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 Results of Operations Foreign Currency Liquidity Capital Resources
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 Executive Overview FactSet is a provider of integrated financial information and analytical applications to the global investment community. We combine content regarding companies and securities from major markets all over the globe into a single online platform of information and analytics. By consolidating content from hundreds of databases with powerful analytics, FactSet supports the investment process from initial research to published results for buy and sell-side professionals. These professionals include portfolio managers, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers and fixed income professionals. Our applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alphatesting, portfolio optimization and simulation, real-time news and quotes and tools to value and analyze fixed income securities and portfolios. With Microsoft Office integration, wireless access and customizable options, we offer a complete financial workflow solution. Our revenues are derived from month-to-month subscriptions to services, databases and financial applications. Investment management clients account for 83.1% of our annual subscription value ("ASV") and the remainder from investment banking firms who perform M&A advisory work and equity research. As of
May 31, 2014, we employed 6,372 employees, up 8% from a year ago. Of these employees, 1,960 were located in the U.S., 749 in Europeand 3,663 in the Asia Pacificregion. Approximately 55% of employees are involved with content collection, 22% work in product development, software and systems engineering, another 20% conduct sales and consulting services and the remaining 3% provide administrative support. We are honored to have recently been named one of FORTUNE's 100 Best Companies to Work For, marking our fifth appearance on that list in the last six years, recognized as one of the UK's"Best Workplaces" by the Great Placeto Workฎ Institute UKfor the sixth consecutive year, listed in Crain's " Chicago'sBest Places to Work" for the second year in a row and included in the "2014 Best Places to Work in France" list for the third consecutive year. Our employees are FactSet's most valuable asset and recognition in these surveys is based on their feedback and underscores our dedication to the development and satisfaction of our employees. We were pleased to see that our ASV growth rate accelerated to 7% and EPS grew to $1.21in the just completed third quarter of fiscal 2014. We continued to capitalize on our opportunities as evidenced by adding 30 net new clients and 620 net new users in the past three months. The current quarter marks our 16th consecutive quarter delivering double-digit diluted EPS growth. We continued to return capital to stockholders through an 11% increase in our quarterly dividend from $0.35to $0.39in May 2014. Our ASV, or annual subscription value, grew $12.3 millionduring the current quarter, increasing the organic growth rate from 6% to 7%. ASV totaled $932 millionat May 31, 2014, which includes $12 millionin acquired ASV from the recent acquisitions of Revere Data and Matrix in September and December of 2013, respectively. Our third quarter results included expanding revenues from both our U.S and non-U.S. operations by 6% and 12%, respectively, and an increase in net user count of 620 as compared to 61 during the same period of fiscal 2013. Annual client retention was greater than 95% of ASV, and on a client base, the annual retention rate was 93% of clients at May 31, 2014, marking the first increase in client retention since fiscal 2011. We continued to improve and develop products and solutions to enhance our FactSet workstation and make it more valuable to our end users as evidenced by a new agreement we entered into with QUICK Corporation, a Japan-based financial information services company in the Nikkei Inc. Group. Together, FactSet and QUICK will work to integrate the Nikkei Group'shigh-quality content with our own global content and workflow solutions in order to provide a premium FactSet service for redistribution within our Asiasegment. Lastly, we announced that Phil Snowwas named President, effective July 1, 2014, and reports directly to Philip Hadley, Chairman and CEO. Mr. Snowjoined FactSet in 1996 and most recently held the role of Senior Vice President, Director of U.S. InvestmentManagement Sales. In his new role, Mr. Snowwill have oversight and management responsibility for both our sales and operations teams and will execute on the strategies that drive our mission which is to provide best-of-breed products and client service to financial professionals worldwide. 29 --------------------------------------------------------------------------------
Results of Operations For an understanding of the significant factors that influenced our performance during the three and nine months ended
May 31, 2014and 2013, respectively, the following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Three Months Ended Nine Months Ended May 31, May 31, (in thousands, except per share data) 2014 2013 Change 2014 2013 Change Revenues $ 231,761 $ 214,6138.0 % $ 681,671 $ 638,7796.7 % Cost of services 90,661 76,721 18.2 % 261,165 226,148 15.5 % Selling, general and administrative 68,063 66,255 2.7 % 197,673 213,746 (7.5 )% Operating income 73,037 71,637 2.0 % 222,833 198,885 12.0 % Net income $ 51,532 $ 53,367(3.4 )% $ 156,136 $ 147,6745.7 % Diluted earnings per common share $ 1.21 $ 1.200.8 % $ 3.62 $ 3.309.7 % Diluted weighted average common shares 42,615 44,485 43,170 44,784 Revenues Revenues for the three months ended May 31, 2014were $231.8 million, up 8.0% compared to the prior year. For the first nine months of fiscal 2014, revenues increased 6.7% to $681.7 million. Our revenue growth drivers during fiscal 2014 were increases in clients and users, continued growth in our Portfolio Analytics suite of products, rising sales of our wealth management workflow solution, expansion of proprietary content, price increases, and incremental revenues from the recent acquisitions of Revere and Matrix partially offset by user count decreases from our investment banking clients.
Growth in the Number of Clients and Users of FactSet
The third quarter of fiscal 2014 represented our strongest third quarter for new client acquisitions since fiscal 2007, as we added 30 net new clients, compared to four during the same period a year ago. Net new client adds in the past 12 months totaled 222, which included 43 clients from the Revere and Matrix acquisitions, bringing our total client count to 2,662 at
May 31, 2014. At FactSet, we do not count every single company that uses our services as a client. Companies that are on trial are not included, nor are clients with ASV of less than $24,000. The addition of new clients is important to us as we anticipate that it lays the groundwork for future additional services, consistent with our strategy of increasing sales of workstations, applications and content at existing clients. At May 31, 2014, our largest individual client accounted for 2% of total subscriptions and annual subscriptions from the ten largest clients did not surpass 15% of our total client subscriptions, consistent with August 31, 2013. In addition, our annual client retention rate remained at greater than 95% of ASV, consistent with last year. As a percentage of actual clients, our annual retention rate improved to 93% of clients, up from 92% a year ago and represents our first increase in that metric since August 2011. We believe these statistics illustrate the power of our business model, as the large majority of clients maintain their subscriptions to FactSet throughout each year. At May 31, 2014, there were 52,483 professionals using FactSet, an increase of 620 users in the past three months, up 2,967 users from a year ago. During the quarter, our investment management clients added 632 net new users, while we experienced a small reduction of 12 users within our investment banking clients. This minor reduction in sell-side users marks the lowest quarterly level of contraction we have observed in recent periods. In the past 12 months, our investment management client base added 3,208 users, while our investment banking clients contracted by 241 users. We believe that although headcount at our investment banking clients is still under pressure, we continue to make gains on the buy-side, which constitutes approximately 83.1% of our ASV. The average ASV from investment management users is also significantly higher than from investment banking users, so we believe that a shift towards more internal research at investment management firms is a long-term positive ASV trend for FactSet. Lastly, while the user count at our investment banking clients has decreased by 241 in the past 12 months, ASV from these same clients has increased by $0.8 millionover the same period. 30 --------------------------------------------------------------------------------
Continued Use of our Portfolio Analytics (PA) Suite of Products
Our Portfolio Analytics suite of products, including our Fixed Income in PA product, continues to be well received within our client base and was a source of revenue growth during the third quarter. The PA suite includes separate products and covers a range of workflows around portfolios. The number of clients and users subscribing to PA, Fixed Income in PA, SPAR,
Risk and Portfolio Publishingexperienced continued growth as this suite is comprehensive and includes highly desired applications for portfolio attribution, risk, quantitative analysis, portfolio publishing and returns based, style analysis. We continue to see existing clients expand their use of our PA and buy more services that integrate within the portfolio analytics suite. Clients continue to find value in our ability to serve as a single solution for their analytics, risk and publishing needs, over a variety of asset classes, which enables them to analyze securities and portfolios based on a variety of asset classes.
Sales of our Wealth Management Workflow Solution
Consistent with the past two fiscal quarters, wealth management continued to be a growing area for us during the just completed third quarter as our wealth management clients and users continue to benefit from the ability to tailor our workstations to accommodate their needs and improve their competitive position. In the past nine months, we have focused product suite and sales teams to address the workflows of these particular types of clients. Aiming to deliver the value-added service and comprehensive, easy to generate reports, our wealth management clients are using more of our PA suite of products in a manner similar to institutional investors. This has helped continue our trend of increasing quarterly wealth management users each quarter for the past five years.
Expansion of our Proprietary Content
We continue to be successful in licensing our proprietary FactSet data, especially FactSet Fundamentals and FactSet Estimates as our global content sales team pursues expanding the distribution of our content. This type of data is licensed in feed form and includes Ownership, Transcripts, M&A and Corporate Hierarchy data. Data feeds are consumed by a wide-range of clients, including existing large FactSet clients and some outside of our core client base that do not manage money or provide sell side services. StreetAccount, our condensed news product, is an application that sells strongly across all FactSet user types and continues to be in demand due to the ability of our clients to receive up-to-the-minute news offered both through and outside the FactSet workstation. In addition, during
May 2014, we signed an agreement with Quick Corp.to begin to develop a premium FactSet service for redistribution in Asiaby combining our industry-leading global content and workflow solutions with the Nikkei Group'shigh-quality content.
Incremental Revenue from the Acquisitions of Revere and Matrix
September 1, 2013, we acquired the assets of Revere, whose taxonomy and supply chain relationship data will serve to complement our commitment to provide our clients with unique and insightful content sets. At the time of the acquisition, Revere had annual subscriptions of $4.9 million. During the second quarter of fiscal 2014, we acquired Matrix, whose primary line of business is to provide intelligence to the UKfinancial services industry. At the time of the acquisition, Matrix had annual subscriptions of $7.3 million. For the three and nine months ended May 31, 2014, the acquisitions of Revere and Matrix added combined incremental revenue of $3.7 millionand $8.2 million, respectively. Partially offsetting the positive revenue drivers discussed above was the underperformance of our global banking and brokerage clients, who represent 16.9% of our total ASV. During the three and nine months ended May 31, 2014, ASV from these sell-side clients decreased by $1.5 millionand $7.1 million, respectively, as they continue to face challenges in their industry. During the just completed third quarter, user count at our investment banking clients decreased by 12 professionals for a total reduction of 241 in the past twelve months. Part of this decline was due to large banks reducing their number of users when their long-term contracts were renewed in order to match the level of deployment with their current headcounts. While investment banking was not an area of growth for us during the recent quarter, our investment banking clients fared better in this third quarter than in recent quarters. We are also encouraged by the uptick in the both the IPO and M&A marketplaces. 31 --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended May 31, May 31, (in thousands) 2014 2013 Change 2014 2013 Change U.S.
$ 156,241 $ 146,9726.3 % $ 463,419 $ 436,9476.1 % % of revenues 67.4 % 68.5 % 68.4 % 68.4 % Europe $ 58,265 $ 52,35811.3 % $ 167,993 $ 155,6387.9 % Asia Pacific 17,255 15,283 12.9 % 50,259 46,194 8.8 % International $ 75,520 $ 67,64111.6 % $ 218,252 $ 201,8328.1 % % of revenues 32.6 % 31.5 % 32.0 % 31.6 % Consolidated $ 231,761 $ 214,6138.0 % $ 681,671 $ 638,7796.7 %
Three months ended
Revenues from our U.S. segment increased 6.3% to
$156.2 millionduring the three months ended May 31, 2014compared to the same period a year ago. Our third quarter fiscal 2014 revenue growth rate in the U.S. of 6.3% reflects the continued growth in the number of users and clients of FactSet, use of our Portfolio Analytics products, increased data feed sales of our proprietary content, $1.4 millionof incremental revenue from the acquisition of Revere and price increases. The U.S. growth was partially offset by a decrease in net user count at our investment banking clients as they continue to reduce user populations and closely monitor vendor spend as they perceive market opportunities. International revenues in the third quarter of fiscal 2014 were $75.5 million, an increase of 11.6% from $67.6 millionin the prior year period. Excluding foreign currency effects and the Matrix acquisition completed in the second quarter of fiscal 2104, the year over year growth rates were 6.5% in Europeand 14% in Asia Pacific. The acquisition of Matrix in the second quarter added $2.3 millionof revenues to the European segment in the just completed third quarter while foreign currency exchange rate fluctuations added 50 basis points to the European revenue growth rate. The 6.5% rise in European revenue was attributable to increases in client count, growth in the number of PA subscriptions, sales of global proprietary content and price increases. Asia Pacificrevenues grew to $17.3 million, up 12.9% from a year ago. The foreign currency impact attributable to the change in the value of the Japanese Yen compared to the U.S. dollar decreased revenues by $0.2 millionduring the third quarter of fiscal 2014. Year over year Asia Pacificrevenue growth was primarily due to growth in our global content offering, net new user and client growth over the last 12 months, our ability to sell additional services to existing clients and the increased demand of our real-time news and quotes that service the needs of a global investor.
Nine months ended
Our U.S. segment revenue increased 6.1% to
$463.4 millionduring the first nine months of fiscal 2014 as compared to $436.9 millionin the same period a year ago. Fiscal year to date incremental revenues from the Revere acquisition of $3.9 millionincreased our U.S. segment growth rate by 90 basis points. This revenue growth rate reflects the addition of users and clients, sales of our PA suite of products, the continued commitment to our wealth management solutions, increased demand for our proprietary content, and price increases partially offset by user count declines at our investment banking clients. International revenues also increased 8.1% to $218.3 millionduring the nine months ended May 31, 2014. Excluding foreign currency effects and the Matrix acquisition completed in fiscal 2104, the year over year growth rates were 5.0% in Europeand 12.2% in Asia Pacific. The acquisition of Matrix added $4.3 millionof revenues to the European segment during fiscal 2014 while foreign currency added $0.3 million. European revenues advanced 5.0% due to sales of our advanced applications, price increases and user and client growth partially offset by user declines at investment banking firms. Asia Pacificrevenue growth, when excluding a $1.6 millionreduction in revenue from a weaker Japanese Yen, was 12.2% year over year, driven by growth in our global content offering and increases in both our user and client counts. 32 --------------------------------------------------------------------------------
Annual Subscription Value (ASV)
ASV, or annual subscription value, is a key metric for us, which we define as a snapshot view of services currently being supplied to clients. ASV at a given point in time represents the forward-looking expected revenues for the next 12 months from all subscription services being supplied to our clients. With proper notice to us, our clients are able to add to, delete portions of, or terminate service at any time. At
May 31, 2014, ASV was $932 million, up 6.8% organically over the prior year, and $12 millionover the past three months. ASV from our U.S. operations was $630 million, up $40 millionfrom a year ago and included $4.9 millionof acquired ASV from Revere. ASV from international operations totaled $302 million, an increase of $28 millionover the past 12 months and included $7.3 millionof acquired ASV from Matrix. The growth in ASV during the third quarter of fiscal 2014 was driven by the net addition of 30 new clients and 620 new users during the current quarter, continued expansion in the use of our PA products, growth in the sales and deployment of our wealth management workflow solutions, sales of proprietary content and a price increase for many of our non-U.S. investment management clients, partially offset by a $1.5 milliondecrease in ASV from our investment banking clients. Operating Expenses Three Months Ended Nine Months Ended May 31, May 31, (in thousands) 2014 2013 Change 2014 2013 Change Cost of services* $ 90,661 $ 76,72118.2 % $ 261,165 $ 226,14815.5 % Selling, general and administrative ("SG&A")** 68,063 66,255 2.7 % 197,673 213,746 (7.5 )% Total operating expenses*** $ 158,724 $ 142,97611.0 % $ 458,838 $ 439,8944.3 % Operating income $ 73,037 $ 71,6372.0 % $ 222,833 $ 198,88512.0 % Operating Margin 31.5 % 33.4 % 32.7 % 31.1 % * Cost of services for the three and nine months ended May 31, 2014include a non-cash pre-tax charge of $1.4 millionrelated to vesting of performance-based options in connection with StreetAccount.
** SG&A expenses for the nine months ended
Cost of Services
Three months ended
For the three months ended
May 31, 2014, cost of services increased 18.2% to $90.7 millioncompared to $76.7 millionin the same period a year ago. Cost of services expressed as a percentage of revenues was 39.1% during the third quarter of fiscal 2014, an increase of 340 basis points over the same prior year period due to a non-cash pre-tax charge of $1.4 millionrelated to vesting of performance-based options granted in 2012 in connection with the acquisition of StreetAccount, higher compensation expense from additional headcount in our engineering, consulting and product development groups, and incremental costs from the Revere and Matrix acquisitions partially offset by lower computer-related expenses, including deprecation. Employee compensation, including stock-based compensation, expressed as a percentage of revenues, increased 360 basis points for the three months ended May 31, 2014compared to the same period a year ago due to the $1.4 millionpre-tax stock-based compensation charge related to vesting of performance-based options, the hiring of new engineers and consultants, the continued expansion of our proprietary content collection operations, the addition of 135 new employees from the acquisitions of Revere and Matrix and base salary increases. Over the last 12 months, we have added 202 net new engineers and 31 net new consultants, as we further develop and enhance our applications and service to our existing client base. In addition, we hired 89 net new employees to collect more content, primarily at our facilities in Indiaand the Philippines. The headcount increases disclosed above exclude the 135 employees acquired from Revere and Matrix. Total headcount, including acquired Revere and Matrix employees, was 6,372 at May 31, 2014, up 8% or 472 people over last year. The $1.4 millioncharge related to vesting StreetAccount performance-based options resulted in a 60 basis point increase in stock-based compensation. The acquisitions of Revere and Matrix increased cost of services, when expressed as a percentage of revenues, by 110 basis points due to compensation paid to the acquired workforce, stock-based compensation from equity based awards granted, incremental third party data costs and amortization of acquired intangible assets. 33
-------------------------------------------------------------------------------- Partially offsetting the growth in cost of services during the third quarter of fiscal 2014 was a reduction in computer-related expenses, including depreciation. Computer-related expenses decreased 50 basis points due to the lower capital expenditures, the continued use of fully depreciated computer equipment and our recent transition to more efficient and cost-effective servers in our data centers.
Nine months ended
Cost of services increased 15.5% to
$261.2 millionfor the nine months ended May 31, 2014compared to the same period a year ago. Expressed as a percentage of revenues, cost of services was 38.3% during fiscal 2014, an increase of 290 basis points from fiscal 2013. The increase was driven by higher employee compensation and incremental costs from the Revere and Matrix acquisitions partially offset by lower computer-related expenses, including deprecation. During fiscal 2014, employee compensation, including stock-based compensation, increased 320 basis points, expressed as a percentage of revenues, as we continued to increase employee headcount, recorded nine months of Revere expenses and approximately six months of Matrix expenses. Since June 1, 2013, we have hired 202 net new software engineers, 31 net new consultants and 89 net new employees for our content collection. Revere and Matrix related expenses during fiscal 2014 increased cost of services, when expressed as a percentage of revenues, by 80 basis points due to compensation paid to the acquired workforce, stock-based compensation from equity based awards granted, incremental third party data costs and amortization of acquired intangible assets. Partially offsetting the growth in cost of services during fiscal 2014 was a reduction in computer depreciation. Computer-related expenses, including computer depreciation and maintenance costs decreased 40 basis points in fiscal 2014 as compared to a year ago due to the continued use of fully depreciated equipment and our transition to more efficient and cost-effective servers in our data centers. .
Selling, General and Administrative
Three months ended
For the three months ended
May 31, 2014, SG&A expenses increased 2.7% to $68.1 millionfrom $66.3 millionin the same period a year ago. SG&A expenses, expressed as a percentage of revenues, decreased 150 basis points to 29.4% during the third quarter of fiscal 2014 due to lower compensation from employees performing SG&A roles partially offset by higher legal fees, more employee travel and entertainment ("T&E") expenses and incremental costs from the Revere and Matrix acquisitions. Employee compensation, expressed as a percentage of revenues, decreased 270 basis points in the third quarter of fiscal 2014 compared to the same period in fiscal 2013 due to a higher percentage of our employee based working in a cost of services capacity versus SGA over the prior year. Of our total employee headcount increase in the past 12 months, 86% was hired by our software engineering, content collection and product development teams, which are included within cost of services. As such, SG&A employee compensation, expressed as a percentage of revenues, has declined compared to the growth in cost of services. The reduction in SG&A expenses during the third quarter of fiscal 2014 was partially offset by higher T&E and legal expenses and incremental costs from the Revere and Matrix acquisitions. T&E expense, expressed as a percentage of revenues, increased 25 basis points in the just completed quarter compared to the same period in fiscal 2013 due to more client visits by our sales teams and increased interoffice travel due to our expanding worldwide presence. Legal fees increased by 75 basis points, expressed as a percentage of revenues, primarily due to the settlement of a claim which resulted in a $1.6 millionpre-tax charge during the current fiscal third quarter.
Nine months ended
SG&A expenses decreased 7.5% to
$197.7 millionduring the nine months ended May 31, 2014compared to the same period a year ago. Expressed as a percentage of revenues, SG&A expenses decreased 450 basis points to 29.0% during fiscal 2014 primarily due to lower employee compensation and the prior year stock-based compensation charge of $15.5 millionfrom vesting Market Metrics performance-based options during the second quarter of fiscal 2013 partially offset by an increase in legal fees as a result of settling a claim during the third quarter fiscal 2014.
Operating Income and Operating Margin
Three months ended
Operating income increased 2.0% to
$73.0 millionfor the three months ended May 31, 2014compared to the prior year period. Our operating margin during the third quarter of fiscal 2014 was 31.5%, down from 33.4% a year ago. The Revere and Matrix acquisitions during fiscal 2014 negatively impacted our operating margin by 120 basis points due to higher employee compensation costs and the amortization of acquired intangibles. Additionally, a pre-tax stock-based compensation charge of $1.4 millionfrom vesting performance-based options and $1.6 millionfrom a legal charge primarily to settle a claim lowered our fiscal 2014 third quarter operating margin by 130 basis points. 34 --------------------------------------------------------------------------------
Nine months ended
Operating income increased 12% to
$222.8 millionduring the first nine months of fiscal 2014 compared to the prior year period. Our operating margin during fiscal 2014 was 32.7%, up from 31.1% a year ago. The acquisitions of Revere and Matrix during fiscal 2014 lowered our fiscal 2014 operating margin by 80 basis points while the pre-tax stock based compensation charge of $1.4 millionand legal fees of $1.6 millionfurther lowered our operating margin by 50 basis points. The Market Metrics performance-based stock option charge of $15.7 millionrecorded in the second quarter of fiscal 2013 reduced our fiscal 2013 year-to-date operating margin by 250 basis points from 33.6% to 31.1%. Operating Income by Segment Three Months Ended Nine Months ended May 31, May 31, (in thousands) 2014 2013 Change 2014 2013 Change U.S. $ 39,081 $ 38,5291.4 % $ 121,806 $ 102,65418.7 % Europe 24,732 25,333 (2.4 )% 75,155 74,275 1.2 % Asia Pacific 9,224 7,775 18.6 % 25,872 21,956 17.8 % Consolidated $ 73,037 $ 71,637 $ 222,833 $ 198,885Our operating segments are aligned with how we, including our chief operating decision maker, manage the business and the demographic markets in which we serve. Our internal financial reporting structure is based on three reportable segments; U.S., Europeand Asia Pacific, which we believe helps us better manage the business and view the markets we serve. Sales, consulting, data collection and software engineering are the primary functional groups within each segment. Each segment records compensation, including stock-based compensation, amortization of intangible assets, depreciation of furniture and fixtures, amortization of leasehold improvements, communication costs, professional fees, rent expense, travel, marketing, office and other direct expenses. Expenditures associated with our data centers, third party data costs and corporate headquarters charges are recorded by the U.S. segment and are not allocated to the other segments. The content collection centers located in Indiaand the Philippinesbenefit all of our segments and thus the expenses incurred at these locations are allocated to each segment based on a percentage of revenues. Operating income from our U.S. business increased 1.4% to $39.1 millionduring the three months ended May 31, 2014compared to $38.5 millionin the same period a year ago. During the nine months ended May 31, 2014, U.S. operating income increased 18.7% to $121.8 million. The second quarter of fiscal 2013 included a $15.7 millionpre-tax charge related to vesting Market Metrics performance-based stock options, which did not recur in fiscal 2014. The increase in operating income is attributed to $9.3 millionof incremental revenues and a decrease in computer depreciation partially offset by increases in employee compensation, T&E expenses and the incremental expenses from the Revere acquisition. U.S. revenue growth was driven by an increase in the number of clients and users of FactSet, the continued use of our advanced applications such as PA, and price increases. Excluding the acquired Revere workforce, U.S. employee headcount increased 5.1% over the prior year leading to higher employee compensation costs during fiscal 2014. Computer-related expenses decreased due to the transition to more efficient and cost-effective servers in our data centers in addition to the continued use of fully depreciated servers. Additional expenses from the acquisition of Revere lowered U.S. operating income by $0.3 millionand $0.7 millionfor the three and nine months ended May 31, 2014. European operating income decreased 2.4% to $24.7 millionduring the three months ended May 31, 2014compared to the same period a year ago. For the nine months ended May 31, 2014, European operating income advanced 1.2% to $75.2 million. European revenues grew 11.3% and 7.9% during the three and nine months ended May 31, 2014, respectively. The European revenue growth was offset by increases in employee compensation and the impact of the Matrix acquisition. Additional expenses from the acquisition of Matrix lowered European operating income by $1.3 millionand $1.7 millionfor the three and nine months ended May 31, 2014. Asia Pacificoperating income increased 18.6% to $9.2 millionduring the three months ended May 31, 2014compared to $7.8 millionin the same period a year ago. For the nine months ended May 31, 2014, Asia Pacificoperating income advanced 17.8% to $25.9 million. The increase in Asia Pacificoperating income in both periods is from incremental revenues year over year partially offset by higher employee compensation and occupancy costs. Asia Pacificrevenues growth of 12.9% and 8.8% during the three and nine months ended May 31, 2014, respectively, was primarily due to our ability to sell our global content, provide additional services to existing clients and new client and user growth over the last 12 months. 35
Income Taxes, Net Income and Diluted Earnings per Share
Three months ended Nine months ended May 31, May 31, (in thousands, except per share data) 2014 2013 Change 2014 2013 Change Provision for income taxes
$ 21,839 $ 18,63117.2 % $ 67,715 $ 52,35729.3 % Net income $ 51,532 $ 53,367(3.4 )% $ 156,136 $ 147,6745.7 % Diluted earnings per share $ 1.21 $ 1.200.8 % $ 3.62 $ 3.309.7 % Effective tax rate 29.8 % 25.9 % 30.3 % 26.2 % Income Taxes
Three months ended
For the three months ended
May 31, 2014, the provision for income taxes increased to $21.8 millioncompared to $18.6 millionin the same period a year ago. The year over year increase in the tax provision was primarily due to the expiration of the U.S. Federal R&D tax credit on December 31, 2013and prior year income tax benefits of $3.3 millionrelated to the R&D tax credit and finalizing prior year tax returns. The effective tax rate for the third quarter of fiscal 2014 was 29.8%, up from 25.9% a year ago. Excluding current quarter income tax benefits of $0.6 millionfrom finalizing prior year tax returns, the fiscal 2014 effective tax rate was 30.5%. If the U.S. Federal R&D tax credit had been re-enacted by May 31, 2014, the annual effective tax rate would have been 28.7%. Excluding income tax benefits of $3.3 millionfrom the year ago third quarter, the fiscal 2013 effective tax was 29.0%.
Nine months ended
For the first nine months of fiscal 2014, the provision for income taxes was
$67.7 million, up 29.3% from $52.4 millionin fiscal 2013. This increase was due to: an 11.9% increase in pre-tax income; the expiration of the U.S. Federal R&D tax credit on December 31, 2013which limited our ability to realize income tax benefits from the R&D credit to only four out of twelve months during fiscal 2014; $6.3 millionin prior year income tax benefits from the reenactment of the R&D credit in January 2013; and our first quarter fiscal 2014 decision to repatriate cash from our wholly owned UKsubsidiary, as the foreign tax credits associated with the distribution were greater than the tax due on the distribution of the foreign earnings.
Net Income and Earnings per Share
Net income decreased 3.4% to
$51.5 millionand diluted earnings per share increased 0.8% to $1.21for the three months ended May 31, 2014. Drivers of the decrease in net income during the third quarter of fiscal 2014 were higher compensation within cost of services, an increase in T&E expenses, added costs from the acquisition of Revere and Matrix, vesting of StreetAccount performance-based options, which reduced net income by $1.0 millionand an after-tax legal charge of $1.1 millionto settle a legal claim partially offset by lower computer depreciation. Net income in the year ago third quarter included income tax benefits of $3.3 millionrelated to the U.S. Federal R&D tax credit and finalizing prior years' tax returns. While net income decreased 3.4% during the third quarter of fiscal 2014, diluted earnings per share grew 0.8% because of a reduction in diluted weighted average shares. Diluted shares outstanding decreased from 44.5 million as of May 31, 2013to 42.6 million primarily due to 3.3 million shares repurchased in the last 12 months partially offset by 1.1 million in employee stock option exercises and a higher FactSet common stock price. During the first nine months of fiscal 2014, net income rose 5.7% to $156.1 millionand diluted earnings per share increased 9.7% to $3.62as compared to $3.30the same period a year ago. Fiscal 2014 net income and diluted EPS results were higher than fiscal 2013 primarily due to the non-cash pre-tax charge of $15.7 millionrelated to the vesting of Market Metrics performance-based stock options. This pre-tax stock-based compensation charge reduced fiscal 2013 net income by $11.0 millionand diluted earnings per share by $0.25.
Certain wholly owned subsidiaries within the European and
Asia Pacificsegments 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 rates for the period for revenues and expenses. Translation gains and losses that arise from translating assets, liabilities, revenues and expenses of foreign operations are recorded in accumulated other comprehensive loss as a component of stockholders' equity. Our non-U.S. dollar denominated revenues expected to be recognized over the next twelve months are estimated to be $24 millionwhile our non-U.S. dollar denominated expenses are $196 million, which together translates into a net foreign currency exposure of $172 millionper year. Our foreign currency exchange exposure is related to our operating expense base in countries outside the U.S., where approximately 69% of our employees were located as of May 31, 2014. During the third quarter of fiscal 2014, foreign currency movements decreased operating income by $1.0 millioncompared to increasing operating income by $0.6 millionduring the same period in the prior year. During the first nine months of fiscal 2014, foreign currency movements decreased operating income by $0.3 millionas compared to having no impact in the prior year. 36 -------------------------------------------------------------------------------- As of May 31, 2014we maintain foreign currency forward contracts to hedge approximately 75% of our Indian Rupee exposure through the fourth quarter of fiscal 2016 and approximately 50% of our Philippines Peso exposure through the second quarter of fiscal 2015. At May 31, 2014the notional principal and fair value of foreign exchange contracts to purchase Indian Rupees with U.S. dollars was Rs.2.8 billionand $1.1 million, respectively. At May 31, 2014the notional principal and fair value of foreign exchange contracts to purchase Philippine Pesos with U.S. dollars was Php408.1millionand $0.1 million, respectively. A $0.1 millionloss on derivatives was recorded into operating income during the third quarter of fiscal 2014 compared to a $0.2 millionloss during the same period in fiscal 2013. During the first nine months of fiscal 2014, a loss on derivatives of $0.3 millionwas recorded into operating income compared to a loss of $0.6 millionin the same period a year ago.
The table below, for the periods indicated, provides selected cash flow information (in thousands): Three Months Ended Nine Months Ended May 31, May 31, 2014 2013 2014 2013 Net cash provided by operating activities
$ 94,995 $ 96,589 $ 193,722 $ 193,627Capital expenditures (1) (3,672 ) (4,204 ) (11,704 ) (13,288 ) Free cash flow (2) $ 91,323 $ 92,385 $ 182,018 $ 180,339Net cash used in investing activities $ (3,706 ) $ (4,512 ) $ (59,524 ) $ (14,899 )Net cash provided by (used in) financing activities $ (61,946 ) $ 2,224 $ (216,276 ) $ (122,890 )Cash and cash equivalents at end of period $ 118,858 $ 242,839
(1) Included in net cash used in investing activities during each fiscal year
(2) We define free cash flow as cash provided by operating activities, which
includes the cash cost for taxes and changes in working capital, less capital
expenditures. The presentation of free cash flow is not intended to be
considered in isolation or as a substitute for the financial information
prepared and presented in accordance with GAAP. We use free cash flow, a
non-GAAP measure, both in presenting our results to stockholders and the
investment community, and in our internal evaluation and management of the
business. Management believes that this financial measure and the information
we provide are useful to investors because it permits investors to view our
performance using the same metric that we use to gauge progress in achieving
our goals. Free cash flow is also an indication of cash flow that may be available to fund further investments in future growth initiatives. Cash and cash equivalents aggregated to
$118.9 millionor 18% of our total assets at May 31, 2014, compared with $242.8 millionor 33% of our total assets at May 31, 2013and $196.6 millionat August 31, 2013or 28% of our total assets. All of our operating and capital expense requirements were financed entirely from cash generated from our operations. Our cash and cash equivalents decreased $77.8 millionduring fiscal 2014 due to $46.9 millionin cash used to acquire Revere and Matrix, $205.2 millionin share repurchases, dividend payments of $44.7 millionand capital expenditures of $11.7 millionpartially offset by cash provided by operations of $193.7 million, $26.8 millionin proceeds from the exercise of employee stock options, $6.8 millionof tax benefits from share-based payment arrangements and $4.3 millionfrom the effects of foreign currency. Free cash flow for the third quarter of fiscal 2014 was $91.3 million, comparable to our record high of $92.4 millionrecorded during the same period of fiscal 2013. Free cash flow generated in the third quarter of fiscal 2014 of $91.3 millionwas attributable to $51.5 millionof net income, $31.0 millionof positive working capital changes and $12.5 millionin non-cash expenses less $3.7 millionin capital expenditures. Working capital improvements of $31.0 millionwere derived from improved accounts receivable collections in the past three months, lower income tax payments and increased accrued compensation based on timing. Consistent with prior years, our days sales outstanding ("DSO") peaked during the second quarter of fiscal 2014, which resulted in our accounts receivable balance increasing by $21.2 millionbetween November 30, 2013and February 28, 2014. As we disclosed in the second quarter Form 10-Q, we expected accounts receivable to return to normal levels during the third quarter of fiscal 2014, which it did as evidenced by an $11.5 milliondecrease in the accounts receivable balance in the past three months. Our DSOs declined from 39 days as of February 28, 2014to 34 days at May 31, 2014. Free cash flow generated over the last twelve months was $253.0 millionand exceeded net income by 22.1%. Included in the twelve month calculation of free cash flow was $269.9 millionof net cash provided by operations less $16.9 millionof capital expenditures. Free cash flow of $253.0 milliongenerated in the last twelve months was the result of higher levels of net income, a reduction in capital expenditures, lower income tax payments, timing of accrued compensation and a reduction in stock-based compensation expense due to the $15.7 millioncharge in fiscal 2013 partially offset by an increase in accounts receivable as our DSOs slipped from 29 days a year ago to 34 days at May 31, 2014. 37
-------------------------------------------------------------------------------- Net cash used in investing activities of
$3.7 millionduring the third quarter of fiscal 2014 represented capital expenditures during the period and were $0.8 millionlower compared to a year ago. In the first nine months of fiscal 2014, net cash used in investing activities was $59.5 million, an increase of $44.6 milliondue to the acquisitions of Revere and Matrix for $46.9 millionpartially offset by a reduction in capital expenditures by $1.6 million. Net cash used in financing activities was $61.9 millionduring the third quarter of fiscal 2014. Of this total $59.0related to the repurchase of 540,000 shares under the existing share repurchase program and $14.7 millionwas from the quarterly dividend payment. Partially offsetting the use of cash were proceeds received from employee stock plans totaling $9.9 millionand related tax benefits of $1.8 million. Net cash used in financing activities was $64.2 millionhigher in the current quarter compared to the prior year because of a $52.9reduction in proceeds from employee stock option exercises and related income tax benefits, higher share repurchases of $9.9 millionand $1.3 millionin higher dividend payments. The proceeds from employee stock exercises and related income tax benefits decreased by $52.9 millionin the third quarter of fiscal 2014 compared to the year ago quarter because the number of employee stock options exercised decreased by 838,172. In the first nine months of fiscal 2014, net cash used in financing activities was $216.3 million, up from $122.9 million. This increase was due to a reduction in the number of employee stock option exercises by 1.2 million shares, which lowered the cash proceeds and tax benefits received by $72.3 million. We expect that for at least the next 12 months, our operating expenses will continue to constitute a significant use of our cash. Furthermore, we expect existing domestic (U.S.) cash to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future. As of May 31, 2014, our total cash and cash equivalents worldwide was $118.9 millionwith no outstanding borrowings. Approximately $19.8 millionof our total available cash and cash equivalents is held in bank accounts located within the U.S., $72.6 millionin Europe(predominantly within the UKand France) and the remaining $26.4 millionis held in Asia Pacific. 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 longer-term operating requirements, as they occur, including working capital needs, capital expenditures, dividend payments, stock repurchases and financing activities. In addition, we expect existing foreign cash, cash equivalent 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. Capital Resources Capital Expenditures Capital expenditures were $3.7 millionfor the quarter ended May 31, 2014, down from $4.2 millionin the same period a year ago. Approximately $3.2 millionor 88% of capital expenditures was for computer equipment including more servers for our existing data centers, purchasing new laptop computers and peripherals for employees, upgrading existing computer systems in our data collection centers in Indiaand the Philippinesand improved telecommunication equipment. During the first nine months of fiscal 2014 capital expenditures were $11.7 millioncompared to $13.3 millionin the comparable prior year period. Of the $11.7 million, 70% or $8.2 millionrelated to computer equipment as we continue to deploy more servers, acquire laptop computers for our growing employee base, upgrade internal telecom equipment and maintain our computer systems in our data collection centers. The remaining 30% was incurred primarily to complete the fit-out of our new office in San Franciscoduring the first quarter of fiscal 2014. Capital Needs We currently have no outstanding indebtedness, other than the letters of credit issued in the ordinary course of business. Approximately $1.8 millionof standby letters of credit have been issued in connection with our current leased office space as of May 31, 2014. These standby letters of credit contain covenants that, among other things, require us to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios. At May 31, 2014, we were in compliance with all covenants contained in the standby letters of credit.
Off-Balance Sheet Arrangements
May 31, 2014and August 31, 2013, 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 or other debt arrangements or for other contractually limited purposes. 38 --------------------------------------------------------------------------------
Share Repurchase Program During the first nine months of fiscal 2014, we repurchased 1,870,000 shares for
$200.7 millionunder the existing share repurchase program. We expect that repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. No minimum number of shares to be repurchased has been fixed. There is no timeframe to complete the repurchase program and it is expected that share repurchases will be paid using existing and future cash generated by operations.
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, 2013, we had total purchase commitments of $50.2 million. There were no material changes in our purchase commitments during the first nine months of fiscal 2014. During February 2014, we signed a new 15-year lease agreement to maintain our presence in New York City. This lease enables us to continue to support our New Yorkbusiness operations into calendar year 2031 and results in incremental future minimum rental payments of $93.7 millionover the non-cancelable lease term. During the third quarter of fiscal 2014, we executed two leases for new office space in Mumbai, Indiaand Austin, Texas, which resulted in additional future minimum rental payments totaling $2.4 millioninto calendar year 2019. Additional lease commitments assumed in connection with the Revere and Matrix acquisitions were immaterial, but did add approximately 11,000 square feet of office space.
With the exception of the new leases entered into in the ordinary course of business, there were no other significant changes to our contractual obligations during the three and nine months ended
May 5, 2014, our Board of Directors approved an 11% increase in the regular quarterly dividend, beginning with the dividend payment in June of 2014 of $0.39per share, or $1.56per share per annum. The cash dividend of $16.4 millionwas paid on June 17, 2014, to common stockholders of record on May 30, 2014. With our dividends and our share repurchases, in the aggregate, we have returned $409 millionto shareholders over the past 12 months. Future cash dividends will be paid using our existing and future cash generated by operations.
Significant Accounting Policies and Critical Accounting Estimates
We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
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, 2013. There were no significant changes in our accounting policies or critical accounting estimates since the end of fiscal 2013.
New Accounting Pronouncements
See Note 3 to the consolidated financial statements for a full description of recent accounting pronouncements, including the expected dates of adoption, which we include here by reference.
In the ordinary course of business, we are exposed to financial risks involving foreign currency and interest rate fluctuations. Major equity indices (e.g., Dow Jones Industrials, Russell 1000, MSCI EAFE, S&P 500 and NASDAQ Composite) continue to experience volatility. Approximately 83% of our annual subscription value 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 could cause a significant increase in redemption requests to move money out of equities and into other asset classes. Moreover, extended declines in the equity markets may reduce new fund or client creation, resulting in lower demand for services from investment managers. Our investment banking clients who perform M&A advisory work and equity research account for approximately 17% of our annual subscription value. A significant portion of these revenues relate 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. Clients could encounter similar problems. A lack of confidence in the global banking system could cause declines in merger and acquisitions funded by debt. Additional uncertainty, consolidation and business failures in the global investment banking sector could adversely affect our financial results and future growth. We service equity research and M&A departments. These are low risk businesses that do not deploy leverage and will likely continue to operate far into the future and should represent a larger percentage of the overall revenues of our clients. 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 revenues may decline if banks including those involved in recent merger activity significantly reduce headcount in the areas of corporate M&A and equity research to compensate for the issues created by other departments. 39
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 regarding future events and our future results that are based on management's current expectations, estimates, forecast and projections about the industries in which we operate and the beliefs and assumptions of our management. All statements, other than statements of historical facts, are statements that could be deemed to be forward-looking statements. These include statements about our strategy for growth, product development, market position, subscriptions and expected expenditures and financial results. Forward-looking statements may be identified by words like "expects," "anticipates," "plans," "intends," "projects," "should," "indicates," "continues," "ASV," "subscriptions," "believes," "estimates," "may" and similar expressions. In addition, any statements that refer to projections of our future financial performance, our anticipated growth, trends in our business and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and not guarantees of future performance and involve a number of risks, uncertainties and assumptions. Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements. We will publicly update forward-looking statements as a result of new information or future events in accordance with applicable
Securities and Exchange Commissionregulations. 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 below. 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.
The following forward-looking statements reflect our expectations as of
June 17, 2014. Given the number of risk factors, uncertainties and assumptions discussed above, 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.
Fourth Quarter Fiscal 2014Expectations
- Revenues are expected to range between
$235 millionand $240 million.
- Operating margin is expected to range between 32.5% and 33.5%, which includes
a 100 basis point reduction from the recent acquisitions of Revere and Matrix.
- The annual effective tax rate is expected to range between 30% and 31% and
assumes that the U.S. Federal R&D tax credit will not be re-enacted by the end
of the fourth quarter of fiscal 2014. - Diluted EPS should range between
$1.30and $1.32. The lapse in the U.S.
Federal R&D tax credit on
EPS range by
Foreign Currency Exchange Risk
We manage our exposure to foreign currency exchange risk through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge currency exposures as well as to reduce earnings volatility resulting from shifts in market rates. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. Interest Rate Risk It is anticipated that the fair market value of our cash and investments will continue to be immaterially affected by fluctuations in interest rates. Preservation of principal is the primary goal of our cash and investment policy. Because we have a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low. 40