RiskMetrics Group Inc. (NYSE: RISK), a leading
provider of risk management and corporate governance products and
services to the global financial community, today announced its
financial results for the first quarter ended March 31, 2010.
Earnings Highlights: See Tables C, D, E, F, J and K for a
reconciliation of GAAP and Non-GAAP financial measures.
(Note: Percentage changes are referenced to the comparable
period in fiscal year 2009, unless otherwise noted.)
- First quarter 2010 revenues of
$77.0 million decreased 0.4% from $77.4 million.
- First quarter 2010 Adjusted
EBITDA decreased to $25.3 million from $29.4 million in the first
quarter of 2009. First quarter 2010 Adjusted EBITDA before payroll
taxes from stock options exercises was $27.2 million, with an
Adjusted EBITDA margin of 35.3%.
- GAAP EPS for first quarter 2010
was $0.08. First quarter 2010 EPS before transaction expenses and
stock option payroll taxes for first quarter 2010 was $0.11.
Ethan Berman, Chief Executive Officer of RiskMetrics Group, said
“The first quarter proved challenging given the uncertainty
regarding the Company’s long term ownership structure, especially
in the Risk business. This uncertainty led to a significant amount
of our Risk sales pipeline being put on hold, and the ensuing
announcement of our merger with MSCI led to a significant amount of
one-time costs. Since the announcement of our deal with MSCI, we’ve
seen a pickup in our Risk new sales pipeline, especially in the US.
We remain excited about our Risk business going forward and expect
our quarterly Risk new sales to improve for the remainder of 2010.”
Mr. Berman added, “Our ISS business had a strong sales quarter by
achieving a $1.2 million or 36% increase in new sales compared to
the first quarter of 2009 driven by strong sales in ES&G.”
Selected Financial Information (unaudited)
All amounts below (except share and per share information) are
in thousands, unless indicated otherwise
TABLE A
Three Months Ended March 31, %
2010 2009 Change Revenues: Risk
40,216 $40,194 0.1% ISS 36,830 37,187 (1.0)% Total Revenues 77,046
$77,381 (0.4)% Operating Cost and Expenses: Adjusted EBITDA
expenses (1) 51,733 48,022 7.7% Other operating expenses (2) 12,271
10,658 15.1% Total operating costs and expenses 64,004 58,680 9.1%
Income from operations 13,042 18,701 (30.3)% Other
expense (4,879) (5,193) (6.0)% Income before income taxes 8,163
13,508 (39.6)% Provision for income taxes 2,904 4,981 (41.7)%
Net income – GAAP $5,259 $8,527 (38.3)% EPS (diluted)
– GAAP $0.08 $0.13 EPS before transaction expenses and stock option
payroll taxes (diluted) (3) $0.11 $0.14
Adjusted EPS (diluted) (4)
$0.17 $0.21
Adjusted EPS before stock option
payroll taxes (diluted) (5)
$0.19 $0.21 Adjusted EBITDA (6) $25,313 $29,359 (13.8)%
Adjusted EBITDA margin 32.9% 37.9% Adjusted EBITDA before
stock option payroll taxes (7) $27,213 $29,359 (7.3)% Adjusted
EBITDA margin before stock option payroll taxes (7) 35.3% 37.9%
(1) Represents cost of revenues, research and development,
selling and marketing and general and administrative expenses,
excluding stock-based compensation and one time charges. Refer to
tables J and K for a reconciliation to the comparable GAAP
measure.
(2) Represents depreciation and amortization of property and
equipment, amortization of intangible assets, one-time costs, loss
on disposal of property and equipment, and stock-based
compensation. Refer to tables J and K for a reconciliation to the
comparable GAAP measure.
(3) Represents net income and EPS before $1.8 million of
transaction expenses due to the proposed merger with MSCI and $1.9
million of first quarter 2010 payroll tax expenses related to stock
option exercises. Refer to table D for a reconciliation to the
comparable GAAP measure.
(4) Represents net income and EPS before amortization of
intangible assets, one-time costs, loss on disposal of property and
equipment and stock-based compensation. Refer to table E for a
reconciliation to the comparable GAAP measure.
(5) Represents net income and EPS before amortization of
intangible assets, one-time costs, loss on disposal of property and
equipment, stock-based compensation and $1.9 million of first
quarter 2010 payroll tax expenses related to stock option
exercises. Refer to table F for a reconciliation to the comparable
GAAP measure.
(6) Represents net income before interest expense, interest
income, income tax expense, depreciation, amortization, non-cash
stock based compensation expense and one-time costs. Refer to table
C for a reconciliation to the comparable GAAP measure.
(7) Represents net income before interest expense, interest
income, income tax expense, depreciation, amortization, non-cash
stock based compensation expense and one-time costs, including $1.9
million for payroll tax expenses associated with stock option
exercises. Refer to table C for a reconciliation to the comparable
GAAP measure.
First Quarter 2010 Results
Compared to First Quarter 2009 Results
Revenues
Total revenues for the first quarter of 2010 (“Q1 2010”) were
$77.0 million, down 0.4% from $77.4 million in the first quarter of
2009 (“Q1 2009”). Q1 2010 consolidated revenues increased $0.6
million, or 0.8%, compared to the fourth quarter of 2009 (“Q4
2009”) due to 1.6% growth in RiskMetrics revenue primarily due to
Q4 2009 sales of RiskManager. Q1 2010 ISS revenues remained flat
compared to Q4 2009 revenues.
Changes in foreign currency exchange rates in Q1 2010 compared
to Q1 2009 had a negative impact on consolidated revenue of $0.5
million.
On a business segment level, Q1 2010 Risk revenues were $40.2
million, or flat compared to Q1 2009. ISS revenues were $36.8
million in Q1 2010, a 1.0% decrease over Q1 2009.
Adjusted EBITDA
Expenses
During Q1 2010 we incurred $1.8 million of transaction expenses
related to the proposed MSCI merger and such costs have been
excluded from Adjusted EBITDA. In addition, during Q1 2010 we
experienced a significant increase in stock option exercises
subsequent to the announcement of the proposed MSCI merger and as a
result we incurred $1.9 million of additional payroll tax expenses
related to stock option exercises. The discussion below makes
reference to Adjusted EBITDA, which excludes $1.8 million of
transaction expenses related to the proposed MSCI merger and
references to Adjusted EBITDA before stock option payroll taxes,
excludes $1.8 million of transaction expenses and $1.9 million of
payroll tax expenses related to stock option exercises.
Adjusted EBITDA expenses, which exclude depreciation and
amortization of property and equipment, amortization of intangible
assets, one-time costs, non-cash stock-based compensation expense,
interest, dividend and investment income (expense) and income tax
expense, of $51.7 million increased $3.7 million, or 7.7%, compared
to Q1 2009.
The $3.7 million increase in Adjusted EBITDA expenses was
primarily due to a $2.7 million increase in compensation expenses
due to $1.9 million of payroll tax expenses related to stock option
exercises and a $1.2 million increase in data expense due to a
one-time data expense reduction of $0.8 million in Q1 2009.
Excluding payroll tax expenses related to stock option exercises
and the Q1 2009 data expense reduction, Adjusted EBITDA expenses
increased $1.0 million, or 2.1 % compared to Q1 2009.
Compensation expenses, which accounted for 70.5% of total
Adjusted EBITDA expenses, increased by 7.9% to $36.5 million for Q1
2010 compared to Q1 2009. The $2.7 million increase in compensation
expenses was driven by increased payroll tax expenses related to
stock option exercises and increased salaries, primarily from
acquisitions. Excluding payroll tax expenses related to stock
option exercises, Q1 2010 compensation expenses increased 3.8% from
Q1 2009.
Q1 2010 non-compensation expenses increased $1.0 million, or
7.2%, from Q1 2009, due mainly to a data expense reduction in Q1
2009. Q1 2010 and 2009 non-compensation expenses both include $0.8
million of foreign exchange losses.
Q1 2010 Adjusted EBITDA expenses of $51.7 million increased $3.7
million compared to Q4 2009 Adjusted EBITDA expenses of $48.0
million. The increase in Adjusted EBITDA expenses was due to a $3.4
million increase in compensation expenses due mainly to increases
in stock option payroll tax expenses in Q1 2010 and a lower bonus
expense accrual in Q4 2009.
Adjusted EBITDA
Consolidated Adjusted EBITDA decreased 13.8% to $25.3 million in
Q1 2010 from $29.4 million in Q1 2009. Q1 2010 Adjusted EBITDA
before stock option payroll taxes was $27.2 million, with an
Adjusted EBITDA margin of 35.3%, or a 7.3% decrease compared to Q1
2009.
On a segment level, the Risk business generated Adjusted EBITDA
before stock option payroll taxes of $15.8 million, an 8.0%
decrease versus Q1 2009. The Q1 2010 Risk Adjusted EBITDA Margin
was 39.2% as compared to 42.7% in Q1 2009 as revenues remained
relatively flat and Adjusted EBITDA expenses increased 6.1%.
The increase in Risk EBITDA expenses is primarily due to
increased foreign exchange losses to $0.6 million and increased
data expenses. The Risk business stock option payroll tax expense
impact in Q1 2010 was $1.6 million.
ISS generated Adjusted EBITDA before stock option payroll taxes
of $11.4 million in Q1 2010, a 6.3% decrease over Q1 2009. The Q1
2010 ISS Adjusted EBITDA Margin of 31.1% declined compared to 32.8%
in Q1 2009 as revenues declined by 1.0% and Adjusted EDITDA
expenses increased 1.6%. The ISS business stock option payroll tax
expense impact in Q1 2010 was $0.3 million.
Consolidated Q1 2010 Adjusted EBITDA before stock option payroll
taxes of $27.2 million declined $1.2 million compared to Q4 2009
and EBITDA margins decreased from 37.2% to 35.3%. The decline in Q1
2010 Adjusted EBITDA is due primarily to the normal seasonality of
annual salary increases, higher temporary employee costs and a
lower bonus expense accrual recorded in Q4 2009.
Other Operating
Expenses
Other operating expenses (stock based compensation,
depreciation, amortization, one-time charges and loss on disposal
of fixed assets) of $12.3 million grew by $1.6 million compared to
Q1 2009 primarily due to $1.8 million of transaction costs
associated with the proposed MSCI merger compared with $1.3 million
of non-recurring expenses in Q1 2010 and an increase in
amortization and depreciation expense as a result of the Innovest
and KLD acquisitions.
Interest, Dividend, Investment
and Other Income (Expense), Net
Net interest, dividend, investment and other expense of $4.9
million for Q1 2010 decreased compared to $5.2 million in Q1 2009
due primarily to decreased interest expense from reduced debt
borrowings.
Net Income and EPS
Net income for Q1 2010 of $5.3 million decreased from $8.5
million for Q1 2009. GAAP EPS (diluted) decreased to $0.08 for Q1
2010 from $0.13 in the prior year. Q1 2010 EPS before transaction
expenses and stock option payroll taxes, as defined in Table D, was
$0.11.
The effective tax rate for Q1 2010 decreased to 35.6% compared
to 36.9% in Q1 2009 primarily as a result of a reduction in
non-deductible stock based compensation expense.
Adjusted EPS, as defined in table E, of $0.17 for Q1 2010
declined compared to Q1 2009 of $0.21. Q1 2010 Adjusted EPS before
stock option payroll taxes, as defined in Table F, was $0.19.
Financial Summary of First
Quarter 2010 Transaction Related Items
As discussed above, we incurred $1.8 million of transaction
expenses related to the proposed MSCI merger and $1.9 million of
additional payroll tax expenses. In total, we recorded $3.7 million
of one-time expenses in Q1 2010 of which $1.9 million was paid in
Q1 2010. During Q1 2010 we experienced a significant increase in
stock option exercises as approximately 3.7 million stock options
were exercised, resulting in cash proceeds of $21.9 million and
yielding a future tax benefit of $18.3 million. The tax benefit of
$18.3 million is expected to offset a significant portion of the
remaining 2010 income tax payments and has no impact on Q1 2010 net
cash flow but is reflected as an operating cash reduction and
corresponding financing cash increase of the cash flow
statement.
Selected Operating Data
The Company believes the following supplemental consolidated
financial information is helpful to understanding the Company’s
overall financial results.
Table B
For the Three Months Ended
March 31
Operating Data 2010 2009
Annualized Contract Value (1) Risk $157,395 $159,994 % Decline 1.6%
ISS (2) $123,996 $127,977 % Decline 3.1% Annualized Contract Value
$281,391 $287,971 % Decline 2.3% Recurring Revenue as a % of
total revenue (3) Risk 98.7% 98.5% ISS 83.2% 83.7%
Recurring Revenue as a % of total
revenue
91.3% 91.4% Renewal Rate Risk 82.7% 85.8% ISS 84.5% 80.4%
Renewal Rate 83.4% 83.5%
Notes to Operating Data
Table:
(1) We define annualized contract value (“ACV”) as the
aggregate value, on an annualized basis, of all recurring
subscription contracts in effect on a reporting date. (2)
KLD was acquired on October 30, 2009 with $5.8 million of ACV and
such comparable amounts are not included in ISS ACV as of March 31,
2009. ACV does not include any contracts where fees are based on
the clients’ asset under management or variable index fees, which
as of March 31, 2010 approximated $1.2 million of annual revenues.
(3) We define recurring revenue as a percentage of total
revenue as revenue from subscription contracts divided by total
revenue during the applicable period.
Overall, renewal rates were 83.4% for Q1 2010 compared with
83.5% for Q1 2009 and 82.6% for the year ended December 31,
2009.
Risk achieved a renewal rate of 82.7% for Q1 2010 which
decreased compared to Q1 2009 renewal rate of 85.8% and 83.7% for
the year ended December 31, 2009. ISS had a renewal rate of 84.5%
for Q1 2010 which increased compared to Q1 2009 renewal rate of
80.4% and 81.2% for the year ended December 31, 2009 primarily due
to an increase in the Proxy, CFRA and Corporate product line
renewal rates.
ACV as of March 31, 2010 was $281.4 million and decreased 2.3%
compared to $288.0 million at March 31, 2009, with Risk ACV
decreasing 1.6% (from $160.0 million to $157.4 million) and ISS ACV
decreasing 3.1% (from $128.0 million to $124.0 million). ACV as of
March 31, 2010 decreased $1.1 million, or 0.4%, compared to
December 31, 2009 due to a 0.7% decline in Risk ACV.
Consolidated new ACV sales in Q1 2010 were $8.8 million, an
increase of 6.3% compared to $8.2 million of new ACV sales in Q1
2009. Risk Q1 2010 new ACV sales were $4.4 million compared to $5.0
million in Q1 2009. Q1 2010 Risk new ACV sales were negatively
impacted by the uncertainty of the Company’s long term ownership
structure which delayed many deal signings into the second quarter.
Since the announcement of the proposed MSCI merger, we have
experienced an increasing Risk new sales pipeline. As a result, we
believe that Risk new sales will improve in the remainder of
2010.
ISS Q1 2010 new ACV sales were $4.4 million, an increase of $1.2
million compared to $3.2 million in Q1 2009. The 36% increase in
ISS new sales was driven by growth in ES&G.
One times sales were $7.0 million for Q1 2010, a decrease of
$0.8 million, compared to $7.8 million in Q1 2009.
Discussion of Cash Flow
As of March 31, 2010, cash and cash equivalents were $242.7
million, up $16.1 million compared to December 31, 2009 due mainly
to $21.9 million of stock option proceeds received partially offset
by capital expenditures and cash used from operations.
During Q1 2010, we recorded an $18.3 million reduction to
operating cash flow and corresponding increase to financing cash
flow for excess tax benefits associated with stock option
exercises. This tax benefit had no impact on Q1 2010 net cash flow
but is expected to offset a significant portion of our remaining
future income tax payments for 2010. Discussions below regarding Q1
2010 free cash flow and cash flow from operations exclude this
$18.3 million tax benefit.
Free Cash Flow (operating cash flow minus capital expenditures
and tax benefit associated with the exercise of options) for Q1
2010 was negative $3.1 million compared to positive $4.0 million
for Q1 2009. Q1 2010 free cash flow was negatively impacted by $1.9
million of payroll taxes from stock option exercises and $2.2
million of 2009 debt interest paid in Q1 2010. Excluding the impact
of payroll taxes from options and 2009 debt interest paid in Q1
2010, free cash flow was positive $1.0 million.
Capital expenditures increased to $1.7 million in Q1 2010
compared to $0.6 million in Q1 2009.
Our cash flow tends to be lower in the beginning of each year
due to year end bonuses and commissions paid during this period. As
a result, we typically generate more cash flows from operations
during the second half of the year than during the first half of
the year.
Subsequent Event
On April 16, 2010, we utilized our existing cash and cash
equivalents to repay $81 million of our existing first term loan
facilities. As a result, current portion of long-term debt were
reduced by $3 million and long-term debt, net of current portion
was reduced by $78 million. As a result of the repayment, we
currently have $206.7 million in principal remaining on our
outstanding loan facility. We expect to yield annual net interest
savings of approximately 200 basis points associated with the $81
million debt repayment.
Conference Call Information
The Company will hold a conference call to discuss results for
the first quarter of 2010 today at 10 a.m. Eastern. The call will
be hosted by Ethan Berman, Chief Executive Officer, and David
Obstler, Chief Financial Officer, of RiskMetrics Group. Investors
can participate in the conference call by using the following
dial-in details:
US Toll free dial-in: 866.383.7989 International dial-in:
617.597.5328 Passcode: 81645313
In addition, investors can access the conference call (as well
as a replay of the call) directly from the RiskMetrics Group
Investor Relations Web Site at http://investor.riskmetrics.com.
About RiskMetrics Group
RiskMetrics Group is a leading provider of risk management and
corporate governance products and services to participants in the
global financial markets. By bringing transparency, expertise and
access to the financial markets, RiskMetrics Group helps investors
better understand and manage the risks associated with their
financial holdings. Our solutions address a broad spectrum of risk
across our clients' financial assets. Headquartered in New York
with 20 global offices, RiskMetrics Group services some of the most
prestigious institutions and corporations worldwide.
Forward-Looking Statements
This release contains forward-looking statements. These
statements relate to future events or to future financial
performance and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or
achievements expressed or implied by these forward-looking
statements. In some cases, you can identify forward-looking
statements by the use of words such as "may," "could," "expect,"
"intend," "plan," "seek," "anticipate," "believe," "estimate,"
"predict," "potential," or "continue" or the negative of these
terms or other comparable terminology. You should not place undue
reliance on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors that are, in
some cases, beyond our control and that could materially affect
actual results, levels of activity, performance, or
achievements.
Other factors that could materially affect actual results,
levels of activity, performance or achievements can be found in the
Company’s December 31, 2009 Annual Form 10-K which was filed with
the Securities and Exchange Commission on February 24, 2010. If any
of these risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary
significantly from what we projected. Any forward-looking statement
in this release reflects our current views with respect to future
events and is subject to these and other risks, uncertainties and
assumptions relating to our operations, results of operations,
growth strategy and liquidity. We assume no obligation to publicly
update or revise these forward-looking statements for any reason,
whether as a result of new information, future events, or
otherwise.
Notes Regarding the Use of Non-GAAP Financial
Measures
RiskMetrics Group (the “Company”) has provided certain non-GAAP
financial information as supplemental information regarding its
operating results. These measures are not in accordance with, or an
alternative for, generally accepted accounting principles in the
United States ("GAAP") and may be different from non-GAAP measures
reported by other companies. The Company believes that its
presentation of non-GAAP measures, such as Adjusted EBITDA,
Adjusted EBITDA expenses, other operating expenses, Adjusted Net
Income, Adjusted EPS and free cash flow, provides useful
information to management and investors regarding certain financial
and business trends relating to its financial condition and results
of operations. In addition, the Company's management uses these
measures for reviewing the financial results of the Company and for
budgeting and planning purposes.
Adjusted EBITDA
The table below sets forth a reconciliation of Net Income to
Adjusted EBITDA and to Adjusted EBITDA before stock option payroll
taxes on our historical results:
Table C
Three months ended March 31, 2010
2009 Net income $ 5,259 $ 8,527 Interest, other expense, net
4,879 5,193 Income tax expense 2,904 4,981 Depreciation and
amortization of property and equipment 2,151 1,955 Amortization of
intangible assets 5,910 5,592 Stock-based compensation 2,384 1,808
Non-recurring expenses 1,826 (a) 1,303 (b) Adjusted EBITDA $ 25,313
$ 29,359 Stock option payroll taxes 1,900 (c) -
Adjusted EBITDA before stock option payroll taxes $ 27,213 $ 29,359
(a) Represents transaction expenses associated with the
proposed MSCI merger. (b) Represents non-recurring employee
severance expenses, acquisition expenses, and lease exit expenses.
(c) Represents employer payroll tax expense associated with the
exercise of stock options.
Adjusted EBITDA, as defined in our credit facility, represents
net income (loss) before interest expense, interest income, income
tax expense (benefit), depreciation and amortization of property
and equipment, amortization of intangible assets, non-cash
stock-based compensation expense and extraordinary or non-recurring
charges or expenses. It is a material metric used by our lenders in
evaluating compliance with the maximum consolidated leverage ratio
covenant in our credit facility. The maximum consolidated leverage
ratio covenant, as defined in our credit facilities, represents the
ratio of total indebtedness as compared to Adjusted EBITDA, and can
not exceed a maximum ratio range which declines from 8.50 to 3.00
over the life of the credit facilities. Non-compliance with this
covenant could result in us being required to immediately repay our
outstanding indebtedness under our credit facility. Adjusted EBITDA
is also a metric used by management to measure operating
performance and for planning, including preparation of annual
budgets, analyzing investment decisions and evaluating
profitability.
We also present Adjusted EBITDA as a supplemental performance
measure because we believe that this measure provides our board of
directors, management and investors with additional information to
measure our performance, provide more consistent comparisons from
period to period by excluding potential differences caused by
variations in capital structure (affecting interest expense), tax
position (such as the impact on periods of changes in effective tax
rates or net operating losses), the age and book depreciation of
fixed assets (affecting relative depreciation expense),
acquisitions (affecting amortization expense) and compensation
plans (affecting stock-based compensation expense).
Adjusted EBITDA is not a measurement of our financial
performance under U.S. GAAP and should not be considered as an
alternative to net income, operating income or any other
performance measures derived in accordance with U.S. GAAP or as an
alternative to cash flow from operating activities as a measure of
our profitability or liquidity.
Adjusted EBITDA
Expenses
Adjusted EBITDA expenses represent cost of revenues, research
and development, selling and marketing and general administrative
expenses, excluding stock-based compensation. Adjusted EBITDA
expenses represent expenses which are classified as reductions to
Adjusted EBITDA, as defined in our credit facility. Adjusted EBITDA
is also a metric used by management to measure operating
performance and for planning, including preparation of annual
budgets, analyzing investment decisions and evaluating
profitability.
Other Operating
Expenses
Other operating expenses represent stock-based compensation,
depreciation and amortization of property and equipment,
amortization of intangible assets and loss on disposal of property
and equipment. Other operating expenses represent expenses which
are classified as reductions to Adjusted EBITDA, as defined in our
credit facility.
Adjusted Net Income and
EPS
We define adjusted net income and adjusted EPS as net income
(earnings per share) before amortization of intangibles, one-time
costs, impairment charges, loss on disposal of property and
equipment and stock-based compensation. A reconciliation from net
income and EPS to net income and EPS before transaction expenses
and stock option payroll taxes and to Adjusted net income and EPS
is set forth below:
Table D
Three months ended March 31, 2010
2009 $ Amount $ Amount GAAP - Net Income $5,259
$8,527 Plus: One-time Costs 1,826 (1) 1,303 (4) Plus: Stock Option
Payroll Taxes 1,900 (2) - Income tax effect (3) (1,341) (469)
Net income before transaction expenses and stock option
payroll taxes $7,644 $9,361 EPS before transaction expenses
and stock option payroll taxes $0.11 $0.14 Diluted Shares
69,420,519 67,342,539 (1) Includes transaction expenses
associated with the proposed MSCI merger. (2) Represents
employer payroll taxes associated with stock option exercises.
(3) Based on estimated normalized effective tax rate of 36%.
(4) Includes one-time expenses, including employee severance
expenses of $0.5 million, $0.6 million for lease exit expenses and
$0.2 million for Innovest acquisition related expenses.
Table E
Three months ended March 31, 2010
2009 $ Amount $ Amount GAAP - Net Income $5,259
$8,527 Plus: One-time Costs 1,826 (1) 1,303 (3) Plus: Stock-Based
Compensation 2,384 1,808 Plus: Amortization of Intangible Assets
5,910 5,592 Income tax effect (2) (3,643) (3,211) Adjusted
Net income $11,736 $14,019 Adjusted EPS – diluted $0.17
$0.21 Diluted Shares 69,420,519 67,342,539 (1)
Includes transaction expenses associated with the proposed MSCI
merger. (2) Based on estimated normalized effective tax rate
of 36%. (3) Includes one-time expenses, including employee
severance expenses of $0.5 million, $0.6 million for lease exit
expenses and $0.2 million for Innovest acquisition related
expenses.
Table F
Three months ended March 31, 2010
2009 $ Amount $ Amount GAAP - Net Income $5,259
$8,527 Plus: One-time Costs 1,826 (1) 1,303 (4) Plus: Stock-Based
Compensation 2,384 1,808 Plus: Stock Option Payroll Taxes 1,900 (2)
- Plus: Amortization of Intangible Assets 5,910 5,592 Income tax
effect (3) (4,327) (3,211) Adjusted Net income before stock
option payroll taxes $12,952 $14,019 Adjusted EPS before
stock option payroll taxes– diluted $0.19 $0.21 Diluted
Shares 69,420,519 67,342,539 (1) Includes transaction
expenses associated with the proposed MSCI merger. (2)
Represents employer payroll taxes associated with stock option
exercises. (3) Based on estimated normalized effective tax
rate of 36%. (4) Includes one-time expenses, including
employee severance expenses of $0.5 million, $0.6 million for lease
exit expenses and $0.2 million for Innovest acquisition related
expenses.
Free Cash Flow
We define free cash flow as net cash provided by operating
activities from continuing operations minus capital expenditures.
We believe free cash flow is an important non-GAAP measure as it
provides useful cash flow information regarding our ability to
service, incur or pay down indebtedness. We use free cash flow as a
measure to reflect cash available to service our debt as well as to
fund our expenditures. A limitation of using free cash flow versus
the GAAP measure of net cash provided by operating activities is
that free cash flow does not represent the total increase or
decrease in the cash balance from operations for the period since
it excludes cash used for capital expenditures during the
period.
Historical GAAP Financial Statements
Tables G through I presents the historical GAAP financial
statements of RiskMetrics Group as of and for the three months
ended March 31, 2010.
TABLE G
RISKMETRICS GROUP, INC. CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS MARCH
31, 2010 AND 2009 (UNAUDITED) (In thousands, except
share and per share amounts) Three months ended
March 31, 2010 2009 REVENUES $
77,046 $ 77,381 OPERATING COSTS AND EXPENSES: Cost of revenues
26,670 23,322 Research and development 12,000 10,137 Selling and
marketing 7,510 7,067 General and administrative 9,763 10,607
Depreciation and amortization of
property and equipment
2,151 1,955 Amortization of intangible assets 5,910 5,592 Total
operating costs and expenses (1) 64,004 58,680 INCOME FROM
OPERATIONS 13,042 18,701
INTEREST, DIVIDEND, INVESTMENT,
AND OTHER INCOME (EXPENSE), NET:
Interest, dividend and investment income 114 193 Interest
expense (4,993) (5,386)
Total interest, dividend,
investment, and other income (expense), net
(4,879) (5,193)
INCOME BEFORE PROVISION FOR INCOME
TAXES
8,163 13,508 PROVISION FOR INCOME TAXES 2,904 4,981 NET INCOME $
5,259 $ 8,527 NET INCOME PER SHARE: Basic $ 0.08 $ 0.14
Diluted $ 0.08 $ 0.13
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 64,131,260 61,464,761 Diluted 69,420,519 67,342,539
(1) Includes stock-based compensation expense of $2,384 and
$1,808 for the three months ended March 31, 2010 and 2009,
respectively.
TABLE H
RISKMETRICS GROUP, INC. CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In
thousands, except share amounts) March 31,
December 31, 2010 2009 ASSETS CURRENT
ASSETS: Cash and cash equivalents $ 242,650 $ 226,612 Accounts
receivable-net 34,343 38,534 Deferred tax assets 834 839 Income
taxes receivable 26,553 10,139 Other receivables and prepaid
expenses 6,805 4,144 Total current assets 311,185 280,268
Intangibles—net 129,499 135,359 Goodwill 325,605 326,247 Property
and equipment—net 13,471 14,042 Deferred financing costs 3,928
4,188 Other assets 1,841 2,036 TOTAL ASSETS $ 785,529 $ 762,140
LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES:
Trade accounts payable $ 3,856 $ 3,337 Accrued expenses 23,176
43,243 Debt-current portion 2,966 2,966 Deferred revenue-current
portion 114,464 115,761 Other current liabilities 221 221 Total
current liabilities 144,683 165,528 LONG-TERM LIABILITIES Debt
284,688 285,430 Deferred tax liabilities 29,869 29,891 Deferred
revenue 560 1,017 Other long-term liabilities 17,545 18,621 Total
liabilities $ 477,345 $ 500,487 STOCKHOLDERS’ EQUITY:
Common stock, $.01 par
value—200,000,000 authorized; 67,094,293 and 63,324,880 issued and
66,851,139 and 63,081,726 outstanding at March 31, 2010 and
December 31, 2009, respectively
$ 671 $ 633 Treasury stock—243,154 shares (579) (579) Additional
paid-in capital 493,772 451,110 Accumulated other comprehensive
loss (10,668) (9,240) Accumulated deficit (175,012) (180,271) Total
stockholders’ equity 308,184 261,653 TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY $ 785,529 $ 762,140
TABLE I
RISKMETRICS GROUP, INC. CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 2010 AND 2009 (UNAUDITED) (Amounts in
thousands) 2010 2009 CASH FLOWS FROM
OPERATING ACTIVITIES: Net income
$
5,259
$
8,527 Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization of property and
equipment 2,151 1,955 Provision for bad debts (58) 266 Amortization
of intangible assets 5,910 5,592 Amortization of debt issuance
costs 260 260 Stock-based compensation 2,384 1,808 Excess tax
benefit associated with exercise of stock options (18,289) (292)
Changes in assets and liabilities (net of assets and liabilities
acquired): Decrease (increase) in accounts receivable 3,798 (9,118)
Decrease in income and deferred taxes 1,377 4,901 Increase in other
receivables and prepaid expenses (1,963) (1,650) Decrease
(increase) in other assets 150 (824) (Decrease) increase in
deferred revenue (1,642) 10,421 Increase in trade accounts payable
585 2,826 Decrease in other accrued expenses and liabilities
(19,648) (20,376) Net cash (used in) provided by operating
activities (19,726) 4,296 CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,670) (608) Cash paid to
acquire Innovest (net of cash acquired) - (14,883) Net cash used in
investing activities (1,670) (15,492) CASH FLOWS FROM FINANCING
ACTIVITIES: Repayment of debt (741) - Excess tax benefit associated
with exercise of stock options 18,289 292 Proceeds from exercise of
stock options 21,903 221 Net cash provided by financing activities
39,451 513 EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,017) (788)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,038
(11,471) CASH AND CASH EQUIVALENTS—Beginning of period 226,612
170,799 CASH AND CASH EQUIVALENTS—End of period $ 242,650 $ 159,328
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for
interest $ 6,863 $ 5,055 Cash paid for income taxes $ 1,552 $ 510
Supplemental Information and Non-GAAP Reconciliations
The tables below set forth a reconciliation of GAAP costs of
revenues, research and development, selling and marketing and
general and administrative expenses to Adjusted EBITDA expenses and
other operating expenses:
Table J
RISKMETRICS GROUP, INC. UNAUDITED AS
ADJUSTED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2010 (AMOUNTS IN THOUSANDS) RISKMETRICS
GROUP, INC. JANUARY 1 TO MARCH 31, 2010 ADJUSTMENTS AS ADJUSTED
Revenues $77,046 $77,046 Operating cost and
expenses: Cost of revenues 26,670 (741) (A) 25,929 Research and
development 12,000 (716) (A) 11,284 Selling and marketing 7,510
(586) (A) 6,924 General and administrative 9,763 (341) (A) 7,596
Non-recurring/ one-time (1,826) (B) Total adjusted
EBITDA expenses 55,943 (4,210) 51,733 Depreciation and
amortization of property and equipment 2,151 2,151 Amortization of
intangible assets 5,910 5,910 Total other operating expenses
8,061 4,210 12,271 Total operating expenses 64,004
64,004 Income from operations 13,042 13,042 Interest,
dividend, investment and other income (expense), net Interest,
dividend and investment income 114 114 Interest expense (4,993)
(4,993) Interest, dividend, investment and other income
(expense), net (4,879) (4,879) Income before
provision for income taxes 8,163 8,163 Provision for income
taxes 2,904 2,904 Net income $5,259 $ - $5,259
The following adjustments are included in the preparation of the
statement of income: (A) Reclassification of stock-based
compensation from adjusted EBITDA expenses to other operating
expenses. (B) Reclassification of transaction expenses related to
the proposed MSCI merger.
Table K
RISKMETRICS GROUP, INC. UNAUDITED AS
ADJUSTED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2009 (AMOUNTS IN THOUSANDS) RISKMETRICS
GROUP, INC. JANUARY 1 TO MARCH 31, 2009 ADJUSTMENTS AS ADJUSTED
Revenues $77,381 $77,381 Operating cost and
expenses: Cost of revenues 23,322 (610) (A) 22,712 Research and
development 10,137 (520) (A) 9,617 Selling and marketing 7,067
(338) (A) 6,729 General and administrative 10,607 (340) (A) 8,964
Non-recurring/one-time expense (1,303) (B) Total
adjusted EBITDA expenses 51,133 (3,111) 48,022 Depreciation
and amortization of property and equipment 1,955 1,955 Amortization
of intangible assets 5,592 5,592 Total other operating
expenses 7,547 3,111 10,658 Total operating expenses 58,680
58,680 Income from operations 18,701 18,701
Interest, dividend, investment and other income (expense), net
Interest, dividend and investment income 193 193 Interest expense
(5,386) (5,386) Other expenses Interest,
dividend, investment and other income (expense), net (5,193)
(5,193) Income before provision for income taxes 13,508
13,508 Provision for income taxes 4,981 4,981
Net income $8,527
$ -
$8,527 The following adjustments are included in the
preparation of the statement of income: (A) Reclassification of
stock-based compensation from adjusted EBITDA expenses to other
operating expenses. (B) Reclassification of non-recurring employee
severance expenses, lease exit expenses, and transaction expenses
from adjusted EBITDA expenses to other operating expenses.
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