FACTSET RESEARCH SYSTEMS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of our financial statements
with a narrative from the perspective of our management on our financial
condition, results of operations, liquidity and certain other factors that may
affect our future results. Our MD&A is presented in the following sections:
•Executive Overview
•Key Metrics
•Results of Operations
•Liquidity
•Capital Resources
•Foreign Currency
•Off-Balance Sheet Arrangements
•Share Repurchase Program
•Contractual Obligations
•Dividends
•Significant Accounting Policies and Critical Accounting Estimates
•New Accounting Pronouncements
•Market Trends
•Forward-Looking Factors
The MD&A should be read in conjunction with our 2019 Form 10-K, Current Reports
on Form 8-K and other filings with the Securities and Exchange Commission , and
the consolidated financial statements and related notes included in this
Quarterly Report on Form 10-Q.
Executive Overview
FactSet Research Systems Inc. (the "Company" or "FactSet") is a global provider
of integrated financial information, analytical applications and
industry-leading services for the investment and corporate communities. For over
40 years, global financial professionals have utilized our content and
multi-asset class solutions across each stage of the investment process. Our
goal is to provide a seamless user experience spanning idea generation,
research, portfolio construction, trade execution, performance measurement, risk
management, reporting, and portfolio analysis, in which we serve the front,
middle, and back offices to drive productivity and improved performance. Our
flexible, open data and technology solutions can be implemented both across the
investment portfolio lifecycle or as standalone components serving different
workflows in the organization. We are focused on growing our business throughout
each of our three segments, the Americas , Europe , and Asia Pacific . We primarily
deliver insight and information through the workflow solutions of Research,
Analytics and Trading , Content and Technology Solutions and Wealth.
We currently serve financial professionals, which include portfolio managers,
investment research professionals, investment bankers, risk and performance
analysts, wealth advisors, and corporate clients. We provide both insights on
global market trends and intelligence on companies and industries, as well as
capabilities to monitor portfolio risk and performance and to execute trades. We
combine dedicated client service with open and flexible technology offerings,
such as a configurable desktop and mobile platform, comprehensive data feeds, an
open marketplace and digital portals and application programming interfaces
("APIs"). Our revenue is primarily derived from subscriptions to products and
services such as workstations, analytics, enterprise data, and research
management.
Business Strategy
As a premier financial solutions provider for the global financial community, we
provide workflow solutions and leading analytical applications across the
investment lifecycle to create an open and scalable platform. We bring the
front, middle and back office together to drive productivity and performance
throughout the portfolio lifecycle. Our strategy is focused on growing our
business in each of our three segments which include the Americas , Europe , and
Asia Pacific . We believe this geographical strategic alignment helps us better
manage our resources and concentrate on markets that demand our products. To
execute on our business strategy of broad-based growth across each geographical
segment, we continue to look at ways to create value for our clients by offering
data, products and analytical applications within our key workflow solutions of
Research, Analytics and Trading , Content and Technology Solutions ("CTS") and
Wealth.
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Fiscal 2020 First Quarter in Review
Revenue in the first quarter of fiscal 2020 was $366.7 million , an increase of
4.3% from the prior year comparable period, of which, 4.2% of the increase can
be attributed to organic revenue growth. Revenue growth can be attributed
primarily to Wealth, CTS and Analytics and Trading , due mainly to increased
demand for our wealth workstations, core and premium data feeds and our
portfolio analytics solutions. As of November 30, 2019 , organic annual
subscription value ("organic ASV") plus professional services totaled $1.48
billion , an increase of 4.1% over the prior year comparable period.
Operating income grew 12.6% and diluted earnings per share ("EPS") increased
12.0% compared to the prior year period. This increase in operating income was
primarily driven by revenue growth outpacing the growth of operating expenses on
a year-over-year basis, with revenue growth of 4.3%, as well as a reduction in
bad debt expense, partially offset by an increase in computer-related and
occupancy expenses.
As of November 30, 2019 , employee count was 9,865, up 2.8% in the past 12
months, due primarily to an increase in net new employees of 4.5% in Asia
Pacific and 4.6% in Europe , partially offset by a net decrease of 2.4% in the
Americas . Of our total employees, 6,194 were located in Asia Pacific , 2,363 were
located in the Americas , 1,308 in Europe .
Key Metrics
The following is a review of our key metrics:
As of and for the
Three Months Ended November 30,
(in thousands, except client and user counts and
per share data) 2019 2018 Change
Revenue $ 366.7 $ 351.6 4.3 %
Operating income $ 113.2 $ 100.5 12.6 %
Net income $ 94.0 $ 84.3 11.5 %
Diluted EPS $ 2.43 $ 2.17 12.0 %
Clients 5,601 5,297 5.7 %
Users 126,785 115,209 10.0 %
The table below provides an unaudited reconciliation of ASV to organic ASV:
As of November 30,
(in millions) 2019 2018 Change
As reported ASV(1) $ 1,453.8 $ 1,398.2
Currency impact to ASV 0.3 -
Organic ASV(2) $ 1,454.1 $ 1,398.2 4.0 %
(1)ASV at any given point in time represents the forward-looking revenue for the
next 12 months from all subscription services currently being supplied to
clients and excludes professional service fees, which are not
subscription-based. The professional service fees are $24.1 million and $22.2
million as of November 30, 2019 and 2018, respectively.
(2)Organic ASV excludes ASV from acquisitions and dispositions completed within
the last 12 months, the effects of foreign currency on the current year period
and professional services.
Organic Subscription Value Growth
Organic ASV at any given point in time represents the forward-looking revenue
for the next 12 months from all subscription services currently being supplied
to clients, excludes ASV from acquisitions and dispositions completed within the
last 12 months, the effects of foreign currency on the current year period, and
professional services. With proper notice provided to us, our clients can add
to, delete portions of, or terminate service at any time, subject to certain
contractual limitations. As of November 30, 2019 , our organic ASV totaled $1.45
billion , up 4.0% over the prior year comparable period. As of November 30, 2019 ,
organic ASV plus professional services was $1.48 billion , an increase of 4.1%,
compared to the prior year period.
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The increase in year-over-year organic ASV was due to growth across all of our
geographic segments from increased sales of products and solutions to new and
existing clients, with the majority of the growth related to the Americas ,
followed by Asia Pacific and Europe . ASV growth from our workflow solutions was
primarily driven by Analytics and Trading , CTS and Wealth, partially offset by
higher cancellations focused in Research. ASV growth in Analytics and Trading
was primarily due to increased sales for our portfolio analytics solutions and
risk products. ASV growth in CTS was primarily driven by increased sales in core
and premium data feeds while ASV growth in Wealth was mainly due to increased
workstation sales.
As of November 30, 2019 , ASV from the Americas segment was $907.5 million , an
increase of 3.5% from the prior year period. ASV from the international
operations was $546.2 million as of November 30, 2019 , an increase of 4.8% over
the prior year comparable period. International ASV represents 37.6% of total
ASV as of November 30, 2019 , up from 37.3% in the prior year.
ASV increased in the Americas segment as of November 30, 2019 , compared to the
prior year period, primarily from our Analytics and Trading , CTS, and Wealth,
due to the increasing demand for our integrated analytics and data products. The
ASV increase from our international operations was due to continued growth in
the Analytics and Trading and CTS workflows.
Buy-side and sell-side ASV growth rates for the first quarter of fiscal 2020
were both 4.0%. Buy-side clients account for 83.9% of ASV, which include
traditional asset managers, wealth advisors, corporations, hedge funds,
insurance companies, plan sponsors and fund of funds. The remaining portion of
ASV is derived from sell-side firms that perform M&A advisory work, capital
markets services and equity research.
Client and User Additions
Our total client count was 5,601 as of November 30, 2019 , representing a net
increase of 304 or 5.7% in the last 12 months and a net increase of 27 for three
months ended November 30, 2019 . The increase for both the three and 12 months
ended November 30, 2019 was due to an increase in corporate and wealth
management clients. As part of our long-term growth strategy, we continue to
focus on expanding and cultivating relationships with our existing client base
through sales of workstations, applications, services and content.
As of November 30, 2019 , there were 126,785 professionals using FactSet,
representing a net increase of 11,576 or 10.0% in the last 12 months driven
primarily by Wealth workstation sales. For the three months ended November 30,
2019 , our user count decreased by 37 primarily driven by a decrease in sell side
users.
Annual client retention as of November 30, 2019 was greater than 95% of ASV and
89% when expressed as a percentage of clients. The cancellation rate for the
first quarter of fiscal 2020 was higher than the prior year comparable period.
Cancellations were higher mainly from continued cost pressures among
institutional asset managers and churn within our banking clients. Despite
higher cancellations, our retention rate remains high, which reflects the
strength of our business strategy and the value of the FactSet products, as the
majority of our clients maintain their subscriptions to the FactSet platform
year-over-year. As of November 30, 2019 , our largest individual client accounted
for less than 3% of total subscriptions, and annual subscriptions from our ten
largest clients did not surpass 15% of total client subscriptions.
Returning Value to Stockholders
On November 15, 2019 , our Board of Directors approved a regular quarterly
dividend of $0.72 per share. The cash dividend of $27.1 million was paid on
December 19, 2019 to common stockholders of record at the close of business on
November 29, 2019 . We repurchased 343,000 shares for $84.4 million during the
first quarter of fiscal 2020 under our existing share repurchase program. For
the three months ended November 30, 2019 , we have returned $111.7 million to
stockholders in the form of share repurchases and dividends. Over the last 12
months, we have returned $343.0 million to stockholders in the form of share
repurchases and dividends. As of November 30, 2019 , $154.2 million remains
available for future share repurchases under the existing share repurchase
program.
Capital Expenditures
Capital expenditures in the first quarter of fiscal 2020 were $26.8 million ,
compared to $9.5 million a year ago. Capital expenditures of $8.5 million , or
32%, were primarily related to the purchase of computers and peripherals. The
remainder of our capital expenditures was primarily for the build-out of our new
corporate headquarters in Norwalk, Connecticut .
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Results of Operations
For an understanding of the significant factors that influenced our performance
for the three months ended November 30, 2019 and 2018, the following discussion
should be read in conjunction with the consolidated financial statements and
related notes presented in this Quarterly Report on Form 10-Q.
Three Months Ended November 30,
(in thousands, except per share data) 2019 2018 Change
Revenue $ 366,658 $ 351,640 4.3 %
Cost of services $ 164,957 $ 166,776 (1.1) %
Selling, general and administrative $ 88,515 $ 84,325 5.0 %
Operating income $ 113,186 $ 100,539 12.6 %
Net income $ 93,957 $ 84,296 11.5 %
Diluted earnings per common share $ 2.43 $ 2.17 12.0 %
Diluted weighted average common shares 38,587 38,809
Revenue
Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 Revenue for the three months endedNovember 30, 2019 was$366.7 million , increasing 4.3% compared to the prior year while organic revenue increased by 4.2% compared to the same period a year ago. Organic revenue excludes the effects of acquisitions and dispositions completed in the last 12 months, foreign currency in all periods presented and deferred revenue fair value adjustments from purchase accounting. The increase in revenue was due to growth across all our operating segments for the three months endedNovember 30, 2019 compared to the prior year period, with the majority of the increase in revenue driven from theAmericas , followed byEurope andAsia Pacific . Revenue by Operating Segment Three Months Ended November 30, (in thousands) 2019 2018 Change Americas$ 231,330 $ 222,203 4.1 % % of revenue 63.1 % 63.2 % Europe$ 100,830 $ 97,765 3.1 % Asia Pacific 34,498 31,672 8.9 % International$ 135,328 $ 129,437 4.6 % % of revenue 36.9 % 36.8 % Consolidated$ 366,658 $ 351,640 4.3 % Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 Revenue from ourAmericas segment increased 4.1% to$231.3 million during the three months endedNovember 30, 2019 , compared to$222.2 million from the same period a year ago. This revenue growth was due mainly to increased sales of products and solutions to clients primarily in Wealth,Analytics and Trading , and CTS, partially offset by cancellations. Organic revenue in theAmericas increased 4.1% compared to the same period a year ago. Revenue from ourAmericas operations accounted for 63.1% of our consolidated revenue during the first quarter of fiscal 2020, comparable to the prior year period of 63.2%. European revenue increased 3.1% to$100.8 million during the three months endedNovember 30, 2019 , compared to$97.8 million from the same period a year ago. This revenue growth was due mainly to increased sales of products and solutions to clients primarily inAnalytics and Trading and CTS, partially offset by cancellations. The European organic revenue growth rate was 3.0% for the three months endedNovember 30, 2019 , compared to the same period a year ago.Asia Pacific revenue increased 8.9% to$34.5 million during the three months endedNovember 30, 2019 , compared to$31.7 million from the same period a year ago. This revenue growth was due mainly to increased sales of products and solutions to clients primarily in theAnalytics and Trading and CTS workflows, partially offset by cancellations.Asia Pacific organic revenue increased 8.9% for the three months endedNovember 30, 2019 , compared to the same period a year ago. 27 -------------------------------------------------------------------------------- Table of Contents Revenue by Workflow Solutions The revenue growth across our operating segments for the three months endedNovember 30, 2019 compared to the same period a year ago, was primarily driven by Wealth, CTS andAnalytics and Trading . Revenue growth from Wealth was mainly due to higher sales of our workstation product. The growth in CTS was driven mainly by increased sales of core and premium data feeds.Analytics and Trading also experienced growth due to increased sales of portfolio analytics solutions and risk products. Offsetting these positive growth factors were increased cancellations compared to the prior year period, resulting from continued industry-wide cost pressures and firm consolidations. Operating Expenses Three Months Ended November 30, (in thousands) 2019 2018 Change Cost of services$ 164,957 $ 166,776 (1.1) % Selling, general and administrative 88,515 84,325 5.0 % Total operating expenses$ 253,472 $ 251,101 0.9 % Operating Income$ 113,186 $ 100,539 12.6 % Operating Margin 30.9 % 28.6 % Cost of Services Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 For the three months endedNovember 30, 2019 , cost of services decreased 1.1% to$165.0 million compared to$166.8 million in the same period a year ago, primarily due to a reduction in compensation costs, partially offset by an increase in computer-related expenses. Cost of services, when expressed as a percentage of revenue, was 45.0% during the first quarter of fiscal 2020, a decrease of 240 basis points compared to the same period a year ago. This decrease was primarily due to year-over-year revenue growth, as well as a decrease in employee compensation and data costs, partially offset by an increase in computer-related expenses and stock-based compensation, when expressed as a percentage of revenue. Employee compensation, including stock-based compensation, when expressed as a percentage of revenue, decreased 210 basis points in the first quarter of fiscal 2020, compared to the same period a year ago. This decrease in employee compensation was primarily driven by a shift in headcount distribution from cost of services to SG&A and from our high to lower cost locations. Although net employee headcount grew by 265 employees, over the past 12 months, with the majority of their compensation included in cost of services, the increase was primarily concentrated in our lower cost, centers of excellence, inAsia Pacific . This decrease was partially offset by an increase in stock-based compensation, when expressed as a percentage of revenue, due to a one-time vesting acceleration. Data costs, when expressed as a percentage of revenue, decreased 40 basis points due primarily to revenue growth outpacing the growth in data costs, which remained flat year-over-year. Computer-related expenses, as a percentage of revenue, increased 60 basis points primarily driven by increased costs from cloud-based hosting and licensed software arrangements. Selling, General and Administrative Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 For the three months endedNovember 30, 2019 , SG&A expenses increased 5.0% to$88.5 million , compared to$84.3 million for the same period a year ago, primarily due to employee compensation and occupancy costs, partially offset by a reduction in bad debt expense. SG&A expenses, expressed as a percentage of revenue, were 24.1% during the first quarter of fiscal 2020, an increase of 20 basis points over the prior year period. When expressed as a percentage of revenue, this increase was primarily driven by an increase in employee compensation and occupancy costs, partially offset by a reduction in bad debt expense and travel expenses. Employee compensation, when expressed as a percentage of revenue, increased 50 basis points in the first quarter of fiscal 2020, compared with the same period a year ago. This increase was primarily driven by a shift in headcount distribution from cost of services to SG&A, partially offset by a reduction in employee benefit costs. Occupancy costs increased 50 basis points over the prior year period, when expressed as a percentage of revenue, primarily related to leasing the new corporate headquarters space inNorwalk, Connecticut while we continued to incur lease expense related to the expiring lease of our prior headquarters. Bad debt expense decreased 70 basis points, as a percentage of revenue. Travel expenses decreased 30 basis points as a percentage of revenue, due to an internal focus on cost discipline measures. 28 -------------------------------------------------------------------------------- Table of Contents Operating Income and Operating Margin Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 Operating income increased 12.6% to$113.2 million for the three months endedNovember 30, 2019 compared to$100.5 million in the prior year period. Operating income increased due to due to revenue growth and a reduction in bad debt expense, partially offset by an increase in computer-related expenses and occupancy costs. Operating margin increased to 30.9% during the first quarter of fiscal 2020 compared to 28.6% in the prior year period. The increase in operating margin on a year-over-year basis was primarily due to revenue growth and reductions in employee compensation including stock-based compensation, bad debt expense, data costs and travel expenses, partially offset by higher computer-related expenses, when expressed as a percentage of revenue. Operating Income by Segment Three Months Ended November 30, (in thousands) 2019 2018 Change Americas$ 49,623 $ 43,841 13.2 % Europe 41,218 39,089 5.4 % Asia Pacific 22,345 17,609 26.9 % Total Operating Income$ 113,186 $ 100,539 12.6 % Our operating segments are aligned with how we manage the business, the demographic markets we serve, and how the chief operating decision maker ("CODM") assesses performance. Our internal financial reporting structure is based on three reportable segments, theAmericas ,Europe andAsia Pacific , which we believe helps us better manage the business and view the markets we serve. Sales, consulting, data collection, product development and software engineering are the primary functional groups within each segment. Each segment records compensation expense, including stock-based compensation, amortization of intangible assets, depreciation of furniture and fixtures, amortization of leasehold improvements, communication costs, professional fees, rent expense, travel, office and other direct expenses. Expenditures associated with our data centers, third-party data costs and corporate headquarters charges are recorded by theAmericas segment and are not allocated to the other segments. The centers of excellence, located inIndia andthe Philippines , primarily focus on content collection that benefit all our segments. The expenses incurred at these locations are allocated to each segment based on a percentage of revenue. Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 Americas operating income increased 13.2% to$49.6 million during the three months endedNovember 30, 2019 compared to$43.8 million in the same period a year ago. The increase inAmericas operating income was primarily due to revenue growth of 4.1%, a reduction to compensation expense and bed debt expense, partially offset by computer-related expenses and occupancy costs. Employee compensation decreased primarily due to a net reduction in headcount of 2.4% over the past 12 months, partially offset by annual base salary increases year-over-year. Computer-related expenses increased year-over-year primarily due to increased costs from cloud-based hosting and licensed software arrangements. Occupancy costs increased primarily due to leasing the new corporate headquarters space inNorwalk, Connecticut while we continued to incur lease expense related to the expiring lease of our prior headquarters. European operating income increased 5.4% to$41.2 million during the three months endedNovember 30, 2019 compared to$39.1 million in the same period a year ago. The increase in European operating income was primarily due to revenue growth of 3.1%, partially offset by an increase in employee compensation expense. Employee compensation increased primarily due to a net headcount increase of 4.6% over the past 12 months and annual base salary increases year-over-year.Asia Pacific operating income increased 26.9% to$22.3 million during the three months endedNovember 30, 2019 , compared to$17.6 million in the same period a year ago. The increase in theAsia Pacific operating income was mainly due to revenue growth of 8.9%, partially offset by an increase in compensation expense. Employee compensation increased as a result of a 4.5% increase in ourAsia Pacific workforce in the last 12 months and annual base salary increases year-over-year. 29 -------------------------------------------------------------------------------- Table of Contents Income Taxes, Net Income and Diluted Earnings per Share Three Months Ended November 30, (in thousands, except for per share data) 2019 2018 Change Provision for income taxes$ 14,784 $ 11,647 26.9 % Net income$ 93,957 $ 84,296 11.5 % Diluted earnings per common share $ 2.43$ 2.17 12.0 % Income Taxes Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 For the three months endedNovember 30, 2019 , the provision for income taxes was$14.8 million , an increase of 26.9% from the same period a year ago. The provision increased due to higher operating income and a reduction in income tax benefits for the three months endedNovember 30, 2019 , compared to the prior year period. Income tax benefits for the three months endedNovember 30, 2019 was$5.9 million due to the remeasurement of a foreign net deferred tax position due to changes in the jurisdiction's tax rate, finalizing prior years' tax returns, and windfall tax benefits from stock-based compensation, compared to a$6.4 million benefit in the prior year period due to windfall tax benefits from stock-based compensation and the revision of the one-time transition tax on accumulated earnings and profits of foreign subsidiaries permitted by the TCJA. Net Income and Diluted Earnings per Share Three months endedNovember 30, 2019 compared to three months endedNovember 30, 2018 Net income increased 11.5% to$94.0 million and diluted earnings per share ("EPS") increased 12.0% to$2.43 for the three months endedNovember 30, 2019 , compared to the same period a year ago. Net income and diluted EPS increased primarily due to revenue growth outpacing the growth of operating expenses on a year-over-year basis, partially offset by an increase in the income tax provision. Diluted EPS also benefited from a 0.2 million share reduction in our diluted weighted average shares outstanding compared to the same period a year ago, mainly due to share repurchases, partially offset by the impact from stock options issued. Non-GAAP Financial Measures To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures including organic revenue, adjusted operating margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are show in the tables below. These non-GAAP financial measures should not be considered in isolation from, as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently that we do, limiting the usefulness of those measures for comparative purposes. Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to gauge progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance. The table below provides an unaudited reconciliation of revenue to organic revenue. Three Months Ended November 30, (In thousands) 2019 2018 Change Revenue$ 366,658 $ 351,640 4.3 % Deferred revenue fair value adjustment(1) 1,216 1,350 Currency impact 27 - Organic revenue$ 367,901 $ 352,990 4.2 %
(1)Deferred revenue fair value adjustments from purchase accounting.
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Table of Contents The table below provides an unaudited reconciliation of operating income, operating margin, net income and diluted EPS to adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted EPS.
Three Months Ended November 30,
(In thousands, except per share data) 2019(1) 2018(2) Change
Operating income $ 113,186 $ 100,539 12.6 %
Intangible asset amortization 5,152 5,893
Deferred revenue fair value adjustment 1,216 1,350
Other items 5,168 3,484
Adjusted operating income $ 124,722 $ 111,266 12.1 %
Adjusted operating margin 33.9 % 31.5 %
Net income $ 93,957 $ 84,296 11.5 %
Intangible asset amortization(3) 4,181 4,792
Deferred revenue fair value adjustment(4) 987 1,098
Other items(5) 4,011 2,832
Income tax items (3,481) (1,709)
Adjusted net income $ 99,655 $ 91,309 9.1 %
Diluted earnings per common share $ 2.43 $ 2.17 12.0 %
Intangible asset amortization 0.11 0.12
Deferred revenue fair value adjustment 0.03 0.03
Other items 0.10 0.07
Income tax items (0.09) (0.04)
Adjusted diluted earnings per common share $ 2.58 $ 2.35 9.8 %
Weighted average common shares (Diluted) 38,587 38,809
(1)Operating income, net income and diluted EPS in the first quarter of fiscal
2020 were adjusted to exclude (i) intangible asset amortization (ii) deferred
revenue fair value adjustments from purchase accounting, and (iii) other items
primarily related to severance, stock-based compensation acceleration,
professional fees related to infrastructure upgrade activities, and facilities
costs.
(2)Operating income, net income and diluted EPS in the first quarter of fiscal
2019 were adjusted to exclude (i) intangible asset amortization (ii) deferred
revenue fair value adjustments from purchase accounting, and (iii) other items
primarily related to severance, stock-based compensation acceleration, and
professional fees.
(3)The intangible asset amortization was recorded net of a tax impact of $1.0
million in the first quarter of fiscal 2020 compared to $1.1 million for the
first quarter of fiscal 2019.
(4)The deferred revenue fair value adjustment was recorded net of a tax impact
of $0.2 million in the first quarter of fiscal 2020 compared to $0.3 million for
the first quarter of fiscal 2019.
(5)The other items were recorded net of a tax impact of $1.2 million for the
first quarter of fiscal 2020 compared to $0.7 million for the first quarter of
2019.
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Liquidity
The table below, for the periods indicated, provides selected cash flow
information:
Three Months Ended November 30,
(in thousands) 2019 2018
Net cash provided by operating activities $ 95,791 $ 46,320
Capital expenditures(1) (26,780) (9,526)
Free cash flow(2) $ 69,011 $ 36,794
Net cash used in investing activities(1) $ (27,143) $ (7,309)
Net cash used in financing activities $ (94,955) $ (75,005)
Cash and cash equivalents at end of period $ 336,217 $ 170,378
(1)Included in net cash used in investing activities during each fiscal period
reported.
(2)Free cash flow is defined as cash provided by operating activities, which
includes the cash cost for taxes and changes in working capital, less capital
expenditures.
Cash and cash equivalents aggregated to $336.2 million as of November 30, 2019 ,
compared to $359.8 million as of August 31, 2019 . Our cash and cash equivalents
decreased $23.6 million during the first three months of fiscal 2020, primarily
due to $84.4 million in share repurchases, $27.3 million in dividend payments,
$26.8 million of capital expenditures, and $0.4 million net increase in
investments (net of investment proceeds). These cash outflows were partially
offset by cash inflows of $95.8 million of net cash provided by operating
activities, $16.7 million in proceeds from the exercise of employee stock
options and $2.7 million increase from the effects of foreign currency
fluctuation on cash balances.
Net cash used in investing activities was $27.1 million in the first three
months of fiscal 2020, representing a $19.8 million increase from the same
period a year ago. This increase was due primarily to $17.3 million of higher
capital expenditures and a $2.6 million reduction in net proceeds from
investments (net of purchases).
Net cash used by financing activities was $95.0 million in the first three
months of fiscal 2020, representing a $20.0 million increase in cash used by
financing activities from the same period a year ago. The increase in cash used
in financing activities was primarily due to a $19.7 million increase in share
purchases and a $3.0 million increase in dividend payments, partially offset by
$2.8 million increase in proceeds from employee stock plans.
We expect that for at least the next 12 months, our operating expenses will
continue to constitute a significant use of cash. As of November 30, 2019 , our
total Cash and cash equivalents worldwide was $336.2 million with $574.2 million
in outstanding borrowings (net of $0.8 million of unamortized debt issuance
costs). The total available cash and cash equivalents held in bank accounts
located within the Americas is $114.2 million , Europe includes $171.2 million
(predominantly within the UK , France , and Germany ) and the remaining $50.8
million is held in the Asia Pacific segment. We believe our liquidity (including
cash on hand, cash from operating activities and other cash flows that we expect
to generate) within each geographic segment will be sufficient to meet our
short-term and long-term operating requirements, as they occur, including
working capital needs, capital expenditures, dividend payments, stock
repurchases, growth objectives and other financing activities. In addition, we
expect existing foreign cash, cash equivalents and cash flows from operations to
continue to be sufficient to fund our foreign operating activities and cash
commitments for investing activities, such as capital expenditures, for at least
the next 12 months, and thereafter, for the foreseeable future.
Free cash flow generated in the three months ended November 30, 2019 was $69.0
million , an increase of 87.6% compared to a year ago. Free cash flow is the
result of $95.8 million of net cash provided by operating activities, partially
offset by $26.8 million in capital expenditures. The increase in free cash flow
was primarily driven by a decrease in net working capital for the three months
ended November 30, 2019 , compared to the prior year period, primarily due to
improved cash collections with a decrease in our days sales outstanding ("DSO")
to 37 days compared to 42 days in the same period a year ago and timing of
payments, as well as an increase in net income. This increase was partially
offset by higher capital expenditures for the build-out of new office space for
some of our locations and increased investments in technology for the three
months ended November 30, 2019 , compared to the prior year period.
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Capital Resources
Capital Expenditures
Capital expenditures in the first quarter of fiscal 2020 were $26.8 million ,
compared to $9.5 million a year ago. Capital expenditures of $8.5 million , or
32%, were primarily related to the purchase of computers and peripherals. The
remainder of our capital expenditures was primarily for the build-out of the new
corporate headquarters in Norwalk, Connecticut .
Capital Needs
Long-Term Debt
2019 Credit Agreement
On March 29, 2019 , the Company entered into the 2019 Credit Agreement (the "2019
Credit Agreement") between FactSet, as the borrower, and PNC Bank, National
Association ("PNC"), as the administrative agent and lender. The 2019 Credit
Agreement provides for a $750.0 million revolving credit facility (the "2019
Revolving Credit Facility"). FactSet may request borrowings under the 2019
Revolving Credit Facility until its maturity date of March 29, 2024 . The 2019
Credit Agreement also allows FactSet, subject to certain requirements, to
arrange for additional borrowings with PNC for an aggregate amount up to $500.0
million , provided that any such request for additional borrowings must be in a
minimum amount of $25.0 million .
FactSet borrowed $575.0 million of the available $750.0 million provided by the
2019 Revolving Credit Facility, resulting in $175.0 million available to be
withdrawn. FactSet is required to pay a commitment fee using a pricing grid
currently at 0.10% based on the daily amount by which the available balance in
the 2019 Revolving Credit Facility exceeds the borrowed amount. All outstanding
loan amounts are reported as Long-term debt within the Consolidated balance
sheets at August 31 . 2019. The principal balance is payable in full on the
maturity date.
The fair value of the Company's long-term debt was $575.0 million as of
November 30, 2019 , which the Company believes approximates the carrying amount
as the terms and interest rate approximate market rates given its floating
interest rate basis. Borrowings under the loan bear interest on the outstanding
principal amount at a rate equal to the daily LIBOR rate plus a spread using a
debt leverage pricing grid, currently at 0.875%. For the three months ended
November 30, 2019 and 2018, the Company recorded interest expense of $4.2
million and $4.7 million on its outstanding debt amounts, respectively. For the
three months ended November 30, 2019 and 2018. The weighted average interest
rate on amounts outstanding under our credit facilities was 2.59% and 3.35% as
of November 30, 2019 and August 31, 2019 , respectively. Interest on the loan
outstanding is payable quarterly, in arrears, and on the maturity date.
During fiscal 2019, FactSet incurred approximately $0.9 million in debt issuance
costs related to the 2019 Credit Agreement. These costs were capitalized as loan
origination fees and are amortized into interest expense ratably over the term
of the 2019 Credit Agreement.
The 2019 Credit Agreement contains covenants and requirements restricting
certain FactSet activities, which are usual and customary for this type of loan.
In addition, the 2019 Credit Agreement requires that FactSet maintains a
consolidated net leverage ratio, as measured by total net funded debt/EBITDA
below a specified level as of the end of each fiscal quarter. The Company was in
compliance with all the covenants and requirements within the 2019 Credit
Agreement as of November 30, 2019 .
Letters of Credit
From time to time, we are required to obtain letters of credit in the ordinary
course of business. Approximately $2.9 million of standby letters of credit have
been issued in connection with our leased office spaces as of November 30, 2019 .
These standby letters of credit utilize the same covenants included in the 2019
Credit Agreement, refer to Note 14 Debt for more information.
Foreign Currency
Foreign Currency Exposure
Certain wholly-owned subsidiaries within the Europe and Asia Pacific segments
operate under a functional currency different from the U.S. dollar. The
financial statements of these foreign subsidiaries are translated into U.S.
dollars using period-end rates of exchange for assets and liabilities and
average exchange rates for revenue and expenses. Translation gains and losses
that arise from translating assets, liabilities, revenue and expenses of foreign
operations are recorded in accumulated other comprehensive income (loss) as a
component of stockholders' equity.
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Our foreign currency exchange exposure is related to our operating expense base
in countries outside the Americas , where approximately 76% of our employees were
located as of November 30, 2019 . During the three months ended November 30, 2019
and 2018, foreign currency movements increased operating income by $1.0 million
and $1.7 million , respectively.
Foreign Currency Hedges
As of November 30, 2019 , we maintained the following foreign currency forward
contracts to hedge its exposures:
•Euro - foreign currency forward contracts to hedge approximately 50% of its
Euro exposure through the third quarter of fiscal 2020, and 25% of its exposure
during the fourth quarter of fiscal 2020
•British Pound Sterling - foreign currency forward contracts to hedge
approximately 50% of its British Pound Sterling exposure through the third
quarter of fiscal 2020 and 25% of its exposure through the fourth quarter of
fiscal 2020
•Indian Rupee - foreign currency forward contracts to hedge approximately 50% of
its Indian Rupee exposure through the third quarter of fiscal 2020, and 25% of
its exposure through the fourth quarter of fiscal 2020
•Philippine Peso - foreign currency forward contracts to hedge approximately 75%
of its Philippine Peso exposure through the fourth quarter of fiscal 2020
As of November 30, 2019 , the gross notional value of foreign currency forward
contracts to purchase Philippine Pesos and Indian Rupees with U.S. dollars was
?1.0 billion and Rs906.4 billion , respectively. The gross notional value of
foreign currency forward contracts to purchase U.S. dollars with Euros and
British Pound Sterling was €21.7 million and £12.8 million, respectively.
A loss on derivatives of $0.7 million was recorded into operating income for the
three months ended November 30, 2019 , compared to a loss on derivatives of $0.4
million in the same period a year ago.
Off-Balance Sheet Arrangements
At November 30, 2019 and August 31, 2019 , we had no off-balance sheet financing
or other arrangements with unconsolidated entities or financial partnerships
(such as entities often referred to as structured finance or special purpose
entities) established for purposes of facilitating off-balance sheet financing,
other debt arrangements, or other contractually limited purposes.
Share Repurchase Program
Repurchases will be made from time to time in the open market and privately
negotiated transactions, subject to market conditions. In the first quarter of
fiscal 2020, we repurchased 343,000 shares for $84.4 million under our existing
share repurchase program compared to 275,000 shares for $60.4 million in the
same period a year ago. For the three months ended November 30, 2019 , we have
returned $111.7 million to stockholders in the form of share repurchases and
dividends. Over the last 12 months, we have returned $343.0 million to
stockholders in the form of share repurchases and dividends. As of November 30,
2019 , $154.2 million remains available for future share repurchases under the
existing share repurchase program.
Contractual Obligations
Fluctuations in our operating results, the degree of success of our accounts
receivable collection efforts, the timing of tax and other payments, as well as
necessary capital expenditures to support growth of our operations will impact
our liquidity and cash flows in future periods. The effect of our contractual
obligations on our liquidity and capital resources in future periods should be
considered in conjunction with the factors mentioned here. As of August 31,
2019 , we had total purchase commitments of $69.9 million . There were no material
changes in our purchase commitments during the first three months of fiscal
2020.
As disclosed earlier in the Capital Resources section of this MD&A, FactSet
entered into the 2019 Credit Agreement on March 29, 2019 and borrowed $575.0
million . The loan balance of $575.0 million remains outstanding as of
November 30, 2019 . Refer to the Capital Resources section of the MD&A for a
discussion on our Long-term debt borrowings.
There were no other significant changes to our contractual obligations during
the first three months of fiscal 2020.
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Dividends
On November 15, 2019 , our Board of Directors approved a regular quarterly
dividend of $0.72 per share. The cash dividend of $27.1 million was paid on
December 19, 2019 , to common stockholders of record at the close of business on
November 29, 2019 . Future cash dividends will depend on our earnings, capital
requirements, financial condition and other factors considered relevant by us
and is subject to final determination by our Board of Directors.
Significant Accounting Policies and Critical Accounting Estimates
We describe our significant accounting policies in Note 3, Summary of
Significant Accounting Policies, of the notes to our consolidated financial
statements included in Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2019 . The accounting policies used in preparing our
consolidated financial statements for the first three months of fiscal 2020 are
applied consistently with those described in our Annual Report on Form 10-K for
the fiscal year ended August 31, 2019 , with the exception of the accounting
guidance adopted in the first quarter of fiscal 2020 related to leases
accounting. Please see Note 15, Leases, of this report for further details on
the adoption of the new leases standard.
We discuss our critical accounting estimates in Management's Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the fiscal year ended August 31, 2019 . There were no
significant changes in our accounting policies or critical accounting estimates
during the first three months of fiscal 2020.
New Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements, in the notes to the consolidated
financial statements for a full description of recent accounting pronouncements,
including the expected dates of adoption, which we include herein by reference.
Market Trends
In the ordinary course of business, we are exposed to financial risks involving
the volatility of equity markets as well as foreign currency and interest rate
fluctuations.
Shift from Active to Passive Investment Management
Approximately 83.9% of our ASV is derived from our investment management
clients. The prosperity of these clients is tied to equity assets under
management. An equity market decline not only depresses assets under management
but also could cause a significant increase in redemption requests to move money
out of equities and into other asset classes. Moreover, a shift from active
investment management to passive investment management can result in lower
demand for our services. Our investment banking clients that provide M&A
advisory work, capital markets services and equity research, account for
approximately 16.1% of our ASV. A significant portion of this revenue relates to
services deployed by large, bulge-bracket banks. Credit continues to impact many
of the large banking clients due to the amount of leverage deployed in past
operations. Our clients could also encounter similar issues. A lack of
confidence in the global banking system could cause declines in M&A funded by
debt. Additional uncertainty, consolidation and business failures in the global
investment banking sector could adversely affect our financial results and
future growth. Regardless, the size of banks in general is shrinking as they
deleverage their balance sheets and adjust their expense bases to future revenue
opportunities. Our revenue may decline if banks, including those involved in
merger activity, significantly reduce headcount in the areas of corporate M&A,
capital markets and equity research to compensate for the challenges faced by
other departments.
Brexit
OnJune 23, 2016 , voters in theUnited Kingdom approved an advisory referendum to withdraw from theEuropean Union ("Brexit"). OnMarch 29, 2017 , theUnited Kingdom invoked Article 50 of the Lisbon Treaty, formally starting negotiations with theEuropean Union . OnOctober 17, 2019 , a new Brexit deal was agreed between theEuropean Union and theUK Government (the "Withdrawal Agreement Bill"). OnOctober 22, 2019 theUK Parliament approved the Withdrawal Agreement Bill but rejected the timing of its implementation. OnDecember 20, 2019 , members ofParliament voted in favor of the Withdrawal Agreement Bill. Provided theEuropean Parliament also approves the Withdrawal Agreement Bill, theUK will formally leave theEuropean Union onJanuary 31, 2020 . Following such departure, theUK will enter a transition period untilDecember 31, 2020 . During this transition period, theUK will still follow all the EU's rules and regulations, will remain in the single market and the customs union, and will permit the free movement of people. A no-deal Brexit could still result, as the Withdrawal Agreement Bill prohibits any extension to the transition period beyond the end of 2020. The political and economic instability created by the Brexit vote has caused, and may continue to cause, significant volatility in global financial markets. At this time, we cannot predict the impact that Brexit will have on our business as it will depend, in part, on the longer-term outcome of tariff, trade, regulatory and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect our operations and financial results. While we evaluate our own risks and 35 -------------------------------------------------------------------------------- Table of Contents uncertainty related to Brexit, we will continue to partner with our clients to help them navigate the fluctuating international markets. Markets in Financial Instruments Directive ("MiFID") MiFID II built upon many of the initiatives introduced through MiFID and is intended to help improve the functioning of theEuropean Union single market by achieving a greater consistency of regulatory standards. MiFID originally became effective in 2007 and was enhanced through adoption of MiFID II, which became effective inJanuary 2018 . We continue to monitor the impact in theEuropean Union of MiFID II on the investment process and trade lifecycle, as well as any impact of MiFID II on non-European Union countries. We also continue to review the application of key MiFID II requirements in the event of a no-deal Brexit in light of a recent publication by theEuropean Securities and Markets Authority. We plan to work with our clients to navigate the MiFID II requirements. Forward-Looking Factors Forward-Looking Statements In addition to current and historical information, this Quarterly Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements based on management's current expectations, estimates, forecasts and projections about industries in which we operate and the beliefs and assumptions of management. All statements that address expectations, guidance, outlook or projections about the future, including statements about our strategy for growth, product development, revenue, future financial results, anticipated growth, market position, subscriptions, expected expenditures, trends in our business and financial results, are forward-looking statements. Forward-looking statements may be identified by words like "expects," "believes", "anticipates," "plans," "intends," "estimates", "projects," "should," "indicates," "continues," "may" and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions. Many factors, including those discussed more fully elsewhere in this Quarterly Report on Form 10-Q or in any of our other filings with theSecurities and Exchange Commission , could cause results to differ materially from those stated. These factors include, but are not limited to: the ability to integrate newly acquired companies, clients and businesses; strains on resources as a result of growth, the volatility and stability of global securities markets, including declines in equity or fixed income returns impacting the buying power of investment management clients; the ability to hire and retain qualified personnel; the maintenance of our leading technological position and reputation; failure to maintain or improve our competitive position in the marketplace; fraudulent, misappropriation or unauthorized data access, including cyber-security and privacy breaches; failures or disruptions of telecommunications, data centers, network systems, facilities, or the Internet; uncertainty, consolidation and business failures in the global investment banking industry; the continued shift from active to passive investing, the negotiation of contract terms with vendors, data suppliers and landlords; the retention of clients and the attraction of new ones; the absence ofU.S. or foreign governmental regulation restricting international business; the unfavorable resolution of tax assessments and legal proceedings; and legislative and regulatory changes in the environments in which we and our clients operate. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws as found in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in this MD&A above and those listed in Part 1 Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 . We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Quarterly Report to reflect actual results or future events or circumstances. Business Outlook The following forward-looking statements reflect our expectations as ofDecember 19, 2019 . Given the number of risk factors, uncertainties and assumptions discussed in Part 1 Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 , actual results may differ materially. We do not intend to update our forward-looking statements until our next quarterly results announcement, other than in publicly available statements. 36 -------------------------------------------------------------------------------- Table of Contents Fiscal 2020 Expectations: - Organic ASV plus professional services is expected to increase in the range of$65 million and$85 million over fiscal 2019. - GAAP revenue is expected to be in the range of$1.49 billion and$1.50 billion . - GAAP operating margin is expected to be in the range of 28.5% and 29.5%. - Adjusted operating margin is expected to be in the range of 31.5% and 32.5%. - FactSet's annual effective tax rate is expected to be in the range of 17.0% and 17.5%. - GAAP diluted EPS is expected to be in the range of$8.70 and$9.00 . Adjusted diluted EPS is expected to be in the range of$9.85 and$10.15 . Both GAAP operating margin and GAAP diluted EPS guidance do not include certain effects of any non-recurring benefits or charges that may arise in fiscal 2020. 37
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