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:
|
•
|
Executive Overview
|
|
•
|
Key Metrics
|
|
•
|
Results of Operations
|
|
•
|
Liquidity
|
|
•
|
Capital Resources
|
|
•
|
Foreign Currency
|
|
•
|
Off-Balance Sheet Arrangements
|
|
•
|
Share Repurchase Program
|
|
•
|
Contractual Obligations
|
|
•
|
Dividends
|
|
•
|
Significant Accounting Policies and Critical Accounting Estimates
|
|
•
|
New Accounting Pronouncements
|
|
•
|
Market Trends
|
|
•
|
Forward-Looking Factors
|
|
•
|
Business Developments
|
Executive Overview
We are a global provider of integrated financial information, analytical applications and industry-leading service for the global investment community. We deliver insight and information to investment professionals through our analytics, service, content, and technology. These professionals include portfolio managers, investment research professionals, investment bankers, risk and performance analysts, and wealth advisors. From streaming real-time data to historical information, including quotes, estimates, news and commentary, we offer unique and third-party content through desktop, web, mobile and off-platform solutions. Our broad 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. With recent acquisitions, we have continued to expand our solutions across the investment lifecycle from idea generation to performance and client reporting. Our revenues are derived from subscriptions to products and services such as workstations, analytics, enterprise data, research management, and trade execution.
Fiscal 2018
Third
Quarter in Review
Revenues in the third quarter were $339.9 million, an increase of 8.9% from the prior year comparable period. Excluding the effects of acquisitions and dispositions completed in the last 12 months and foreign currency, organic revenues grew 5.7% over the previous year. Annual subscription value (“ASV”) during the quarter grew 5.3% organically and totaled $1.36 billion as of May 31, 2018. The increase is primarily driven by higher sales of our analytics products, content and technology solutions (“CTS”) and wealth management solutions in addition to our annual international price increase.
Operating income increased 6.4% and diluted earnings per share (“EPS”) increased 15.1% compared to the prior year period. The increase in operating income was due primarily to an increase in revenue of 8.9%, partially offset by restructuring charges and certain one-time administrative expenses. The increase in EPS was primarily attributable to the lower tax rate from the TCJA and our share repurchase program.
As of May 31, 2018, employee count was 9,197, up 3.5% in the past 12 months including workforces acquired in the last 12 months. Of our total employees, 2,403 are in the U.S., 1,230 in Europe and 5,564 in the Asia Pacific region.
Additionally, FactSet received 5 industry awards, recognizing the strength of FactSet’s products and people. Awards included Best Data Analytics Provider from Waters Technology IMD/IRN, Best Middle Office solution from FTF News’ Technology Innovation Awards, and Best Buy-Side EMS from Markets Choice Awards.
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)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenues
|
|
$
|
339.9
|
|
|
$
|
312.1
|
|
|
|
8.9%
|
|
Operating income
|
|
$
|
93.3
|
|
|
$
|
87.6
|
|
|
|
6.4%
|
|
Net income
|
|
$
|
74.7
|
|
|
$
|
65.4
|
|
|
|
14.3%
|
|
Diluted EPS
|
|
$
|
1.91
|
|
|
$
|
1.66
|
|
|
|
15.1%
|
|
As reported ASV
|
|
$
|
1,356.2
|
|
|
$
|
1,282.2
|
|
|
|
5.8%
|
(1)
|
Clients
|
|
|
4,975
|
|
|
|
4,629
|
|
|
|
7.5%
|
(2)
|
Users
|
|
|
89,506
|
|
|
|
86,025
|
|
|
|
4.0%
|
(
3
)
|
(1)
|
In the second quarter of fiscal 2017, FactSet changed its client count definition to capture clients with ASV greater than $10,000 versus the previous metric of clients with ASV greater than $24,000. The prior year client count was restated to reflect this change for comparison purposes.
|
(2)
|
In the second quarter of fiscal 2017, FactSet changed its user count definition to account for users from workstations previously not captured due to certain product bundling and also users of the StreetAccount web product.
The prior year user count was restated to reflect this change for comparison purposes.
|
Annual Subscription Value
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 $1.36 billion at May 31, 2018 and excludes professional services fees billed in the last 12 months, which are not subscription-based. We grew organic ASV by $67.5 million, or 5.3%, from a year ago. Organic ASV excludes ASV from acquisitions and dispositions completed within the past 12 months and the effects of foreign currency. The increase in ASV during the past three months was driven by higher sales of our analytics products, content and technology solutions (“CTS”) and wealth management solutions as well as our annual international price increase.
Buy-side and sell-side ASV growth rates for the third quarter of fiscal 2018 were 5.3% and 5.0%, respectively. Buy-side clients account for 84.4% of ASV, while the remainder is derived from sell-side firms that perform mergers and acquisitions advisory work, capital markets services and equity research. Our buy-side and sell-side client growth rates for the third quarter of fiscal 2018 were both down year over year due to continuing cost pressure on our clients, cancellations from firm closures and consolidations and an uptick in the length of our selling cycle due to offering more workflow solutions, combined with economic and market uncertainty.
ASV from U.S. operations was $843.6 million, increasing 4.4% over prior year and 4.4% organically. The increase is driven by higher sales of our analytics products and CTS products primarily sold to institutional asset managers. ASV from international operations was $512.6 million, increasing 8.1% over prior year and 6.7% organically. International ASV now represents 37.8% of total ASV, compared with 37.0% reported a year ago. This shift in ASV to international operations was due primarily to acquisitions completed in the last 12 months, growth in the fixed income and risk analytics products within the European segment, an increase in new business sales of analytics products and CTS in Asia Pacific, and our annual international price increase.
Client and User Additions
Our total client count was 4,975 as of May 31, 2018, representing a net increase of 80 clients in the past three months. In the second quarter of fiscal 2017, FactSet changed its client count definition to capture clients with ASV greater than $10,000 versus the previous metric of clients with ASV greater than $24,000. The prior year client count was restated to reflect this change for comparison purposes. Client count has increased by 7.5% in the last 12 months. We continue to focus on expanding and cultivating relationships with our current client base as it is essential to our long-term growth strategy and assists in our upsell of workstations, applications and content at our existing clients.
As of May 31, 2018, there were 89,506 professionals using FactSet. In the second quarter of fiscal 2017, FactSet also changed its user count definition to account for users from workstations previously not captured due to certain product bundling and to include StreetAccount web product users. The prior year user count was restated to reflect this change for comparison purposes. User count increased by 860 in the past three months primarily driven by an increase in wealth workstation sales.
Annual client retention as of May 31, 2018 was greater than 95% of ASV and 90% when expressed as a percentage of clients. Our retention success demonstrates that a majority of our clients maintain their subscriptions to FactSet year over year, highlighting the strength of our business model. As of May 31, 2018, our largest individual client accounted for approximately 2% of total subscriptions and annual subscriptions from our ten largest clients did not surpass 15% of total client subscriptions.
Returning Value to Stockholders
On May 7, 2018, our Board of Directors approved a regular quarterly dividend of $0.64 per share. The cash dividend of $24.6 million was paid on June 19, 2018 to common stockholders of record at the close of business on May 31, 2018. We repurchased 620,000 shares for $122.0 million during the third quarter of fiscal 2018 under our existing share repurchase program. Over the last 12 months, we have returned $368.9 million to stockholders in the form of share repurchases and cash dividends, funded by cash generated from operations. As of May 31, 2018, $309.3 million remained available for future share repurchases.
On March 26, 2018, our Board of Directors approved a $300.0 million expansion of the existing share repurchase program. Subsequent to this expansion, $431.2 million was available for future share repurchases.
C
apital Expenditures
Capital expenditures in the third quarter of fiscal 2018 were $6.0 million, compared with $7.9 million a year ago. Approximately $3.8 million, or 63.8%, of our capital expenditures was for upgrades to existing computer systems in Norwalk, additional server equipment for our data centers located in New Jersey and Virginia, as well as laptop computers and peripherals for new and existing employees. The remainder of our capital expenditures was primarily for the build out of office space including $1.2 million in Hong Kong.
Results of Operations
For an understanding of the significant factors that influenced our performance for the nine months ended May 31, 2018 and 2017, 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)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenues
|
|
$
|
339,911
|
|
|
$
|
312,120
|
|
|
|
8.9
|
%
|
|
$
|
1,004,283
|
|
|
$
|
894,537
|
|
|
|
12.3
|
%
|
Cost of services
|
|
$
|
165,073
|
|
|
$
|
146,426
|
|
|
|
12.7
|
%
|
|
$
|
489,829
|
|
|
$
|
405,311
|
|
|
|
20.9
|
%
|
Selling, general and administrative
|
|
$
|
81,573
|
|
|
$
|
78,052
|
|
|
|
4.5
|
%
|
|
$
|
236,606
|
|
|
$
|
219,519
|
|
|
|
7.8
|
%
|
Operating income
|
|
$
|
93,265
|
|
|
$
|
87,642
|
|
|
|
6.4
|
%
|
|
$
|
277,848
|
|
|
$
|
269,707
|
|
|
|
3.0
|
%
|
Net income
|
|
$
|
74,746
|
|
|
$
|
65,414
|
|
|
|
14.3
|
%
|
|
$
|
198,262
|
|
|
$
|
198,707
|
|
|
|
(0.2
|
)%
|
Diluted EPS
|
|
$
|
1.91
|
|
|
$
|
1.66
|
|
|
|
15.1
|
%
|
|
$
|
5.01
|
|
|
$
|
5.00
|
|
|
|
0.2
|
%
|
Diluted weighted average common shares
|
|
|
39,104
|
|
|
|
39,457
|
|
|
|
|
|
|
|
39,543
|
|
|
|
39,736
|
|
|
|
|
|
Revenues
Thre
e months ended
May
31
, 2018
compared to three months ended
May
31
, 2017
Revenues for the three months ended May 31, 2018 were $339.9 million, up 8.9% compared to the same period a year ago. The increase is primarily driven by higher sales of our analytics products, content and technology solutions (“CTS”) and wealth management solutions in addition to our annual international price increase. Within analytics, we saw strong contributions from our risk offering as well as fixed income and equity products. CTS had a strong third quarter and continued momentum around our new platform offering both core financial and alternative data sets. Wealth Management also had a strong quarter with workstation deployments across top tier clients. Offsetting these positive growth factors were cancellations, but at a decreased rate. Most of the cancellations were due to firm closures and firm consolidations of services leading to redundancies. Excluding the effects of revenue from acquisitions of $7.0 million and $1.9 million in foreign currency, our organic revenue growth rate was 5.7%.
Nine
months ended
May
31
, 201
8
compared to
nine
months ended
May 31
, 201
7
Revenues for the nine months ended May 31, 2018 were $1,004.3 billion, up 12.3% compared to the same period a year ago. The increase in revenue was driven by acquisitions, continued momentum from our analytics and CTS products and a solid performance from our wealth products.
Revenues by Geographic Region
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
U.S.
|
|
$
|
210,308
|
|
|
$
|
197,834
|
|
|
|
6.3
|
%
|
|
$
|
627,976
|
|
|
$
|
580,090
|
|
|
|
8.3
|
%
|
% of revenues
|
|
|
61.9
|
%
|
|
|
63.4
|
%
|
|
|
|
|
|
|
62.5
|
%
|
|
|
64.8
|
%
|
|
|
|
|
Europe
|
|
$
|
98,856
|
|
|
$
|
87,327
|
|
|
|
13.2
|
%
|
|
$
|
286,789
|
|
|
$
|
235,464
|
|
|
|
21.8
|
%
|
Asia Pacific
|
|
|
30,747
|
|
|
|
26,959
|
|
|
|
14.1
|
%
|
|
|
89,518
|
|
|
|
78,983
|
|
|
|
13.3
|
%
|
International
|
|
$
|
129,603
|
|
|
$
|
114,286
|
|
|
|
13.4
|
%
|
|
$
|
376,307
|
|
|
$
|
314,447
|
|
|
|
19.7
|
%
|
% of revenues
|
|
|
38.1
|
%
|
|
|
36.6
|
%
|
|
|
|
|
|
|
37.5
|
%
|
|
|
35.2
|
%
|
|
|
|
|
Consolidated
|
|
$
|
339,911
|
|
|
$
|
312,120
|
|
|
|
8.9
|
%
|
|
$
|
1,004,283
|
|
|
$
|
894,537
|
|
|
|
12.3
|
%
|
Thre
e months ended
May
31
, 2018
compared to three month
s ended
May 31
,
2017
Revenues from our U.S. segment increased 6.3% to $210.3 million during the three months ended May 31, 2018, compared to the same period a year ago, primarily from the analytics and CTS products sold to institutional asset managers. Excluding the effects of acquisitions and dispositions completed in the last 12 months, organic revenues in the U.S. were up 5.0% compared to the same period a year ago. Revenues from our U.S. operations accounted for 61.9% of our consolidated revenues during the third quarter of fiscal 2018, a decrease from 63.4% in the prior year. This shift in revenues was due primarily to additional revenue from recent acquisitions largely impacting the European segment, as well as international sales growth that outpaced the growth in the U.S. segment.
European revenues grew 13.2%, compared to the same period a year ago, due primarily to recent acquisitions with significant operations in the European markets, competitive wins in analytics, CTS, increases in workstation sales and our international price increase. Foreign currency exchange rate fluctuations reduced our European revenue growth rate by 200 basis points. Year over year organic growth rates in Europe were negatively impacted by regulatory environment and political events, resulting in delayed purchasing decisions.
Asia Pacific revenue growth of 14.1% was primarily due to an increase in new business with asset managers focused on our risk analytics products and increased sales to existing clients. We also opened a new office in Shanghai, strengthening our position in the growing Chinese market. Foreign currency exchange rate fluctuations increased our Asia Pacific revenue growth rate by 70 basis points.
Nine
months ended
May 31
, 2018
compared to
nine
months ended
May
31
, 2017
Revenues from our U.S. segment increased 8.3% to $628.0 million during the nine months ended May 31, 2018, compared to the same period a year ago. Our U.S. revenue growth rate of 8.3% for the first nine months of fiscal 2018 reflects the performance of our analytics suite, data feed products and incremental revenue from acquisitions completed in the last 12 months. Excluding the effects of acquisitions and dispositions, organic revenues in the U.S. were up 5.0% compared to the prior year period. Revenues from our U.S. operations accounted for 62.5% of our consolidated revenues during the first nine months of fiscal 2018, a decrease from 64.8% in the prior year.
European revenues grew 21.8% during the nine months ended May 31, 2018, compared to the same period a year ago due primarily from recent acquisitions, along with increased sales from analytics and CTS products. Excluding the effects of acquisitions and dispositions completed in the last 12 months and foreign currency, European revenues grew 5.3% for the nine months ended May 31, 2018, compared to the same period a year ago. Foreign currency exchange rate fluctuations reduced our European revenue growth rate by 200 basis points.
Asia Pacific revenue growth of 13.3% during the nine months ended May 31, 2018, compared to the same period a year ago was primarily due to growth from analytics, both fixed income and equity products, and CTS. Excluding the effects of acquisitions and dispositions completed in the last 12 months and foreign currency, Asia Pacific revenues grew 13.1% for the nine months ended May 31, 2018, compared to the same period a year ago. Foreign currency exchange rate fluctuations reduced our Asia Pacific revenue by less than $0.1 million.
Operating Expenses
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Cost of services
|
|
$
|
165,073
|
|
|
$
|
146,426
|
|
|
|
12.7
|
%
|
|
$
|
489,829
|
|
|
$
|
405,311
|
|
|
|
20.9
|
%
|
SG&A
|
|
|
81,573
|
|
|
|
78,052
|
|
|
|
4.5
|
%
|
|
|
236,606
|
|
|
|
219,519
|
|
|
|
7.8
|
%
|
Total operating expenses
|
|
$
|
246,646
|
|
|
$
|
224,478
|
|
|
|
9.9
|
%
|
|
$
|
726,435
|
|
|
$
|
624,830
|
|
|
|
16.3
|
%
|
Operating Income
|
|
$
|
93,265
|
|
|
$
|
87,642
|
|
|
|
6.4
|
%
|
|
$
|
277,848
|
|
|
$
|
269,707
|
|
|
|
3.0
|
%
|
Operating Margin
|
|
|
27.4
|
%
|
|
|
28.1
|
%
|
|
|
|
|
|
|
27.7
|
%
|
|
|
30.2
|
%
|
|
|
|
|
Cost of Services
Three months ended
May
31
, 201
8
compared t
o three months ended
May
31
, 201
7
For the three months ended May 31, 2018, cost of services increased 12.7% to $165.1 million, compared to $146.4 million in the same period a year ago. Cost of services, expressed as a percentage of revenues, was 48.6% during the third quarter of fiscal 2018, an increase of 170 basis points over the prior year period primarily driven by restructuring charges and certain one-time administration expenses.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues increased 110 basis points in the third quarter of fiscal 2018 compared to the same period a year ago. The increase is primarily due to annual base salary increases, the hiring of 312 net new employees over the last 12 months with the majority of their compensation included in cost of services, and a weaker U.S. dollar resulting in a negative foreign currency impact.
Amortization of acquired intangible assets, when expressed as a percentage of revenues, increased in the third quarter of fiscal 2018 compared to the same period a year ago, primarily due to recent acquisitions, which added $93.2 million of intangible assets to be amortized over a weighted-average life of 11.5 years. Data costs, when expressed as a percentage of revenues, increased 40 basis points due primarily from our recent acquisitions and higher variable data costs associated with additional users.
Nine
months ended
May
31
, 2018
compared to
Nine
months ended
May
31
, 2017
For the nine months ended May 31, 2018, cost of services increased 20.9% to $489.8 million, compared to $405.3 million in the same period a year ago. Cost of services, expressed as a percentage of revenues, was 48.8% during the first nine months of fiscal 2018, an increase of 350 basis points over the prior year period. This increase was primarily due to higher employee compensation costs driven by an increased employee base, restructuring actions, amortization of intangible assets associated with our recent acquisitions, and data costs from acquisitions and additional users.
SG&A
Three months ended
May
31
, 201
8
compared to three months ended
May
31
, 201
7
For the three months ended May 31, 2018, SG&A expenses increased to $81.6 million, up 4.5%, from $78.1 million in the same period a year ago. SG&A expenses, expressed as a percentage of revenues, were 24.0% during the third quarter of fiscal 2018, a decrease of 100 basis points over the prior year period as a result of foreign currency exchange gains on hedging activities and increased revenues while holding overhead costs flat on a year over year basis partially offset by restructuring costs.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues, decreased 62 basis points in the third quarter of fiscal 2018 compared to the same period a year ago. The decrease is primarily related to a higher percentage of our employee base working in a cost of services capacity compared to an SG&A role.
Nine
months ended
May 31
, 2018
compared to
nine
months ended
May
31
, 2017
For the nine months ended May 31, 2018, SG&A expenses increased to $236.6 million, up 7.8% from $219.5 million in the same period a year ago. SG&A expenses, expressed as a percentage of revenues, was 23.6% during the first nine months of fiscal 2018, a decrease of 100 basis points over the prior year period. This decrease was primarily due to revenue growth outpacing the growth of SG&A related expenses on a year over year basis, foreign currency exchange gains on hedging activities and lower employee compensation, partially offset by restructuring costs.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues decreased 40 basis points during the first nine months of fiscal 2018 compared to the same period a year ago. The decrease is primarily related to a higher percentage of our employee base working in a cost of services capacity compared to an SG&A role.. Compensation for our employees within the content collection, consulting, product development, software and systems engineering groups are recorded within cost of services while employees within our sales and various other support and administrative departments are reflected in SG&A. In the past 12 months, the majority of our hiring has been in departments within cost of services, thus driving a higher percentage of our employee base compensation in this area.
Operating Income and Operating Margin
Three months ended
May
31
, 2018
compared to three months ended
May
31
, 2017
Operating income increased 6.4% to $93.3 million for the three months ended May 31, 2018,
compared to the prior year period. Our operating margin during the third quarter of fiscal 2018 was 27.4%, down from 28.1% a year ago. The lower operating margin was primarily due to restructuring charges, higher intangible asset amortization and data costs from recent acquisitions, an increase in employee compensation costs, and a weaker U.S. dollar that resulted in a negative impact from foreign currency, partially offset by a gain on our Indian Rupee foreign exchange hedges.
Nine
months ended
May
31
, 201
8
compared to
nine
months ended
May
31
, 201
7
Operating income increased 3.0% to $277.8 million for the nine months ended May 31, 2018, compared to the prior year period. Our operating margin during the first nine months of fiscal 2018 was 27.7%, down from 30.2% a year ago. The lower operating margin was primarily due to higher expenses from recent acquisitions, an increase in employee compensation costs, and restructuring actions, partially offset by a gain on our Indian Rupee foreign exchange hedges.
O
perating Income by Segment
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
U.S.
|
|
$
|
37,987
|
|
|
$
|
34,382
|
|
|
|
10.5
|
%
|
|
$
|
117,285
|
|
|
$
|
110,574
|
|
|
|
6.1
|
%
|
Europe
|
|
|
37,380
|
|
|
|
37,766
|
|
|
|
(1.0
|
)%
|
|
|
107,344
|
|
|
|
114,282
|
|
|
|
(6.1
|
)%
|
Asia Pacific
|
|
|
17,898
|
|
|
|
15,494
|
|
|
|
15.5
|
%
|
|
|
53,219
|
|
|
|
44,851
|
|
|
|
18.7
|
%
|
Consolidated
|
|
$
|
93,265
|
|
|
$
|
87,642
|
|
|
|
6.4
|
%
|
|
$
|
277,848
|
|
|
$
|
269,707
|
|
|
|
3.0
|
%
|
Our operating segments are aligned with how we manage the business and the demographic markets in which we serve and how the chief operating decision maker assesses performance. 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, 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 centers of excellence, located in India and the Philippines, primarily focus on content collection that benefit all our segments. The expenses incurred at these locations are allocated to each segment based on a percentage of revenues.
Three months ended
May
31
, 201
8
compared to three months ended
May
31
, 201
7
U.S. operating income increased 10.5% to $38.0 million during the three months ended May 31, 2018, compared to $34.4 million in the same period a year ago. The increase in U.S. operating income is primarily from revenue growth of 6.3% partially offset by increases in expenses related to employee compensation and data costs. U.S. revenue growth was driven by U.S. organic ASV growth of 5.0% and sales of our analytics suite and CTS products to institutional asset managers. Employee compensation increased primarily due to annual base salary increases, restructuring actions and higher employee benefit costs including medical expenditures. Data costs increased due to our recent acquisitions and additional users.
European operating income decreased 1.0% to $37.4 million during the three months ended May 31, 2018, compared to $37.8 million in the same period a year ago. The decrease in European operating income was due to higher employee compensation, amortization of intangible assets, and data costs partially offset by revenue growth. The impact of foreign currency reduced European operating income by $2.3 million year over year. Amortization of intangible assets increased due to acquired intangible assets from the recent acquisitions, the majority of which reside within our European segment. Data costs increased due to higher data costs related to our recently acquired businesses. These costs were partially offset by European revenue growth from increased sales in fixed income and risk analytics products.
Asia Pacific operating income increased 15.5% to $17.9 million during the three months ended May 31, 2018, compared to $15.5 million in the same period a year ago. The increase in the Asia Pacific operating income was due to revenue growth of 14.1%, partially offset by a rise in employee compensation. The impact of foreign currency increased Asia Pacific operating income by $1.2 million year over year. Asia Pacific revenue growth was due primarily to an increase in new business focused on our risk analytics suite.
Nine
months ended
May
31
, 2018
compared to
nine
months ended
May 31
, 2017
U.S. operating income increased 6.1% to $117.3 million during the nine months ended May 31, 2018,
compared to $110.6 million in the same period a year ago. The increase in U.S. operating income was primarily due to revenue growth of 8.3% partially offset by increases in expenses related to employee compensation, computer equipment and data costs. Employee compensation increased primarily due to annual base salary increases, restructuring actions, and higher employee benefit costs including medical expenditures. Computer-related expenses, which include depreciation, maintenance, software and other fees, increased 20.8% year over year due to upgrades to existing computer systems in Norwalk, additional server equipment in our data centers located in New Jersey and Virginia, as well as laptop computers and peripherals for new and existing employees. Data costs increased primarily to higher third-party data costs from our recent acquisitions and additional users.
European operating income decreased 6.1% to $107.3 million during the nine months ended May 31, 2018, compared to $114.3 million in the same period a year ago. The decrease in European operating income was due to higher employee compensation, amortization of intangible assets, and data costs partially offset by revenue growth of 21.8%. The impact of foreign currency decreased European operating income by $4.8 million year over year. The employee compensation increase was mainly due to annual base salary increases and additional employee headcount in our European offices. The majority of these acquisitions primarily reside within our European segment, leading to increased amortization of intangible assets and data costs compared to the prior year period.
Asia Pacific operating income increased 18.7% to $53.2 million during the nine months ended May 31, 2018, compared to $44.9 million in the same period a year ago. The increase in the Asia Pacific operating income was due to revenue growth of 13.3%, partially offset by increases in employee compensation. The impact of foreign currency increased Asia Pacific operating income by $2.0 million year over year. Employee compensation was higher year over year as a result of a 6.7% increase in our Asia Pacific workforce.
Income Taxes, Net Income and Diluted Earnings per Share
|
|
Three months ended May 31,
|
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Provision for income taxes
|
|
$
|
14,765
|
|
|
$
|
19,815
|
|
|
|
(25.5
|
)%
|
|
$
|
69,641
|
|
|
$
|
65,832
|
|
|
|
5.8
|
%
|
Net income
|
|
$
|
74,746
|
|
|
$
|
65,414
|
|
|
|
14.3
|
%
|
|
$
|
198,262
|
|
|
$
|
198,707
|
|
|
|
(0.2
|
)%
|
Diluted EPS
|
|
$
|
1.91
|
|
|
$
|
1.66
|
|
|
|
15.1
|
%
|
|
$
|
5.01
|
|
|
|
5.00
|
|
|
|
0.2
|
%
|
Income Taxes
Three months ended
May
31
, 201
8
compared to three months ended
May
31
, 201
7
For the three months ended May 31, 2018, the provision for income taxes was $14.8 million, down 25.5% from the same period a year ago due to the impacts from the TCJA. On December 22, 2017, the U.S. government enacted comprehensive tax legislation through the TCJA. The TCJA, among other things, lowered the statutory U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018, implemented a modified territorial tax system and imposed a mandatory one-time transition tax on accumulated E&P of foreign subsidiaries that were previously deferred from U.S. income taxes. Due to our August 31 fiscal year-end, the lower tax rate was phased in, resulting in a blended U.S. statutory federal rate of 25.7% for the full fiscal 2018 year and a 21% rate for subsequent years. Our third quarter fiscal 2018 effective tax rate was 16.5% compared with 23.2% a year ago primarily due to the TCJA.
Nine
months ended
May
31
, 2018 compared to
nine
months ended
May
31
, 2017
For the nine months ended May 31, 2018, the provision for income taxes was $69.6 million, up 5.8% from the same period a year ago. The increase was primarily due to the one-time transition tax expense of $23.2 million and a non-recurring $2.2 million tax expense related to the remeasurement of our net U.S. deferred tax position, both of which were recorded in the second quarter of fiscal 2018. These income tax charges were partially offset by a lower blended statutory rate
,
the recognition of $7.1 million of excess tax benefits from stock option exercises and a $1.5 million income tax benefit from settlements with tax authorities. We had approximately $250.0 million in undistributed foreign E&P generated prior to December 31, 2017, which resulted in a provisional amount for the one-time transition tax expense of $23.2 million, payable over an eight-year period. This amount may change as we finalize the calculation of foreign E&P previously deferred from U.S. federal taxation, as well as the analysis of available foreign tax credits. Due to the changes in taxation of undistributed foreign earnings under the TCJA, we will continue to analyze foreign subsidiary earnings, as well as global working capital requirements, and may repatriate earnings when the amounts are remitted substantially free of additional tax. In addition, the estimates may also be affected by changes in interpretations at the federal and state levels, and any additional regulatory guidance that may be issued.
Net Income and Diluted Earnings per Share
Three months ended
May
31
, 2018 compared to three months ended
May
31
, 2017
Net income increased 14.3% to $74.7 million and diluted EPS increased 15.1% to $1.91 for the three months ended May 31, 2018, compared to the three months ended May 31, 2017. Net income and diluted EPS increased during the third quarter of fiscal 2018 due to $7.4 million of incremental revenue from acquisitions completed in the last 12 months, a decrease in the quarterly effective tax rate from 23.2% a year ago to 16.5% in the current quarter and a reduction in our weighted average shares outstanding due to significant share repurchases during the quarter. These benefits were partially offset by an increase in interest expense associated with our outstanding debt and a $1.1 million negative foreign currency impact, which lowered diluted EPS by $0.02.
Nine
months ended
May
31
, 2018 compared to
nine
months ended
May 31
, 201
7
Net income decreased 0.2% to $198.3 million while diluted EPS increased 0.2% to $5.01 for the nine months ended May 31, 2018, compared to the nine months ended May 31, 2017. Net income decreased due to restructuring actions initiated during the most recent third quarter and a $3.0 million negative foreign currency impact. . Diluted EPS increased due to the aforementioned drop in our weighted average shares outstanding.
Adjusted Net Income and Diluted Earnings per Share
(non-GAAP)
(Details may not sum to total due to rounding)
Financial measures in accordance with U.S. GAAP including net income and diluted EPS have been adjusted below. These adjusted financial measures are used both in presenting our results to stockholders and the investment community, and also 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 they permit investors to view our performance using the same tools that we use to gauge progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.
|
|
Three months ended May 31,
|
|
(In thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
GAAP net income
|
|
$
|
74,746
|
|
|
$
|
65,414
|
|
|
|
14.3
|
%
|
Intangible asset amortization
|
|
|
5,190
|
|
|
|
4,305
|
|
|
|
|
|
Deferred revenue fair value adjustment
|
|
|
1,242
|
|
|
|
1,886
|
|
|
|
|
|
Other non-recurring items
|
|
|
3,935
|
|
|
|
3,262
|
|
|
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
(1,918
|
)
|
|
|
|
|
Adjusted net income
|
|
$
|
85,113
|
|
|
$
|
72,949
|
|
|
|
16.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP diluted EPS
|
|
$
|
1.91
|
|
|
$
|
1.66
|
|
|
|
15.1
|
%
|
Intangible asset amortization
|
|
|
0.13
|
|
|
|
0.11
|
|
|
|
|
|
Deferred revenue fair value adjustment
|
|
|
0.03
|
|
|
|
0.05
|
|
|
|
|
|
Other non-recurring items
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
(0.05
|
)
|
|
|
|
|
Adjusted diluted EPS
|
|
$
|
2.18
|
|
|
$
|
1.85
|
|
|
|
17.8
|
%
|
Weighted average common shares (diluted)
|
|
|
39,104
|
|
|
|
39,457
|
|
|
|
|
|
The presentation of th
e
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.
Adjusted net income for the three months ended May 31, 2018 was $85.1 million, an increase of 16.7% from the prior year period. As presented in the table above, adjusted net income for the three months ended May 31, 2018 excludes $5.2 million (after-tax) of intangible asset amortization, $1.2 million (after-tax) related to deferred revenue fair value adjustments from purchase accounting, $3.9 million (after-tax) of non-recurring severance charges, stock-based compensation acceleration and restructuring actions. Adjusted net income for the three months ended May 31, 2017 was $72.9 million, which excludes $4.3 million (after-tax) of intangible asset amortization, $1.9 million (after-tax) related to deferred revenue fair value adjustments from purchase accounting, $3.3 million (after-tax) of non-recurring acquisition costs and $1.9 million of income tax benefits related to finalizing prior years’ tax returns and other discrete items.
Fiscal 2018 third quarter adjusted diluted EPS of $2.18 excludes the net effect of the $0.13 detriment from the intangible asset amortization, $0.03 detriment from the deferred revenue fair value adjustments and $0.10 detriment from non-recurring severance charges, stock-based compensation acceleration and restructuring actions. Fiscal 2017 third quarter adjusted diluted EPS of $1.85 excludes the net effect of the $0.24 detriment from the intangible asset amortization, deferred revenue fair value adjustments and non-recurring acquisition costs and $0.05 benefit from finalizing prior years’ tax returns and other discrete items.
Liquidity
The table below, for the periods indicated, provides selected cash flow information:
|
|
Nine months ended May 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
279,342
|
|
|
$
|
220,312
|
|
Capital expenditures
(1)
|
|
|
(18,375
|
)
|
|
|
(25,981
|
)
|
Free cash flow
(2)
|
|
$
|
260,967
|
|
|
$
|
194,331
|
|
Net cash used in investing activities
|
|
$
|
(18,111
|
)
|
|
$
|
(334,407
|
)
|
Net cash used in financing activities
|
|
$
|
(241,159
|
)
|
|
$
|
51,407
|
|
Cash and cash equivalents at end of period
|
|
$
|
213,061
|
|
|
$
|
161,758
|
|
|
(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 $213.1 million, or 15.1% of our total assets at May 31, 2018, compared with $161.8 million, or 11.9% of our total assets at May 31, 2017. Our cash and cash equivalents increased $18.3 million during the first nine months of fiscal 2018 due to cash provided by operations of $279.3 million and $57.5 million in proceeds from the exercise of employee stock options. These cash inflows were partially offset by $65.0 million in dividend payments, $18.4 million of capital expenditures, $1.7 million from the effects of foreign currency fluctuations, and $235.9 million in share repurchases, which included $234.8 million under the existing share repurchase program and $1.1 million in shares repurchased from employees to cover their cost of taxes upon vesting of restricted stock.
Net cash used in investing activities was $18.1 million in the first nine months of fiscal 2018, representing a $316.3 million decrease from the same period a year ago. This decrease was primarily due to acquisitions completed in the first nine months of fiscal 2017 which represented $301.8 million of total cash used for acquisitions. Additionally, cash used in investing activities decreased year over year due to lower capital expenditures of $7.6 million and a decrease in the purchase of investments (net of sales) of $6.8 million year over year.
Net cash used in financing activities was $241.2 million in the first nine months of fiscal 2018, representing a $292.6 million decrease from the same period a year ago. This decrease was primarily due to $275.0 million in proceeds (net of repayment) from the issuance of long-term debt in fiscal 2017 that did not occur in fiscal 2018. In addition to the issuance of debt, the decrease was due to higher dividend payments of $5.9 million, increase in share repurchases of $21.1 million, and a reduction of tax benefits from share-based payment arrangements due to the adoption of the accounting standard update, which required us to report $7.1 million in benefits from a financing to an operating activity. Offsetting the above financing activities was also an increase in proceeds from employee stock plans of $15.4 million.
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, 2018, our total cash and cash equivalents worldwide was $213.1 million with $574.7 million in outstanding borrowings (net of $0.3 million of unamortized debt issuance costs). Approximately $39.4 million of our total available cash and cash equivalents is held in bank accounts located within the U.S., $118.8 million in Europe (predominantly within the UK, France, and Germany) and the remaining $54.9 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.
Free cash flow generated in the nine months ended May 31, 2018 was $261.0 million, an increase of 34.3% compared to the same period a year ago. Free cash flow was attributable to $198.3 million of net income, $67.0 million of non-cash items, $14.1 million of working capital changes less $18.4 million in capital expenditures. The year over year free cash flow growth was driven by positive working capital changes totaling $47.5 million and lower capital expenditures of $7.6 million. Working capital improved year over year primarily due to increased cash collected on our receivables and the adoption of the accounting standard update for share-based payments, which required us to report $7.1 million in benefits from a financing to an operating activity.
Free cash flow generated over the last twelve months was $350.3 million and exceeded net income by 35.9% over that same period. Included in the twelve-month calculation of free cash flow was $379.6 million of net cash provided by operations less $29.3 million of capital expenditures.
C
apital Resources
Capital Expenditures
Capital expenditures in the third quarter of fiscal 2018 were $6.0 million, compared with $7.9 million a year ago. Approximately $3.8 million, or 63.8%, of our capital expenditures was for upgrades to existing computer systems in Norwalk, additional server equipment in our data centers located in New Jersey and Virginia, as well as laptop computers and peripherals for new and existing employees. The remainder of our capital expenditures was primarily for the build out of office space including $1.2 million in Hong Kong.
Capital expenditures were $18.4 million during the first nine months of fiscal 2018, down from $26.0 million in the same period a year ago. Approximately $12.8 million, or 69.6%, of capital expenditures related to upgrades to existing computer systems at our corporate headquarters in Norwalk, laptop computers and peripherals for new employees and additional servers for our existing data centers. The remainder of our capital expenditures was primarily for the build out of office space including $1.2 million in Hong Kong, $0.9 million in the Netherlands and $0.7 million in New York.
Capital Needs
Long-Term Debt
On March 17, 2017, we entered into a Credit Agreement (the “2017 Credit Agreement”) between FactSet, as the borrower, and PNC Bank, National Association (“PNC”), as the administrative agent and lender. The 2017 Credit Agreement provides for a $575.0 million revolving credit facility (the “2017 Revolving Credit Facility”). We may request borrowings under the 2017 Revolving Credit Facility until its maturity date of March 17, 2020. The 2017 Credit Agreement also allows us, subject to certain requirements, to arrange for additional borrowings with PNC for an aggregate amount of up to $225.0 million, provided that any such request for additional borrowings must be in a minimum amount of $25.0 million. At our option, a borrowing may be in the form of a base rate loan or a LIBOR rate loan. Borrowings under the loan bear interest on the outstanding principal amount at a rate equal to the daily LIBOR rate plus 1.00%. Interest on the loan outstanding is payable quarterly in arrears and on the maturity date. There are no prepayment penalties if we elect to prepay the outstanding loan amounts prior to the scheduled maturity date. The principal balance is payable in full on the maturity date.
In conjunction with our entrance into the 2017 Credit Agreement, we borrowed $575.0 million in the form of a LIBOR rate loan under the 2017 Revolving Credit Facility. Proceeds from the 2017 Revolving Credit Facility were also used to fund our acquisition of BISAM.
All outstanding loan amounts are reported as
Long-term debt
within the Consolidated Balance Sheet, presented net of related loan origination fees at May 31, 2018. The loan origination fees are amortized into interest expense over the term of the loan using the effective interest method. During the three months ended May 31, 2018 and 2017, we paid approximately $4.3 million and $2.9 million in interest on our outstanding debt amounts, respectively. During the nine months ended May 31, 2018 and 2017, we paid approximately $11.3 million and $5.3 million in interest on our outstanding debt amounts, respectively. As of May 31, 2018, no commitment fee was owed by us since we borrowed the full amount under the 2017 Credit Agreement.
The 2017 Credit Agreement contained covenants restricting certain FactSet activities, which are usual and customary for this type of loan. In addition, the 2017 Credit Agreement required that we 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 the covenants of the 2017 Credit Agreement as of May 31, 2018 and August 31, 2017.
As of May 31, 2018 the fair value of our long-term debt was $575.0 million, which we believe approximated the 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 $2.2 million of standby letters of credit have been issued in connection with our leased office spaces as of May 31, 2018. 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, 2018 and August 31, 2017, 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) income as a component of stockholders’ equity.
As of May 31, 2018 our annualized non-U.S. dollar denominated revenues are estimated to be $99.5 million while our non-U.S. dollar denominated expenses are estimated to be $323.6 million, which translates into a net foreign currency exposure of $224.1 million. Our foreign currency exchange exposure is related to our operating expense base in countries outside the U.S., where 74% of our employees were located as of May 31, 2018. During the third quarter of fiscal 2018, foreign currency movements decreased operating income by $1.1 million, compared to an increase in operating income of $2.5 million in the same period a year ago. During the first nine months of fiscal 2018, foreign currency movements decreased operating income by $3.0 million, compared to an increase in operating income of $6.4 million in the same period a year ago.
Foreign Currency Hedges
As of May 31, 2018, we maintained foreign currency forward contracts on the Indian Rupee to hedge approximately 75% of our exposures through the third quarter of fiscal 2019 and 50% of our exposure from the fourth quarter of fiscal 2019 through the end of the second quarter of fiscal 2020. We also maintained foreign currency forward contracts on the Philippine Peso to hedge approximately 75% of our exposures through the fourth quarter of fiscal 2020. The gross notional value of foreign currency forward contracts to purchase Indian Rupees with U.S. dollars was Rs. 3.7 billion. The gross notional value of foreign currency forward contracts to purchase Philippine Pesos with U.S. dollars was Php 3.1 billion.
There were no other outstanding foreign currency forward contracts as of May 31, 2018. A gain on derivatives of $1.0 million was recorded into operating income during the three months ended May 31, 2018, compared to a loss of $0.4 million in the same period a year ago. During the first nine months of fiscal 2018, a gain on derivatives of $2.6 million was recorded into operating income, compared to a loss on derivatives of $2.8 million in the same period a year ago.
Off-Balance Sheet Arrangements
At May 31, 2018 and August 31, 2017, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing, other debt arrangements, or other contractually limited purposes.
Share Repurchase Program
Repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. In the third quarter of 2018, we repurchased 620,000 shares for $122.0 million under the existing share repurchase program compared to 300,000 shares for $48.3 million in the same period a year ago. During the first nine months of fiscal 2018, we repurchased 1,204,920 shares for $234.8 million compared to 1,284,822 shares for $208.8 million in the prior year comparable period. Over the last 12 months, we have returned $368.9 million to stockholders in the form of share repurchases and cash dividends. As of May 31, 2018, $309.3 million is available for future share repurchases under the existing share repurchase program.
On March 26, 2018, our Board of Directors approved a $300.0 million expansion of the existing share repurchase program. Subsequent to this expansion, $431.2 million is available 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, 2017, we had total purchase commitments of $81.0 million. There were no material changes in our purchase commitments with suppliers during the first nine months of fiscal 2018.
On February 14, 2018, we entered into a new lease to relocate our corporate headquarters to 45 Glover Avenue in Norwalk, Connecticut. The new location will comprise approximately 173,000 square feet of office space. We expect to take possession of the newly leased property on or around January 1, 2019 for fit-out purposes. We will continue to occupy our existing headquarters space until the new headquarters property is ready for occupancy, currently estimated to be in the second quarter of fiscal 2020. Including new lease agreements executed during fiscal 2018, our worldwide leased office space increased to approximately 1,760,000 square feet at May 31, 2018, up 617,000 square feet, or 54.0%, from August 31, 2017. This increase was primarily related to additional office space in the Philippines and the new headquarters lease signed in February 2018. Future minimum commitments for our operating leases in place as of May 31, 2018 totaled $416.3 million, an increase from $281.7 million as of August 31, 2017 primarily due to the aforementioned additional office space in the Philippines and the new headquarters lease in Norwalk.
As disclosed in the
Capital Resources
section of the MD&A, we entered into the 2017 Credit Agreement on March 17, 2017 and borrowed $575.0 million.
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 first nine months of fiscal 2018.
D
ividends
On May 7, 2018, our Board of Directors approved a regular quarterly cash dividend of $0.64 per share. The $0.08 per share or 14.3% increases marked our 13
th
consecutive year we have increased dividends, highlighting our continued commitment to returning value to our shareholders. The cash dividend of $24.6 million was paid on June 19, 2018, to common stockholders of record on May 31, 2018. 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
Estimate
s
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, 2017.
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, 2017. There were no significant changes in our accounting policies or critical accounting estimates during the first nine months of fiscal 2018.
New Accounting Pronouncements
See Note 3,
Recent Accounting Pronouncements
, in the Notes to the Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption, which we include herein by reference.
Market Trends
In the ordinary course of business, we are exposed to financial risks involving the volatility of equity markets as well as foreign currency and interest rate fluctuations.
Shift from Active to Passive Investment Management
Approximately 84.4% of our ASV is derived from our investment management clients. The prosperity of these clients is tied to equity assets under management. An equity market decline not only depresses assets under management but also could cause a significant increase in redemption requests to move money out of equities and into other asset classes. Moreover, a shift from active investment management to passive investment management can result in lower demand for our services. Our investment banking clients, that provide M&A advisory work, capital markets services and equity research, account for approximately 15.6% 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. Our clients could also 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.
Foreign Currency Volatility
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.
Brexit
Volatility is expected to continue in the short term as the UK negotiates its exit from the European Union. The initial UK economic performance has been stronger than originally expected as the timeframe from the initial vote increases. Additionally, increased European confidence and UK consumer spending has contributed to the recovery of the economic outlook. The negotiation process is continuing, including the latest milestone of the UK and European Union developing a draft of the legal text for the transition deal. Any impact from Brexit on us will depend, in part, on the longer-term outcome of tariff, trade, regulatory and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect our operations and financial results. While we evaluate our own risks and uncertainty related to Brexit, we will continue to partner with our clients to help them navigate the fluctuating international markets.
MiFID II
In the European Union, the new version of the Markets in Financial Instruments Directive, also known as "MiFID II", became effective in January 2018. The main purpose of this initiative was to ensure fairer, safe and more efficient markets and facilitate greater transparency for all participants. Research is one area where both buy-side and sell-side clients have seen and will continue to see significant change requirements as a result of the MiFID II inducement rules. The goal of the new legislative framework is to strengthen investor protection and improve the functioning of financial markets, making them more efficient, resilient and transparent. New reporting requirements and tests will increase the amount of information available, and reduce the use of dark pools and OTC trading. MiFID II requirements have meant pricing models and business practices have had to adapt significantly. We will continue to evaluate our own risks and uncertainty related to MiFID II and partner with our clients to help them navigate these new rules. However, recently we have noticed a substantial interest in our research unbundling solutions, which is part of the opportunity for us, but more importantly, allows our clients to leverage our technology solutions for MiFID II compliance.
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
Starting with our first quarter of fiscal 2018, we provided annual guidance and discontinued quarterly guidance. The following forward-looking statements reflect our expectations as of June 26, 2018. Given the risk factors, uncertainties and assumptions discussed below, 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.
Fiscal 2018 Expectations:
We are
confirming
our
guidance, provided in the first quarter of fiscal 2018, for the following metrics:
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Organic ASV is expected to increase in the range of $65 million and $85 million implying a growth rate in the range of 4.9% to 6.5% compared with fiscal 2017.
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GAAP Revenues are expected to be in the range of $1.34 billion and $1.36 billion.
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Adjusted operating margin is expected to be in the range of 31.0% and 32.5%.
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We are
updating
our
guidance, provided in the first quarter of fiscal 2018, for the following metrics:
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GAAP operating margin is expected to be in the range of 27.5% and 29.0%.
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Our annual effective tax rate is expected to be in the range of 18.0% and 19.5% primarily as a result of the TCJA. This range excludes the one-time deemed repatriation tax on historical unrepatriated foreign earnings, amongst other provisions related to the TCJA. Our fiscal year end is August 31, resulting in a blended federal statutory tax rate for the full 2018 fiscal year.
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GAAP diluted EPS is now expected to be in the range of $6.92 and $7.17. Adjusted diluted EPS is now expected to be in the range of $8.37 and $8.62.
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Both GAAP operating margin and GAAP diluted EPS guidance do not include the effects of any non-recurring benefits or charges that may arise in the fourth quarter of fiscal 2018.
Business Developments
Planned Departure of Chief Financial Officer
On May 8, 2018, we entered into a separation of employment and general release agreement with Maurizio Nicolelli (the “Separation Agreement”), pursuant to which Mr. Nicolelli will remain in his current position as our Chief Financial Officer (“CFO”) until his successor is appointed, participate in an orderly transition of duties to the new CFO and remain until his effective termination date of December 31, 2018. A copy of the Separation Agreement is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
Planned Departure of Chief Human Resources Officer
On July 5, 2018, we entered into a separation of employment and general release agreement with Edward Baker-Greene (the “Agreement”), pursuant to which Mr. Baker-Greene will remain in his current position as our Chief Human Resources Officer (“CHRO”) until his successor is appointed, participate in an orderly transition of duties to the new CHRO and remain until his effective termination date of November 30, 2018. A copy of the Agreement is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.