OREANDA-NEWS. FactSet Research Systems Inc. (NYSE:FDS) (NASDAQ:FDS), a leading provider of integrated financial information and analytical applications, today announced its results for the third quarter of fiscal 2016.

For the quarter ended May 31, 2016, revenues grew to $287.5 million. Operating income was $89.3 million compared to $85.4 million in the prior year period. Net income was $66.8 million versus $61.4 million a year ago. Diluted earnings per share were $1.62 compared to $1.45 in the same period of fiscal 2015.

Adjusted operating income and margin, adjusted net income and adjusted diluted earnings per share exclude both deal-related amortization and non-recurring items. The Company believes that these adjusted financial measures better reflect the underlying economic performance of FactSet. A supplementary schedule reconciling GAAP results to these adjusted financial measures is presented on page 10 of this earnings release.

Excluding revenues acquired from acquisitions completed within the last 12 months and the effects of foreign currency, organic revenues grew 9.0%. Adjusted operating income for the quarter, which excludes $4.1 million of deal-related amortization and $1.4 million of professional fees primarily related to the sale of the Company’s Market Metrics business, was $94.8 million, up 8.1% over the prior year. Adjusted net income increased 9.7% over the year ago third quarter and excludes the after-tax charge of $2.9 million from deal-related amortization, the after-tax charge of $1.0 million from professional fees and $3.2 million in income tax benefits from finalizing prior years’ tax returns and other discrete items. Adjusted diluted EPS rose 12.3% to $1.64 and excludes the net effect of deal-related amortization, incremental professional fees and income tax benefits.

Consolidated Statements of Income

       
(Condensed and Unaudited)   Three Months Ended
May 31,		  
(In thousands, except per share data)   2016   2015    Change
             
Revenues $ 287,501 $ 254,522 13.0 %
Adjusted operating income $ 94,769 $ 87,640 8.1 %
Adjusted net income $ 67,545 $ 61,598 9.7 %
Adjusted diluted earnings per share $ 1.64 $ 1.46 12.3 %
GAAP diluted earnings per share $ 1.62 $ 1.45 11.7 %
Diluted weighted average shares   41,189   42,297    
             
             

“We had another strong quarter, amidst an uncertain market. This reaffirms the strength of the FactSet business model and the appeal of our products and solutions,” said Phil Snow, FactSet’s CEO.

Annual Subscription Value (“ASV”)

ASV was $1.156 billion at May 31, 2016, up 9.3% organically from the prior year. Over the last three months organic ASV increased $16.3 million, which excludes the effects of foreign currency. ASV at any given point in time represents the forward-looking revenues for the next 12 months from all services currently being supplied to clients.

Buy-side and sell-side ASV growth rates for the third quarter of fiscal 2016 were 9.6% and 8.1%, respectively. Buy-side clients account for 83.6% of ASV and the remainder is derived from sell-side firms that perform mergers and acquisitions advisory work, capital markets services and equity research. Supplementary tables covering buy-side and sell-side ASV growth rates are presented on page 12 of this earnings release.

Financial Highlights – Third Quarter of Fiscal 2016

  • ASV from U.S. operations was $775.6 million, increasing 9.0% organically over the prior year. U.S. revenues were $193.2 million. Excluding revenues from acquisitions completed within the past 12 months, the U.S. growth rate was 8.5%.   
  • ASV from non-U.S. operations grew 10.1% organically to $380.7 million and now represents 32.9% of total ASV, up from 32.6% a year ago. Non-U.S. revenues rose to $94.3 million. Excluding the impact of foreign currency and acquisitions completed within the past 12 months, the international revenue growth rate was 10.1%.
  • Adjusted operating margin was 33.0%, compared to 34.4% in the year ago third quarter. Portware’s operations reduced FactSet’s just completed third quarter operating margin by 130 basis points and diluted earnings per share by $0.01. Excluding deal-related amortization, the Portware acquisition was $0.03 accretive to the third quarter of fiscal 2016.
  • The Company’s effective tax rate for the third quarter was 24.8%, as compared to 28.5% a year ago. Excluding income tax benefits from both periods, the current year annual effective tax rate was 28.4% compared to 30.1% in the prior period.
  • Quarterly free cash flow was $88.6 million. Free cash flow in the last 12 months grew 9.9% and totaled $299.7 million.

Operational Highlights – Third Quarter of Fiscal 2016

  • Client count rose by 18 and totaled 3,075 at May 31, 2016.
  • User count grew 7.7% to 63,535.
  • Annual client retention was greater than 95% of ASV. When expressed as a percentage of clients, annual retention was 94%, consistent with the prior year third quarter.
  • Employee count was 8,100 at May 31, 2016, up 1,149 people in the past 12 months. Excluding the acquired Portware workforce, headcount increased 14.1% from a year ago. 
  • Capital expenditures were $8.2 million.
  • The regular quarterly dividend was increased 13.6% from $0.44 to $0.50 per share, beginning with the Company’s dividend payment on June 21, 2016.
  • FactSet repurchased 505,000 shares for $76.3 million during the third quarter. On May 19, 2016, the Company’s Board of Directors approved a $165 million expansion of the existing share repurchase program. Including this expansion, $360 million remained authorized for further repurchases as of May 31, 2016. Over the last 12 months, $344 million has been returned to stockholders in the form of share repurchases and dividends, funded entirely by cash generated from operations.
  • Common shares outstanding were 40.7 million at May 31, 2016.
  • FactSet was ranked #89 on Fortune’s “100 Best Companies to Work For,” marking the Company’s eighth appearance on the list in the last nine years.
  • FactSet was recently recognized as one of the UK’s “Best Workplaces” by the Great Place to Work® Institute UK for the eighth consecutive year.
  • 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.

Sale of the Market Metrics Business

On May 21, 2016 FactSet entered into a definitive agreement to sell its market research business focused on advisor-sold investments and insurance, consisting of Market Metrics LLC and Matrix Data Limited, to Asset International, a portfolio company of Genstar Capital. The total purchase price is approximately $165 million, subject to certain working capital adjustments, with an additional earn-out of $10 million based on the achievement of certain growth targets over the next two years. The transaction is expected to close in FactSet’s fourth quarter of fiscal 2016, with the proceeds from the sale being primarily used for share repurchases under the Company’s existing program. The sale is not expected to have a material impact on FactSet’s fourth quarter of fiscal 2016 or full-year fiscal 2017 results.

Election of two new Directors, Sheila Jordan and Malcolm Frank

On June 27, 2016, the Board of Directors of FactSet elected two new directors, Sheila B. Jordan and Malcolm Frank. In conjunction with their election to the Board, Ms. Jordan was appointed to serve as a member of the Company’s Audit Committee and Mr. Frank will serve on FactSet’s Compensation Committee. Both will stand for election by a vote of stockholders at the Company’s 2016 Annual Meeting of Stockholders in December 2016.

Philip Hadley, Executive Chairman of FactSet, said, “We are pleased to welcome the additions of Sheila Jordan and Malcolm Frank to FactSet’s Board of Directors. We look forward to leveraging their global technology expertise as we deliver leading insight and information to investment professionals around the world.”

Ms. Jordan, age 51, currently serves as Senior Vice President, Chief Information Officer at Symantec Corporation, a global leader in cybersecurity. Ms. Jordan has served in this role since February 2014 and is responsible for driving Symantec's information technology strategy and operations with a focus on building and supporting the global information technology effort. She serves as global executive sponsor for the Symantec Women’s Action Network, a networking forum to help support and encourage female employees to achieve their potential. Prior to joining Symantec, Ms. Jordan spent nine years at Cisco Systems Inc., where she served as Senior Vice President of IT, Communication and Collaboration. Previously, Ms. Jordan held leadership roles at Grand Circle Corporation, as Chief Information Officer and Executive Vice President, and at The Walt Disney Company, where she was a Senior Vice President for Destination Disney and Vice President of Marketing and Sales Finance. She was also a senior financial analyst at Martin Marietta, a construction supplies aggregate company. Ms. Jordan serves on the customer advisory board of Sutter Hill Ventures, a venture capital firm. She received her Bachelor’s degree from the University of Central Florida and an M.B.A. from the Florida Institute of Technology.

Mr. Frank, age 50, currently serves as Executive Vice President, Strategy & Marketing at Cognizant Technology Solutions Corp., a provider of custom information technology, consulting and business process outsourcing services. Mr. Frank joined Cognizant in 2005 and has more than two decades of experience in the information technology industry. Prior to joining Cognizant, he was co-founder, President and CEO of CXO systems, an independent software vendor providing dashboard solutions for senior managers. In addition, he was the founder, President, Chief Executive Officer and chairman of Nervewire Inc., a leading management consulting and systems integration firm. Prior to founding Nervewire, Mr. Frank was a co-founder, executive officer and Senior Vice President at Cambridge Technology Partners, where he ran Worldwide Marketing, Business Development and several business units. Mr. Frank is a recognized industry thought leader and is a frequent speaker on key issues of IT management. He has been profiled by Forbes magazine and ABC’s 20/20 and is the subject of a Harvard Business School case study on Leadership and Management. Mr. Frank is a graduate of Yale University with a degree in Economics.

Business Outlook

The following forward-looking statements reflect FactSet’s expectations as of today’s date. Given the risk factors, uncertainties and assumptions discussed below, actual results may differ materially. FactSet does not intend to update its forward-looking statements until its next quarterly results announcement, other than in publicly available statements.

Fourth Quarter Fiscal 2016 Expectations (the expectations below include the Market Metrics business for the full quarter):

  • Revenues are expected to range between $292 million and $298 million.
  • 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%.
  • The annual effective tax rate is expected to range between 28.0% and 29.0%.
  • 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. 
  • The Market Metrics transaction is expected to close in FactSet’s fourth quarter of fiscal 2016, at which time updated guidance for the fourth quarter of fiscal 2016 will be provided.

Conference Call

The Company will host a conference call today, June 28, 2016 at 11:00 a.m. Eastern Time to review the third quarter earnings release. To listen, please visit the “Audiocasts” section on FactSet's Investor Relations website at http://investor.factset.com.

Forward-looking Statements

This news release contains forward-looking statements based on management's current expectations, estimates and projections. All statements that address expectations or projections about the future, including statements about the Company's strategy for growth, product development, market position, subscriptions, expected expenditures and financial results are forward-looking statements. Forward-looking statements may be identified by words like "expects," "anticipates," "plans," "intends," "projects," "should," "indicates," "continues," "subscriptions" and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions. Many factors, including those discussed more fully elsewhere in this release and in FactSet's filings with the Securities and Exchange Commission, particularly its latest annual report on Form 10-K and quarterly reports on Form 10-Q, as well as others, could cause results to differ materially from those stated. These factors include, but are not limited to: the current status of the global economy; the ability to integrate newly acquired companies and businesses; the stability of global securities markets; the ability to hire qualified personnel; the maintenance of the Company's leading technological position; the impact of global market trends on the Company's revenue growth rate and future results of operations; the negotiation of contract terms with corporate vendors, data suppliers and potential landlords; the retention of key clients; the successful resolution of ongoing audits by tax authorities; the continued employment of key personnel; the absence of U.S. or foreign governmental regulation restricting international business; and the sustainability of historical levels of profitability and growth rates in cash flow generation.

About Adjusted Financial Measures

Financial measures in accordance with U.S. generally accepted accounting principles (“GAAP”) including operating income, operating margin, net income and diluted earnings per share have been adjusted. Adjusted operating income during the just completed third quarter excludes $4.1 million of deal-related amortization and $1.4 million of professional fees primarily related to the sale of FactSet’s Market Metrics business. Adjusted net income excludes the after-tax charge of $2.9 million from deal-related amortization, the after-tax charge of $1.0 million from incremental professional fees and $3.2 million in income tax benefits from finalizing prior years’ tax returns and other discrete items. Adjusted diluted EPS of $1.64 excludes the net effect of the $0.08 in income tax benefits, a $0.07 detriment from deal-related amortization and a $0.02 detriment from professional fees.

FactSet uses these adjusted financial measures, both in presenting its results to stockholders and the investment community, and in its internal evaluation and management of the business. The Company believes that these adjusted financial measures and the information they provide are useful to investors because they permit investors to view the Company’s performance using the same tools that management uses to gauge progress in achieving its goals. Investors may benefit from referring to these adjusted financial measures in assessing the Company’s performance and when planning, forecasting and analyzing future periods and may also facilitate comparisons to its historical performance. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

About Non-GAAP Free Cash Flow

The GAAP financial measure, cash flows provided by operating activities, has been adjusted to report non-GAAP free cash flow that includes the cash cost for taxes and changes in working capital, less capital expenditures. Included in the recently completed third quarter was $96.8 million of net cash provided by operations and $8.2 million of 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. FactSet uses this financial measure, both in presenting its results to stockholders and the investment community, and in the Company’s internal evaluation and management of the business. Management believes that this financial measure is useful to investors because it permits investors to view the Company’s performance using the same metric that management uses to gauge progress in achieving its goals and is an indication of cash flow that may be available to fund further investments in future growth initiatives.

About FactSet

FactSet delivers the world's best insight and information to investment professionals through superior analytics, service, content, and technology. More than 63,000 users make smarter investment decisions with FactSet's desktop analytics, mobile applications, and comprehensive data feeds. FactSet is also an honoree of Fortune's 100 Best Companies to Work For and a Best Workplace Award recipient in the United Kingdom and France. FactSet is listed on the New York Stock Exchange and NASDAQ (NYSE:FDS | NASDAQ:FDS).

Consolidated Statements of Income – Unaudited

  Three Months Ended
May 31,		   Nine Months Ended
May 31,
(In thousands, except per share data)   2016       2015       2016       2015  
               
Revenues $ 287,501     $ 254,522     $ 839,801     $ 744,990  
               
Operating expenses              
Cost of services   124,602       100,686       363,249       297,745  
Selling, general and administrative   73,609       68,480       214,610       200,980  
Total operating expenses   198,211       169,166       577,859       498,725  
               
Operating income   89,290       85,356       261,942       246,265  
               
Other (expense) income, net   (433 )     482       (765 )     1,445  
Income before income taxes   88,857       85,838       261,177       247,710  
               
Provision for income taxes   22,076       24,429       66,669       68,843  
Net income $ 66,781     $ 61,409     $ 194,508     $ 178,867  
                                   
Diluted earnings per common share $ 1.62     $ 1.45     $ 4.68     $ 4.23  
               
Diluted weighted average common shares   41,189       42,297       41,596       42,317  
                               

Consolidated Statements of Comprehensive Income – Unaudited

  Three Months Ended
May 31,		   Nine Months Ended
May 31, 
(In thousands)   2016       2015       2016       2015  
               
Net income $ 66,781     $ 61,409     $ 194,508     $ 178,867  
               
Other comprehensive income (loss), net of tax              
Net unrealized gain (loss) on cash flow hedges*   2,464       (1,020 )     229       (289 )
Foreign currency translation adjustments   8,883       (4,187 )     (7,867 )     (25,753 )
Other comprehensive income (loss)   11,347       (5,207 )     (7,638 )     (26,042 )
Comprehensive income $ 78,128     $ 56,202     $ 186,870     $ 152,825  
                                 
* For the three and nine months ended May 31, 2016, the unrealized gain on cash flow hedges was net of tax expense of $1,448 and $135, respectively. The unrealized loss on cash flow hedges disclosed above for the three and nine months ended May 31, 2015, was net of tax benefits of $606 and $172, respectively.
 

Consolidated Balance Sheets - Unaudited

    May 31,     August 31,    
(In thousands)       2016       2015    
               
ASSETS              
Cash and cash equivalents   $ 187,436     $ 158,914    
Investments   23,720       23,497    
Accounts receivable, net of reserves   104,666       95,064    
Prepaid taxes       --       4,808    
Deferred taxes     2,521       2,105    
Prepaid expenses and other current assets     15,736       19,786    
Assets held for sale     48,940         --    
  Total current assets     383,019       304,174    
                 
Property, equipment, and leasehold improvements, net   78,082       59,264    
Goodwill       460,393       308,287    
Intangible assets, net       97,978       40,052    
Deferred taxes       14,257       20,599    
Other assets       5,246       4,295    
  TOTAL ASSETS     $ 1,038,975     $ 736,671    
                           
LIABILITIES        
Accounts payable and accrued expenses $ 38,033     $ 33,880    
Accrued compensation     43,393       44,916    
Deferred fees     34,076       38,488    
Taxes payable     4,333       3,755    
Deferred taxes     425       562    
Dividends payable     20,328       18,179    
Liabilities held for sale     14,110         --    
  Total current liabilities     154,698       139,780    
Deferred taxes       1,543       1,697    
Taxes payable       8,200       6,776    
Long-term debt   300,000       35,000    
Deferred rent and other non-current liabilities   30,877       21,834    
  TOTAL LIABILITIES   $ 495,318     $ 205,087    
               
STOCKHOLDERS’ EQUITY          
  Common stock   $ 509     $ 503    
  Additional paid-in capital   616,954       542,355    
  Treasury stock, at cost     (1,181,695 )     (988,873 )  
  Retained earnings     1,159,579       1,021,651    
  Accumulated other comprehensive loss       (51,690 )     (44,052 )  
  TOTAL STOCKHOLDERS’ EQUITY     543,657       531,584    
  TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,038,975     $ 736,671    
                   

Consolidated Statements of Cash Flows – Unaudited

(In thousands) Nine Months Ended
May 31,		  
        2016       2015    
CASH FLOWS FROM OPERATING ACTIVITIES              
Net income   $ 194,508     $ 178,867    
Adjustments to reconcile net income to net cash provided by operating activities        
Depreciation and amortization   28,222       24,229    
Stock-based compensation expense   22,433       17,112    
Deferred income taxes   3,015       3,041    
Loss (gain) on sale of assets   2       (17 )  
Tax benefits from share-based payment arrangements   (13,327 )     (23,926 )  
Changes in assets and liabilities, net of effects of acquisitions        
Accounts receivable, net of reserves       (11,316 )     (1,159 )  
Accounts payable and accrued expenses       3,474       5,973    
Accrued compensation    (1,809 )     (5,496 )  
Deferred fees    3,696       5,951    
Taxes payable, net of prepaid taxes    20,313       16,213    
Prepaid expenses and other assets    1,250       78    
Deferred rent and other non-current liabilities    10,812       1,873    
Other working capital accounts, net    (169 )     103    
Net cash provided by operating activities     261,104       222,842    
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Acquisition of businesses, net of cash acquired     (264,087 )     (33,556 )  
Purchases of investments     (12,934 )     (12,437 )  
Proceeds from sales of investments     12,423       7,535    
Purchases of property, equipment and leasehold improvements, net of proceeds from dispositions     (34,671 )     (15,391 )  
Net cash used in investing activities     (299,269 )     (53,849 )  
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Dividend payments     (54,042 )     (48,404 )  
Repurchase of common stock     (192,823 )     (177,556 )  
Proceeds from debt       265,000       35,000    
Debt issuance costs       (12 )     (32 )  
Proceeds from employee stock plans       38,845       51,852    
Tax benefits from share-based payment arrangements        13,327       23,926    
Net cash provided by (used in) financing activities       70,295       (115,214 )  
             
Effect of exchange rate changes on cash and cash equivalents     (3,608 )     (12,262 )  
                     
Net increase in cash and cash equivalents       28,522       41,517    
             
Cash and cash equivalents at beginning of period       158,914       116,378    
Cash and cash equivalents at end of period     $ 187,436     $ 157,895