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 endedDecember 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 "
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 benchmarks, return-analytics 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 ofMarch 31, 2021 , we served over 4,4001 clients in more than 90 countries. As ofMarch 31, 2021 , we had offices in more than 30 cities across more than 20 countries to help serve our diverse client base, with 45.4% of our revenues coming from clients in theAmericas , 38.7% in EMEA and 15.9% inAsia andAustralia . 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. We also license annual recurring subscriptions for the majority of our Real Estate products for a fee which is primarily paid in arrears after the product is delivered, with the exception of the Market Information product for which the fees are generally paid in advance. 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.
1 Represents the aggregate of all related clients under their respective parent
entity. 20
-------------------------------------------------------------------------------- In evaluating our financial performance, we focus on revenue and profit growth, including results accounted for under accounting principles generally accepted inthe 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, includingRun 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. More than three-fifths of the AUM is invested in securities denominated in currencies other than theU.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 months endedMarch 31, 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: Three Months Ended March 31, 2021 2020 (in thousands, except per share data) Operating revenues$ 478,423 $ 416,780 14.8 % Operating expenses: Cost of revenues 85,780 74,609 15.0 % Selling and marketing 56,467 55,549 1.7 % Research and development 24,862 26,562 (6.4 %) General and administrative 34,728 30,833 12.6 % Amortization of intangible assets 15,068 13,776 9.4 % Depreciation and amortization of property, equipment and leasehold improvements 7,143 7,567 (5.6 %) Total operating expenses 224,048 208,896 7.3 % Operating income 254,375 207,884 22.4 % Other expense (income), net 38,347 45,035 (14.9 %) Income before provision for income taxes 216,028 162,849 32.7 % Provision for income taxes 19,209 14,724 30.5 % Net income$ 196,819 $ 148,125 32.9 % Earnings per basic common share$ 2.38 $
1.75 36.0 %
Earnings per diluted common share$ 2.36 $ 1.73 36.4 % Operating margin 53.2 % 49.9 % 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. 21 -------------------------------------------------------------------------------- The following table presents operating revenues by type for the periods indicated: Three Months Ended March 31, 2021 2020 % Change (in thousands) Recurring subscriptions$ 337,732 $ 304,425 10.9 % Asset-based fees 126,706 100,196 26.5 % Non-recurring 13,985 12,159 15.0 % Total operating revenues$ 478,423 $ 416,780 14.8 % Total operating revenues for the three months endedMarch 31, 2021 increased 14.8% to$478.4 million compared to$416.8 million for the three months endedMarch 31, 2020 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 14.0% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Operating revenues from recurring subscriptions for the three months endedMarch 31, 2021 increased 10.9% to$337.7 million compared to$304.4 million for the three months endedMarch 31, 2020 , primarily driven by growth in Index products, which increased$15.3 million , or 10.9%, strong growth in ESG and Climate products, which increased$9.2 million , or 37.1%, and growth in Analytics products, which increased$7.6 million , or 6.1%. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 9.9% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Operating revenues from asset-based fees for the three months endedMarch 31, 2021 increased 26.5% to$126.7 million compared to$100.2 million for the three months endedMarch 31, 2020 . The increase in asset-based fees was driven by growth in revenues from all of our indexed investment product categories, including an increase in revenues from ETFs linked toMSCI equity indexes that was primarily driven by a 33.3% increase in average AUM in ETFs, partially offset by a change in fee levels of certain products. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes resulting from new funds and increased demand in ESG products and climate products. Revenues from exchange traded futures and options contracts linked toMSCI indexes also increased, primarily driven by price increases, partially offset by lower volume. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. The following table presents the value of AUM in ETFs linked toMSCI equity indexes and the sequential change of such assets as of the end of each of the periods indicated: Period Ended 2020 2021 March June September December March (in billions) 31, 30, 30, 31, 31, AUM in ETFs linked toMSCI equity indexes(1), (2)$ 709.5 $ 825.4 $ 908.9
Sequential Change in Value Market Appreciation/(Depreciation)$ (216.5 ) $ 117.4 $ 57.0 $ 135.7 $ 43.2 Cash Inflows (8.4 ) (1.5 ) 26.5 59.0 62.8 Total Change$ (224.9 ) $ 115.9 $ 83.5 $ 194.7 $ 106.0
The following table presents the average value of AUM in ETFs linked to
2020 2021 (in billions) March June September December March AUM in ETFs linked toMSCI equity indexes(1), (2) Quarterly average$ 877.1 $ 776.9 $ 893.4 $ 999.2 $ 1,169.2 Year-to-date average$ 877.1 $ 827.0 $ 849.1 $ 886.7 $ 1,169.2
(1) 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
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 theSEC . 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
multiplying the equity ETF net asset value by the number of shares outstanding. The average value of AUM in ETFs linked toMSCI equity indexes for the three months endedMarch 31, 2021 was$1,169.2 billion , up$292.1 billion , or 33.3%, from$877.1 billion for the three months endedMarch 31, 2020 . 22 -------------------------------------------------------------------------------- Non-recurring revenues for the three months endedMarch 31, 2021 increased 15.0% to$14.0 million compared to$12.2 million for the three months endedMarch 31, 2020 , primarily driven by growth in Index products, which increased$1.4 million , or 15.7%.
The following table presents operating revenues by reportable segment and revenue type for the periods indicated:
Three Months Ended March 31, 2021 2020 % Change (in thousands) Operating revenues: Index Recurring subscriptions$ 155,117 $ 139,840 10.9 % Asset-based fees 126,706 100,196 26.5 % Non-recurring 10,668 9,220 15.7 % Index total 292,491 249,256 17.3 % Analytics Recurring subscriptions 131,672 124,065 6.1 % Non-recurring 2,345 1,443 62.5 % Analytics total 134,017 125,508 6.8 % ESG and Climate Recurring subscriptions 34,140 24,901 37.1 % Non-recurring 610 332 83.7 % ESG and Climate total 34,750 25,233 37.7 % All Other - Private Assets Recurring subscriptions 16,803 15,619 7.6 % Non-recurring 362 1,164 (68.9 %) All Other - Private Assets total 17,165 16,783 2.3 % Total operating revenues$ 478,423 $ 416,780 14.8 %
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. 23
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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: Three Months Ended March 31, 2021 2020 % Change (in thousands) Operating expenses: Cost of revenues$ 85,780 $ 74,609 15.0 % Selling and marketing 56,467 55,549 1.7 % Research and development 24,862 26,562 (6.4 %) General and administrative 34,728 30,833 12.6 % Amortization of intangible assets 15,068 13,776 9.4 % Depreciation and amortization of property,
equipment and leasehold improvements 7,143 7,567
(5.6 %) Total operating expenses$ 224,048 $ 208,896 7.3 % Total operating expenses for the three months endedMarch 31, 2021 increased 7.3% to$224.0 million compared to$208.9 million for the three months endedMarch 31, 2020 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 5.4% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 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 endedMarch 31, 2021 increased 15.0% to$85.8 million compared to$74.6 million for the three months endedMarch 31, 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, wages and salaries and benefits costs, as well as higher non-compensation costs, reflecting higher information technology costs, professional fees and market data costs, partially offset by lower travel and entertainment costs. 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 endedMarch 31, 2021 increased 1.7% to$56.5 million compared to$55.5 million for the three months endedMarch 31, 2020 , driven by higher costs in the ESG and Climate reportable segment, partially offset by lower costs in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, including severance costs, wages and salaries and incentive compensation, partially offset by decreases in non-compensation costs, primarily relating to lower travel and entertainment costs, marketing costs and recruiting costs.
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 endedMarch 31, 2021 decreased 6.4% to$24.9 million compared to$26.6 million for the three months endedMarch 31, 2020 , reflecting higher allocation of resources to projects eligible for capitalization across all of the segments, leading to a decline in compensation and benefits costs, primarily wages and salaries, expensed as R&D. 24 --------------------------------------------------------------------------------
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 endedMarch 31, 2021 increased 12.6% to$34.7 million compared to$30.8 million for the three months endedMarch 31, 2020 , reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation. The following table presents operating expenses using compensation and non-compensation categories, rather than using activity categories, for the periods indicated: Three Months Ended March 31, 2021 2020 % Change (in thousands) Compensation and benefits$ 151,517 $ 137,262 10.4 % Non-compensation expenses 50,320 50,291 0.1 % Amortization of intangible assets 15,068 13,776 9.4 % Depreciation and amortization of property,
equipment and leasehold improvements 7,143 7,567
(5.6 %) Total operating expenses$ 224,048 $ 208,896 7.3 % 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 3,728 and 3,459 employees as ofMarch 31, 2021 and 2020, respectively, reflecting a 7.8% 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 ofMarch 31, 2021 , 64.9% of our employees were located in emerging market centers compared to 63.3% as ofMarch 31, 2020 .
Compensation and benefits costs for the three months ended
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 of
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 endedMarch 31, 2021 increased 9.4% to$15.1 million compared to$13.8 million for the three months endedMarch 31, 2020 , primarily driven by higher amortization of internally developed capitalized software. 25 --------------------------------------------------------------------------------
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 life of the assets. Depreciation and amortization of property, equipment and leasehold improvements for the three months endedMarch 31, 2021 decreased 5.6% to$7.1 million compared to$7.6 million for the three months endedMarch 31, 2020 . The decrease was primarily the result of lower depreciation on computer and related equipment, software and leasehold improvements, partially offset by higher depreciation on furniture.
Other Expense (Income), Net
Other expense (income), net for the three months endedMarch 31, 2021 decreased 14.9% to$38.3 million compared to$45.0 million for the three months endedMarch 31, 2020 . The decrease in net expenses was primarily driven by the absence of the$10.0 million loss on debt extinguishment associated with the redemption of all of the$300.0 million aggregate principal amount of 5.250% senior unsecured notes due 2024 that remained outstanding (the "2024 Senior Notes Redemption") during the three months endedMarch 31, 2020 .
Income Taxes
The Company's provision for income taxes for the three months endedMarch 31, 2021 and 2020 was$19.2 million and$14.7 million , respectively. These amounts reflect effective tax rates of 8.9% and 9.0% for the three months endedMarch 31, 2021 and 2020, respectively. The effective tax rate of 8.9% for the three months endedMarch 31, 2021 reflects the Company's estimate of the effective tax rate for the period which was impacted by certain favorable discrete items totaling$22.3 million . For the three months endedMarch 31, 2021 , these discrete items primarily related to$20.4 million of excess tax benefits recognized on share-based compensation vested during the period. The effective tax rate of 9.0% for the three months endedMarch 31, 2020 reflects the Company's estimate of the effective tax rate for the period which was impacted by certain favorable discrete items totaling$22.4 million . For the three months endedMarch 31, 2020 , these discrete items primarily related to$18.9 million of excess tax benefits recognized on share-based compensation vested during the period and$2.6 million related to the tax impact of loss on debt extinguishment recognized during the period. The discrete items also included a$0.8 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
Weighted Average Shares
The weighted average shares outstanding used to calculate basic and diluted earnings per share for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 decreased by 2.6% and 2.4%, respectively. The decreases 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. "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. 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. 26 -------------------------------------------------------------------------------- The following table presents the calculation of Adjusted EBITDA for the periods indicated: Three Months Ended March 31, 2021 2020 % Change (in thousands) Operating revenues$ 478,423 $ 416,780 14.8 % Adjusted EBITDA expenses 201,837 187,553 7.6 % Adjusted EBITDA$ 276,586 $ 229,227 20.7 % Adjusted EBITDA margin % 57.8 % 55.0 % Operating margin % 53.2 % 49.9 % Adjusted EBITDA for the three months endedMarch 31, 2021 increased 20.7% to$276.6 million compared to$229.2 million for the three months endedMarch 31, 2020 . Adjusted EBITDA margin for the three months endedMarch 31, 2021 increased to 57.8% compared to 55.0% for the three months endedMarch 31, 2020 . The increase in Adjusted EBITDA margin reflects a higher rate of growth in operating revenues as compared to the rate of growth of Adjusted EBITDA expenses.
Reconciliation of Adjusted EBITDA to Net Income and Adjusted EBITDA Expenses to Operating Expenses
The following table presents the reconciliation of Adjusted EBITDA to net income for the periods indicated: Three Months Ended March 31, 2021 2020 (in thousands) Index Adjusted EBITDA$ 219,879 $ 183,587 Analytics Adjusted EBITDA 45,731 36,317 ESG and Climate Adjusted EBITDA 5,045 3,626
All Other - Private Assets Adjusted EBITDA 5,931 5,697 Consolidated Adjusted EBITDA
276,586 229,227 Amortization of intangible assets 15,068 13,776
Depreciation and amortization of property,
equipment and leasehold improvements 7,143 7,567 Operating income 254,375 207,884 Other expense (income), net 38,347 45,035 Provision for income taxes 19,209 14,724 Net income$ 196,819 $ 148,125
The following table presents the reconciliation of Adjusted EBITDA expenses to operating expenses for the periods indicated:
Three Months Ended March 31, 2021 2020 (in thousands) Index Adjusted EBITDA expenses$ 72,612 $
65,669
Analytics Adjusted EBITDA expenses 88,286
89,191
ESG and Climate Adjusted EBITDA expenses 29,705
21,607
All Other - Private Assets Adjusted EBITDA expenses 11,234 11,086 Consolidated Adjusted EBITDA expenses
201,837
187,553
Amortization of intangible assets 15,068
13,776
Depreciation and amortization of property,
equipment and leasehold improvements 7,143 7,567 Total operating expenses$ 224,048 $ 208,896
The discussion of the segment results is presented below.
27
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Segment Results Index Segment The following table presents the results for the Index segment for the periods indicated: Three Months Ended March 31, 2021 2020 % Change (in thousands) Operating revenues: Recurring subscriptions$ 155,117 $ 139,840 10.9 % Asset-based fees 126,706 100,196 26.5 % Non-recurring 10,668 9,220 15.7 % Operating revenues total 292,491 249,256 17.3 % Adjusted EBITDA expenses 72,612 65,669 10.6 % Adjusted EBITDA$ 219,879 $ 183,587 19.8 % Adjusted EBITDA margin % 75.2 % 73.7 %
Revenues related to Index products for the three months ended
Recurring subscriptions for the three months endedMarch 31, 2021 increased 10.9% to$155.1 million compared to$139.8 million for the three months endedMarch 31, 2020 . The increase was primarily driven by strong growth in market cap-weighted 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 endedMarch 31, 2021 increased 26.5% to$126.7 million compared to$100.2 million for the three months endedMarch 31, 2020 . The increase in asset-based fees was driven by growth in revenues from all of our indexed investment product categories, including an increase in revenues from ETFs linked toMSCI equity indexes that was primarily driven by a 33.3% increase in average AUM in ETFs, partially offset by a change in fee levels of certain products. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes resulting from new funds and increased demand in ESG products and climate products. Revenues from exchange traded futures and options contracts linked toMSCI indexes also increased, primarily driven by price increases, partially offset by lower volume. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. Index segment Adjusted EBITDA expenses for the three months endedMarch 31, 2021 increased 10.6% to$72.6 million compared to$65.7 million for the three months endedMarch 31, 2020 , reflecting higher expenses across the cost of revenues and G&A expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 8.4% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 .
Analytics Segment
The following table presents the results for the Analytics segment for the periods indicated: Three Months Ended March 31, 2021 2020 % Change (in thousands) Operating revenues: Recurring subscriptions$ 131,672 $ 124,065 6.1 % Non-recurring 2,345 1,443 62.5 % Operating revenues total 134,017 125,508 6.8 % Adjusted EBITDA expenses 88,286 89,191 (1.0 %) Adjusted EBITDA$ 45,731 $ 36,317 25.9 % Adjusted EBITDA margin % 34.1 % 28.9 % Analytics segment revenues for the three months endedMarch 31, 2021 increased 6.8% to$134.0 million compared to$125.5 million for the three months endedMarch 31, 2020 , primarily driven by growth in Multi-Asset Class and Equity Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 6.6% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . 28 -------------------------------------------------------------------------------- Analytics segment Adjusted EBITDA expenses for the three months endedMarch 31, 2021 decreased 1.0% to$88.3 million compared to$89.2 million for the three months endedMarch 31, 2020 , primarily driven by lower expenses across the R&D and selling and marketing expense activity categories, partially offset by higher expenses across the G&A and cost of revenues expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, the decrease would have been 2.4% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 .
ESG and Climate Segment
The following table presents the results for the ESG and Climate segment for the periods indicated: Three Months Ended March 31, 2021 2020 % Change (in thousands) Operating revenues: Recurring subscriptions$ 34,140 $ 24,901 37.1 % Non-recurring 610 332 83.7 % Operating revenues total 34,750 25,233 37.7 % Adjusted EBITDA expenses 29,705 21,607 37.5 % Adjusted EBITDA$ 5,045 $ 3,626 39.1 %
Adjusted EBITDA margin % 14.5 % 14.4 %
ESG and Climate segment revenues for the three months endedMarch 31, 2021 increased 37.7% to$34.8 million compared to$25.2 million for the three months endedMarch 31, 2020 . The increase in ESG and Climate revenues was primarily driven by strong growth from Ratings and Climate products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate operating revenues would have increased 31.8%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . ESG and Climate segment Adjusted EBITDA expenses for the three months endedMarch 31, 2021 increased 37.5% to$29.7 million compared to$21.6 million for the three months endedMarch 31, 2020 , reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 34.0% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 .
All Other - Private Assets Segment
The following table presents the results for the All Other - Private Assets segment for the periods indicated:
Three Months Ended March 31, 2021 2020 % Change (in thousands) Operating revenues: Recurring subscriptions$ 16,803 $ 15,619 7.6 % Non-recurring 362 1,164 (68.9 %) Operating revenues total 17,165 16,783 2.3 % Adjusted EBITDA expenses 11,234 11,086 1.3 % Adjusted EBITDA$ 5,931 $ 5,697 4.1 %
Adjusted EBITDA margin % 34.6 % 33.9 %
All Other - Private Assets segment revenues for the three months endedMarch 31, 2021 increased 2.3% to$17.2 million compared to$16.8 million for the three months endedMarch 31, 2020 . The increase in All Other - Private Assets revenues was primarily driven by favorable foreign currency exchange rate fluctuations, partially offset by the absence of a previously disclosed one-time data license fee recognized during the three months endedMarch 31, 2020 . Adjusting for the impact of foreign currency exchange rate fluctuations, All Other - Private Assets operating revenues would have decreased 5.6% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . All Other - Private Assets segment Adjusted EBITDA expenses for the three months endedMarch 31, 2021 increased 1.3% to$11.2 million compared to$11.1 million for the three months endedMarch 31, 2020 , primarily driven by higher expenses across the cost of revenues and G&A expense activity categories, partially offset by lower expenses across the R&D and selling and marketing expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other - Private Assets segment Adjusted EBITDA expenses would have decreased 2.2% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . 29 --------------------------------------------------------------------------------
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 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 toRun 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 fromRun 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 or non-renewal 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 inRun Rate . The actual amount of recurring revenues we will realize over the following 12 months will differ fromRun 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
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. 30
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The following table presents the Run Rates as of the dates indicated and the growth percentages over the periods indicated:
As of March 31, March 31, % 2021 2020 Change (in thousands) Index: Recurring subscriptions$ 634,565 $ 574,132 10.5 % Asset-based fees 503,207 348,218 44.5 % Index total 1,137,772 922,350 23.4 % Analytics 556,997 528,378 5.4 % ESG and Climate 147,334 103,781 42.0 %
All Other - Private Assets 56,900 49,671 14.6 %
Total Run Rate$ 1,899,003 $ 1,604,180 18.4 % Recurring subscriptions total$ 1,395,796 $ 1,255,962 11.1 % Asset-based fees 503,207 348,218 44.5 % Total Run Rate$ 1,899,003 $ 1,604,180 18.4 % TotalRun Rate grew 18.4% to$1,899.0 million as ofMarch 31, 2021 compared to$1,604.2 million as ofMarch 31, 2020 . Recurring subscriptionsRun Rate grew 11.1% to$1,395.8 million as ofMarch 31, 2021 compared to$1,256.0 million as ofMarch 31, 2020 . Adjusting for the impact of foreign currency exchange rate fluctuations, recurring subscriptionsRun Rate would have increased 10.3% as ofMarch 31, 2021 compared toMarch 31, 2020 .Run Rate from asset-based fees increased 44.5% to$503.2 million as ofMarch 31, 2021 from$348.2 million as ofMarch 31, 2020 , primarily driven by higher AUM in ETFs linked toMSCI equity indexes, higher prices in non-ETF indexed funds linked toMSCI indexes and higher prices in futures and options. Partially offsetting the impact of the increase in AUM in ETFs linked toMSCI 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 2.61 as ofMarch 31, 2021 from 2.71 as ofMarch 31, 2020 . As ofMarch 31, 2021 , the value of AUM in ETFs linked toMSCI equity indexes was$1,209.6 billion , up$500.1 billion , or 70.5%, from$709.5 billion as ofMarch 31, 2020 . The increase of$500.1 billion consisted of market appreciation of$353.3 billion and net inflows of$146.8 billion . Index recurring subscriptionsRun Rate grew 10.5% to$634.6 million as ofMarch 31, 2021 compared to$574.1 million as ofMarch 31, 2020 , primarily driven by growth in market cap-weighted index products and reflected growth across all regions and all client segments.Run Rate from Analytics products increased 5.4% to$557.0 million as ofMarch 31, 2021 compared to$528.4 million as ofMarch 31, 2020 , primarily driven by growth in both Multi-Asset Class and Equity Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, AnalyticsRun Rate would have increased 4.7% as ofMarch 31, 2021 .Run Rate from ESG and Climate products increased 42.0% to$147.3 million as ofMarch 31, 2021 compared to$103.8 million as ofMarch 31, 2020 , primarily driven by strong growth in both Ratings and Climate products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and ClimateRun Rate would have increased 38.8% as ofMarch 31, 2021 compared toMarch 31, 2020 .Run Rate from All Other - Private Assets products increased 14.6% to$56.9 million as ofMarch 31, 2021 compared to$49.7 million as ofMarch 31, 2020 , primarily driven by strong growth in both Enterprise Analytics and Global Intel products and growth from new sales of Real Estate Climate Value-at-Risk products. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other - Private AssetsRun Rate would have increased 7.4% as ofMarch 31, 2021 compared toMarch 31, 2020 .
Sales
Sales represents the annualized value of products and services clients commit to purchase fromMSCI and will result in additional operating revenues. Non-recurring sales represent the actual value of the customer agreements entered into during the period and are not a component ofRun Rate . New recurring subscription sales represent additional selling activities, such as new customer agreements, additions to existing agreements or increases in price that occurred during the period and are additions toRun Rate . Subscription cancellations reflect client activities during the period, such as discontinuing products and services and/or reductions in price, resulting in reductions toRun Rate . Net new recurring subscription sales represent the amount of new recurring subscription sales net of subscription cancellations during the period, which reflects the net impact toRun Rate during the period. 31 --------------------------------------------------------------------------------
Total gross sales represent the sum of new recurring subscription sales and non-recurring sales. Total net sales represent the total gross sales net of the impact from subscription cancellations.
The following table presents our recurring subscription sales, cancellations and non-recurring sales by reportable segment for the periods indicated:
Three Months Ended March 31, March 31, % 2021 2020 Change (in thousands) New recurring subscription sales Index$ 20,856 $ 19,054 9.5 % Analytics 12,210 11,218 8.8 % ESG and Climate 11,640 6,994 66.4 % All Other - Private Assets 1,684 1,175 43.3 % New recurring subscription sales total 46,390 38,441 20.7 % Subscription cancellations Index (5,198 ) (5,116 ) 1.6 % Analytics (5,879 ) (8,244 ) (28.7 %) ESG and Climate (1,052 ) (1,503 ) (30.0 %) All Other - Private Assets (698 ) (550 ) 26.9 % Subscription cancellations total (12,827 ) (15,413 )
(16.8 %)
Net new recurring subscription sales Index 15,658 13,938 12.3 % Analytics 6,331 2,974 112.9 % ESG and Climate 10,588 5,491 92.8 % All Other - Private Assets 986 625 57.8 % Net new recurring subscription sales total 33,563 23,028 45.7 % Non-recurring sales Index 11,205 10,283 9.0 % Analytics 2,973 3,265 (8.9 %) ESG and Climate 697 151 361.6 % All Other - Private Assets 886 880 0.7 % Non-recurring sales total 15,761 14,579 8.1 % Gross sales Index$ 32,061 $ 29,337 9.3 % Analytics 15,183 14,483 4.8 % ESG and Climate 12,337 7,145 72.7 % All Other - Private Assets 2,570 2,055 25.1 % Total gross sales$ 62,151 $ 53,020 17.2 % Net sales Index$ 26,863 $ 24,221 10.9 % Analytics 9,304 6,239 49.1 % ESG and Climate 11,285 5,642 100.0 % All Other - Private Assets 1,872 1,505 24.4 % Total net sales$ 49,324 $ 37,607 31.2 % 32
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A significant portion of
Retention Rate
The following table presents our Retention Rate by reportable segment for the periods indicated: Three Months Ended March 31, 2021 2020 Index 96.6% 96.3% Analytics 95.8% 93.7% ESG and Climate 97.0% 94.1% All Other - Private Assets 95.1% 95.7% Total 96.3% 95.0% The annual Retention Rate represents the retained subscriptionRun Rate (subscriptionRun Rate at the beginning of the fiscal year less actual cancels during the year) as a percentage of the subscriptionRun Rate at the beginning of the fiscal year. Retention Rate is an important metric because subscription cancellations decrease ourRun 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 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 subscriptionRun 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 ourRun 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 or critical accounting estimates since the end of the fiscal year endedDecember 31, 2020 .
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 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. 33 --------------------------------------------------------------------------------
Senior Notes and Credit Agreement
We have an aggregate of$3,900.0 million in Senior Notes outstanding and a$500.0 million undrawn Revolving Credit Agreement with a syndicate of banks. OnApril 12, 2021 , we paid$518.2 million , which included a premium of$18.2 million , for the pre-maturity redemption all of the outstanding 2026 Senior Notes. See Note 7, "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, andWells 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 ofMarch 31, 2021 , our Consolidated Leverage Ratio was 3.53:1.00 and our Consolidated Interest Coverage Ratio was 7.57:1.00. As ofMarch 31, 2021 , there were no amounts drawn and outstanding under the Revolving Credit Agreement. 34 -------------------------------------------------------------------------------- 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$1,035.4 million , or 58.9%, of our total revenue for the trailing 12 months endedMarch 31, 2021 , approximately$375.2 million , or 40.3%, of our consolidated operating income for the trailing 12 months endedMarch 31, 2021 , and approximately$1,058.0 million , or 23.2%, of our consolidated total assets (excluding intercompany assets) and$688.3 million , or 13.6%, of our consolidated total liabilities, in each case as ofMarch 31, 2021 . Share Repurchases
The following table provides information with respect to repurchases of the Company's common stock pursuant to open market repurchases:
Average Total Dollar Price Number of Value of Paid Per Shares Shares Three Months Ended Share Repurchased Repurchased (in thousands) March 31, 2021$ 407.70 330$ 134,340 March 31, 2020$ 248.65 1,310$ 325,699
As of
Cash Dividend
OnApril 26, 2021 , the Board of Directors declared a quarterly cash dividend of$0.78 per share for the three months endingJune 30, 2021 . The second quarter 2021 dividend is payable onMay 28, 2021 to shareholders of record as of the close of trading onMay 14, 2021 . Cash Flows As ofMarch 31 ,December 31, 2021 2020 (in thousands)
Cash and cash equivalents
Cash and cash equivalents were$1,747.1 million and$1,300.5 million as ofMarch 31, 2021 andDecember 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 ofMarch 31, 2021 andDecember 31, 2020 ,$473.7 million and$423.3 million , respectively, of the cash and cash equivalents were held by foreign subsidiaries. Repatriation of some foreign cash may be subject to certain withholding taxes in local jurisdictions and other distribution restrictions. The global cash and cash equivalent balances that are maintained will be available to meet our global needs whether for general corporate purposes or other needs, including acquisitions or expansion of our products. We believe that global cash flows from operations, together with existing cash and cash equivalents and funds available under our existing credit facility and our ability to access the debt and capital markets for additional funds, will continue to be sufficient to fund our global operating activities and cash commitments for investing and financing activities, such as material capital expenditures and share repurchases, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect that foreign cash flows from operations, together with existing cash and cash equivalents will continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. 35 -------------------------------------------------------------------------------- Net Cash Provided by (Used In) Operating, Investing and Financing Activities Three Months Ended March 31, 2021 2020 (in thousands) Net cash provided by operating activities$ 215,457 $
112,770
Net cash used in investing activities (10,360 ) (201,638 ) Net cash provided by (used in) financing activities 245,542 (340,081 ) Effect of exchange rate changes (4,013 ) (10,762 ) Net increase (decrease) in cash$ 446,626 $ (439,711 )
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$215.5 million and$112.8 million for the three months endedMarch 31, 2021 and 2020, respectively. The year-over-year increase was primarily driven by higher cash collections from customers. 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.
Cash Flows From Investing Activities
Cash used in investing activities was$10.4 million for the three months endedMarch 31, 2021 compared to$201.6 million for the three months endedMarch 31, 2020 . The year-over-year change was primarily driven by the absence of the$190.8 million equity method investment in Burgiss.
Cash Flows From Financing Activities
Cash provided by financing activities was$245.5 million for the three months endedMarch 31, 2021 compared to cash used in financing activities of$340.1 million for the three months endedMarch 31, 2020 . The year-over-year change was primarily driven by the absence of the 2024 Senior Notes Redemption, lower share repurchases and the impact of higher proceeds from the new senior notes offerings made during the three months endedMarch 31, 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.
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