FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2022; comparisons are with the periods ended May 31, 2021. Amounts are in U.S. dollars unless stated otherwise.
Business context
FactSet provides subscription-based financial data, analytics, and technology to investment professionals. It reports results across the Americas, EMEA, and Asia Pacific. On March 1, 2022, FactSet completed its $1.932 billion cash acquisition of CUSIP Global Services (CGS), expanding its identifiers and financial-instrument data business.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $488.8 million | $399.6 million | $1,344.6 million | $1,179.6 million |
| Operating income | $97.3 million | $117.7 million | $343.3 million | $354.9 million |
| Operating margin | 19.9% | 29.5% | 25.5% | 30.1% |
| Net income | $74.9 million | $100.7 million | $292.5 million | $298.5 million |
| Diluted EPS | $1.93 | $2.62 | $7.58 | $7.73 |
- Q3 revenue rose 22.3%; management reported 10.5% organic revenue growth, with acquisition-related revenue contributing materially. Nine-month revenue rose 14.0%, including 9.8% organic growth.
- Organic annual subscription value plus Professional Services was $1.775 billion at May 31, up 10.1% year over year. Annual client retention was over 95% measured by ASV; users numbered 173,698, up 12.1%.
- Operating income and diluted EPS declined in Q3 despite revenue growth. Management attributed margin pressure mainly to office-space impairment charges, CGS-related professional fees and amortization, and acquired-contract royalty fees. The quarter also had higher interest expense following debt refinancing.
- Q3 long-lived asset impairments were $49.0 million; nine-month charges were $63.0 million, primarily for lease right-of-use assets and property and equipment associated with vacated offices. Management said it did not currently expect additional similarly sized charges from this office-footprint initiative.
- Effective tax rates were 12.2% for Q3 and 10.6% for the nine-month period, versus 11.9% and 14.5%, respectively, a year earlier. The company cited R&D credits, the FDII deduction, and stock-option exercise windfalls among the factors reducing the current-year rates.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $386.9 million, compared with $370.2 million. Capital expenditures were $36.0 million, resulting in company-defined free cash flow of $351.0 million, up 8.7% year over year.
- Investing cash outflow was $2.018 billion, largely reflecting the CGS acquisition and the $50.0 million Cobalt acquisition. Financing cash inflow was $1.489 billion, primarily reflecting new borrowing and note proceeds, partly offset by debt repayments, dividends, and other uses.
- At May 31, cash and cash equivalents were $527.0 million and investments were $33.6 million. Current assets were $873.5 million and current liabilities were $412.7 million.
- Debt principal outstanding was $2.125 billion, with a net carrying value of $2.105 billion. It included $875 million under the term facility, $250 million under the revolving facility, and $1.0 billion of senior notes. The revolving facility had $250 million of unused commitments. The notes mature in 2027 and 2032; the term facility matures in 2025.
- The term and revolving facilities bear floating-rate interest; a swap hedged $700 million of debt at quarter-end. Management stated that available liquidity, including revolving capacity and financing alternatives, was expected to fund operations and planned growth for the next 12 months and foreseeable future. This is management’s assessment, not a guarantee.
Material changes, outlook, and risks
- The CGS acquisition and related financing substantially increased goodwill, intangible assets, and debt. Nine-month interest expense, net, was $15.2 million versus $4.7 million a year earlier; the quarter’s expense also included a one-time $3.5 million benefit from terminating the prior interest-rate swap.
- FactSet suspended its share repurchase program beginning in Q2 FY2022 through at least the second half of FY2023, apart from limited dilution-offset or tax-withholding repurchases, to prioritize debt repayment. The quarterly dividend was raised to $0.89 per share.
- No specific numerical revenue, earnings, or margin guidance is provided in the supplied filing text. Management described continued investment in its digital platform, cloud migration, workflow products, and growth initiatives.
- Management reported no significant financial impact from COVID-19 to date. It discontinued commercial operations and product delivery to clients in Russia; related revenue was described as not material. It was monitoring potential regional and global effects, including continuity risks involving its Latvia office.
- Risks include CGS integration and realizing expected benefits, elevated debt and floating-rate exposure, covenant compliance, foreign-exchange movements, and regulatory and geopolitical developments. The company’s stated leverage covenant limit was 4.00 to 1.00 at May 31, 2022, subject to the agreement’s definitions and terms.
- Massachusetts sales-tax notices and an information request cover historical periods. FactSet is contesting the matters, has not recorded a liability, and says the outcome cannot be reasonably estimated; an adverse assessment could materially affect results, financial position, or cash flows. Other described legal proceedings and tax audits were not expected by management to have a material effect.
Important facts for investors to verify
- CGS’s contribution to recurring revenue and earnings, the final purchase-price allocation, and progress toward realizing acquisition benefits.
- Whether organic growth and subscription-value trends persist as acquisition-related revenue becomes less prominent.
- The durability of margins after office impairments, acquisition costs, acquired-intangible amortization, and royalty expenses.
- Debt repayment, interest-rate exposure, covenant headroom, and the impact of future financing costs on earnings and cash flow.
- Developments and potential exposure in the Massachusetts sales-tax matters, as well as integration, currency, and geopolitical risks.