ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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:
|
•
|
Off-Balance Sheet Arrangements
|
|
•
|
Share Repurchase Program
|
|
•
|
Contractual Obligations
|
|
•
|
Significant Accounting Policies and Critical Accounting Estimates
|
|
•
|
New Accounting Pronouncements
|
|
•
|
Forward-Looking Factors
|
Executive Overview
FactSet is a leading provider of integrated financial information and analytical applications to the global investment community. We deliver insight and information to investment professionals through our analytics, service, content, and technology. By integrating comprehensive datasets and analytics across asset classes with client data, we support the workflow of both the buy-side and sell-side. These professionals include portfolio managers, wealth managers, research and performance analysts, risk managers, sell-side equity research professionals, investment bankers and fixed income professionals. From streaming real-time data to historical information, including quotes, estimates, news and commentary, FactSet offers unique and third-party content through desktop, wireless, and off-platform solutions. Our wide application suite offers tools and resources including company and industry analyses, full screening tools, portfolio analysis, risk profiles, alpha-testing, portfolio optimization and research management solutions. Recent additions to our offering include a complete services solution focused on verifying, cleaning and loading portfolio data across asset classes, and an execution management system through our acquisition of Portware. Our revenues are derived from subscriptions to products and services such as workstations, analytics, enterprise data and content, research management and trade execution. Investment management (buy-side) clients account for 83.6% of our annual subscription value and the remainder is derived from investment banking firms (sell-side) that perform mergers and acquisitions (“M&A”) advisory work, capital markets services and equity research.
Fiscal 2016
Third
Quarter in Review
FactSet continued its record of producing solid results in the third quarter of fiscal 2016. We reported year over year revenue growth of 13.0% and an increase in diluted earnings per share (“EPS”) of 11.7%. In a challenging market environment, we saw strong growth from our Analytics, Content & Technology Solutions (“CTS”) and Portware businesses. Annual Subscription Value (“ASV”) as of May 31, 2016 totaled $1.156 billion while our organic ASV growth rate increased to 9.3%, compared to 8.9% a year ago. Overall, our buy-side business, which includes traditional asset management clients, hedge funds, wealth managers and Portware, accelerated to 9.6% growth, up over 100 basis points from the prior year period. Conversely, our sell-side, which includes M&A advisory, capital markets and equity research professionals, declined to 8.1% growth as market volatility postponed the buying decisions of our investment banking clients.
As a testament to our broadening suite of premium products and the strength of our business and service model, in May 2016, FactSet was awarded “Best Overall Provider,” "Best Research Provider" and "Best Data Analytics Provider" by Inside Market Data. FactSet was previously awarded Acquisition of the Year in 2014, Best Research Provider in 2014 and 2012, and Best Analytics Provider in 2008, 2009 and 2011.
At our core, FactSet is client-centric and
well-situated to serve a broad range of our users’ needs through our ability to offer enterprise solutions across many workflows, backed with our industry-leading client service. As of May 31, 2016, our employee headcount was 8,100, up 16.5% from a year ago. Of our total employees, 2,358 were located in the U.S., 910 in Europe and 4,832 in the Asia Pacific region. Approximately 55% of our employees are involved with content collection, 23% work in product development, software and systems engineering, another 19% conduct sales and consulting services and the remaining 3% provide administrative support. We are proud that FactSet was recently recognized for the eighth time on
Fortune
’s 100 Best Companies to Work For
®
list and named one of the UK’s “Best Workplaces” by the Great Place to Work® Institute UK for the eighth consecutive year.
As previously announced in the third quarter, we made the decision to exit from our non-core market research business focused on advisor-sold investments and insurance businesses. As such, on May 21, 2016, we entered into a definitive stock purchase agreement (the “Purchase Agreement”) to sell Market Metrics and Matrix Solutions (the “Transaction”). The Transaction is consistent with our long-term strategic direction and demonstrates our commitment to deliver significant value to our shareholders. The Transaction closed on July 1, 2016, at which time we received $165.0 million in cash less estimated working capital and certain adjustments set forth in the Purchase Agreement, including a $9.7 million bonus adjustment amount. Upon the achievement of certain growth targets over the next two years by the market research business that has been sold, we would be entitled to an additional earn-out of $10.0 million.
Key Metrics
The following is a review of our key metrics:
|
|
As of and for the
Three months ended May 31,
|
|
|
|
|
|
(in millions, except client and user counts)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Revenues
|
|
$
|
287.5
|
|
|
$
|
254.5
|
|
|
|
13.0%
|
|
Operating Income
|
|
$
|
89.3
|
|
|
$
|
85.4
|
|
|
|
4.6%
|
|
Net Income
|
|
$
|
66.8
|
|
|
$
|
61.4
|
|
|
|
8.8%
|
|
Diluted EPS
|
|
$
|
1.62
|
|
|
$
|
1.45
|
|
|
|
11.7%
|
|
Free Cash Flow
(2
)
|
|
$
|
88.6
|
|
|
$
|
98.5
|
|
|
|
(10.0)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASV
|
|
$
|
1,156.3
|
|
|
$
|
1,021.2
|
|
|
|
13.2%
(1)
|
|
Clients
|
|
|
3,075
|
|
|
|
2,915
|
|
|
|
5.5%
|
|
Users
|
|
|
63,535
|
|
|
|
58,995
|
|
|
|
7.7%
|
|
|
(1)
|
ASV grew 9.3% organically year over 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 they
permit 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.
|
Annual Subscription Value
Growth
Annual subscription value at any given point in time represents the forward-looking revenues for the next twelve months from all subscription services currently being supplied to clients. With proper notice to us, our clients are able to add to, delete portions of, or terminate service at any time
, subject to certain contractual limitations. ASV totaled $1.156 billion at May 31, 2016, up 9.3% organically over the prior year and an increase of $16.3 million over the second quarter of fiscal 2016. Organic ASV excludes ASV from acquisitions completed within the past 12 months and the effects of foreign currency. Organic ASV continued to grow despite significant market volatility. We have achieved organic ASV growth of $95.2 million over the last 12 months.
Overall, ASV for our buy-side business accelerated to 9.6%, up over 100 basis points from the prior year period while our sell-side business declined to 8.1% growth. The decrease in the sell-side growth rate can be attributed to being more heavily leveraged to workstation and headcount trends. Also contributing to growth this quarter was our annual price increase for clients in the European and Asia Pacific regions. This increase contributed $4.2 million in ASV.
ASV from our U.S. operations was $775.6 million for the third quarter of 2016, up 9.0% organically from a year ago. International (non-U.S.) ASV totaled $380.7 million, up 10.1% organically from a year ago. ASV from our international operations represented 32.9% of our Company-wide total, its highest level in our history. Our European organic ASV achieved a growth rate of 7.8% over the last 12 months while Asia Pacific organic ASV grew by 17.9%. We saw solid growth in our core buy-side client base particularly in the Americas and Europe.
Client and User Additions
As of May 31, 2016, there were 63,535 professionals using FactSet, an increase of 35 users in the third quarter of fiscal 2016. We have increased users by 4,540, or 7.7%, from the third quarter of fiscal 2015. During the third quarter of fiscal 2016, we added 18 net new clients, increasing the number of clients by 5.5% over the prior year. Our total client count was 3,075 as of May 31, 2016. We continue to focus on expanding our current client base as it is essential to our long-term growth strategy and encourages incremental sales growth of workstations, applications and content at our existing clients.
Annual client retention as of May 31, 2016 was greater than 95% of ASV and 94% when expressed as a percentage of clients, consistent with the prior year third quarter. Our retention success, demonstrating a majority of our clients maintain their subscriptions to FactSet year over year, highlights the strength of our business model. Over the past 12 months, we have added 160 net new clients. At May 31, 2016, our largest individual client accounted for 2% of total subscriptions and annual subscriptions from our ten largest clients did not surpass 15% of total client subscriptions, consistent with August 31, 2015.
Returning Value to Stockholders
On May 6, 2016, our Board of Directors approved a 13.6% increase in the regular quarterly dividend beginning with the dividend payment in June 2016 which was $0.50 per share, or $2.00 per share per annum. Additionally, in the third quarter of 2016, we repurchased 505,000 shares for $76.3 million under the existing share repurchase program compared to 440,100 shares for $70.2 million in the same period a year ago. In May 2016, our Board of Directors approved a $165 million expansion of the existing share repurchase program. Including the expansion, $359.7 million remains available for future share repurchases. Combining our dividends and share repurchases, we returned $95.0 million to stockholders in the third quarter of fiscal 2016 and $343.7 million in the last 12 months.
Capital
Expenditures
Capital expenditures were $8.2 million during the third quarter of fiscal 2016, compared to $3.6 million in the same period a year ago. Approximately $4.8 million, or 58%, of capital expenditures related to the build out of office space, including $1.4 million at our Chicago location and $1.1 million at our corporate headquarters in Norwalk. The remainder of our capital expenditures was primarily for purchases of more servers for our existing data centers, additional laptop computers and peripherals for new employees, upgrades to existing computer systems and improvements to our telecommunication equipment.
Results of Operations
For an understanding of the significant factors that influenced our performance for the three and nine months ended May 31, 2016 and 2015, 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 May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Revenues
|
|
$
|
287,501
|
|
|
$
|
254,522
|
|
|
|
13.0%
|
|
|
$
|
839,801
|
|
|
$
|
744,990
|
|
|
|
12.7%
|
|
Cost of services
|
|
$
|
124,602
|
|
|
$
|
100,686
|
|
|
|
23.8%
|
|
|
$
|
363,249
|
|
|
$
|
297,745
|
|
|
|
22.0%
|
|
Selling, general and administrative
|
|
$
|
73,609
|
|
|
$
|
68,480
|
|
|
|
7.5%
|
|
|
$
|
214,610
|
|
|
$
|
200,980
|
|
|
|
6.8%
|
|
Operating income
|
|
$
|
89,290
|
|
|
$
|
85,356
|
|
|
|
4.6%
|
|
|
$
|
261,942
|
|
|
$
|
246,265
|
|
|
|
6.4%
|
|
Net income
|
|
$
|
66,781
|
|
|
$
|
61,409
|
|
|
|
8.7%
|
|
|
$
|
194,508
|
|
|
$
|
178,867
|
|
|
|
8.7%
|
|
Diluted earnings per common share
|
|
$
|
1.62
|
|
|
$
|
1.45
|
|
|
|
11.7%
|
|
|
$
|
4.68
|
|
|
$
|
4.23
|
|
|
|
10.6%
|
|
Diluted weighted average common shares
|
|
|
41,189
|
|
|
|
42,297
|
|
|
|
|
|
|
|
41,596
|
|
|
|
42,317
|
|
|
|
|
|
Revenues
Revenues for the three months ended May 31, 2016 were $287.5 million, up 13.0% compared to the prior year. For the first nine months of fiscal 2016, revenues increased 12.7% to $839.8 million compared to the first nine months of fiscal 2015. The increase in revenue was driven by organic ASV growth of 9.3%, strong demand for our Analytics suite of products, robust growth in CTS business and ongoing growth from Portware.
Strong Demand for Analytics
We continue to see demand for our Multi-Asset Class (MAC) Analytics suite which includes solutions for Risk, Performance Attribution, Return Analytics, Publishing, Quant and Portfolio Services. These products are core to our buy-side clients and continue to drive the largest segment of our business. A key driver of this demand is the ongoing convergence towards multi-asset class investment strategies as clients pursue yield in a low rate environment. 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.
Robust G
rowth in Content & Technology Solutions
Our CTS suite of products, which provides solutions for our clients outside our terminal business, was a significant growth driver during the third quarter of fiscal 2016. There is an increased awareness of our CTS capabilities and data solutions to power workflows for the front and middle office. We have seen success in licensing proprietary FactSet data as our global content sales team pursues expanding the distribution of our content. This type of data is licensed in feed form and includes Fundamentals, Estimates, Transcripts and Ownership, among other offerings. The CTS suite includes a growing number of standardized data feeds that complement and mirror the data in the FactSet workstation.
Ongoing Growth
from
Portware
Portware, acquired on October 16, 2015, has maintained its strong track record of growth. We acquired Portware to expand our presence strategically in large global asset managers by becoming part of their trading ecosystem. In the third quarter of fiscal 2016, Portware client volume increased as did new client and broker connections. The integration of the Portware group into our organization continues to go smoothly. We continue to execute on the healthy pipeline of business from the close of the acquisition and have taken advantage of cross-selling the Portware solution to FactSet’s client base.
Impa
ct of Foreign Currency
In addition to the positive revenue drivers disclosed above, foreign currency movements increased revenues by $0.2 million, or 10 basis points, during the third quarter of fiscal 2016 compared to the year ago quarter. Foreign currency movements reduced our revenues by $0.6 million, or 10 basis points, during the first nine months of fiscal 2016 compared to the same period a year ago. Excluding incremental revenues from acquisitions completed within the last twelve months and the effects of foreign currency, our organic revenue growth rate for the quarter was 9.0%.
Revenues by Geographic Region
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
U.S.
|
|
$
|
193,166
|
|
|
$
|
172,070
|
|
|
|
12.3%
|
|
|
$
|
565,063
|
|
|
$
|
502,271
|
|
|
|
12.5%
|
|
% of revenues
|
|
|
67.2
|
%
|
|
|
67.6
|
%
|
|
|
|
|
|
|
67.3
|
%
|
|
|
67.4
|
%
|
|
|
|
|
Europe
|
|
$
|
70,243
|
|
|
$
|
63,156
|
|
|
|
11.2%
|
|
|
$
|
206,198
|
|
|
$
|
186,320
|
|
|
|
10.7%
|
|
Asia Pacific
|
|
|
24,092
|
|
|
|
19,296
|
|
|
|
24.9%
|
|
|
|
68,540
|
|
|
|
56,399
|
|
|
|
21.5%
|
|
International
|
|
$
|
94,335
|
|
|
$
|
82,452
|
|
|
|
14.4%
|
|
|
$
|
274,738
|
|
|
$
|
242,719
|
|
|
|
13.2%
|
|
% of revenues
|
|
|
32.8
|
%
|
|
|
32.4
|
%
|
|
|
|
|
|
|
32.7
|
%
|
|
|
32.6
|
%
|
|
|
|
|
Consolidated
|
|
$
|
287,501
|
|
|
$
|
254,522
|
|
|
|
13.0%
|
|
|
$
|
839,801
|
|
|
$
|
744,990
|
|
|
|
12.7%
|
|
Thre
e months ended May 31, 2016
compared to three months ended
May 31
, 2015
Revenues from our U.S. segment increased 12.3% to $193.2 million during the three months ended May 31, 2016 compared to the same period a year ago. Our fiscal 2016 third quarter U.S. revenue growth rate of 12.3% reflects a strong performance in our Analytics suite of products, robust growth in our CTS business, revenue from Portware and solid advancement in our buy-side client base. Excluding revenue attained from recent acquisitions, organic revenues in the U.S. were up 8.5% compared to the year ago third quarter. Revenues from our U.S. operations accounted for 67.2% of our consolidated revenues during the third quarter of fiscal 2016, a decrease from the prior year as U.S. sales growth was outpaced by international growth.
European revenues grew 11.2%, attributable to continued growth in ASV, revenue from Portware and our annual price increase for European clients. Foreign currency exchange rate fluctuations reduced our European growth rate by 30 basis points. Excluding acquired revenue from Portware and the impact of foreign currency fluctuations, European revenues grew 8.1% year over year.
Asia Pacific revenue growth of 24.9% was primarily due to increased subscriptions to our Analytics suite of products, revenue from Portware and our annual price increase for Asia Pacific clients. Excluding acquired revenue from Portware and the impact of foreign currency fluctuations, Asia Pacific revenues grew 16.8% year over year.
Nine
months ended
May 31
, 2016
compared to
nine
months ended
May 31
, 2015
Revenues from our U.S. segment increased 12.5% to $565.1 million during the nine months ended May 31, 2016 compared to the same period a year ago. The U.S. revenue growth rate of 12.5% in the first nine months of fiscal 2016 reflects a strong performance in our Analytics suite of products, robust growth in CTS, revenue from Portware and continued client and user additions within the U.S. Revenues from our U.S. operations accounted for 67.3% of our consolidated revenues during the first nine months of fiscal 2016, down slightly from the prior year.
European revenues grew 10.7%, attributable to increases in client and user counts, continued growth in ASV from European buy-side clients and revenue from Portware, partially offset by the negative effects of foreign currency. Foreign currency exchange rate fluctuations reduced our European growth rate by 30 basis points. Excluding acquired revenue from Portware and the impact of foreign currency fluctuations, European revenues grew 8.2% year over year.
Asia Pacific revenue growth of 21.5% was primarily due to net new user and client growth, increased subscriptions to our Analytics suite of products, our proficiency in selling additional services to existing clients and revenue from Portware, partially offset by negative effects of foreign due to the change in the value of the Japanese Yen compared to the U.S. dollar. Excluding acquired revenue from Portware and the impact of foreign currency fluctuations, Asia Pacific revenues grew 16.4% year over year.
Operating Expenses
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Cost of services
|
|
$
|
124,602
|
|
|
$
|
100,686
|
|
|
|
23.8%
|
|
|
$
|
363,249
|
|
|
$
|
297,745
|
|
|
|
22.0%
|
|
SG&A
|
|
|
73,609
|
|
|
|
68,480
|
|
|
|
7.5%
|
|
|
|
214,610
|
|
|
|
200,980
|
|
|
|
6.8%
|
|
Total operating expenses
|
|
$
|
198,211
|
|
|
$
|
169,166
|
|
|
|
17.2%
|
|
|
$
|
577,859
|
|
|
$
|
498,725
|
|
|
|
15.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
$
|
89,290
|
|
|
$
|
85,356
|
|
|
|
4.6%
|
|
|
$
|
261,942
|
|
|
$
|
246,265
|
|
|
|
6.4%
|
|
Operating Margin
|
|
|
31.1
|
%
|
|
|
33.5
|
%
|
|
|
|
|
|
|
31.2
|
%
|
|
|
33.1
|
%
|
|
|
|
|
Cost of Services
Three months ended
May 31
, 201
6
compared to three months ended
May 31
, 2015
For the three months ended May 31, 2016, cost of services increased 23.8% to $124.6 million compared to $100.7 million in the same period a year ago. Cost of services, expressed as a percentage of revenues, was 43.3% during the third quarter of fiscal 2016, an increase of 370 basis points over the prior year period due to higher employee compensation, including stock-based compensation, amortization of intangible assets and computer-related expenses.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues increased 270 basis points in the third quarter of fiscal 2016 compared to the same period a year ago. This increase was primarily due to new employees hired in the past year. Over the last 12 months, we have added 678 net new employees involved with content collection and 234 net new engineering and product development employees, as we continue to focus on servicing our existing client base, expanding our content and improving our applications. The increase in employee headcount includes 123 employees added from the Portware acquisition in cost of sales related roles. Amortization of acquired intangible assets, when expressed as a percentage of revenues, increased 50 basis points in the third quarter of fiscal 2016 compared to the same period a year ago primarily due to the addition of $75.5 million of intangible assets related to the acquisition of Portware. Computer-related expenses, which include depreciation, maintenance, software and other fees, increased 50 basis points when expressed as a percentage of revenues, as we require additional computer hardware and peripherals for new employees, upgrades to existing computer systems and the development of new internal systems to support our growing infrastructure.
Nine
months
ended
May 31
, 2016 compared to
nine
months ended
May 31
, 2015
For the nine months ended May 31, 2016, cost of services increased 22.0% to $363.2 million compared to $297.7 million in the same period a year ago. Cost of services, expressed as a percentage of revenues, was 43.3% during the first nine months of fiscal 2016, an increase of 330 basis points over the prior year period due to higher employee compensation, including stock-based compensation, amortization of intangible assets and computer-related expenses.
Selling, General and Administrative
Three months ended
May 31
, 201
6
compared to three months ended
May 31
, 2015
For the three months ended May 31, 2016, SG&A expenses increased to $5.1 million, up 7.5%, from $68.5 million in the same period a year ago. SG&A expenses, expressed as a percentage of revenues, decreased from 26.9% to 25.6% during the third quarter of fiscal 2016 compared to the prior year period. This decrease was primarily due to lower compensation expense attributable to employees performing SG&A related roles, partially offset by higher professional expenses.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues decreased 160 basis points from a year ago due to a higher percentage of our employee base working in a cost of services capacity compared to an SG&A role. Of our total employee headcount increase in the last 12 months, only 19% were in SG&A related roles, including 43 employees from the Portware acquisition. As such, employee compensation classified as SG&A expense declined compared to the growth in cost of services. Professional fees, expressed as a percentage of revenues, increased 50 basis points year over year primarily due to $1.4 million of professional fees primarily related to the sale of Market Metrics.
Nine
months ended
May 31
, 201
6
compared to
nine
months ended
May 31
, 2015
For the nine months ended May 31, 2016, SG&A expenses increased to $13.6 million, up 6.8% from $201.0 million in the same period a year ago. SG&A expenses, expressed as a percentage of revenues, decreased from 27.0% to 25.5% during the first half of fiscal 2016 compared to the prior year period. This decrease was primarily due to lower compensation expense from employees performing SG&A related roles and lower occupancy costs, which include rent and depreciation of furniture and fixtures, partially offset by higher professional expenses. Professional fees for the nine months ended May 31, 2016 included the $1.4 million primarily related to the sale of Market Metrics and $0.7 million related to the Portware acquisition in October 2015.
Operating Income and Operating Margin
Three months ended
May 31
, 2016
compared to three months ended
May 31
, 2015
Operating income increased 4.6% to $89.3 million for the three months ended May 31, 2016 compared to the prior year period. Our operating margin during the third quarter of fiscal 2016 was 31.1%, down from 33.5% a year ago.
The lower operating margin was primarily due to Portware’s operations, which reduced our operating margin by 130 basis points in the current period. Additionally, the incremental $1.4 million of professional fees reduced the margin by 40 basis points. Offsetting these decreases was organic revenue growth of 9.0% and foreign currency benefits totaling $1.9 million.
Nine
months ended
May 31
, 2016
compared to
nine
months ended
May 31
, 2015
Operating income increased 6.4% to $261.9 million for the nine months ended May 31, 2016 compared to the prior year period. Our operating margin during the first nine months of fiscal 2016 was 31.2%, down from 33.1% a year ago.
The lower operating margin was primarily due to Portware’s operations, which reduced our operating margin by 120 basis points in the current period. Additionally the incremental $2.1 million of professional fees further reduced the margin by 20 basis points. Offsetting these drivers was organic revenue growth of 9.6% and foreign currency benefits totaling $8.8 million.
Operating Income by Segment
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
U.S.
|
|
$
|
42,020
|
|
|
$
|
43,332
|
|
|
|
(3.0)%
|
|
|
$
|
127,479
|
|
|
$
|
130,271
|
|
|
|
(2.1)%
|
|
Europe
|
|
|
33,304
|
|
|
|
31,187
|
|
|
|
6.8%
|
|
|
|
95,536
|
|
|
|
85,675
|
|
|
|
11.5%
|
|
Asia Pacific
|
|
|
13,966
|
|
|
|
10,837
|
|
|
|
28.9%
|
|
|
|
38,927
|
|
|
|
30,319
|
|
|
|
28.4%
|
|
Consolidated
|
|
$
|
89,290
|
|
|
$
|
85,356
|
|
|
|
4.6%
|
|
|
$
|
261,942
|
|
|
$
|
246,265
|
|
|
|
6.4%
|
|
Our operating segments are aligned with how we manage the business and the demographic markets in which we serve. Our internal financial reporting structure is based on three reportable segments, the U.S., Europe and Asia 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, 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 India and the Philippines benefit all of our segments and thus the expenses incurred at these locations are allocated to each segment based on a percentage of revenues.
Three months ended
May 31
, 2016
compared to three months ended
May 31
, 2015
U.S. operating income decreased 3.0% to $42.0 million during the three months ended May 31, 2016 compared to $43.3 million in the same period a year ago. The decrease in U.S. operating income is primarily due to an increase in employee compensation expense, partially offset by revenue growth of 12.3%. U.S. employee headcount grew 11.0% year over year. U.S. revenue growth was driven by U.S. organic ASV growth of 9.0%, solid advancement in our core buy-side client base and revenue from Portware.
European operating income increased 6.8% to $33.3 million during the three months ended May 31, 2016 compared to $31.2 million in the same period a year ago. The increase in European operating income was due to revenue growth of 11.2% and benefits from a stronger U.S. dollar, partially offset by increases in employee compensation. The impact of foreign currency increased European operating income by $0.3 million year over year. Employee compensation increased in Europe primarily due to a 14.6% increase in the European employee headcount year over year.
Asia Pacific operating income increased 28.9%% to $14.0 million during the three months ended May 31, 2016 compared to $10.8 million a year ago. The increase in Asia Pacific operating income was due to revenue growth of 24.9% and benefits from a stronger U.S. dollar, partially offset by increases in employee compensation. The impact of foreign currency increased Asia Pacific operating income by $1.6 million year over year. Employee compensation increased due to a 19.8% increase in Asia Pacific employee headcount year over year.
Nine
months ended
May 31
, 2016
compared to
nine
months ended
May 31
, 2015
U.S. operating income decreased 2.1% to $127.5 million during the nine months ended May 31, 2016 compared to $130.3 million in the same period a year ago. The decrease in U.S. operating income is attributed to increases in employee compensation and
higher professional expenses partially offset by revenue growth of 12.5%. Employee compensation increased primarily due to an 11.0% increase in the U.S. employee headcount year over year while professional fees rose due to $2.1 million of costs incurred related to the sale of Market Metrics and the acquisition of Portware.
European operating income increased 11.5% to $95.5 million during the nine months ended May 31, 2016 compared to $85.7 million in the same period a year ago. The increase in European operating income was due to revenue growth of 10.7% and benefits from a stronger U.S. dollar, partially offset by increases in employee compensation. The impact of foreign currency increased European operating income by $3.7 million year over year. Employee compensation increased in Europe primarily due to a 14.6% increase in the European employee headcount year over year.
Asia Pacific operating income increased 28.4% to $38.9 million during the nine months ended May 31, 2016 compared to $30.3 million a year ago. The increase in Asia Pacific operating income was due to revenue growth of 21.5% and benefits from a stronger U.S. dollar, partially offset by increases in employee compensation. The impact of foreign currency increased Asia Pacific operating income by $4.9 million year over year. Employee compensation increased due to a 19.8% increase in the Asia Pacific employee headcount year over year.
Income Taxes, Net Income and Diluted Earnings per Share
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Provision for income taxes
|
|
$
|
22,076
|
|
|
$
|
24,429
|
|
|
|
(9.6)%
|
|
|
$
|
66,669
|
|
|
$
|
68,843
|
|
|
|
(3.2)%
|
|
Net income
|
|
$
|
66,781
|
|
|
$
|
61,409
|
|
|
|
8.7%
|
|
|
$
|
194,508
|
|
|
$
|
178,867
|
|
|
|
8.7%
|
|
Diluted earnings per share
|
|
$
|
1.62
|
|
|
$
|
1.45
|
|
|
|
11.7%
|
|
|
$
|
4.68
|
|
|
$
|
4.23
|
|
|
|
10.6%
|
|
Income Taxes
Three
months ended
May 31
, 2016 compared to three months ended
May 31
, 2015
For the three months ended May 31, 2016
, the provision for income taxes was $22.1 million, down 9.6% from the same period a year ago. This was primarily due to income tax benefits of $3.2 million in the third quarter of fiscal 2016 compared to income tax benefits of $1.4 million in the same period a year ago. The income tax benefits related to finalizing prior years’ tax returns and other discrete items.
Nine
months ended
May 31
, 201
6
compared to
nine
months ended
May 31
, 2015
For the nine months ended May 31, 2016
, the provision for income taxes was $66.7 million, down 3.2% from the same period a year ago, primarily due to the US. Federal R&D tax credit being reenacted in December 2015 and income tax benefits related to finalizing prior years’ tax returns and other discrete items. Overall, we recognized income tax benefits of $10.5 million in fiscal 2016 compared to $6.5 million in the same period in fiscal 2015. Offsetting the increase in tax benefits was an increase in taxable income of $13.5 million year over year.
Net Income and Diluted Earnings per Share
Three months ended
May 31
, 201
6
compared to three months ended
May 31
, 2015
Net income increased 8.7% to $66.8 million and diluted earnings per share increased 11.7% to $1.62 for the three months ended May 31, 2016 compared to the three months ended May 31, 2015. Drivers of net income and earnings per share during the third quarter of fiscal 2016 included revenue growth of 13.0%, a decrease in diluted shares outstanding and tax benefits of $3.2 million related to finalizing prior years’ tax returns and other discrete items. These increases were partially offset by incremental employee compensation expense due to the hiring of 1,149 net new employees (including 166 employees from acquisitions completed in the last 12 months), higher intangible asset amortization expense and the negative effects of foreign currency movements. The third quarter of fiscal 2016 net income was also reduced by the after-tax charges of $1.0 million from professional fees related to the sale of Market Metrics. During the third quarter of fiscal 2016, foreign currency movements increased operating income by $1.9 million compared to a benefit of $4.3 million in the year ago quarter.
Nine
months ended
May 31
, 201
6
compared to
nine
months ended
May 31
, 2015
Net income increased 8.7% to $194.5 million and diluted earnings per share increased 10.6% to $4.68 for the nine months ended May 31, 2016 compared to the nine months ended
May 31, 2015. Drivers of net income and earnings per share during the first nine months of fiscal 2016 included organic ASV growth of 9.3% and tax benefits of $10.5 million related to the permanent reenactment of the U.S. Federal R&D tax credit and finalizing prior years’ tax returns and other discrete items. These increases were partially offset by incremental employee compensation expense due to the hiring of 1,149 net new employees (including 166 employees from acquisitions completed in the last 12 months), an increase in professional fees and higher intangible asset amortization expense. During the first nine months of fiscal 2016, foreign currency movements increased operating income by $8.8 million compared to a benefit of $7.2 million in the same period of fiscal 2015.
Adjusted Net Income and Diluted Earnings per Share
(non-GAAP)
Financial measures in accordance with U.S. GAAP including net income and diluted earnings per share have been adjusted. We use these adjusted financial measures, both in presenting our results to stockholders and the investment community, and in our internal evaluation and management of the business. We believe that these adjusted financial measures and the information they provide are useful to investors because it permits investors to view our performance using the same tools that we use to gauge progress in achieving our goals.
Adjusted operating income and margin, adjusted net income and adjusted earnings per share exclude both deal-related amortization and non-recurring items. We believe that this change to our reported adjusted financial measures better reflects the underlying economic performance of FactSet.
Adjusted net income for the three months ended May 31, 2016 was $67.5 million, an increase of 9.7% from the prior year period. As presented in the table below, adjusted net income for the quarter ended May 31, 2016 excludes the after-tax charge of $2.9 million from deal-related amortization, the after-tax charge of $1.0 million from professional fees related to the sale of our Market Metrics business and $3.2 million in income tax benefits from finalizing prior years’ tax returns and other discrete items. Adjusted net income for the three months ended May 31, 2015 excludes the after-tax charge of $1.6 million from deal-related amortization and $1.4 million in income tax benefits.
Fiscal 2016 third quarter adjusted diluted EPS of $1.64 excludes the net effect of the $0.08 benefit from finalizing prior years’ tax returns and other discrete items, a $0.07 detriment from deal-related amortization and a $0.02 detriment from the professional fees. Fiscal 2015 third quarter adjusted diluted EPS of $1.46 excludes the net effect of the $0.03 benefit from finalizing prior years’ tax returns and other discrete items and a $0.04 detriment from deal-related amortization.
|
|
Three months ended May 31,
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
GAAP Net income
|
|
$
|
66,781
|
|
|
$
|
61,409
|
|
|
|
8.7
|
%
|
Deal-related amortization
|
|
|
2,925
|
|
|
|
1,597
|
|
|
|
|
|
Incremental professional fees
|
|
|
998
|
|
|
|
—
|
|
|
|
|
|
Income tax benefits
|
|
|
(3,159
|
)
|
|
|
(1,408
|
)
|
|
|
|
|
Adjusted Net income (non-GAAP)
|
|
$
|
67,545
|
|
|
$
|
61,598
|
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted earnings per common share (non-GAAP)
|
|
$
|
1.64
|
|
|
$
|
1.46
|
|
|
|
12.3
|
%
|
Weighted average common shares (Diluted)
|
|
|
41,189
|
|
|
|
42,297
|
|
|
|
|
|
The presentation of the financial information above is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Liquidity
The table below, for the periods indicated, provides selected cash flow information:
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Net cash provided by operating activities
|
|
$
|
261,104
|
|
|
$
|
222,842
|
|
Capital expenditures
(1)
|
|
|
(34,671
|
)
|
|
|
(15,391
|
)
|
Free cash flow
(2)
|
|
$
|
226,433
|
|
|
$
|
207,451
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(299,269
|
)
|
|
$
|
(53,849
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
70,295
|
|
|
$
|
(115,214
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
187,436
|
|
|
$
|
157,895
|
|
|
(1)
|
Included in net cash used in investing activities during each fiscal year reported.
|
|
(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.
|
Cash and cash equivalents aggregated to $187.4 million, or 18.0% of our total assets at May 31, 2016, compared with $158.9 million, or 21.6% of our total assets at August 31, 2015. Our cash and cash equivalents increased $28.5 million during the first nine months of fiscal 2016 due to cash provided by operations of $261.1 million, $265.0 million in proceeds from long-term debt, $38.8 million in proceeds from the exercise of employee stock options and $13.3 million in tax benefits from share-based payment arrangements. These cash inflows were partially offset by $264.1 million in cash paid to acquire Portware (net of cash acquired), $189.5 million in share repurchases under the existing share repurchase program, dividend payments of $54.0 million, capital expenditures of $34.7 million and $3.6 million from the effects of foreign currency fluctuation.
Free cash flow generated in the nine months ended May 31, 2016 was $226.4 million, up 9.1% compared to a year ago. The free cash flow was attributable to $194.5 million of net income, $26.3 million of positive working capital changes and adjusted for $40.3 million of non-cash items, less $34.7 million in capital expenditures. The year over year free cash flow increase was driven by higher net income of $15.6 million and a positive working capital increase of $2.7 million. Our days sales outstanding (“DSO”) was 35 days as of May 31, 2016, representing an increase from 33 days at August 31, 2015. DSO was 33 days at May 31, 2015.
Free cash flow generated over the last twelve months was $299.7 million and exceeded net income by 16.8%. Included in the twelve month calculation of free cash flow was $344.7 million of net cash provided by operations less $45.0 million of capital expenditures. Free cash flow generated in the last twelve months was up 9.9% from the comparable year ago period due to higher levels of net income, and the timing of payables and accrued compensation, offset by incremental capital expenditures.
Net cash used in investing activities was $299.3 million in the first nine months of fiscal 2016, representing a $245.4 million increase from the same period a year ago. This was primarily due to our acquisition of Portware in the first quarter of fiscal 2016 which resulted in a net cash outflow of $264.1 million compared to a net cash outflow of $30.1 million for the acquisition of Code Red in the second quarter of fiscal 2015. Additionally, cash used in investing activities increased year over year due to an increase in capital expenditures primarily due to the fit-out of new space in New York, Chicago and at our corporate headquarters in Norwalk. These cash outflows were partially offset by an increase in proceeds from the sales of investments (net of purchases) of $4.4 million year over year.
During the first nine months of fiscal 2016, net cash provided by financing activities was $70.3 million, compared to cash used in financing activities of $115.2 million in the first nine months of fiscal 2015. The year over year fluctuation was primarily due to proceeds from long-term debt of $265.0 million and an increase in share repurchases of $15.3 million, partially offset by lower proceeds and tax benefits from stock options exercised of $23.6 million. The proceeds from long-term debt related to additional borrowings under the Second Amendment (defined in
Capital Needs
) to our credit agreement dated February 6, 2015 (the “Credit Agreement”) to fund our acquisition of Portware on October 16, 2015.
We expect that for at least the next 12 months, our operating expenses will continue to constitute a significant use of our cash. As of May 31, 2016, our total cash and cash equivalents worldwide was $187.4 million with $300.0 million in outstanding borrowings. Approximately $25.5 million of our total available cash and cash equivalents is held in bank accounts located within the U.S., $128.0 million in Europe (predominantly within the UK and France) and the remaining $33.9 million is held in the Asia Pacific region. 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.
Capital Resources
Capital Expenditures
Capital expenditures were $8.2 million for the quarter ended May 31, 2016, up from $3.6 million in the same period a year ago. Approximately $4.8 million, or 58%, of capital expenditures related to the build out of office space including $1.4 million at our Chicago location and $1.1 million at our corporate headquarters in Norwalk. The remainder of our capital expenditures was primarily for purchases of more servers for our existing data centers, additional laptop computers and peripherals for employees.
Capital expenditures were $34.7 million during the first nine months of fiscal 2016, up from $15.4 million in the same period a year ago. Approximately $21.4 million, or 62%, of capital expenditures related to the build out of office space including $14.3 million at our New York location, $1.5 million at our Chicago location and $1.3 million at our corporate headquarters in Norwalk
. The remaining 38% of our capital expenditures was for purchases of computer equipment, including new servers for our existing data centers and purchasing laptop computers and peripherals for employees, upgrading existing computer systems and improving telecommunication equipment.
Capital Needs
Long-Term Debt
On February 6, 2015, we entered into a Credit Agreement between FactSet, as the borrower, and Bank of America, N.A., as the lender (the “Lender”). At that date, the Credit Agreement provided for a $35.0 million revolving credit facility (the “Revolving Credit Facility”), under which we could request borrowings. The Credit Agreement also allowed us to arrange for additional borrowings for an aggregate amount of up to $265.0 million provided that any such request for additional borrowings was in a minimum amount of $25.0 million.
For purposes of funding our acquisition of Code Red on February 6, 2015, we borrowed $35.0 million in the form of a Eurodollar rate loan (the “Loan”) under the Revolving Credit Facility. The proceeds of the Loan made under the Credit Agreement could be used for permitted acquisitions and general corporate purposes. On September 21, 2015, we amended the Credit Agreement to borrow an additional $265.0 million (the “Second Amendment) in order to fund our acquisition of Portware, which closed on October 16, 2015. The maturity date on all outstanding loan amounts (which total $300.0 million as of May 31, 2016) is September 21, 2018. The Second Amendment also allows us, subject to certain requirements, to arrange for additional borrowings with the Lender for an aggregate amount of up to $400.0 million, provided that any such request for additional borrowings must be in a minimum amount of $25.0 million.
The $300.0 million borrowed under the Credit Agreement bears interest on the outstanding principal amount at a rate equal to the Eurodollar rate plus 0.75% and is reported as
Long-term debt
within the Consolidated Balance Sheet at May 31, 2016. The Eurodollar rate is defined in the Credit Agreement as the rate per annum equal to one-month LIBOR. Interest on the Loan is payable quarterly in arrears and on the maturity date. During the three and nine months ended May 31, 2016, we paid approximately $0.9 million and $2.2 million, respectively, in interest on our outstanding Loan amount. We paid interest of less than $0.1 million on our outstanding Loan amount for the nine months ended May 31, 2015. The principal balance is payable in full on the maturity date.
As of May 31, 2016, we owed no commitment fees since we borrowed the full amount of the Credit Agreement. Other fees incurred, such as legal costs to draft and review the Credit Agreement, totaled less than $0.1 million and were capitalized as loan origination fees. These loan origination fees are being amortized to interest expense over the term of the Loan (three years) using the effective interest method.
The Credit Agreement contains covenants restricting certain FactSet activities, which are usual and customary for this type of loan.
In addition, the Credit Agreement requires us to maintain a consolidated leverage ratio, as measured by total funded debt/EBITDA, below a specified level as of the end of each fiscal quarter. We were in compliance with all of the covenants of the Credit Agreement as of May 31, 2016.
As of May 31, 2016, the fair value of our long-term debt was $300.0 million, which we believe approximates carrying amount as the terms and interest rates approximate market rates given its floating interest rate basis.
Letters of Credit
From time to time, we are required to obtain letters of credit in the ordinary course of business. Approximately $1.0 million of standby letters of credit have been issued in connection with our current leased office space as of May 31, 2016. 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. As of May 31, 2016 and August 31, 2015, we were in compliance with all covenants contained in the standby letters of credit.
Foreign Currency
Foreign Currency Exposure
Certain wholly owned subsidiaries within the European 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 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.
As of May 31, 2016, our annualized non-U.S. dollar denominated revenues are estimated to be $21.7 million while our non-U.S. dollar denominated expenses are estimated to be $207.4 million, which translates into a net foreign currency exposure of $185.7 million. Our foreign currency exchange exposure is related to our operating expense base in countries outside the U.S., where 71% of our employees were located as of May 31, 2016. Our operating income was $1.9 million higher during the third quarter of fiscal 2016 compared to $4.3 million a year ago. During the first nine months of fiscal 2016, foreign currency movements increased operating income by $8.8 million, compared to $11.2 million a year ago.
Foreign Currency Hedges
As of May 31, 2016, we maintained the following foreign currency forward contracts to hedge our foreign currency exposure:
|
●
|
British Pound
Sterling
-
foreign currency forward contracts to hedge approximately 50% of its British Pound Sterling exposure through the fourth quarter of fiscal 2017.
|
|
●
|
Euro -
foreign currency forward contracts to hedge approximately 50% of its Euro exposure through the fourth quarter of fiscal 2016.
|
|
●
|
Indian Rupee
- foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the fourth quarter of fiscal 2018.
|
As of May 31, 2016, the gross notional value of foreign currency forward contracts to purchase British Pound Sterling with U.S. dollars was £28.3 million. The gross notional value of foreign currency forward contracts to purchase Euros with U.S. dollars was €4.5 million. The gross notional value of foreign currency forward contracts to purchase Indian Rupees with U.S. dollars was Rs. 4.0 billion.
There were no other outstanding foreign currency forward contracts as of May 31, 2016. A loss on derivatives of less than $0.1 million was recorded into operating income during the third quarter of fiscal 2016, compared to a loss of $0.3 million in the year ago third quarter. During the first nine months of fiscal 2016, a gain on derivatives of less than $0.1 million was recorded into operating income, compared to a loss of $0.5 million a year ago.
Off-Balance Sheet Arrangements
At May 31, 2016 and August 31, 2015, 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.
S
hare Repurchase Program
On May 19, 2016, our Board of Directors approved a $165.0 million expansion of the existing share repurchase program. 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 from existing and future cash generated by operations. During the first nine months of fiscal 2016, we repurchased 1,220,000 shares for $189.5 million under the existing share repurchase program compared to 1,209,954 shares for $174.3 million a year ago. Including the expansion, $359.7 million remains authorized for future share repurchases.
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, 2015, we had total purchase commitments of $65.2 million. There were no material changes in our purchase commitments during the first nine months of fiscal 2016.
At May 31, 2016, FactSet leased approximately 1,044,000 square feet of office space, which we believe is adequate for our current needs and that additional space is available for lease to meet any future needs. During the nine months ended May 31, 2016, we entered into the following new lease agreements:
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Chicago, Illinois:
A new lease agreement was entered into during November 2015 to expand the Company’s office space in Chicago. At the time of signing, the new lease agreement resulted in incremental future minimum rental payments of $11.3 million over the lease term through September 2027.
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Riga, Latvia:
A new lease amendment was signed to extend and expand the Company’s existing office space in Riga by 4,144 rentable square feet. At the time of signing, the renewal resulted in incremental future minimum rental payments of $0.5 million through October 2020.
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London, England:
A new lease agreement was entered into in September 2015 for 1,150 square feet of additional office space in London for the Company’s Matrix business. At the time of signing, the new lease agreement resulted in incremental future minimum rental payments of $0.3 million over the non-cancelable lease term through February 2019.
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Los Angeles, California
:
A new lease agreement was entered into during April 2016 for 500 square feet of new office space in Los Angeles. At the time of signing, the new lease agreement resulted in incremental future minimum rental payments of $0.1 million over the lease term through August 2018.
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Manila, Philippines
:
A new lease agreement was entered into during April 2016 for 24,940 square feet of additional office space in Manila. At the time of signing, the new lease agreement resulted in incremental future minimum rental payments of $2.4 million over the non-cancelable lease term through May 2021.
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Hyderabad, India
:
A new lease agreement was entered into during April 2016 for 15,809 square feet of new office space in Hyderabad. At the time of signing, the new lease agreement resulted in incremental future minimum rental payments of $0.8 million over the lease term through April 2021.
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As disclosed earlier in the
Capital Needs
section of this MD&A, we borrowed $35.0 million in the form of a Eurodollar rate loan to fund the acquisition of
Code Red in February 2015 and $265.0 million in the form of a Eurodollar rate loan to fund the acquisition of
Portware in October 2015. The maturity date on all outstanding loan amounts is September 21, 2018 and there are no prepayment penalties in the event that we elect to prepay the loan prior to its scheduled maturity date. The amount borrowed bears interest on the outstanding principal amount at a rate equal to the Eurodollar rate plus 0.75% and is reported as
Long-term debt
within our Consolidated Balance Sheet at May 31, 2016.
With the exception of the new leases entered into in the ordinary course of business and the $265.0 million borrowing to fund the Portware acquisition, there were no other significant changes to our contractual obligations during the first nine months of fiscal 2016.
Subsequent to May 31, 2016, we entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Bank of America, N.A. (“BofA”), to repurchase an aggregate of $120.0 million of our common stock. The ASR Agreement was entered into pursuant to the $165.0 million share repurchase program approved by our Board of Directors on May 19, 2016. Under the terms of the ASR Agreement, we made a $120.0 million prepayment to BofA on July 5, 2016 and received an initial delivery of 0.6 million shares of our common stock on that same day. The final number of shares to be repurchased will be based on the volume-weighted average stock price of our common stock during the term of the transaction, less a discount and subject to potential adjustments pursuant to the terms of the ASR Agreement. The final settlement of the transaction under the ASR Agreement is scheduled to occur in the first quarter of fiscal 2017, but it may be terminated earlier under certain circumstances.
D
ividends
On May 6, 2016, our Board of Directors approved a 13.6% increase in the regular quarterly dividend beginning with the dividend payment in June 2016 which was $0.50 per share, or $2.00 per share per annum. The cash dividend of $20.2 million was paid on June 21, 2016, to common stockholders of record on May 31, 2016. With our dividends and our share repurchases, in the aggregate, we have returned $343.7 million to shareholders over the past 12 months. 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 Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2015.
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, 2015. There were no significant changes in our accounting policies or critical accounting estimates during the first nine months of fiscal 2016.
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.
Approximately 83.6% 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 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 management clients. Our investment banking clients that perform M&A advisory work, provide capital markets services and equity research, account for approximately 16.4% of our ASV. 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 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 revenues may decline if banks, including those involved in recent merger activity, significantly reduce headcount in the areas of corporate M&A, capital markets and equity research to compensate for the issues created by other departments.
Due to the global nature of our operations, we conduct business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, Japanese Yen and Philippine Peso. To the extent that our international activities increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase. To manage this exposure, we utilize derivative instruments (foreign currency forward contracts). By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. Credit risk is managed through the continuous monitoring of exposure to the counterparties associated with these instruments. Our primary objective in holding derivatives is to reduce the volatility of earnings associated with changes in foreign currency.
On June 23, 2016, the United Kingdom (“UK”) held a referendum in which British citizens approved an exit from the European Union (“EU”), commonly referred to as “Brexit.” As a result of the referendum, the global markets and currencies have been adversely impacted, including a sharp decline in the value of the British Pound Sterling as compared to the U.S. dollar. Volatility in exchange rates is expected to continue in the short term as the UK negotiates its exit from the EU. We currently hedge approximately 50% of our British Pound Sterling exposure through the fourth quarter of fiscal 2017, thus reducing our currency risk. In the longer term, any impact from Brexit on us will depend, in part, on the 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 uncertainty related to Brexit, we will continue to partner with our clients to help them navigate the fluctuating international markets. Our products, including our datasets such as GeoRev, allow our clients to understand geographic exposure and assess the risks of operating on a global scale so they may make informed business decisions.
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 Commission regulations.
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.
Business Outlook
The following forward-looking statements reflect our expectations as of July 5, 2016. Given the 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 2016 Expectations
(includes the results of the Market Metrics business through July 1, 2016)
:
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Revenues are expected to range between $286 million and $292 million.
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GAAP operating margin is expected to range between 31.0% and 32.0%. Adjusted operating margin is expected to range between 32.5% and 33.5%.
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The annual effective tax rate is expected to range between 28.0% and 29.0%.
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GAAP diluted EPS should range between $1.61 and $1.65. Adjusted EPS is expected to range between $1.68 and $1.72. The midpoint of the adjusted EPS range represents 12.6% growth over the prior year.
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