MSCI Inc.

MSCI leases office space, data centers and certain equipment under non-cancellable operating lease agreements and determines if an arrangement is a lease at inception. The Company’s leases have remaining lease terms of up to approximately 14 years. Some of these leases have options to extend which, if exercised, would extend the maximum term to approximately 24 years. Some of the leases also provide for early termination, the exercise of which would shorten the term of those leases by up to 5 years. The Company does not currently have any financing lease arrangements.

Operating lease assets, net of initial direct costs and accumulated amortization are reflected in “Right of use assets,” with the corresponding present value of operating lease liabilities included in “Other accrued liabilities” and “Long-term operating lease liabilities” in the Unaudited Condensed Consolidated Statement of Financial Condition. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. MSCI uses its incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. The incremental borrowing rate reflects the rate of interest that MSCI would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company determined its incremental borrowing rates by starting with the rates on its currently outstanding Senior Notes and making adjustments for collateralization and the relevant duration of the associated leases. The lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.  

The effective tax rate of negative 38.9% for the three months ended March 31, 2019 reflects the Company’s estimate of the effective tax rate for the period and was impacted by certain discrete items totaling $77.8 million. For the three months ended March 31, 2019, these discrete items primarily related to $66.6 million of excess tax benefits recognized upon vesting during the period of certain multi-year restricted stock units that are subject to the achievement of multi-year total shareholder return targets (performance targets subject to market conditions) granted in 2016 (“2016 multi-year MSUs”) and $9.8 million of excess tax benefits on other share-based compensation recognized during the period.

The effective tax rate of 17.5% for the three months ended March 31, 2018 reflected the Company’s estimate of the effective tax rate for the period and was impacted by certain discrete items totaling $7.9 million. For the three months ended March 31, 2018 these discrete items primarily related to $7.5 million of excess tax benefits on share-based compensation recognized during the period and to $1.6 million of net adjustment benefit relating to the adjustment resulting from the Company’s provisional accounting for the effects of the Tax Cuts and Jobs Act that was enacted on December 22, 2017 (“Tax Reform”).  

Revenues from asset-based fees decreased 4.3% to $81.8 million for the three months ended March 31, 2019 compared to $85.5 million for the three months ended March 31, 2018. The decrease in asset-based fees was driven by a decline across all types of index-linked investment products, including a $3.2 million, or 5.5%, decrease in revenue from ETFs linked to MSCI indexes. This decline was driven by a 1.7% decrease in average AUM, as well as by the impact of a change in product mix. In addition, the decrease in asset-based fees was also driven by a decline in revenues from non-ETF passive products and exchange traded futures and options contracts based on MSCI indexes. The decrease in revenues from futures and options contracts reflected lower net fees charged by certain exchanges, which more than offset an increase in total trading volumes. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible.