Business context and reporting period
FactSet Research Systems Inc. (NYSE: FDS) is a global financial data and analytics subscription business serving investment professionals through its Americas, EMEA and Asia Pacific segments. This Form 10-Q covers the fiscal second quarter and six months ended February 28, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $431.1 million, up 10.0% | $855.8 million, up 9.7% |
| Organic revenue growth | 9.9% | 9.4% |
| Operating income | $123.3 million, up 6.2% | $246.0 million, up 3.7% |
| Operating margin | 28.6%, versus 29.6% | 28.7%, versus 30.4% |
| Net income | $109.9 million, up 13.8% | $217.6 million, up 10.0% |
| Diluted EPS | $2.84, up 13.6% | $5.63, up 10.0% |
| Effective tax rate | 9.9%, versus 15.7% | 10.0%, versus 15.8% |
Growth came across all segments and workflows, led by Research & Advisory, particularly workstation demand. Second-quarter segment revenue increased 10.4% in the Americas, 8.6% in EMEA and 11.9% in Asia Pacific. Organic ASV plus Professional Services was $1.744 billion at February 28, up 9.4% year over year. Annual client retention remained above 95% of ASV; users grew 11.7% to 171,341.
Six-month operating cash flow was $195.0 million, down 15.2%; free cash flow was $174.4 million, down 13.3%. The company attributed lower operating cash flow primarily to timing of tax payments and receivable collections and higher bonus payments. Cash and cash equivalents were $773.0 million at February 28, 2022. Capital expenditures were $20.5 million; dividends paid were $61.4 million and share repurchases were $18.6 million.
At February 28, long-term debt was $574.6 million, representing $575.0 million borrowed under the then-existing revolving facility; $175.0 million of that facility remained available. Current assets were $1.091 billion and current liabilities $293.2 million. Lease liabilities totaled $264.3 million. The company reported compliance with its existing debt covenants.
Material changes and unusual items
- Revenue growth exceeded operating-income growth, and GAAP operating margin fell year over year. SG&A rose 35.2% in the quarter, reflecting real-estate impairment charges, higher compensation and professional fees related to the planned CUSIP Global Services acquisition. Six-month impairment charges associated with vacated leased offices totaled $13.4 million.
- Lower tax expense supported net income and EPS growth. Management cited R&D credits, the FDII deduction and stock-option exercise windfall benefits; the sustainability of these benefits is uncertain.
- On March 1, 2022, after quarter-end, FactSet completed its $1.925 billion cash acquisition of CUSIP Global Services (CGS). It financed the transaction using cash, debt-facility borrowings and proceeds from senior notes. Purchase-price allocation was not yet complete.
- Also on March 1, FactSet issued $500 million of 2.900% notes due 2027 and $500 million of 3.450% notes due 2032, borrowed $1.0 billion under a new term facility and $250 million under a new revolving facility, and repaid and terminated its prior credit agreement. The filing reports total outstanding debt of $2.25 billion after these transactions. An $800 million interest-rate swap was put in place to hedge part of floating-rate debt. The share repurchase program was suspended through at least the second half of fiscal 2023 to prioritize debt repayment.
- Termination of the former interest-rate swap is expected to produce a one-time $3.5 million benefit in fiscal Q3 2022.
Outlook, commentary and risks
The filing provides no specific numerical revenue or earnings guidance. Management said liquidity and financing alternatives should support needs for the next 12 months and the foreseeable future. It views the subscription model as relatively stable and said COVID-19 had not materially affected results; the company continued to use remote and hybrid work arrangements and was reassessing its office footprint.
Management is monitoring the Russia-Ukraine conflict. On March 18, 2022, FactSet announced it would discontinue commercial operations and service delivery to clients in Russia and terminate Russian vendor contracts; it stated related revenue was not material. The company also flagged potential impacts if events affect its Latvia office.
Key risks include integrating CGS and achieving expected benefits, transaction and integration costs, higher leverage and refinancing or debt-service demands, exposure to variable interest rates, and covenant compliance. Massachusetts tax authorities have issued notices concerning potential sales-tax assessments for 2006–2018 and requested information for 2019–June 2021. FactSet has contested the matters, recorded no liability because the outcome could not be reasonably estimated, and warned an eventual assessment could be material. Other ordinary-course litigation and tax audits were not expected by management to have a material effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- CGS’s purchase-price allocation, integration costs, contribution to revenue and earnings, and realization of anticipated strategic benefits.
- Post-acquisition debt levels, interest expense, liquidity, leverage covenant headroom and sensitivity to rate changes.
- Whether ASV growth, client retention and subscription demand remain strong, and whether GAAP margins recover after acquisition and office-related costs.
- The continuation of unusually low effective tax rates and stock-option-related tax windfalls.
- Developments in the Massachusetts sales-tax matters and any financial impact from Russia-related actions or regional disruption.