Introduction and Basis of Presentation | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Introduction and Basis of Presentation | 1. INTRODUCTION AND BASIS OF PRESENTATION |
Organization |
MSCI Inc., together with its wholly-owned subsidiaries (the “Company” or “MSCI”), is a global provider of investment decision support tools, including indexes, portfolio risk and performance analytics and multi-asset class market risk analytics products and services. The Company’s flagship products are its global equity indexes and environmental, social and governance (“ESG”) products marketed under the MSCI and MSCI ESG Research brands, its private real estate benchmarks marketed under the IPD brand, its portfolio risk and performance analytics covering global equity markets marketed under the Barra brand, its multi-asset class, market and credit risk analytics marketed under the RiskMetrics and Barra brands and its performance reporting products and services offered to the investment consultant community marketed under the InvestorForce brand. |
On March 17, 2014, MSCI Inc. entered into a definitive agreement to sell Institutional Shareholder Services Inc. (“ISS”). As a result, the Company reported the operating results of ISS in “Income from discontinued operations, net of income taxes” in the Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012. As a result of this change, the Company now operates as one segment. Unless otherwise indicated, the disclosures accompanying these consolidated financial statements reflect the Company’s continuing operations. |
The Company completed the sale of ISS on April 30, 2014. See Note 3, “Dispositions and Discontinued Operations,” for further details. |
Basis of Presentation |
The consolidated financial statements include the accounts of MSCI Inc. and its wholly-owned subsidiaries. The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock unless it does not control the entity. It is also the Company’s policy to consolidate any variable interest entity for which the Company is the primary beneficiary, of which the Company has none, as required by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 810-10, “Consolidations.” For investments in any entities in which the Company owns 20% or less of the outstanding voting stock and significant influence does not exist, such investments are carried at cost. |
Revision |
In connection with the preparation of the Company’s unaudited condensed consolidated financial statements for the three months ended June 30, 2014, the Company determined that it had understated its net tax liabilities in certain years prior to December 31, 2012. As a result of these errors, the Company has recorded the following corrections to its Consolidated Statement of Financial Condition as of December 31, 2013: (i) an $11.3 million decrease to beginning retained earnings, (ii) a $0.7 million decrease to additional paid in capital, (iii) a $12.8 million decrease to prepaid taxes, (iv) a $13.6 million increase to long-term deferred tax liabilities and (v) a $14.3 million increase to goodwill. In accordance with the accounting guidance found in ASC Subtopic 250-10, “Accounting Changes and Error Corrections,” the Company has revised its Consolidated Statement of Financial Condition as of December 31, 2013 and the Consolidated Statement of Cash Flows for the year ended December 31, 2013 to reflect these corrections. |
In accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” the Company assessed the materiality of the adjustments and concluded that these corrections were not material to any of its previously issued financial statements. The Company also concluded that its compliance with debt covenants would not have been affected by these adjustments. |
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Accordingly, the Company has revised the Consolidated Statement of Financial Condition as of December 31, 2013 from amounts previously reported as follows: |
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| | As Previously | | | Adjustment | | | As Revised | |
Reported |
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Prepaid taxes | | $ | 27,333 | | | $ | (12,765 | ) | | $ | 14,568 | |
Total current assets | | $ | 637,035 | | | $ | (12,765 | ) | | $ | 624,270 | |
Goodwill | | $ | 1,798,821 | | | $ | 14,343 | | | $ | 1,813,164 | |
Total assets | | $ | 3,134,537 | | | $ | 1,578 | | | $ | 3,136,115 | |
Deferred taxes | | $ | 221,054 | | | $ | 13,595 | | | $ | 234,649 | |
Total liabilities | | $ | 1,558,173 | | | $ | 13,595 | | | $ | 1,571,768 | |
Additional paid in capital | | $ | 1,073,893 | | | $ | (736 | ) | | $ | 1,073,157 | |
Retained earnings | | $ | 770,256 | | | $ | (11,281 | ) | | $ | 758,975 | |
Total shareholders’ equity | | $ | 1,576,364 | | | $ | (12,017 | ) | | $ | 1,564,347 | |
Total liabilities and shareholders’ equity | | $ | 3,134,537 | | | $ | 1,578 | | | $ | 3,136,115 | |
The Company has revised the Consolidated Statement of Cash Flows for the year ended December 31, 2013 from amounts previously reported as follows: |
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| | As Previously | | | Adjustment | | | As Revised | |
Reported |
| | (in thousands) | |
Excess tax benefits from share-based compensation | | $ | (2,633 | ) | | $ | 736 | | | $ | (1,897 | ) |
Net cash provided by operating activities | | $ | 320,447 | | | $ | 736 | | | $ | 321,183 | |
Excess tax benefits from share-based compensation | | $ | 2,633 | | | $ | (736 | ) | | $ | 1,897 | |
Net cash (used in) provided by financing activities | | $ | (145,848 | ) | | $ | (736 | ) | | $ | (146,584 | ) |
The Company has revised the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011 from amounts previously reported as follows: |
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| | As Previously | | | Adjustment | | | As Revised | |
Reported |
| | (in thousands) | |
As of December 31, 2011 | | | | | | | | | | | | |
Retained earnings | | $ | 363,461 | | | $ | (11,281 | ) | | $ | 352,180 | |
Total shareholders’ equity | | $ | 1,305,432 | | | $ | (11,281 | ) | | $ | 1,294,151 | |
For the year ended December 31, 2013 | | | | | | | | | | | | |
Excess tax benefits from share-based compensation | | $ | 2,633 | | | $ | (736 | ) | | $ | 1,897 | |
As of December 31, 2013 | | | | | | | | | | | | |
Additional paid in capital | | $ | 1,073,893 | | | $ | (736 | ) | | $ | 1,073,157 | |
Total shareholders’ equity | | $ | 1,576,364 | | | $ | (12,017 | ) | | $ | 1,564,347 | |
Significant Accounting Policies |
Basis of Financial Statements and Use of Estimates |
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require the Company to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the deferral and recognition of revenue, research and development and software capitalization, the allowance for doubtful accounts, impairment of long-lived assets, accrued compensation, income taxes and other matters that affect the consolidated financial statements and related disclosures. The Company believes that estimates used in the preparation of these consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. |
Inter-company balances and transactions are eliminated in consolidation. |
Revenue Recognition |
In general, the Company applies SEC Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition,” in determining revenue recognition. Accordingly, the Company recognizes revenue when all the following criteria are met: |
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| • | | The Company has persuasive evidence of a legally binding arrangement, | | | | | | | | | |
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| • | | Delivery has occurred, | | | | | | | | | |
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| • | | Client fee is deemed fixed or determinable, and | | | | | | | | | |
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| • | | Collection is probable. | | | | | | | | | |
When a sales arrangement requires the delivery of more than one product and service, revenue is recognized pursuant to the requirements of ASC Subtopic 605-25, “Revenue Arrangements with Multiple Deliverables.” Under the provisions of ASC Subtopic 605-25, elements within a multi-deliverable arrangement should be considered separate units of accounting if all of the following criteria are met: |
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| • | | The delivered items have value to the client on a standalone basis. The items have value on a standalone basis if they can be sold separately by any vendor or the client could resell the delivered items on a standalone basis; and | | | | | | | | | |
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| • | | If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor. | | | | | | | | | |
The Company provides products and services to its clients under various software and non-software related arrangements. The Company has signed contracts with substantially all clients that set forth the fees to be paid for its products and services. Further, the Company regularly assesses the receivable balances for each client for collectability. The Company’s application service license arrangements generally do not include acceptance provisions, which generally allow a client to test the solution for a defined period of time before committing to the license. If a license agreement includes an acceptance provision, the Company does not recognize subscription revenues until the earlier of the receipt of a written client acceptance or, if not notified by the client that it is cancelling the license agreement, the expiration of the acceptance period. |
The Company’s subscription agreements for non-software-related application services include provisions that, among other things, allow clients, for no additional fee, to receive updates and modifications that may be made from time to time when and if available, for the term of the agreement, which is typically one year. These arrangements do not provide the client with the right to take possession of the application at any time. For sales arrangements with multiple deliverables, which may include application service subscription and professional services associated with implementation and other services, the Company evaluates each deliverable in these multiple-element arrangements to determine whether it represents a separate unit of accounting and allocates revenue accordingly. |
In most cases, the Company recognizes revenues from subscription arrangements ratably over the term of the license agreement pursuant to contract terms. The contracts state the terms under which these fees are to be calculated. The fees are recognized as the Company supplies the product and service to the client over the license period and are generally billed in advance, prior to the license start date. When implementation services are included, the Company recognizes revenues allocated to the subscription ratably from the date the application is put into production to the end of the license period. Revenues associated with the implementation services are recognized ratably over the useful life of those services. For products and services whose fees are based on estimated assets under management linked to the Company’s indexes, or contract values related to futures and options, the Company recognizes revenues based on estimates from independent third-party sources or the most recently reported information from the client. Revenues from subscription agreements for the receipt of periodic benchmark reports, digests, and other publications, which are most often associated with the Company’s real estate benchmark business, are recognized upon delivery of such reports or data updates. |
The Company’s software-related arrangements do not require significant modification or customization of any underlying software applications being licensed. Accordingly, the Company recognizes software revenues pursuant to the requirements of ASC Subtopic 985-605, “Software-Revenue Recognition.” The Company’s subscription agreements for software products include provisions that, among other things, would allow clients to receive unspecified, when and if available, software upgrades for no additional fee as well as the right to use the software products with maintenance and technical support for the term of the agreement, which is typically one year. Software agreements may include other consulting and professional services. In accordance with ASC Subtopic 985-605, “Software Revenue Recognition,” the Company does not have vendor specific objective evidence (“VSOE”) for these elements and therefore begins to recognize software related revenue ratably over the term of the license agreement once delivered. |
Adjustment to Revenues |
During the year ended December 31, 2012, as a result of a one-time adjustment, the Company recorded a $5.2 million cumulative revenue reduction to correct an error related to revenues previously reported through December 31, 2011. The effect of recording this adjustment in the first quarter of 2012 resulted in a one-time decrease to the energy and commodity analytics products revenues in the Company’s Consolidated Statement of Income and an increase in deferred revenues in the Company’s Consolidated Statement of Financial Condition. It was determined that under ASC Subtopic 985-605, the Company incorrectly established VSOE for certain energy and commodity analytics products and as a result should not have been recognizing a substantial portion of the revenue immediately upon delivery or renewal of a time based subscription license, the terms of which are generally one year. Rather, the entire license fee should have been recognized ratably over the term of the license. As such, the Company made the cumulative adjustment effective January 1, 2012 and started recognizing revenue related to all contracts still in effect as of this date ratably over the remainder of the term. The Company began recognizing revenue ratably over the contract term for any new contracts entered into on or after January 1, 2012. Based upon an evaluation of all relevant factors, management believes the correcting adjustment did not have a material impact on the Company’s previously reported results and, accordingly, has determined that restatement of previously issued financial statements is not necessary. |
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Share-Based Compensation |
Certain of the Company’s employees have received share-based compensation under certain compensation programs. The Company’s compensation expense reflects the fair value method of accounting for share-based payments under ASC Subtopic 718-10, “Compensation-Stock Compensation.” ASC Subtopic 718-10 requires measurement of compensation cost for equity-based awards at fair value and recognition of compensation cost over the service period, net of estimated forfeitures. |
The fair value of MSCI restricted stock units (“RSUs”) is measured as the closing price of MSCI’s common stock on the date prior to grant. Restricted stock units subject to performance conditions (“PSUs”) are based on performance measures that impact the amount of shares that each recipient will receive upon vesting. PSUs are granted at fair market value, which is measured as the closing price of MSCI’s common stock on the date prior to grant. |
The fair value of MSCI standard stock options is determined using the Black-Scholes valuation model and the single grant life method. Under the single grant life method, option awards with graded vesting are valued using a single weighted-average expected option life. The fair value of MSCI stock options that contain stock price contingencies is determined using a Monte Carlo simulation model, which creates a normal distribution of future stock prices, which is then used to value the awards based on their individual terms. |
Based on interpretive guidance related to share-based compensation, the Company’s policy is to accrue the estimated cost of share-based awards that are granted to retirement-eligible employees over the course of the prior year in which they were earned rather than expensing the awards on the date of grant. A portion of the awards granted to employees consist of PSUs. The Company bases initial accruals of compensation cost on the estimated number of units for which the requisite service is expected to be rendered. If the estimated number of units changes from previous estimates, the cumulative effect on current and prior periods of a change is recognized in compensation cost in the period of the change. |
Research and Development |
The Company accounts for research and development costs in accordance with several accounting pronouncements, including ASC Subtopic 730-10, “Research and Development.” ASC Subtopic 730-10 requires that research and development costs generally be expensed as incurred. The majority of the Company’s research and development costs are incurred in developing, reviewing and enhancing the methodologies and data models offered within its product portfolio. |
The Company applies the provisions of ASC Subtopic 350-40, “Internal Use Software,” and accounts for the cost of computer software developed for internal use by capitalizing qualifying costs, which are substantially incurred during the application development stage. The amounts capitalized include external direct costs of services used in developing internal-use software and for payroll and payroll-related costs of employees directly associated with the development activities. Additionally, costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements provide additional functionality to the software. The Company capitalized $8.3 million and $3.3 million of costs related to software developed for internal use in the Consolidated Statement of Financial Condition for the years ended December 31, 2014 and 2013, respectively. |
Capitalized software development costs are amortized on a straight-line basis over the estimated useful life of the related product, which is typically three to five years, beginning with the date the software is placed into service. |
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Costs incurred in the preliminary and post-implementation stages of our products are expensed as incurred. |
Income Taxes |
Income tax expense is provided for using the asset and liability method, under which deferred tax assets and deferred tax liabilities are determined based on the temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. |
The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions in which it is required to file income tax returns. The Company recorded additional tax expense related to open tax years, which the Company’s management believes is adequate in relation to the potential for assessments. These amounts have been recorded in “Other non-current liabilities” on the Consolidated Statement of Financial Condition. The Company’s management believes the resolution of tax matters will not have a material effect on the Company’s consolidated financial condition. However, to the extent the Company is required to pay amounts in excess of its reserves, a resolution could have a material impact on its Consolidated Statement of Income for a particular future period. In addition, an unfavorable tax settlement could require use of cash and result in an increase in the effective tax rate in the period in which such resolution occurs. |
Deferred Revenue |
Deferred revenues represent amounts billed to customers for products and services in advance of delivery. The Company’s clients generally pay subscription fees annually or quarterly in advance. Deferred revenue is generally amortized ratably over the service period as revenue recognition criteria are met. Where the service period has not begun and the client has not paid or the contract has not been renewed, deferred revenues and accounts receivable are not recognized. |
Goodwill |
Goodwill is recorded as part of the Company’s acquisitions of businesses when the purchase price exceeds the fair value of the net tangible and separately identifiable intangible assets acquired. The Company’s goodwill relates to the acquisitions of Barra, Inc. (“Barra”), RiskMetrics Group, Inc. (“RiskMetrics”), Measurisk, LLC (“Measurisk”), IPD Group Limited (“IPD”), Investor Force Holdings, Inc. (“InvestorForce”) and Governance Holdings Co. (“GMI Ratings”). The Company’s goodwill is not amortized, but rather is subject to an impairment test each year, or more often if conditions indicate impairment may have occurred, pursuant to ASC Topic 350, “Intangibles—Goodwill and Other.” |
The Company tests goodwill for impairment on an annual basis on July 1 and on an interim basis when certain events and circumstances exist. The testing for impairment is performed at the reporting unit level, which is deemed to be at the level of the MSCI business segments. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit with its respective book value. If the estimated fair value exceeds the book value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below book value, however, further analysis is required to determine the amount of impairment. Additionally, if the book value of a reporting unit is zero or a negative value and it is determined that it is more likely than not that the goodwill is impaired, further analysis is required. As the estimated fair value of its reporting units exceeded their respective book value on the testing dates, no impairment of goodwill was recorded during the years ended December 31, 2014, 2013 and 2012. |
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Intangible Assets |
Intangible assets consist of those definite-lived intangibles from the acquisitions of Barra in June 2004, RiskMetrics in June 2010, Measurisk in July 2010, IPD in November 2012, InvestorForce in January 2013 and GMI Ratings in August 2014. The Company amortizes definite-lived intangible assets over their estimated useful lives. Definite-lived intangible assets are tested for impairment when impairment indicators are present, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. No impairment of intangible assets has been identified during any of the periods presented. The Company has no indefinite-lived intangibles. The intangible assets have remaining useful lives ranging from one to 20 years. |
Foreign Currency Translation |
Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at year-end exchange rates, and income statement accounts are translated at weighted average exchange rates for the year. Gains or losses resulting from translating foreign currency financial statements, net of related tax effects, are reflected in accumulated other comprehensive loss, a separate component of shareholders’ equity. Gains or losses resulting from foreign currency transactions incurred in currencies other than the local functional currency are included in non-operating “Other expense (income), net” on the Consolidated Statement of Income. |
Derivative Instruments |
The Company applies ASC Subtopic 815-10, “Derivatives and Hedging,” which establishes accounting and reporting standards for derivative instruments and hedging activities. The Company may use interest rate swaps and forward contracts on foreign currency to manage risks generally associated with interest rate and foreign exchange rate fluctuations, respectively. The Company’s derivative financial instruments are used as risk management tools and not for speculative or trading purposes. |
For derivative instruments that are designated and qualify as hedging instruments for accounting purposes, the Company documents and links the relationships between the hedging instruments and hedged items. The Company also assesses and documents at the hedge’s inception whether the derivatives used in hedging transactions were effective in offsetting changes in fair values associated with the hedged items. ASC Subtopic 815-10 provides that, for derivative instruments that qualify for hedge accounting being used to hedge cash flows, changes in the fair value are recognized in accumulated other comprehensive income (loss), a separate component of shareholders’ equity, until the hedged item is recognized in earnings. In addition, the ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. |
The Company manages foreign currency exchange rate risk through the use of derivative financial instruments comprised principally of forward contracts on foreign currency which are not designated as hedging instruments for accounting purposes. The objective of the derivative instruments is to minimize the income statement impact associated with assets and liabilities that are denominated in certain foreign currencies. Derivative instruments that do not qualify for hedge accounting are carried at fair value on the Consolidated Statement of Financial Condition with gains and losses recorded in the Consolidated Statement of Income. |
Property, Equipment and Leasehold Improvements |
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and fixtures and computer and communications equipment are amortized using the straight-line method over the estimated useful life of the asset. Estimates of useful lives are as follows: furniture & fixtures – seven years; computer and related equipment – three to five years. Leasehold improvements are amortized on a straight-line basis over one to 21 years, which represents the lesser of the estimated useful life of the asset or, where applicable, the remaining term of the lease. |
Treasury Stock |
The Company holds repurchased shares of common stock as treasury stock. The Company accounts for treasury stock under the cost method and includes treasury stock as a component of shareholders’ equity. |
In accordance with ASC Subtopic 505-10, “Equity,” the Company accounts for the capped accelerated share repurchase (“ASR”) agreements into which it enters as two separate transactions: (a) as shares of common stock acquired in a treasury stock transaction recorded on the acquisition date of the shares and (b) as a forward contract indexed to the Company’s own common stock. As such, the Company accounts for the shares that it receives under capped ASR agreements during the period as a repurchase of its common stock for the purpose of calculating earnings per common share. The Company has determined that the forward contracts indexed to the Company’s common stock meet all the applicable criteria for equity classification in accordance with ASC Subtopic 815-10 and, therefore, the capped ASR agreements are not accounted for as derivative instruments. |
Allowance for Doubtful Accounts |
The Company licenses its products and services to investment managers mainly in the United States, Europe and Asia (primarily Hong Kong and Japan). The Company evaluates the credit of its customers and does not require collateral. The Company maintains an allowance on customer accounts where estimated losses may result from the inability of its customers to make required payments. |
An allowance for doubtful accounts is recorded when it is probable and estimable that a receivable will not be collected. Changes in the allowance for doubtful accounts from December 31, 2011 to December 31, 2014 were as follows: |
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| | Amount | | | | | | | | | |
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Balance as of December 31, 2011 | | $ | 857 | | | | | | | | | |
Addition to provision | | | 403 | | | | | | | | | |
Amounts written off, net of recoveries | | | (296 | ) | | | | | | | | |
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Balance as of December 31, 2012 | | $ | 964 | | | | | | | | | |
Addition to provision | | | 876 | | | | | | | | | |
Amounts written off, net of recoveries | | | (560 | ) | | | | | | | | |
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Balance as of December 31, 2013 | | $ | 1,280 | | | | | | | | | |
Addition to provision | | | 452 | | | | | | | | | |
Amounts written off, net of recoveries | | | (875 | ) | | | | | | | | |
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Balance as of December 31, 2014 | | $ | 857 | | | | | | | | | |
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Accrued Compensation |
The Company makes significant estimates in determining its accrued non-stock based compensation and benefits expenses. A significant portion of the Company’s employee incentive compensation programs are discretionary. Each year end the Company determines the amount of discretionary cash bonus expense. The Company also reviews compensation and benefits expenses throughout the year to determine how overall performance compares to management’s expectations. These and other factors, including historical performance, are taken into account in accruing discretionary cash compensation estimates quarterly. |
Concentrations |
For the year ended December 31, 2014, BlackRock, Inc. accounted for 10.6% of the Company’s operating revenues. For the years ended December 31, 2013 and 2012, no single customer accounted for 10.0% or more of the Company’s operating revenues. |