13,949
186,061
196,725
EMEA:
19,384
19,678
37,046
33,561
56,430
53,239
1,347
1,896
32,290
37,946
33,637
39,842
276,128
289,806
13. SUBSEQUENT EVENTS
On October 25, 2021, the Board of Directors declared a quarterly cash dividend of $1.04 per share for the three months ending December 31, 2021 (“fourth quarter 2021”). The fourth quarter 2021 dividend is payable on November 30, 2021 to shareholders of record as of the close of trading on November 12, 2021.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (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.
Except as the context otherwise indicates, the terms “MSCI,” the “Company,” “we,” “our” and “us” refer to MSCI Inc., together with its subsidiaries.
Overview
We are a leading provider of critical decision support tools and services for the global investment community. Leveraging our knowledge of the global investment process and our expertise in research, data and technology, our actionable solutions power better investment decisions by enabling our clients to understand and analyze key drivers of risk and return and confidently and efficiently build more effective portfolios.
Investors all over the world use our tools and services to gain insight and improve transparency throughout their investment processes, including to help define their investment universe, inform and analyze their asset allocation and portfolio construction decisions, measure and manage portfolio performance and risk, conduct performance attribution, implement sustainable and other investment strategies, design and issue ETFs and other indexed financial products, and facilitate reporting to stakeholders.
Our leading research-enhanced products and services include indexes; portfolio construction and risk management analytics; ESG and climate solutions; and real estate market and transaction data, benchmarks, return-analytics, climate assessments and market insights. Through our integrated franchise we provide solutions across our products and services to support our clients’ dynamic and complex needs. Our content and capabilities can be accessed by our clients through multiple channels and platforms.
We are focused on product innovation to address the evolving needs of our clients in light of changing investment trends and an increasingly complex industry. In order to most effectively serve our clients, we are committed to driving an integrated solutions-based approach, achieving service excellence, enhancing our differentiated research and content, and delivering flexible, cutting-edge technology and platforms.
Our clients comprise a wide spectrum of the global investment industry and include the following key client types:
•
Asset owners (pension funds, endowments, foundations, central banks, sovereign wealth funds, family offices and insurance companies)
Asset managers (institutional funds and accounts, mutual funds, hedge funds, ETFs, insurance products, private banks and real estate investment trusts)
Financial intermediaries (banks, broker-dealers, exchanges, custodians, trust companies and investment consultants)
Wealth managers (including robo-advisors and self-directed brokerages)
Corporates
As of September 30, 2021, we served over 4,5001 clients in more than 90 countries. As of September 30, 2021, we had offices in more than 35 cities across more than 20 countries to help serve our diverse client base, with 45.1% of our revenues coming from clients in the Americas, 39.1% in EMEA and 15.8% in Asia and Australia.
Our principal business model is generally to license annual, recurring subscriptions for the majority of our Index, Analytics and ESG and Climate products and services for a fee due in advance of the service period. Real Estate products are also licensed annually through subscriptions, which are generally recurring, for a fee which is paid in advance when products are generally delivered ratably over the subscription period or in arrears after the product is delivered. A portion of our fees comes from clients who use our indexes as the basis for index-linked investment products. Such fees are primarily based on a client’s assets under management (“AUM”), trading volumes and fee levels.
Represents the aggregate of all related clients under their respective parent entity, excluding clients of Real Capital Analytics, Inc. (“RCA”) which were not previously MSCI’s clients.
In evaluating our financial performance, we focus on revenue and profit growth, including results accounted for under accounting principles generally accepted in the United States (“GAAP”) as well as non-GAAP measures, for the Company as a whole and by operating segment. In addition, we focus on operating metrics, including Run Rate, subscription sales and Retention Rate, to manage the business. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our profits into excess cash in the future. Our growth strategy includes: (a) extending leadership in research-enhanced content across asset classes, (b) enhancing distribution and content-enabling technology, (c) expanding solutions that empower client customization, (d) strengthening existing and developing new client relationships and (e) executing strategic relationships and acquisitions with complementary content and technology companies.
In the discussion that follows, we provide certain variances excluding the impact of foreign currency exchange rate fluctuations. Foreign currency exchange rate fluctuations reflect the difference between the current period results as reported compared to the current period results recalculated using the foreign currency exchange rates in effect for the comparable prior period. While operating revenues adjusted for the impact of foreign currency fluctuations includes asset-based fees that have been adjusted for the impact of foreign currency fluctuations, the underlying AUM, which is the primary component of asset-based fees, is not adjusted for foreign currency fluctuations. Approximately three-fifths of the AUM is invested in securities denominated in currencies other than the U.S. dollar, and accordingly, any such impact is excluded from the disclosed foreign currency-adjusted variances.
The discussion of our results of operations for the three and nine months ended September 30, 2021 and 2020 are presented below. The results of operations for interim periods may not be indicative of future results.
Results of Operations
The following table presents the results of operations for the periods indicated:
% Change
21.6
19.3
26.8
21.8
13.6
9.2
13.9
9.1
38.0
18.7
(1.6
%)
41.3
(9.1
(6.9
19.8
16.7
23.1
21.7
106.3
12.6
6.1
24.7
360.3
76.6
(6.8
19.4
(5.5
(6.0
21.3
Operating margin
54.2
53.5
53.0
52.0
Operating Revenues
Our revenues are grouped by the following types: recurring subscriptions, asset-based fees and non-recurring. We also group revenues by major product or reportable segment as follows: Index, Analytics, ESG and Climate and All Other – Private Assets, which includes the Real Estate product line.
24
The following table presents operating revenues by type for the periods indicated:
14.2
12.5
41.2
40.2
50.5
28.2
Total operating revenues
Total operating revenues for the three months ended September 30, 2021 increased 21.6% to $517.1 million compared to $425.3 million for the three months ended September 30, 2020. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, total operating revenues would have increased 20.4% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase of total operating revenues was 19.3%, growing to $1,493.7 million compared to $1,251.7 million for the nine months ended September 30, 2020. Adjusting for the impact of foreign currency exchange rate fluctuations and the acquisition, total operating revenues would have increased 18.3% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Operating revenues from recurring subscriptions for the three months ended September 30, 2021 increased 14.2% to $357.6 million compared to $313.2 million for the three months ended September 30, 2020, primarily driven by growth in Index products, which increased $18.9 million, or 12.9%, strong growth in ESG and Climate products, which increased $14.4 million, or 51.3%, and growth in Analytics products, which increased $8.1 million, or 6.4%. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, operating revenues from recurring subscriptions would have increased 12.6% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase of operating revenues from recurring subscriptions was 12.5%, growing to $1,043.5 million compared to $927.5 million for the nine months ended September 30, 2020, primarily driven by growth in Index products, which increased $48.9 million, or 11.3%, strong growth in ESG and Climate products, which increased $36.3 million, or 46.0%, and growth in Analytics products, which increased $22.9 million, or 6.1%. Adjusting for the impact of foreign currency exchange rate fluctuations and the acquisition, operating revenues from recurring subscriptions would have increased 11.2% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Operating revenues from asset-based fees for the three months ended September 30, 2021 increased 41.2% to $141.7 million compared to $100.4 million for the three months ended September 30, 2020. The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked to MSCI equity indexes that was primarily driven by a 52.4% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked to MSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible.
For the nine months ended September 30, 2021, revenues from asset-based fees increased 40.2% to $404.6 million compared to $288.6 million for the nine months ended September 30, 2020. The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked to MSCI equity indexes that was primarily driven by a 50.1% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked to MSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible.
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The following table presents the value of AUM in ETFs linked to MSCI equity indexes and the sequential change of such assets as of the end of each of the periods indicated:
Period Ended
(in billions)
March
31,
June
30,
September
December
AUM in ETFs linked to MSCI equity indexes(1), (2)
709.5
825.4
908.9
1,103.6
1,209.6
1,336.2
1,336.6
Sequential Change in Value
Market Appreciation/(Depreciation)
(216.5
117.4
57.0
135.7
43.2
73.7
(30.7
Cash Inflows
(8.4
(1.5
26.5
59.0
62.8
52.9
31.1
Total Change
(224.9
115.9
83.5
194.7
106.0
126.6
0.4
The following table presents the average value of AUM in ETFs linked to MSCI equity indexes for the periods indicated:
Quarterly average
877.1
776.9
893.4
999.2
1,169.2
1,292.4
1,361.9
Year-to-date average
827.0
849.1
886.7
1,230.8
1,274.5
The historical values of the AUM in ETFs linked to our equity indexes as of the last day of the month and the monthly average balance can be found under the link “AUM in ETFs Linked to MSCI Equity Indexes” on our Investor Relations homepage at http://ir.msci.com. This information is updated mid-month 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 SEC. The AUM in ETFs also includes AUM in Exchange Traded Notes, the value of which is less than 1.0% of the AUM amounts presented.
(2)
The value of AUM in ETFs linked to MSCI equity indexes is calculated by multiplying the equity ETF net asset value by the number of shares outstanding.
The average value of AUM in ETFs linked to MSCI equity indexes for the three months ended September 30, 2021 was $1,361.9 billion, up $468.5 billion, or 52.4%, from $893.4 billion for the three months ended September 30, 2020. For the nine months ended September 30, 2021, it was $1,274.5 billion, up $425.4 billion, or 50.1%, from $849.1 billion for the nine months ended September 30, 2020.
The following table presents operating revenues by reportable segment and revenue type for the periods indicated:
Operating revenues:
12.9
11.3
61.7
26.4
Index total
25.7
23.0
6.4
(5.2
39.9
Analytics total
6.2
6.5
51.3
46.0
175.4
117.8
ESG and Climate total
47.0
24.3
19.7
(46.6
(28.0
All Other - Private Assets total
22.4
17.5
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Refer to the section titled "Segment Results" that follows for further discussion of segment revenues.
Operating Expenses
We group our operating expenses into the following activity categories:
Cost of revenues;
Selling and marketing;
Research and development (“R&D”);
General and administrative (“G&A”);
Amortization of intangible assets; and
Depreciation and amortization of property, equipment and leasehold improvements.
Costs are assigned to these activity categories based on the nature of the expense or, when not directly attributable, an estimated allocation based on the type of effort involved.
The following table presents operating expenses by activity category for the periods indicated:
Total operating expenses for the three months ended September 30, 2021 increased 19.8% to $236.9 million compared to $197.7 million for the three months ended September 30, 2020. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 18.4% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase was 16.7%, growing to $701.6 million compared to $601.1 million for the nine months ended September 30, 2020. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 14.4% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Cost of Revenues
Cost of revenues expenses consist of costs related to the production and servicing of our products and services and primarily includes related information technology costs, including data center, cloud service, platform and infrastructure costs; costs to acquire, produce and maintain market data information; costs of research to support and maintain existing products; costs of product management teams; costs of client service and consultant teams to support customer needs; as well as other support costs directly attributable to the cost of revenues including certain human resources, finance and legal costs.
Cost of revenues for the three months ended September 30, 2021 increased 26.8% to $89.7 million compared to $70.7 million for the three months ended September 30, 2020, reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries and incentive compensation, as well as higher non-compensation costs, reflecting higher professional fees, information technology costs and market data costs.
For the nine months ended September 30, 2021, the increase was 21.8%, growing to $262.8 million compared to $215.8 million for the nine months ended September 30, 2020, reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries and incentive compensation, as well as higher non-compensation costs, reflecting higher professional fees, information technology costs and market data costs.
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Selling and Marketing
Selling and marketing expenses consist of costs associated with acquiring new clients or selling new products or product renewals to existing clients and primarily includes the costs of our sales and marketing teams, as well as costs incurred in other groups associated with acquiring new business, including product management, research, technology and sales operations.
Selling and marketing expenses for the three months ended September 30, 2021 increased 13.6% to $59.8 million compared to $52.7 million for the three months ended September 30, 2020, reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, including higher incentive compensation and wages and salaries, partially offset by lower severance costs, as well as higher non-compensation costs, primarily relating to higher marketing and information technology costs.
For the nine months ended September 30, 2021, the increase was 9.2%, growing to $174.5 million compared to $159.8 million for the nine months ended September 30, 2020, reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, including incentive compensation and wages and salaries.
Research and Development
R&D expenses consist of the costs to develop new or enhance existing products and the costs to develop new or improved technology and service platforms for the delivery of our products and services and primarily include the costs of development, research, product management, project management and the technology support associated with these efforts.
R&D expenses for the three months ended September 30, 2021 increased 13.9% to $28.4 million compared to $24.9 million for the three months ended September 30, 2020, reflecting higher investment in the Index and ESG and Climate reportable segments, partially offset by lower investment in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation, as well as higher non-compensation costs, reflecting higher information technology costs.
For the nine months ended September 30, 2021, the increase was 9.1%, growing to $80.7 million compared to $74.0 million for the nine months ended September 30, 2020, reflecting higher investment in the Index and ESG and Climate reportable segments, partially offset by lower investment in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation, as well as higher non-compensation costs, reflecting higher information technology costs.
General and Administrative
G&A expenses consist of costs primarily related to finance operations, human resources, office of the CEO, legal, corporate technology, corporate development and certain other administrative costs that are not directly attributed, but are instead allocated, to a product or service.
G&A expenses for the three months ended September 30, 2021 increased 38.0% to $38.1 million compared to $27.6 million for the three months ended September 30, 2020, reflecting increases across all four reportable segments. The change was driven by higher non-compensation costs, primarily driven by non-recurring transaction and integration costs related to the acquisition of RCA, higher professional fees and information technology costs, as well as higher compensation costs, reflecting higher incentive compensation and wages and salaries, partially offset by lower severance costs.
For the nine months ended September 30, 2021, the increase was 18.7%, growing to $103.0 million compared to $86.8 million for the nine months ended September 30, 2020, reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation and wages and salaries, partially offset by lower severance costs, and higher non-compensation costs related to non-recurring transaction and integration costs related to the acquisition of RCA, information technology costs, insurance costs and professional fees.
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The following table presents operating expenses using compensation and non-compensation categories, rather than using activity categories, for the periods indicated:
Compensation and benefits
152,540
129,920
17.4
452,237
395,985
Non-compensation expenses
63,415
45,966
168,786
140,370
20.2
Compensation and Benefits
Compensation and benefits costs are our most significant expense and typically represent approximately 65% of operating expenses or more than 70% of Adjusted EBITDA expenses. We had 4,237 and 3,545 employees as of September 30, 2021 and 2020, respectively, reflecting a 19.5% growth in the number of employees. 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 September 30, 2021, 62.5% of our employees were located in emerging market centers compared to 64.2% as of September 30, 2020.
Compensation and benefits costs for the three months ended September 30, 2021 increased 17.4% to $152.5 million compared to $129.9 million for the three months ended September 30, 2020. For the nine months ended September 30, 2021, the increase was 14.2%, growing to $452.2 million compared to $396.0 million for the nine months ended September 30, 2020. The increase in both the three and nine months ended September 30, 2021 was primarily driven by higher incentive compensation and wages and salaries.
A significant portion of the incentive compensation component of operating expenses is based on the achievement of a number of financial and operating metrics. In a scenario where operating revenue growth and profitability moderate, incentive compensation would be expected to decrease accordingly.
Non-Compensation Expenses
Non-compensation expenses for the three months ended September 30, 2021 increased 38.0% to $63.4 million compared to $46.0 million for the three months ended September 30, 2020, primarily driven by higher non-recurring transaction and integration costs related to the acquisition of RCA, professional fees, information technology costs and market data costs.
For the nine months ended September 30, 2021, the increase was 20.2%, growing to $168.8 million compared to $140.4 million for the nine months ended September 30, 2020, primarily driven by higher information technology costs, professional fees, non-recurring transaction and integration costs related to the acquisition of RCA and market data costs.
Fixed costs constitute a significant portion of the non-compensation component of operating expenses. The discretionary non-compensation component of operating expenses could, however, be reduced in the near-term in a scenario where operating revenue growth moderates.
Amortization of Intangible Assets
Amortization of intangible assets expense relates to definite-lived intangible assets arising from past acquisitions and internal capitalized software projects recognized over their estimated useful lives. Amortization of intangible assets expense for the three months ended September 30, 2021 remained consistent at $14.1 million compared to $14.3 million for the three months ended September 30, 2020.
For the nine months ended September 30, 2021, it increased 41.3% to $59.6 million compared to $42.2 million for the nine months ended September 30, 2020, primarily driven by a write-off of $16.0 million of certain internally developed capitalized software intangible assets as a result of management’s decision during the three months ended June 30, 2021 to discontinue development and cease related sales activities of certain Analytics segment products and transition existing customers to other product offerings.
Depreciation and Amortization of Property, Equipment and Leasehold Improvements
Depreciation and amortization of property, equipment and leasehold improvements consists of expenses related to depreciating or amortizing the cost of furniture and fixtures, computer and related equipment and leasehold improvements over the estimated useful
29
life of the assets. Depreciation and amortization of property, equipment and leasehold improvements for the three months ended September 30, 2021 decreased 9.1% to $6.8 million compared to $7.5 million for the three months ended September 30, 2020. The decrease was primarily the result of lower depreciation on software, computer and related equipment and furniture.
For the nine months ended September 30, 2021, it decreased 6.9% to $21.0 million compared to $22.5 million for the nine months ended September 30, 2020. The decrease was primarily the result of lower depreciation on software, computer and related equipment and leasehold improvements.
Other Expense (Income), Net
Other expense (income), net for the three months ended September 30, 2021 increased 106.3% to $79.6 million compared to $38.6 million for the three months ended September 30, 2020. The increase in net expenses was primarily driven by the approximately $37.3 million loss on debt extinguishment associated with the redemption of all of the $500.0 million aggregate principal amount of the 2027 Senior Notes (the “2027 Senior Notes Redemption”) during the three months ended September 30, 2021. The loss on debt extinguishment associated with the 2027 Senior Notes Redemption included an applicable premium of approximately $33.6 million (as set forth in the indenture governing the terms of the 2027 Senior Notes) and the write-off of approximately $3.7 million of unamortized debt issuance costs associated with the 2027 Senior Notes.
For the nine months ended September 30, 2021, net expenses increased 12.6% to $179.8 million compared to $159.6 million for the nine months ended September 30, 2020. The increase in net expenses was primarily driven by the approximately $37.3 million and $21.8 million loss on debt extinguishment associated with the 2027 Senior Notes Redemption and the redemption of all of the $500.0 million aggregate principal amount of the 2026 Senior Notes that remained outstanding (the “2026 Senior Notes Redemption”) during the nine months ended September 30, 2021, respectively. The loss on debt extinguishment associated with the 2026 Senior Notes Redemption included an applicable premium of approximately $18.2 million (as set forth in the indenture governing the terms of the 2026 Senior Notes) and the write-off of approximately $3.6 million of unamortized debt issuance costs associated with the 2026 Senior Notes. This was partially offset by the absence of the $35.0 million and $10.0 million loss on debt extinguishment associated with the redemption of all of the outstanding $800.0 million aggregate principal amount of the 2025 Senior Notes (“2025 Senior Notes Redemption”) and the redemption of all of the remaining $300.0 million of the 5.250% Senior Notes due 2024 (“2024 Senior Notes Redemption”) during the nine months ended September 30, 2020, respectively.
Income Taxes
The Company’s provision for income taxes for the three months ended September 30, 2021 and 2020 was $30.8 million and $6.7 million, respectively. These amounts reflect effective tax rates of 15.3% and 3.5% for the three months ended September 30, 2021 and 2020, respectively.
The effective tax rate of 15.3% for the three months ended September 30, 2021 reflects the Company’s estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling $15.1 million. For the three months ended September 30, 2021, these discrete items primarily related to the $9.6 million tax impact of loss on debt extinguishment recognized during the period on the 2027 Senior Notes Redemption. Also included in the discrete items was a $3.8 million benefit related to prior year settlements, $1.3 million of excess tax benefits recognized on share-based compensation vested during the period and $0.4 million of tax benefits related to other prior year items. In addition, the effective tax rate was impacted by the level of earnings.
The effective tax rate of 3.5% for the three months ended September 30, 2020 reflects the Company’s estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling $27.7 million. For the three months ended September 30, 2020, these discrete items primarily related to the $20.8 million tax impact from the favorable impact on prior years of financial regulations released during the three months ended September 30, 2020 clarifying certain provisions established in the 2017 Tax Act. The discrete items also included a $5.5 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings.
The Company’s provision for income taxes for the nine months ended September 30, 2021 and 2020 was $80.3 million and $45.5 million, respectively. These amounts reflect effective tax rates of 13.1% and 9.3% for the nine months ended September 30, 2021 and 2020, respectively.
The effective tax rate of 13.1% for the nine months ended September 30, 2021 reflects the Company’s estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling $49.3 million in relation to pretax income. For the nine months ended September 30, 2021, these discrete items primarily related to $22.7 million of excess tax benefits recognized on share-based compensation vested during the period and $15.2 million related to the tax impact of loss on debt extinguishment recognized during the period on the 2027 Senior Notes Redemption and 2026 Senior Notes Redemption. Also included in the discrete items is a $5.1 million benefit related to prior year settlements, a $2.3 million benefit related to the revaluation of deferred taxes as a result of the enactment of an increase in the UK corporate tax rate, a $2.0 million benefit related to the filing of prior year refund claims and $2.0 million of tax benefits related to other prior year items. In addition, the effective tax rate was impacted by the level of earnings.
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The effective tax rate of 9.3% for the nine months ended September 30, 2020 reflects the Company’s estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling $61.7 million. For the nine months ended September 30, 2020, these discrete items primarily related to $21.9 million of excess tax benefits recognized on share-based compensation vested during the period, the $20.8 million tax impact from the favorable impact on prior years of financial regulations released during the three months ended September 30, 2020 clarifying certain provisions established in the 2017 Tax Act and $11.5 million related to the tax impact of loss on debt extinguishment recognized during the period. The discrete items also included a $6.3 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings.
Net Income
As a result of the factors described above, net income for the three months ended September 30, 2021 decreased 6.8% to $169.9 million compared to $182.4 million for the three months ended September 30, 2020 and for the nine months ended September 30, 2021 increased 19.4% to $532.1 million compared to $445.6 million for the nine months ended September 30, 2020.
Weighted Average Shares
The weighted average shares outstanding used to calculate basic and diluted earnings per share for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 decreased by 1.4% and 1.1%, respectively. For the nine months ended September 30, 2021, the weighted average shares outstanding used to calculate basic and diluted earnings per share compared to the nine months ended September 30, 2020 decreased by 1.8% and 1.6%, respectively. The decrease in both the three and nine months ended September 30, 2021, primarily reflect the impact of share repurchases made pursuant to the stock repurchase program.
Adjusted EBITDA
“Adjusted EBITDA,” a non-GAAP measure used by management to assess operating performance, is defined as net income before (1) provision for income taxes, (2) other expense (income), net, (3) depreciation and amortization of property, equipment and leasehold improvements, (4) amortization of intangible assets and, at times, (5) certain other transactions or adjustments, including certain non-recurring acquisition-related integration and transaction costs.
“Adjusted EBITDA expenses,” a non-GAAP measure used by management to assess operating performance, is defined as operating expenses less depreciation and amortization of property, equipment and leasehold improvements and amortization of intangible assets and, at times, certain other transactions or adjustments, including certain non-recurring acquisition-related integration and transaction costs.
Adjusted EBITDA and Adjusted EBITDA expenses are believed to be meaningful measures of the operating performance of the Company because they adjust for significant one-time, unusual or non-recurring items as well as eliminate the accounting effects of certain capital spending and acquisitions that do not directly affect what management considers to be the Company’s ongoing operating performance in the period. All companies do not calculate adjusted EBITDA and adjusted EBITDA expenses in the same way. These measures can differ significantly from company to company depending on, among other things, long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Accordingly, the Company’s computation of the Adjusted EBITDA and Adjusted EBITDA expenses measures may not be comparable to similarly titled measures computed by other companies.
The following table presents the calculation of Adjusted EBITDA for the periods indicated:
Adjusted EBITDA expenses
210,504
175,886
615,572
536,355
14.8
22.9
22.8
Adjusted EBITDA margin %
59.3
58.6
58.8
57.2
Operating margin %
Adjusted EBITDA for the three months ended September 30, 2021 increased 22.9% to $306.6 million compared to $249.4 million for the three months ended September 30, 2020. Adjusted EBITDA margin for the three months ended September 30, 2021 increased to 59.3% compared to 58.6% for the three months ended September 30, 2020. For the nine months ended September 30, 2021, Adjusted EBITDA increased 22.8% to $878.1 million compared to $715.4 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, Adjusted EBITDA margin increased to 58.8% compared to 57.2% for the nine months ended September 30, 2020. The increase in Adjusted EBITDA margin for both the three and nine months ended
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September 30, 2021, reflects a higher rate of growth in operating revenues as compared to the rate of growth of Adjusted EBITDA expenses.
Reconciliation of Adjusted EBITDA to Net Income and Adjusted EBITDA Expenses to Operating Expenses
The following table presents the reconciliation of Adjusted EBITDA to net income for the periods indicated:
All Other - Private Assets Adjusted EBITDA
Consolidated Adjusted EBITDA
The following table presents the reconciliation of Adjusted EBITDA expenses to operating expenses for the periods indicated:
Index Adjusted EBITDA expenses
75,916
60,971
221,023
186,292
Analytics Adjusted EBITDA expenses
86,007
83,281
260,381
253,868
expenses
33,871
20,893
97,164
63,303
14,710
10,741
37,004
32,892
Consolidated Adjusted EBITDA expenses
The discussion of the segment results is presented below.
32
Segment Results
Index Segment
The following table presents the results for the Index segment for the periods indicated:
Operating revenues total
24.5
18.6
26.1
76.4
76.2
76.0
75.1
Revenues related to Index products for the three months ended September 30, 2021 increased 25.7% to $321.5 million compared to $255.7 million for the three months ended September 30, 2020 and for the nine months ended September 30, 2021, the increase was 23.0%, growing to $920.0 million compared to $747.9 million for the nine months ended September 30, 2020.
Recurring subscriptions for the three months ended September 30, 2021 increased 12.9% to $165.3 million compared to $146.4 million for the three months ended September 30, 2020. The increase was primarily driven by strong growth from market cap-weighted index products and from factor, ESG and climate index products. The impact of foreign currency exchange rate fluctuations on revenues from recurring subscriptions was negligible.
For the nine months ended September 30, 2021, the increase was 11.3%, growing to $480.5 million compared to $431.6 million for the nine months ended September 30, 2020. The increase was primarily driven by strong growth from market cap-weighted index products and from factor, ESG and climate index products. The impact of foreign currency exchange rate fluctuations on revenues from recurring subscriptions was negligible.
Revenues from asset-based fees for the three months ended September 30, 2021 increased 41.2% to $141.7 million compared to $100.4 million for the three months ended September 30, 2020. The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked to MSCI equity indexes that was primarily driven by a 52.4% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked to MSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible.
For the nine months ended September 30, 2021, the increase was 40.2%, growing to $404.6 million compared to $288.6 million for the nine months ended September 30, 2020. The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked to MSCI equity indexes that was primarily driven by a 50.1% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked to MSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible.
Non-recurring revenues for the three months ended September 30, 2021 increased 61.7% to $14.4 million compared to $8.9 million for the three months ended September 30, 2020. For the nine months ended September 30, 2021, the increase was 26.4%, growing to $34.9 million compared to $27.6 million for the nine months ended September 30, 2020. The increase in both the three and nine months ended September 30, 2021, was primarily driven by client license and usage fees related to prior periods.
Index segment Adjusted EBITDA expenses for the three months ended September 30, 2021 increased 24.5% to $75.9 million compared to $61.0 million for the three months ended September 30, 2020, reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, Index segment Adjusted EBITDA expenses would have increased 22.8% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase was 18.6%, growing to $221.0 million compared to $186.3 million for the nine months ended September 30, 2020, reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, Index segment Adjusted EBITDA expenses would have increased 16.0% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Analytics Segment
The following table presents the results for the Analytics segment for the periods indicated:
3.3
2.6
11.6
14.3
36.9
35.1
35.9
33.4
Analytics segment revenues for the three months ended September 30, 2021 increased 6.2% to $136.3 million compared to $128.3 million for the three months ended September 30, 2020, primarily driven by growth in Multi-Asset Class and Equity Analytics products. The impact of foreign currency exchange rate fluctuations on Analytics segment revenues was negligible.
For the nine months ended September 30, 2021, the increase was 6.5%, growing to $406.2 million compared to $381.4 million for the nine months ended September 30, 2020, primarily driven by growth in Multi-Asset Class and Equity Analytics products. The impact of foreign currency exchange rate fluctuations on Analytics segment revenues was negligible.
Analytics segment Adjusted EBITDA expenses for the three months ended September 30, 2021 increased 3.3% to $86.0 million compared to $83.3 million for the three months ended September 30, 2020, reflecting higher expenses across the cost of revenues, G&A and selling and marketing expense activity categories, partially offset by lower expense across the R&D expense activity category. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics segment Adjusted EBITDA expenses would have increased 2.1% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase was 2.6%, growing to $260.4 million compared to $253.9 million for the nine months ended September 30, 2020, reflecting higher expenses across the cost of revenues, G&A and selling and marketing expense activity categories, partially offset by lower expense across the R&D expense activity category. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics segment Adjusted EBITDA expenses would have increased 0.7% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
ESG and Climate Segment
The following table presents the results for the ESG and Climate segment for the periods indicated:
62.1
22.7
22.5
21.0
ESG and Climate segment revenues for the three months ended September 30, 2021 increased 53.0% to $43.7 million compared to $28.6 million for the three months ended September 30, 2020. The increase in ESG and Climate revenues was primarily driven by strong growth from Ratings, Screening and Climate products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate operating revenues would have increased 47.2%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase was 47.0%, growing to $117.7 million compared to $80.1 million for the nine months ended September 30, 2020. The increase in ESG and Climate revenues was primarily driven by strong growth from Ratings, Climate and Screening products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and
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Climate operating revenues would have increased 39.6%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
ESG and Climate segment Adjusted EBITDA expenses for the three months ended September 30, 2021 increased 62.1% to $33.9 million compared to $20.9 million for the three months ended September 30, 2020, reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate segment Adjusted EBITDA expenses would have increased 60.4% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase was 53.5%, growing to $97.2 million compared to $63.3 million for the nine months ended September 30, 2020, reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate segment Adjusted EBITDA expenses would have increased 49.7% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
All Other – Private Assets Segment
The following table presents the results for the All Other – Private Assets segment for the periods indicated:
37.0
(55.4
34.6
5.7
15.8
All Other – Private Assets segment revenues for the three months ended September 30, 2021 increased 22.4% to $15.6 million compared to $12.8 million for the three months ended September 30, 2020. The increase in All Other – Private Assets revenues was primarily driven by the acquisition of RCA, which contributed $3.4 million of operating revenues. Excluding the acquisition of RCA, All Other – Private Assets segment revenues were lower due to lower volume of deliveries to clients in three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Adjusting for both the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets operating revenues would have decreased 7.6% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets operating revenues would have decreased 4.4% and increased 19.2%, respectively, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase was 17.5%, growing to $49.8 million compared to $42.4 million for the nine months ended September 30, 2020. The increase in All Other – Private Assets revenues was primarily driven by the acquisition of RCA and favorable foreign currency exchange rate fluctuations. Adjusting for both the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets operating revenues would have increased 1.6% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets operating revenues would have increased 9.4% and 9.7%, respectively, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
All Other – Private Assets segment Adjusted EBITDA expenses for the three months ended September 30, 2021 increased 37.0% to $14.7 million compared to $10.7 million for the three months ended September 30, 2020, driven by higher expenses across the cost of revenues, G&A and selling and marketing expense activity categories. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets segment Adjusted EBITDA expenses would have increased 4.0% and 34.1%, respectively, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021, the increase was 12.5%, growing to $37.0 million compared to $32.9 million for the nine months ended September 30, 2020, driven by higher expenses across the cost of revenues and G&A expense activity categories. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets segment Adjusted EBITDA expenses would have increased 1.8% and 8.3%, respectively, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Run Rate
“Run Rate” estimates at a particular point in time the annualized value of the recurring revenues under our client license agreements (“Client Contracts”) for the next 12 months, assuming all Client Contracts that come up for renewal, or reach the end of
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the committed subscription period, are renewed and assuming then-current currency exchange rates, subject to the adjustments and exclusions described below. For any Client Contract where fees are linked to an investment product’s assets or trading volume/fees, the Run Rate calculation reflects, for ETFs, the market value on the last trading day of the period, for futures and options, the most recent quarterly volumes and/or reported exchange fees, and for other non-ETF products, the most recent client-reported assets. Run Rate does not include fees associated with “one-time” and other non-recurring transactions. In addition, we add to Run Rate the annualized fee value of recurring new sales, whether to existing or new clients, when we execute Client Contracts, even though the license start date, and associated revenue recognition, may not be effective until a later date. We remove from Run Rate the annualized fee value associated with products or services under any Client Contract with respect to which we have received a notice of termination, non-renewal or an indication the client does not intend to continue their subscription during the period and have determined that such notice evidences the client’s final decision to terminate or not renew the applicable products or services, even though such notice is not effective until a later date.
Changes in our recurring revenues typically lag changes in Run Rate. The actual amount of recurring revenues we will realize over the following 12 months will differ from Run Rate for numerous reasons, including:
fluctuations in revenues associated with new recurring sales;
modifications, cancellations and non-renewals of existing Client Contracts, subject to specified notice requirements;
differences between the recurring license start date and the date the Client Contract is executed due to, for example, contracts with onboarding periods or fee waiver periods;
fluctuations in asset-based fees, which may result from changes in certain investment products’ total expense ratios, market movements, including foreign currency exchange rates, or from investment inflows into and outflows from investment products linked to our indexes;
fluctuations in fees based on trading volumes of futures and options contracts linked to our indexes;
fluctuations in the number of hedge funds for which we provide investment information and risk analysis to hedge fund investors;
price changes or discounts;
revenue recognition differences under U.S. GAAP, including those related to the timing of implementation and report deliveries for certain of our products and services;
fluctuations in foreign currency exchange rates; and
the impact of acquisitions and divestitures.
The following table presents the Run Rates as of the dates indicated and the growth percentages over the periods indicated:
Change
Index:
667,023
598,799
11.4
550,230
401,196
37.1
1,217,253
999,995
568,932
544,315
4.5
178,398
122,273
45.9
131,678
52,970
148.6
Total Run Rate
2,096,261
1,719,553
21.9
Recurring subscriptions total
1,546,031
1,318,357
17.3
Total Run Rate grew 21.9% to $2,096.3 million as of September 30, 2021 compared to $1,719.6 million as of September 30, 2020. Recurring subscriptions Run Rate grew 17.3% to $1,546.0 million as of September 30, 2021 compared to $1,318.4 million as of September 30, 2020. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, recurring
subscriptions Run Rate would have increased 11.7% and 17.4%, respectively, as of September 30, 2021 compared to September 30, 2020.
Run Rate from asset-based fees increased 37.1% to $550.2 million as of September 30, 2021 from $401.2 million as of September 30, 2020, primarily driven by higher AUM in ETFs linked to MSCI equity indexes and higher AUM in non-ETF indexed funds linked to MSCI indexes. Partially offsetting the impact of the increase in AUM in ETFs linked to MSCI equity indexes was a change in fee levels of certain products, which was the primary driver of a decline in average basis point fees to 2.57 as of September 30, 2021 from 2.67 as of September 30, 2020. As of September 30, 2021, the value of AUM in ETFs linked to MSCI equity indexes was $1,336.6 billion, up $427.7 billion, or 47.1%, from $908.9 billion as of September 30, 2020. The increase of $427.7 billion consisted of market appreciation of $221.9 billion and net inflows of $205.8 billion.
Index recurring subscriptions Run Rate grew 11.4% to $667.0 million as of September 30, 2021 compared to $598.8 million as of September 30, 2020, driven by growth in market cap-weighted index products and strong growth in factor, ESG and climate index products and reflected growth across all regions and all client segments.
Run Rate from Analytics products increased 4.5% to $568.9 million as of September 30, 2021 compared to $544.3 million as of September 30, 2020, primarily driven by growth in both Equity Analytics and Multi-Asset Class products. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics Run Rate would have increased 4.9% as of September 30, 2021.
Run Rate from ESG and Climate products increased 45.9% to $178.4 million as of September 30, 2021 compared to $122.3 million as of September 30, 2020, primarily driven by strong growth in both Ratings and Climate products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate Run Rate would have increased 46.3% as of September 30, 2021 compared to September 30, 2020.
Run Rate from All Other – Private Assets products increased 148.6% to $131.7 million as of September 30, 2021 compared to $53.0 million as of September 30, 2020, primarily driven by the acquisition of RCA, growth in both Global Intel and Enterprise Analytics products and strong growth from new sales of Real Estate Climate Value-at-Risk products. Adjusting for both the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets Run Rate would have increased 7.3% as of September 30, 2021 compared to September 30, 2020. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, All Other – Private Assets Run Rate would have increased 9.1% and 147.4%, respectively, as of September 30, 2021 compared to September 30, 2020.
Sales
Sales represents the annualized value of products and services clients commit to purchase from MSCI and will result in additional operating revenues. Non-recurring sales represent the actual value of the customer agreements entered into during the period and are not a component of Run Rate. New recurring subscription sales represent additional selling activities, such as new customer agreements, additions to existing agreements or increases in price that occurred during the period and are additions to Run Rate. Subscription cancellations reflect client activities during the period, such as discontinuing products and services and/or reductions in price, resulting in reductions to Run Rate. Net new recurring subscription sales represent the amount of new recurring subscription sales net of subscription cancellations during the period, which reflects the net impact to Run Rate during the period.
Total gross sales represent the sum of new recurring subscription sales and non-recurring sales. Total net sales represent the total gross sales net of the impact from subscription cancellations.
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The following table presents our recurring subscription sales, cancellations and non-recurring sales by reportable segment for the periods indicated:
New recurring subscription sales
19,546
18,743
4.3
66,037
58,073
13.7
15,889
15,229
44,381
41,426
7.1
17,310
7,932
118.2
46,706
26,128
78.8
2,479
1,412
75.6
6,023
3,733
61.3
New recurring subscription sales total
55,224
43,316
27.5
163,147
129,360
Subscription cancellations
(6,203
(7,050
(12.0
(18,192
(19,589
(7.1
(9,213
(8,211
12.2
(25,188
(27,008
(6.7
(1,338
(1,215
10.1
(3,636
(4,473
(18.7
(1,296
(656
97.6
(2,881
(1,694
70.1
Subscription cancellations total
(18,050
(17,132
5.4
(49,897
(52,764
(5.4
Net new recurring subscription sales
13,343
11,693
14.1
47,845
38,484
6,676
7,018
(4.9
19,193
14,418
33.1
15,972
6,717
137.8
43,070
21,655
98.9
1,183
56.5
3,142
2,039
54.1
Net new recurring subscription sales total
37,174
26,184
42.0
113,250
76,596
47.9
Non-recurring sales
17,366
10,001
73.6
39,340
30,734
28.0
2,377
2,562
(7.2
8,123
7,486
8.5
1,090
135
707.4
2,927
702
317.0
130
16.1
1,201
1,150
4.4
Non-recurring sales total
20,963
12,810
63.6
51,591
40,072
28.7
Gross sales
36,912
28,744
28.4
105,377
88,807
18,266
17,791
2.7
52,504
48,912
7.3
18,400
8,067
128.1
49,633
26,830
85.0
2,609
1,524
71.2
7,224
4,883
Total gross sales
76,187
56,126
35.7
214,738
169,432
26.7
Net sales
30,709
21,694
41.6
87,185
69,218
26.0
9,053
9,580
27,316
21,904
17,062
6,852
149.0
45,997
22,357
105.7
1,313
868
4,343
3,189
36.2
Total net sales
58,137
38,994
49.1
164,841
116,668
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A significant portion of MSCI's operating revenues are derived from subscriptions or licenses of products and services, which are provided over contractually-agreed periods of time that are subject to renewal or cancellation at the end of current contract terms.
Retention Rate
The following table presents our Retention Rate by reportable segment for the periods indicated:
96.0%
95.0%
96.1%
95.3%
93.4%
93.8%
94.0%
93.2%
95.2%
96.5%
94.1%
All Other - Private Assets (1)
91.0%
94.8%
91.2%
95.6%
94.5%
94.9%
94.3%
Retention rate for All Other – Private Assets excluding the impact of RCA was 93.7% and 94.2% for the three and nine months ended September 30, 2021, respectively.
The annual Retention Rate represents the retained subscription Run Rate (subscription Run Rate at the beginning of the fiscal year less actual cancels during the year) as a percentage of the subscription Run Rate at the beginning of the fiscal year. Retention Rate is an important metric because subscription cancellations decrease our Run Rate and ultimately our future operating revenues over time.
The Retention Rate for a non-annual period is calculated by annualizing the cancellations for which we have received a notice of termination or for which we believe there is an intention not to renew or discontinue the subscription during the non-annual period, and we believe that such notice or intention evidences the client’s final decision to terminate or not renew the applicable agreement, even though such notice is not effective until a later date. This annualized cancellation figure is then divided by the subscription Run Rate at the beginning of the fiscal year to calculate a cancellation rate. This cancellation rate is then subtracted from 100% to derive the annualized Retention Rate for the period.
Retention Rate is computed by operating segment on a product/service-by-product/service basis. In general, if a client reduces the number of products or services to which it subscribes within a segment, or switches between products or services within a segment, we treat it as a cancellation for purposes of calculating our Retention Rate except in the case of a product or service switch that management considers to be a replacement product or service. In those replacement cases, only the net change to the client subscription, if a decrease, is reported as a cancel. In the Analytics and the ESG and Climate operating segments, substantially all product or service switches are treated as replacement products or services and netted in this manner, while in our Index and Real Estate operating segments, product or service switches that are treated as replacement products or services and receive netting treatment occur only in certain limited instances. In addition, we treat any reduction in fees resulting from a down-sell of the same product or service as a cancellation to the extent of the reduction. We do not calculate Retention Rate for that portion of our Run Rate attributable to assets in index-linked investment products or futures and options contracts, in each case, linked to our indexes.
Retention Rate is generally higher during the first three quarters and lower in the fourth quarter, as the fourth quarter is traditionally the largest renewal period in the year.
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. There have been no significant changes in our accounting policies since the end of the fiscal year ended December 31, 2020 or critical accounting estimates applied in the fiscal year ended December 31, 2020. In accordance with our acquisition of Real Capital Analytics, Inc. (“RCA”) on September 13, 2021, the initial valuation of intangible assets, as part of the acquisition method of accounting, are subjective and based, in part, on inputs that are unobservable. These inputs include, but are not limited to, forecasted cash flows, operating revenues growth rates, client attrition rates and discount rates. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and assumed liabilities differently from the allocation that we have made.
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, existing cash and cash equivalents and credit capacity under our existing credit facility. In addition, we believe we have access to additional funding in the public and private markets. We intend to use these sources of liquidity
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to, among other things, service our existing and future debt obligations, fund our working capital requirements for capital expenditures, investments, acquisitions and dividend payments, and repurchases of our common stock. In connection with our business strategy, we regularly evaluate acquisition and strategic partnership opportunities. We believe our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth.
Senior Notes and Credit Agreement
We have an aggregate of $4,200.0 million in Senior Notes outstanding and a $500.0 million undrawn Revolving Credit Agreement with a syndicate of banks. See Note 8, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements (Unaudited) included herein for additional information on our Senior Notes and Revolving Credit Agreement.
The Senior Notes and the Revolving Credit Agreement are fully and unconditionally, and jointly and severally, guaranteed by our direct or indirect wholly owned domestic subsidiaries that account for more than 5% of our and our subsidiaries’ consolidated assets, other than certain excluded subsidiaries (the “subsidiary guarantors”). Amounts due under the Revolving Credit Agreement are our and the subsidiary guarantors’ senior unsecured obligations and rank equally with the Senior Notes and any of our other unsecured, unsubordinated debt, senior to any of our subordinated debt and effectively subordinated to our secured debt to the extent of the assets securing such debt.
The indentures governing our Senior Notes (the “Indentures”) among us, each of the subsidiary guarantors, and Wells Fargo Bank, National Association, as trustee, contain covenants that limit our and certain of our subsidiaries’ ability to, among other things, incur liens, enter into sale/leaseback transactions and consolidate, merge or sell all or substantially all of our assets. In addition, the Indentures restrict our non-guarantor subsidiaries’ ability to create, assume, incur or guarantee additional indebtedness without such non-guarantor subsidiaries guaranteeing the Senior Notes on a pari passu basis.
The Revolving Credit Agreement contains affirmative and restrictive covenants that, among other things, limit our ability and the ability of our existing or future subsidiaries to:
incur liens;
in the case of our subsidiaries that are not guarantors under the Revolving Credit Agreement, incur additional indebtedness;
merge, dissolve, liquidate, consolidate with or into another person or sell all or substantially all assets of the Company and its subsidiaries on a consolidated basis;
enter into sale/leaseback transactions;
pay dividends or make other distributions in respect of our capital stock or engage in stock repurchases, redemptions and other restricted payments; or
change the nature of our business.
The Revolving Credit Agreement and the Indentures also contain customary events of default, including those relating to non-payment, breach of representations, warranties or covenants, cross-default and cross-acceleration, and bankruptcy and insolvency events, and, in the case of the Revolving Credit Agreement, invalidity or impairment of loan documentation, change of control and customary ERISA defaults in addition to the foregoing. None of the restrictions above are expected to impact our ability to effectively operate the business.
The Revolving Credit Agreement 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 Revolving Credit Agreement: (1) the maximum Consolidated Leverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall not exceed 4.25:1.00 (or 4.50:1.00 for two fiscal quarters following a material acquisition) and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall be at least 4.00:1.00. As of September 30, 2021, our Consolidated Leverage Ratio was 3.56:1.00 and our Consolidated Interest Coverage Ratio was 7.42:1.00. As of September 30, 2021, there were no amounts drawn and outstanding under the Revolving Credit Agreement.
Our non-guarantor subsidiaries under the Senior Notes consist of: (i) domestic subsidiaries of the Company that account for 5% or less of consolidated assets of the Company and its subsidiaries and (ii) any foreign or domestic subsidiary of the Company that is deemed to be a controlled foreign corporation within the meaning of Section 957 of the Internal Revenue Code of 1986, as amended. Our non-guarantor subsidiaries accounted for approximately $1,173.8 million, or 60.6%, of our total revenue for the trailing 12 months ended September 30, 2021, approximately $418.3 million, or 40.8%, of our consolidated operating income for the trailing 12 months ended September 30, 2021, and approximately $2,185.8 million, or 42.5%, of our consolidated total assets (excluding intercompany assets) and $851.1 million, or 15.7%, of our consolidated total liabilities, in each case as of September 30, 2021.
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Share Repurchases
The following table provides information with respect to repurchases of the Company’s common stock pursuant to open market repurchases:
As of September 30, 2021, there was $1,594.4 million of available authorization remaining under the 2020 Repurchase Program.
Cash Dividend
On October 25, 2021, the Board of Directors declared a quarterly cash dividend of $1.04 per share for the three months ending December 31, 2021. The fourth quarter 2021 dividend is payable on November 30, 2021 to shareholders of record as of the close of trading on November 12, 2021.
Cash Flows
Cash and cash equivalents were $1,284.7 million and $1,300.5 million as of September 30, 2021 and December 31, 2020, respectively. We typically seek to maintain minimum cash balances globally of approximately $200.0 million to $250.0 million for general operating purposes. As of September 30, 2021 and December 31, 2020, $514.4 million and $423.4 million, respectively, of the cash and cash equivalents were held by foreign subsidiaries. Repatriation of some foreign cash may be subject to certain withholding taxes in local jurisdictions and other distribution restrictions. We believe the global cash and cash equivalent balances that are maintained will be available to meet our global needs whether for general corporate purposes or other needs, including acquisitions or expansion of our products.
We believe that global cash flows from operations, together with existing cash and cash equivalents and funds available under our existing revolving credit facility and our ability to access the debt and capital markets for additional funds, will continue to be sufficient to fund our global operating activities and cash commitments for investing and financing activities, such as material capital expenditures and share repurchases, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect that 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.
Net Cash Provided by (Used In) Operating, Investing and Financing Activities
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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 $656.4 million and $575.2 million for the nine months ended September 30, 2021 and 2020, respectively. The year-over-year increase was driven by higher cash collections from customers, partially offset by higher payments for income taxes and cash expenses.
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. Historically, the payment of cash for compensation and benefits is at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year. In addition, during the three months ended December 31, 2021, we expect higher payments to satisfy tax liabilities by approximately $110.0 million resulting from the temporary acceleration of the recognition of income for tax purposes. The timing and amount of the payments is contingent upon execution of transactions that result in higher tax obligations for the current fiscal year.
Cash Flows From Investing Activities
Cash used in investing activities was $985.9 million for the nine months ended September 30, 2021 compared to $224.9 million for the nine months ended September 30, 2020. The year-over-year change was primarily driven by the acquisition of RCA, partially offset by the absence of the $190.8 million equity method investment in Burgiss.
Cash Flows From Financing Activities
Cash provided by financing activities was $321.2 million for the nine months ended September 30, 2021 compared to cash used in financing activities of $549.5 million for the nine months ended September 30, 2020. The year-over-year change was primarily driven by the impact of lower share repurchases and higher proceeds from the new senior notes offerings made during the nine months ended September 30, 2021.
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.
Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
We are subject to foreign currency exchange fluctuation risk. Exchange rate movements can impact the U.S. dollar-reported value of our revenues, expenses, assets and liabilities denominated in non-U.S. dollar currencies or where the currency of such items is different than the functional currency of the entity where these items were recorded.
We generally invoice our clients in U.S. dollars; however, we invoice a portion of our clients in Euros, British pounds sterling, Japanese yen and a limited number of other non-U.S. dollar currencies. For the nine months ended September 30, 2021 and 2020, 15.1% and 14.0%, respectively, of our revenues are subject to foreign currency exchange rate risk and primarily includes clients billed in foreign currency as well as U.S. dollar exposures on non-U.S. dollar foreign operating entities. Of the 15.1% of non-U.S. dollar exposure for the nine months ended September 30, 2021, 42.1% was in Euros, 25.9% was in British pounds sterling and 24.4% was in Japanese yen. Of the 14.0% of non-U.S. dollar exposure for the nine months ended September 30, 2020, 40.4% was in Euros, 27.2% was in Japanese yen and 24.2% was in British pounds sterling.
Revenues from asset-based fees represented 27.1% and 23.1% of operating revenues for the nine months ended September 30, 2021 and 2020, respectively. While a substantial portion of our asset-based fees are invoiced in U.S. dollars, the fees are based on the assets in investment products, of which approximately three-fifths are invested in securities denominated in currencies other than the U.S. dollar. Accordingly, declines in such other currencies against the U.S. dollar will decrease the fees payable to us under such licenses. In addition, declines in such currencies against the U.S. dollar could impact the attractiveness of such investment products resulting in net fund outflows, which would further reduce the fees payable under such licenses.
We are exposed to additional foreign currency risk in certain of our operating costs. Approximately 42.1% and 40.7% of our operating expenses for the nine months ended September 30, 2021 and 2020, respectively, were denominated in foreign currencies, the significant majority of which were denominated in British pounds sterling, Indian rupees, Hungarian forints, Euros, Swiss francs, Mexican pesos and Hong Kong dollars. Expenses incurred in foreign currency may increase as we expand our business outside the U.S.
We have certain monetary assets and liabilities denominated in currencies other than local functional amounts and when these balances are remeasured into their local functional currency, either a gain or a loss results from the change of the value of the functional currency as compared to the originating currencies. We manage foreign currency exchange rate risk, in part, through the use of derivative financial instruments comprised principally of forward contracts on foreign currency which are not designated as hedging instruments for accounting purposes. The objective of the derivative instruments is to minimize the impact on the income statement of the volatility of amounts denominated in certain foreign currencies. We recognized total foreign currency exchange losses of $0.8 million and $1.0 million for the nine months ended September 30, 2021 and 2020, respectively.
Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of September 30, 2021, and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company in the ordinary course of business. While the amounts claimed could be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that MSCI’s business, operating results, financial condition or cash flows in a particular period could be materially affected by certain contingencies. However, based on facts currently available, management believes that the disposition of matters that are currently pending or asserted will not, individually or in the aggregate, have a material effect on MSCI’s business, operating results, financial condition or cash flows.
There have been no material changes to the significant risk factors and uncertainties known to the Company and disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2020 that, if they were to materialize or occur, would, individually or in the aggregate, have a material effect on MSCI’s business, operating results, financial condition or cash flows.
For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for fiscal year 2020.
There have been no unregistered sales of equity securities.
The table below presents information with respect to purchases made by or on behalf of the Company of its common shares during the three months ended September 30, 2021.
Issuer Purchases of Equity Securities
Period
Purchased(1)
Average Price
Paid
Purchased
As Part of
Publicly
Announced
Plans
or Programs
Approximate
Value of Shares
that May Yet
Be
Under
the Plans or
Programs(2)
July 1, 2021-July 31, 2021
7,143
562.39
1,594,416,000
August 1, 2021-August 31, 2021
September 1, 2021-September 30, 2021
1,949
651.09
9,092
581.40
Includes (i) shares purchased by the Company on the open market under the stock repurchase program; (ii) shares withheld to satisfy tax withholding obligations on behalf of employees that occur upon vesting and delivery of outstanding shares underlying restricted stock units; (iii) shares withheld to satisfy tax withholding obligations and exercise price on behalf of employees that occur upon exercise and delivery of outstanding shares underlying stock options; and (iv) shares held in treasury under the MSCI Inc. Non-Employee Directors Deferral Plan. The value of shares withheld to satisfy tax withholding obligations was determined using the fair market value of the Company’s common stock on the date of withholding, using a valuation methodology established by the Company.
See Note 10, “Shareholders’ Equity (Deficit)” of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information regarding our stock repurchase program.
EXHIBIT INDEX
Exhibit
Number
Description
3.1
Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Form 10-Q (File No. 001-33812), filed with the SEC on May 4, 2012 and incorporated by reference herein)
3.2
Amended and Restated Bylaws (filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-33812), filed with the SEC on January 11, 2021 and incorporated by reference herein)
4.1
Indenture, dated as of August 17, 2021, among MSCI Inc., each of the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (filed as Exhibit 4.1 of the Company’s Current Report on Form 8-K (File No. 001-33812), filed with the SEC on August 17, 2021 and incorporated by reference herein)
4.2
Form of Note for MSCI Inc. 3.250% Senior Notes due August 15, 2033 (included in Exhibit 4.1 of the Company’s Current Report on Form 8-K (File No. 001-33812), filed with the SEC on August 17, 2021 and incorporated by reference herein)
Statement Re: Computation of Earnings Per Common Share (The calculation of per share earnings is in Part I, Item 1, Note 4 to the Condensed Consolidated Financial Statements (Earnings Per Common Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K)
*
Rule 13a-14(a) Certification of the Chief Executive Officer
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer
**
32.1
Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Filed herewith.
Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: October 26, 2021
(Registrant)
By:
/s/ Andrew C. Wiechmann
Andrew C. Wiechmann
Chief Financial Officer
(Principal Financial Officer)
46