filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. 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 |
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| ● | Key Metrics |
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| ● | Results of Operations |
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| ● | Liquidity |
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| ● | Capital Resources |
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| ● | Foreign Currency |
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| ● | Off-Balance Sheet Arrangements |
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| ● | Share Repurchase Program |
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| ● | Contractual Obligations |
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| ● | Dividends |
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| ● | Significant Accounting Policies |
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| ● | Critical Accounting Estimates |
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| ● | New Accounting Pronouncements |
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| ● | Market Trends |
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| ● | Forward-Looking Factors |
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The MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Executive Overview
FactSet Research Systems Inc. (the “Company” or “FactSet”) provides integrated financial information and analytical applications to the global investment community. We deliver insight and information to financial investment professionals through our analytics, service, content, and technology. By integrating comprehensive datasets and analytics across asset classes with client data, we support the workflow of both buy-side and sell-side clients. These professionals include portfolio managers, wealth managers, research and performance analysts, risk managers, research professionals, investment bankers and fixed income professionals. From streaming real-time data to historical information, including quotes, estimates, news and commentary, FactSet offers unique and third-party content through desktop, wireless, and off-platform solutions. Our wide application suite offers tools and resources including company and industry analyses, full screening tools, portfolio analysis, risk profiles, alpha-testing, portfolio optimization and research management solutions. Our revenues are derived from subscriptions to products and services such as workstations, analytics, enterprise data and content, research management and trade execution. Investment management (buy-side) clients account for 84.1% of our annual subscription value and the remainder is derived from investment banking firms (sell-side) that perform mergers and acquisitions (“M&A”) advisory work, capital markets services and equity research.
2017 Year in Review
Fiscal 2017 results continued our positive topline growth. Organic revenue was up 6.9% while annual subscription value (“ASV”) increased 5.7% organically. This fiscal year marked our 39th year of operation, our 37th consecutive year of revenue growth and our 21st consecutive year of adjusted earnings growth as a public company. We have dedicated ourselves to helping our clients navigate an uncertain environment. As of August 31, 2017, ASV totaled $1.32 billion, an increase of $166.8 million over the prior year. In addition, clients and users reached new highs of 4,744 and 88,846, respectively, in fiscal 2017. We returned $341.9 million to stockholders in the form of share repurchases and dividends.
In fiscal 2017, we continued to diversity our suite of products through strategic acquisitions and product investments, including Vermilion Holdings Limited (“Vermilion”) in the first quarter of fiscal 2017, along with both BI-SAM Technologies (“BISAM”) and Interactive Data Managed Solutions, renamed FactSet Digital Solutions, in the third quarter of fiscal 2017. These acquisitions increased FactSet’s footprint in Europe, added to the Company’s robust product offerings, and provided end-to-end solutions to clients.
As a testament to our broadening suite of premium products and the strength of our business and service model FactSet was awarded “Best Market Data Provider” and "Best Data Analytics Provider" by Inside Market Data in fiscal 2017. We were also named the “Best Performance Measurement System Provider” by Waters Technology and other recognition included “Best Research and Analytics Tool” award for our wealth management tools at the annual Systems in the City Awards. Portware also earned “Best Buy-side EMS” for the fourth time and Vermilion was recognized as “Best Client Reporting Solution” by FTF News Technology Innovation and “Best Client Reporting Solution” by WealthBriefing European Awards.
Client Service / Consultants
A client-centric approach has always been a key foundation of our success at FactSet. We support our powerful information and analytical applications with a team of financial data and modeling experts. Client satisfaction is a key metric by which we measure the success of our service. According to our fiscal 2017 global client satisfaction survey, 95% of respondents were satisfied or very satisfied with FactSet’s support, consistent with the prior year. The depth of our knowledge, the data behind the models and the complex mathematics behind the answers each create an opportunity for us to forge close working relationships with our user community.
Our industry-leading customer care is largely due to the talent of our employee population. As of August 31, 2017, employee headcount was 9,074, up 8.3% from a year ago. Excluding workforces acquired in fiscal 2017, headcount increased 2.4% from a year ago. The increases were primarily in client-focused positions focused on client loyalty as evidenced by an annual client retention rate of greater than 95% of ASV as of August 31, 2017. Our consulting teams have been trained to listen to our clients’ needs and transfer this knowledge directly to the product development teams, helping us transform suggestions into new or enhanced product offerings.
Educating our clients is also an important component of our service. Not only do we teach our users the nuances of our software and content offerings, but FactSet personnel are often thought-leaders in a particular area of financial modeling in our rapidly evolving industry. As a result, clients look to FactSet as a trusted partner to stay on the cutting edge of financial modeling and analysis. During fiscal 2017, over 2,500 clients attended live or online FactSet training sessions, with over 54,000 eLearning courses taken.
In May 2017, John W. Wiseman was named the Company’s new Executive Vice President, Global Head of Sales and Client Solutions. In this role, Mr. Wiseman reports directly to FactSet’s Chief Executive Officer, Phil Snow, and is responsible for all global sales and client service activities for the Company.
In order to optimize costs, we have invested in expanding our footprint and talent pool in India and the Philippines, where we now have a combined workforce of over 5,000 people. Of our total employees, 2,493 were located in the U.S., 1,322 in Europe and 5,259 in Asia Pacific. Approximately 70% of the Company’s employees were involved in company operations including content collection and software and systems engineering, 27% had a client focused role conducting sales and consulting services and the remaining 3% provided administrative support.
Key Metrics
The following is a review of our key metrics:
| As of and for the Year ended August 31, | ||||||||||||
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| (in millions, except per share data_,_ client and user counts) | 2017 | 2016 | Change | |||||||||
| Revenues | $ | 1,221.2 | $ | 1,127.1 | 8.3 | % | ||||||
| Operating Income | $ | 352.1 | $ | 349.7 | 0.7 | % | ||||||
| Net Income | $ | 258.3 | $ | 338.8 | (23.8% | ) | ||||||
| Diluted EPS | $ | 6.51 | $ | 8.19 | (20.5 | ) | ||||||
| Free Cash Flow(1) | $ | 283.7 | $ | 283.4 | 0.1 | % | ||||||
| ASV | $ | 1,316.6 | $ | 1,149.9 | 14.5 | % (2)(3) | ||||||
| Clients | 4,744 | 4,205 | 12.8 | % (4) | ||||||||
| Users | 88,846 | 83,936 | 5.8 | % (5) |
| (1) | We define free cash flow as cash provided by operating activities, which includes the cash cost for taxes and changes in working capital, less capital expenditures. The presentation of free cash flow is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. We use free cash flow, a non-GAAP measure, both in presenting our results to stockholders and the investment community, and in our internal evaluation and management of the business. Management believes that this financial measure and the information we provide are useful to investors because they permit investors to view our performance using the same metric that we use to gauge progress in achieving our goals. Free cash flow is also an indication of cash flow that may be available to fund further investments in future growth initiatives. |
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| (2) | ASV grew 5.7% organically year over year. Organic ASV excludes ASV from acquisitions and dispositions completed with__in the last 12 months and the effects of foreign currency. |
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| (3) | In the third quarter of fiscal 2017, FactSet changed its ASV definition to exclude professional services as these fees are not subscription based. |
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| (4) | 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. |
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| (5) | 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. |
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Annual Subscription Value Growth
Annual subscription value at any given point in time represents the forward-looking revenues for the next twelve months from all subscription services currently being supplied to clients. With proper notice to us, our clients are able to add to, delete portions of, or terminate service at any time, subject to certain contractual limitations. Organic ASV excludes ASV from acquisitions and dispositions completed within the past 12 months and the effects of foreign currency. ASV totaled $1.32 billion at August 31, 2017, up 5.7% organically over the prior year. The increase in ASV was driven by growth across the majority of our key workflows including Analytics, Investment Banking, and Content and Technology Solutions (“CTS”). Additionally, we have leveraged relationships with existing clients to increase year over year sales through cross-selling and upselling of our diversified product suite.
Buy-side clients accounted for 84.1% of ASV while the remainder derived from sell-side firms that perform mergers and acquisitions advisory work, capital markets services and equity research. The buy-side ASV experienced a growth rate of 5.9% compared to prior year, down 440 basis points from fiscal 2016. The sell-side ASV had a 4.6% growth rate, down 310 basis points from the prior year.
ASV from our U.S. operations was $825.1 million for the fourth quarter of 2017, up 4.9% organically from a year ago. International ASV totaled $491.5 million, up 7.7% organically from a year ago. ASV from our international operations represented 37.3% of our Company-wide total, its highest level in FactSet history. Our European organic ASV achieved a growth rate of 6.1% over the last 12 months while Asia Pacific organic ASV grew by 12.8%. This substantial shift in ASV to international operations was due primarily to our recent acquisitions, which have significant sales and operations in Europe.
Client and User Additions
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. Our total client count was 4,744 as of August 31, 2017 representing an increase of 539 net new clients or an equivalent 12.8% increase over fiscal 2016, as a result of cross-selling within FactSet’s diverse product suite. We continue to focus on expanding our current client base as it is essential to our long-term growth strategy and encourages incremental sales growth of workstations, applications and content at our existing clients.
In the third 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. Using the new definition, as of August 31, 2017, there were 88,846 professionals using FactSet, an increase of 4,910 users or an equivalent 5.8% increase compared to fiscal 2016.
Annual client retention as of August 31, 2017, was greater than 95% ASV and 91% when expressed as a percentage of clients, down slightly from 92% in the prior year. Our retention success, demonstrating that a majority of our clients maintain their subscriptions to FactSet year over year, highlights the strength of our business model. August 31, 2017, our largest individual client accounted for 2% of total subscriptions, and annual subscriptions from our ten largest clients did not surpass 15% of total client subscriptions, consistent with August 31, 2016.
Returning Value to Stockholders
We repurchased 1.6 million shares for $252.8 million during fiscal 2017 under the our existing share repurchase program. On March 27, 2017, the Board of Directors of FactSet approved a $300.0 million expansion of to the existing share repurchase program. Including this expansion, $244.1 million is available for future share repurchases as of August 31, 2017.
On May 5, 2017, our Board of Directors approved a 12.0% increase in the regular quarterly dividend, beginning with the dividend payment on June 2017, with an increase to $0.56 per share, or $2.24 per share per annum. Over the last 12 months, we have returned a total of $341.9 million to stockholders in the form of dividends and share repurchases, funded by cash generated from operations.
On July 1, 2016, we entered into an accelerated share repurchase agreement (“ASR Agreement”) to repurchase $120.0 million of our common stock. We received 595,607 shares of common stock on July 5, 2016, which was approximately 80% of the total number of shares of common stock expected to be repurchased under the ASR Agreement. The final settlement of the ASR Agreement occurred in the first quarter of fiscal 2017 with FactSet receiving an additional 102,916 shares of our common stock.
Capital Expenditures
Capital expenditures were $36.9 million during fiscal 2017, down from $47.7 million a year ago. Approximately $21.4 million, or 58%, of our capital expenditures was primarily for purchases of more servers for our existing data centers, additional laptop computers and peripherals for new employees, upgrades to existing computer systems and improvements to our telecommunication equipment. The remainder of our capital expenditures was primarily for the build out of office space including $4.4 million at our Chicago location, $4.4 million at our New York locations and $2.7 million at our India locations.
Results of Operations
For an understanding of the significant factors that influenced our performance during the past three fiscal years, the following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this Annual Report on Form 10-K.
| Years ended August 31, | |||||||||||||||||||||||||
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| (in thousands, except per share data) | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||||||
| Revenues | $ | 1,221,179 | $ | 1,127,092 | 8.3 | % | $ | 1,127,092 | $ | 1,006,768 | 12.0 | % | |||||||||||||
| Cost of services | $ | 566,580 | $ | 487,409 | 16.2 | % | $ | 487,409 | $ | 405,339 | 20.2 | % | |||||||||||||
| Selling, general and administrative | $ | 302,464 | $ | 290,007 | 4.3 | % | $ | 290,007 | $ | 269,511 | 7.6 | % | |||||||||||||
| Operating income | $ | 352,135 | $ | 349,676 | 0.7 | % | $ | 349,676 | $ | 331,918 | 5.4 | % | |||||||||||||
| Net income | $ | 258,259 | $ | 338,815 | NM | $ | 338,815 | $ | 241,051 | NM | |||||||||||||||
| Diluted earnings per common share | $ | 6.51 | $ | 8.19 | NM | $ | 8.19 | $ | 5.71 | NM | |||||||||||||||
| Diluted weighted average common shares | 39,642 | 41,365 | 41,365 | 42,235 |
Revenues
Fiscal 201****7 compared to Fiscal 201****6
Revenues in fiscal 2017 were $1,221.2 million, up 8.3% compared to fiscal 2016. The increase in revenue was primarily driven by organic ASV growth, continued momentum for our multi-asset class analytic solutions, workstations, data feeds products and the additions to our product offerings from our fiscal 2017 acquisitions. We have seen an increase in new business with solid wins from plan sponsors, hedge funds and wealth managers, as well as growing sales to existing clients through cross-selling opportunities. Our recent acquisitions have also given rise to higher revenues from professional services fees. Offsetting these positive factors, we experienced cancellations due to firm consolidations and failures. Excluding the effects of acquisitions and dispositions completed in the last 12 months and foreign currency, our organic revenue growth rate for fiscal 2017 was 6.9%.
Fiscal 201****6 compared to Fiscal 201****5
Revenues in fiscal 2016 were $1,127.1 million, up 12.0% compared to fiscal 2015. Our revenue growth drivers during fiscal 2016 were robust demand for our analytics suite of products, including an expansion of our multi-asset class value added products, accelerated growth in our CTS, advancement in Workstation Solutions and significant progress in the Portware LLC (“Portware”) business, partially offset by the impact of foreign currency.
Revenues by Geographic Region
| Years ended August 31, | ||||||||||||
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| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| U.S. | $ | 784,146 | $ | 755,492 | $ | 678,774 | ||||||
| % of revenues | 64.2 | % | 67.0 | % | 67.4 | % | ||||||
| Europe | $ | 330,332 | $ | 277,682 | $ | 251,522 | ||||||
| Asia Pacific | 106,701 | 93,918 | 76,472 | |||||||||
| International | $ | 437,033 | $ | 371,600 | $ | 327,994 | ||||||
| % of revenues | 35.8 | % | 33.0 | % | 32.6 | % | ||||||
| Consolidated | $ | 1,221,179 | $ | 1,127,092 | $ | 1,006,768 |
Fiscal 201****7 compared to Fiscal 201****6
Revenues from our U.S. segment increased 3.8% to $784.1 million in fiscal 2017 compared to $755.5 million in fiscal 2016. Our U.S. revenue growth reflects the performance of our analytic solutions, CTS, as well as revenue from our recent acquisitions. Excluding the effects of acquisitions and dispositions completed in the last 12 months, organic revenues in the U.S. were up 6.2% compared to fiscal 2016. Revenues from our U.S. operations accounted for 64.2% of our consolidated revenues during fiscal 2017, a decrease from 67.0% in the prior year as our recent acquisitions have mainly increased international revenue.
European revenues grew 19.0% year over year, which was attributable to solid growth in CTS, analytics, client price increases, and our recent acquisitions. Foreign currency exchange rate fluctuations reduced our European growth rate by 40 basis points. Excluding the effects of acquisitions and dispositions completed in the last 12 months and foreign currency, European revenues grew 8.3% compared to fiscal 2016.
The Asia Pacific revenue growth rate of 13.6% was primarily due to increased subscriptions to our content, PA and core workstation product offerings. Additionally, foreign currency exchange rate fluctuations increased our Asia Pacific growth rate by 46 basis points. Excluding the effects of acquisitions and dispositions completed in the last 12 months and foreign currency, Asia Pacific revenues grew 12.7% compared to fiscal 2016.
Fiscal 2016 compared to Fiscal 2015
Revenues from our U.S. segment increased 11.3% to $755.5 million in fiscal 2016 compared to $678.8 million in fiscal 2015. Our fiscal 2016 U.S. revenue growth rate of 11.3% reflects increases in the number of users and clients of FactSet within the U.S., predominantly at buy-side hedge fund and middle-market clients. Additionally, we recognized $21.9 million of incremental revenue from the acquisition of Portware. Revenues from our U.S. operations accounted for 67.0% of our consolidated revenues during fiscal 2016, down from 67.4% in fiscal 2015, as our international ASV growth rate surpassed our U.S. ASV growth rate by 200 basis points.
European revenues advanced 10.4% year over year which was attributable to increases in client and user counts, increased sales of PA subscriptions and incremental Portware revenues of $7.3 million, partially offset by the negative effects of foreign currency. Foreign currency exchange rate fluctuations reduced our European growth rate by 30 basis points.
The Asia Pacific revenue growth rate of 22.8% was primarily due to an increase in the number of workstations, advancement in our multi-asset class risk and analytics, as well positive growth in our fee business. Portware contributed $4.1 million in sales since its acquisition in fiscal 2016. Additionally, foreign currency exchange rate fluctuations increased our Asia Pacific growth rate by 90 basis points.
Operating Expenses
| Years ended August 31, | ||||||||||||
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| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Cost of services | $ | 566,580 | $ | 487,409 | $ | 405,339 | ||||||
| Selling, general and administrative (“SG&A”) | 302,464 | 290,007 | 269,511 | |||||||||
| Total operating expenses | $ | 869,044 | (1) | $ | 777,416 | (2) | $ | 674,850 | (3) | |||
| Operating income | $ | 352,135 | $ | 349,676 | $ | 331,918 | ||||||
| Operating Margin | 28.8 | % | 31.0 | % | 33.0 | % |
| (1) | Total operating expenses in fiscal 2017 include $5.0 million from restructuring actions initiated by the Company, $5.6 million related to a change in the vesting of performance-based stock options, and $7.5 million of acquisition_-__related costs. Of this total, $_11.8 million was reported within SG&A expenses with the remainder in cost of services. | |
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| (2) | Total operating expenses in fiscal 2016 include $4.6 million related primarily to legal matters, $2.8 million from restructuring actions initiated by the Company and $1.8 million related to a change in the vesting of performance-based stock options. Of this total, $6.0 million was reported within SG&A expenses with the remainder in cost of services. |
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| (3) | Total operating expenses in fiscal 2015 include an incremental $3.0 million from the vesting of performance-based equity instruments and $3.2 million related to changes in the senior leadership responsible for the Company’s sales force_. Of this total, $3.8 million was reported within SG&A expenses with the remainder in cost of services._ |
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Cost of Services
Fiscal 201****7 compared to Fiscal 201****6
Cost of services increased 16.2% to $566.6 million compared to the same period a year ago. Expressed as a percentage of revenues, cost of services was 46.4% in fiscal 2017, an increase of 320 basis points from a year ago. The increase was primarily driven by higher employee compensation, including stock-based compensation, computer related expenses, amortization of intangibles and acquisition-related costs.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues increased 200 basis points in fiscal 2017 compared to fiscal 2016. Over the past 12 months, we have added 699 new employees, which includes head count expansion from our recent acquisitions of 498 new employees (primarily in the European segment), as well as base salary changes and incremental hires in our centers of excellence located in India and the Philippines. This increase was also due to new employees hired in the past year, of which a significant number are involved with content collection, engineering and product development, as we continue to focus on servicing our existing client base, expanding our content and improving our applications. As of August 31, 2017, approximately 70% of our employee based performed operational roles. Employee compensation also increased due to a non-recurring charge of $5.9 million related to restructuring actions initiated by the Company and a change in the vesting of performance-based stock options.
Computer related expenses, which include depreciation, maintenance, software and other fees increased 30 basis points, when expressed as a percentage of revenues, in fiscal 2017 compared to fiscal 2016 due to expenses and depreciation associated with additional laptop computers and peripherals for new employees, upgrades to existing computer systems and improvements to our telecommunication equipment. Amortization of intangible assets increased 30 basis points, when expressed as a percentage of revenues, in fiscal 2017 compared to fiscal 2016 primarily due to our fiscal 2017 acquisitions, which added approximately $93.2 million of intangible assets to be amortized over a weighted-average life of 11.5 years. Additionally, acquisition-related costs increased cost of sales by approximately 40 basis points when expressed as a percentage of revenue year over year.
Fiscal 2016 compared to Fiscal 2015
Cost of services increased 20.2% to $487.4 million in fiscal 2016 as compared to fiscal 2015. Expressed as a percentage of revenues, cost of services was 43.2% in fiscal 2016, an increase of 290 basis points from fiscal 2015. The increase was primarily driven by higher employee compensation, including stock-based compensation, amortization of intangibles and computer-related expenses.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues increased 230 basis points in fiscal 2016 compared to fiscal 2015. This increase was primarily due to new employees hired in the past year. In fiscal 2016, we have added 604 net new employees involved with content collection and 266 net new engineering and product development employees, as we continue to focus on servicing our existing client base, expanding our content and improving our applications. The increase in employee headcount includes 123 employees added from the Portware acquisition in cost of sales related roles. Amortization of acquired intangible assets, when expressed as a percentage of revenues, increased 50 basis points in fiscal 2016 compared to fiscal 2015 primarily due to the addition of $75.5 million of intangible assets related to the acquisition of Portware. Computer-related expenses, which include depreciation, maintenance, software and other fees, increased 40 basis points when expressed as a percentage of revenues, as we require additional computer hardware and peripherals for new employees, upgrades to existing computer systems and the development of new internal systems to support our growing infrastructure.
Selling, General and Administrative
Fiscal 201****7 compared to Fiscal 201****6
SG&A expenses increased 4.3% to $302.5 million during fiscal 2017 compared to $290.0 million in fiscal 2016. Expressed as a percentage of revenues, SG&A expenses decreased 90 basis points to 24.8% in fiscal 2017 primarily due to lower employee compensation expense partially offset by higher professional fees and occupancy costs, including rent expense and depreciation of furniture and fixtures. Additionally, fiscal 2016 included a non-recurring charge of $3.3 million related primarily to legal matters.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues decreased 160 basis points from a year ago due to a continued shift in our employee base from SG&A to cost of service related roles. This decrease in employee compensation was offset by a non-recurring charge of $4.4 million related to restructuring actions initiated by the Company and a change in the vesting of performance-based stock options. Professional fees, expressed as a percentage of revenues, increased 30 basis points from costs associated with acquisitions in the fiscal 2017. Occupancy costs, when expressed as a percentage of revenue, increased 30 basis points due to the increase in the worldwide-leased office space of 71,000 square feet including new or expanded offices in Germany, Switzerland, Bulgaria, India and the Netherlands.
Fiscal 2016 compared to Fiscal 2015
SG&A expenses increased 7.6% to $290.0 million during fiscal 2016 compared to $269.5 million in fiscal 2015. Expressed as a percentage of revenues, SG&A expenses decreased 110 basis points to 25.7% in fiscal 2016 primarily due to lower employee compensation and lower occupancy costs, which include depreciation of furniture and fixtures, partially offset by expenses related to non-recurring legal matters and higher marketing costs.
Employee compensation, including stock-based compensation, when expressed as a percentage of revenues decreased 150 basis points compared to fiscal 2015 due to a higher percentage of our employee base working in a cost of services capacity compared to an SG&A role. Of our total employee headcount increase in fiscal 2016 compared to fiscal 2015, only 14% were in SG&A related roles, including 43 employees from the Portware acquisition. Additionally, approximately 142 employees in SG&A related roles left the Company as part of the sale of the Market Metrics business in July 2016. As such, employee compensation classified as SG&A expense declined compared to the growth in cost of services. Occupancy costs, when expressed as a percentage of revenues, decreased 20 basis points, primarily due to furniture and leasehold improvements becoming fully depreciated. The Company incurred approximately $3.3 million in non-recurring expenses in fiscal 2016 related primarily to legal matters. Marketing expenses increased $1.2 million year over year driven by incremental branding and advertising costs.
Operating Income and Operating Margin
Fiscal 201****7 compared to Fiscal 201****6
Operating income increased 0.7% to $352.1 million in fiscal 2017 compared to the prior year. Our operating margin for fiscal 2017 was 28.8%, down from 31.0% a year ago. Expenses related to employee compensation, professional fees, computer related costs, amortization of intangibles and acquisition-related costs all increased in fiscal 2017, resulting in our total operating expenses increasing 11.8% year over year. We also recognized non-recurring charges of approximately $18.0 million related to restructuring actions initiated by the Company, a change in the vesting of performance-based stock options and other acquisition-related costs, compared to non-recurring charges of approximately $7.0 million in the prior fiscal year. The higher expenses were offset partially by a year over year increase in revenues of 8.3%, driven partially by our recent acquisitions.
Fiscal 2016 compared to Fiscal 2015
Operating income increased 5.4% to $349.7 million in fiscal 2016 compared to fiscal 2015. Our operating margin for fiscal 2016 was 31.0%, down from 33.0% in fiscal 2015. The lower operating margin was primarily due to Portware’s operations, which reduced our operating margin by 120 basis points in fiscal 2016. Additionally, higher employee compensation, including stock-based compensation, reduced our operating margin collectively by 90 basis points. In fiscal 2016, we also incurred non-recurring charges of approximately $4.6 million related primarily to legal matters. Offsetting these drivers was organic revenue growth of 9.9% and lower occupancy costs.
Operating Income by Segment
| Years ended August 31, | ||||||||||||
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| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| U.S. | $ | 137,105 | $ | 165,251 | $ | 172,980 | ||||||
| Europe | 153,676 | 131,410 | 116,310 | |||||||||
| Asia Pacific | 61,354 | 53,015 | 42,628 | |||||||||
| Consolidated | $ | 352,135 | $ | 349,676 | $ | 331,918 |
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. This structure helps us better manage the business and view the markets we serve. Sales, consulting, data collection, product development and software engineering are the primary functional groups within each segment. Each segment records compensation expense, including stock-based compensation, amortization of intangible assets, depreciation of furniture and fixtures, amortization of leasehold improvements, communication costs, professional fees, rent expense, travel, marketing, office and other direct expenses. Expenditures associated with our data centers, third party data costs and corporate headquarters charges are recorded by the U.S. segment and are not allocated to the other segments. The content collection centers located in India and the Philippines benefit all of our segments, so the expenses incurred at these locations are allocated to each segment based on a percentage of revenues.
Fiscal 201****7 compared to Fiscal 201****6
U.S. operating income decreased 17.0% to $137.1 million during fiscal 2017 compared to $165.3 million a year ago. The decrease in U.S. operating income is primarily due to increases in expenses related to employee compensation, and occupancy costs, partially offset by revenue growth of 3.8%. Employee compensation increased primarily due to a 3.6% increase in the U.S. employee headcount year over year and a change in the vesting of performance-based stock options. Occupancy costs including rent expense and depreciation of furniture and fixtures increased due primarily to an increase in rent expense at our New York location.
European operating income increased 16.9% to $153.7 million during fiscal 2017 compared to $131.4 million a year ago. The increase in European operating income was due to revenue growth of 19.0% and benefits from a stronger U.S. dollar, offset by higher employee compensation, occupancy costs, and amortization of intangibles. European revenues grew due to recent acquisitions, which have a significant sales presence in European markets. The impact of foreign currency increased European operating income by $6.2 million year over year. Employee compensation was higher year over year as a result of 473 net new employees in our European offices in the last 12 months. These employees are primarily from our recent acquisition of FactSet Digital Solutions, which is headquartered in Germany. Occupancy costs including rent expense and depreciation of furniture and fixtures increased due primarily to an increase in rent expense in Germany associated with the 2017 acquisitions. Amortization of intangibles increased due to the addition of approximately $93.2 million of intangibles in the current year, the majority of which reside in our European segment.
Asia Pacific operating income increased 15.7% to $61.4 million during fiscal 2017 compared to $53.0 million a year ago. The increase in Asia Pacific operating income was due to revenue growth of 13.6% and benefits from a stronger U.S. dollar, partially offset by increases in employee compensation and occupancy costs. Employee compensation was higher year over year as a result of a 2.7% increase in our Asia Pacific workforce in the last 12 months. Occupancy costs increased due primarily to an increase in rent expense at our India locations. The impact of foreign currency increased Asia Pacific operating income by $1.4 million year over year.
Fiscal 2016 compared to Fiscal 2015
U.S. operating income decreased 4.5% to $165.3 million during fiscal 2016 compared to $173.0 million during fiscal 2015. The decrease in U.S. operating income is attributed to employee compensation growth, non-recurring charges of $4.4 million and $8.3 million of incremental amortization expense from Portware, partially offset by revenue growth of 11.3%. Employee compensation increased primarily due to a 7.6% increase in the U.S. employee headcount year over year. The non-recurring charges were related primarily to legal matters.
European operating income increased 13.0% to $131.4 million during fiscal 2016 compared to $116.3 million during fiscal 2015. The increase in European operating income was due to revenue growth of 10.4% and benefits from a stronger U.S. dollar. The impact of foreign currency increased European operating income by $5.1 million year over year.
Asia Pacific operating income increased 24.4% to $53.0 million during fiscal 2016 compared to $42.6 million during fiscal 2015. The increase in Asia Pacific operating income was due to revenue growth of 22.8% and benefits from a stronger U.S. dollar, partially offset by increases in employee compensation. The impact of foreign currency increased Asia Pacific operating income by $6.5 million year over year. Employee compensation increased due to a 19.3% increase in the Asia Pacific employee headcount year over year.
Income Taxes, Net Income and Diluted Earnings per Share
| Years ended August 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Provision for income taxes | $ | 86,053 | $ | 122,178 | $ | 92,703 | ||||||
| Net income | $ | 258,259 | $ | 338,815 | $ | 241,051 | ||||||
| Diluted earnings per common share | $ | 6.51 | $ | 8.19 | $ | 5.71 |
Income Taxes
Fiscal 201****7 compared to Fiscal 201****6
The fiscal 2017 provision for income taxes was $86.1 million, down 29.6% from the same period a year ago. This decrease was primarily due to tax expense of $30.8 million related to the gain on sale of our Market Metrics business in the fourth quarter of fiscal 2016. Excluding the tax impact of the gain, the provision for income taxes decreased by 5.9% year over year related primarily to our organizational realignment. Effective September 1, 2016 we realigned certain aspects of our global operations from FactSet Research Systems Inc., our U.S. parent company, to FactSet UK Limited, a U.K. operating company, to better position us to serve our growing client base outside the U.S. Due to the realignment we recognized a 200 basis point benefit in our annual tax rate. Additionally, excluding the gain on sale in the prior year, our provision for income taxes decreased due to a decrease in taxable income year over year. This decrease was due primarily to higher interest expense incurred as a result of an increase in our outstanding debt borrowings by approximately $300 million.
Fiscal 2016 compared to Fiscal 2015
The fiscal 2016 provision for income taxes was $122.2 million, up 31.8% compared to fiscal 2015. In the fourth quarter of fiscal 2016, the Company recognized tax expense of $30.8 million related to the gain on sale of our Market Metrics business. Excluding tax expense from the gain, the provision for income taxes was $91.4 million in fiscal 2016, a decrease of 1.4% from fiscal 2015, primarily due to income tax benefits from the permanent reenactment of the U.S. Federal R&D Tax Credit in December 2015, finalizing prior year tax returns and other discrete items. Overall, we recognized income tax benefits of $10.5 million in fiscal 2016 compared to $6.5 million in the same period in fiscal 2015. Offsetting the tax benefits and excluding the gain on sale was an increase in taxable income of $14.8 million.
Net Income and Diluted Earnings per Share
Fiscal 201****7 compared to Fiscal 201****6
Net income decreased 23.8% to $258.3 million and diluted earnings per share decreased 20.5% to $6.51 during fiscal 2017 compared to fiscal 2016. A large component of the decrease in net income and diluted earnings per share year over year related to the after-tax gain of $81.7 million from the sale of the Market Metrics business in fiscal 2016. This gain increased diluted earnings per share by $2.01. Excluding the prior year after-tax gain on sale, net income increased 0.4% year over year, while diluted EPS increased by 5.3%. During fiscal 2017, net income and earnings per share increased due to revenue growth of 8.3% year over year, couple with a reduction to the income tax provision of 29.6% primarily related to the gain from the sale of our Market Metrics business along with an organizational realignment. Additionally, during fiscal 2017, foreign currency movements increased operating income by $7.1 million compared to a benefit of $11.6 million in the same period of fiscal 2016. These increases were partially offset by incremental employee compensation expense due to the hiring of 699 net new employees (including 498 employees from acquisitions completed in the last 12 months), an increase in professional fees, occupancy costs, computer related expenses, amortization of intangibles and acquisition-related costs. The increase in diluted earnings per share was also driven by a decrease in diluted shares outstanding as a result of continued share repurchases in fiscal 2017.
Fiscal 2016 compared to Fiscal 2015
Net income increased 40.6% to $338.8 million and diluted earnings per share increased 43.4% to $8.19 during fiscal 2016 compared to fiscal 2015. A large component of the increase in net income and diluted earnings per share during fiscal 2016 was an after-tax gain of $81.7 million related to the sale of the Market Metrics business. The gain increased diluted earnings per share by $2.01. Excluding the after-tax gain on sale, net income increased 6.7% in fiscal 2016 compared to fiscal 2015, while diluted EPS was $6.18. The increase year over year was primarily due to organic ASV growth of 8.8% and tax benefits of $10.5 million related to the permanent reenactment of the U.S. Federal R&D tax credit and finalizing the fiscal 2015 tax returns and other discrete items. These increases were partially offset by incremental employee compensation expense due to the hiring of 1,015 net new employees (including 166 employees from acquisitions completed in fiscal 2016). Additionally, Portware’s operations reduced our operating margin by 120 basis points in fiscal 2016. In fiscal 2016 we also incurred non-recurring charges of approximately $3.3 million, after-tax, related primarily to legal matters. During fiscal 2016, foreign currency movements increased operating income by $11.6 million compared to a benefit of $11.2 million in the same period of fiscal 2015.
Liquidity
The table below, for the periods indicated, provides selected cash flow information:
| Years ended August 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Net cash provided by operating activities | $ | 320,527 | $ | 331,140 | $ | 306,442 | ||||||
| Capital expenditures (1) | (36,862 | ) | (47,740 | ) | (25,682 | ) | ||||||
| Free cash flow (2) | $ | 283,665 | $ | 283,400 | $ | 280,760 | ||||||
| Net cash used in investing activities | $ | (347,306 | ) | $ | (158,408 | ) | $ | (64,877 | ) | |||
| Net cash used in financing activities | $ | (8,161 | ) | $ | (91,002 | ) | $ | (187,326 | ) | |||
| Cash and cash equivalents at end of year | $ | 194,731 | $ | 228,407 | $ | 158,914 |
| (1) | Included in net cash used in investing activities during each fiscal year reported. |
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| (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. |
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Fiscal 201****7 compared to Fiscal 201****6
Cash and cash equivalents aggregated to $194.7 million, or 13.8% of our total assets at August 31, 2017, compared with $228.4 million, or 22.4% of our total assets at August 31, 2016. Our cash and cash equivalents decreased $33.7 million during fiscal 2017 due primarily to $303.1 million in cash paid for acquisitions (net of cash acquired), $252.8 million in share repurchases under the existing share repurchase program, dividend payments of $80.9 million, capital expenditures of $36.9 million and $7.4 million from the purchase of investments (net of proceeds). These cash outflows were partially offset by cash provided by operations of $320.5 million, $275.0 million in net proceeds from long-term debt, $50.0 million in proceeds from the exercise of employee stock options, $10.3 million in tax benefits from share-based payment arrangements and $1.3 million from the effects of foreign currency fluctuation.
Free cash flow for fiscal 2017 was $283.7 million compared to $283.4 million in the prior year comparable period. Free cash flow generated during fiscal 2017 was attributable to $258.3 million of net income adjusted for $78.3 million of non-cash items partially offset by $36.9 million in capital expenditures and $16.0 million of negative working capital changes. Free cash flow increased slightly from the comparable year ago period, due primarily to a reduction in capital expenditures partially offset by a decrease in net cash provided by operating activities. The decrease in net cash provided by operating activities was the result of higher client receivables and the timing of taxes payments. Our day’s sales outstanding (“DSO”) was 41 days as of August 31, 2017, representing an increase from 31 days at August 31, 2016. The increase in DSO was primarily related to our recent acquisitions as we work to align their collection policies with those of FactSet.
Net cash used in investing activities was $347.3 million in fiscal 2017, representing a $188.9 million increase from fiscal 2016 due primarily to an increase in the cash used in acquisitions and the purchases of investments (net of proceeds), partially offset by a decrease in capital expenditures. Additionally, in fiscal 2016 we recognized proceeds from the sale of our Market Metrics business of $153.1 million. Acquisitions during fiscal 2017, largely related to BISAM and Vermilion, resulted in a cash outflow of $303.1 million compared to a net cash outflow of $262.9 million for the Portware acquisition during fiscal 2016. Purchase of investments (net of proceeds) results in an increased cash outflow of $6.5 million in fiscal 2017 compared to fiscal 2016. The decrease in capital expenditures of $10.9 million was due fiscal 2016 including the fit-out of new space in New York, Chicago and at our corporate headquarters in Norwalk. Fiscal 2017 capital expenditures related primarily to computer equipment for our U.S. locations and additional expenses at our Chicago, New York, and India locations.
During fiscal 2017, net cash used in financing activities was $8.2 million compared to $91.0 million in fiscal 2016. This decrease was due primarily to FactSet entering into an ASR Agreement to repurchase $120.0 million of our common stock in July 2016. We received 595,607 shares of common stock on July 5, 2016, which was approximately 80% of the total number of shares of common stock expected to be repurchased under the ASR Agreement. The final settlement of the ASR Agreement occurred in the first quarter of fiscal 2017 with us receiving an additional 102,916 shares of our common stock. Excluding cash used in the ASR Agreement, cash provided by financing activities in fiscal 2016 was $29.0 million, resulting in a fluctuation of $37.2 million in the current year. This fluctuation was due to an increase in cash used to repurchase common stock under our existing share repurchase program of $24.2 million, an increase in payments of regular quarterly dividends of $6.7 million, lower proceeds from employee stock plans of $6.8 million and lower tax benefits from share-based payment arrangements of $7.9 million. Cash used in share repurchases increased year over year as we repurchased 1.6 million shares for $252.8 million under the existing share repurchase program compared to 1.5 million shares for $232.3 million in fiscal 2016. Dividend payments increased as our Board of Directors approved a 12.0% increase in the regular quarterly dividend to $0.56 per share, or $2.24 per share per annum, beginning with the dividend payment in June 2017. The year over year fluctuation was also due to additional borrowings under our 2017 Credit Agreement (defined in Capital Needs) of $575.0 million, used to fund our acquisition of BISAM on March 17, 2017 and retire our existing debt of $365.0 million. In fiscal 2016 we borrowed $265.0 million under our previous credit agreement to fund our acquisition of Portware on October 16, 2015. Refer to the Capital Resources section of the MD&A for a discussion of our long-term debt borrowings.
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 August 31, 2017, our total cash and cash equivalents worldwide was $194.7 million, with $575.0 million in outstanding borrowings. Approximately $17.8 million of our total available cash and cash equivalents is held in bank accounts located within the U.S., $141.2 million in Europe (predominantly within the UK, France, and Germany) and the remaining $35.7 million is held in the Asia Pacific region. As of August 31, 2017, 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.
Fiscal 2016 compared to Fiscal 2015
Cash and cash equivalents aggregated to $228.4 million, or 22.4% of our total assets at August 31, 2016, compared with $158.9 million, or 21.6% of our total assets at August 31, 2015. Our cash and cash equivalents increased $69.5 million during fiscal 2016 due to cash provided by operations of $331.1 million, $153.1 million in proceeds from the sale of our Market Metrics business, $56.9 million in proceeds from the exercise of employee stock options, $265.0 million in proceeds from long-term debt and $18.2 million in tax benefits from share-based payment arrangements. These cash inflows were partially offset by $262.9 million in cash paid to acquire Portware, $356.8 million in share repurchases, dividend payments of $74.2 million, capital expenditures of $47.7 million and purchases of investments, net of proceeds, of $0.9 million.
Free cash flow for fiscal 2016 was $283.4 million. Free cash flow generated during fiscal 2016 was attributable to $338.8 million of net income, including an after-tax gain on sale of $81.7 million, $50.6 million of positive working capital changes and $58.3 million in non-cash expenses less $47.7 million in capital expenditures. Free cash flow generated in fiscal 2016 was up $2.6 million from the comparable year ago period due to higher levels of net income and the timing of payables and accrued compensation, offset by incremental capital expenditures.
Net cash used in investing activities was $158.4 million in fiscal 2016, representing a $93.5 million increase from fiscal 2015. This increase was primarily due to our acquisition of Portware in the first quarter of fiscal 2016 which resulted in a net cash outflow of $262.9 million compared to a net cash outflow of $34.8 million for acquisitions occurring in fiscal 2015. Additionally, cash used in investing activities increased year over year due to an increase in capital expenditures, primarily due to the fit-out of new space in New York, Chicago and the expansion of our corporate headquarters in Norwalk. These cash outflows were partially offset by net proceeds of $153.1 million from the sale of our Market Metrics business and an increase in proceeds from the sales of investments (net of purchases) of $3.5 million year over year.
During fiscal 2016, net cash used in financing activities was $91.0 million compared to $187.3 million in fiscal 2015. The year over year decrease in cash used was primarily due to proceeds from long-term debt of $265.0 million, offset by an increase in cash used in share repurchases of $100.6 million, lower proceeds and tax benefits from stock options exercised of $25.4 million, and an increase in payments of regular quarterly dividends of $7.7 million. The proceeds from long-term debt related to additional borrowings under our previous credit agreement used to fund our acquisition of Portware on October 16, 2015. Cash used in share repurchases increased year over year as we repurchased 1.5 million shares for $232.3 million under the existing share repurchase program and 0.6 million shares for $120.0 million related to the ASR Agreement entered into in July 2016. We repurchased 1.7 million shares for $252.8 million in fiscal 2015 under the existing share repurchase program. Dividend payments increased as our Board of Directors approved a 13.6% increase in the regular quarterly dividend to $0.50 per share, or $2.00 per share per annum, beginning with the dividend payment in June 2016.
Capital Resources
Capital Expenditures
Capital expenditures were $36.9 million during fiscal 2017, down from $47.7 million a year ago. Approximately $21.4 million, or 58%, of our capital expenditures was primarily for purchases of more servers for our existing data centers, additional laptop computers and peripherals for new employees, upgrades to existing computer systems and improvements to our telecommunication equipment. The remainder of our capital expenditures was primarily for the build out of office space including $4.4 million at our Chicago location, $4.4 million at our New York locations and $2.7 million at our India locations.
Capital expenditures were $47.7 million during fiscal 2016, up from $25.7 million in fiscal 2015. Approximately $27.7 million, or 58%, of our capital expenditures related to the build out of office space including $15.1 million at our New York location, $3.9 million at our Chicago location and $1.4 million at our corporate headquarters in Norwalk. The remainder of our capital expenditures was primarily for purchases of more servers for our existing data centers, additional laptop computers and peripherals for new employees, upgrades to existing computer systems and improvements to our telecommunication equipment.
Capital Needs
Long-Term Debt
On March 17, 2017, the Company 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 FactSet, 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 FactSet’s entrance into the 2017 Credit Agreement, the Company borrowed $575.0 million in the form of a LIBOR rate loan under the 2017 Revolving Credit Facility and retired the outstanding debt under its previous credit agreement between FactSet, as the borrower, and Bank of America, N.A., as the lender. The total principal amount of the debt outstanding at the time of retirement was $365.0 million and there were no prepayment penalties. Proceeds from the 2017 Revolving Credit Facility were also used to fund FactSet’s acquisition of BISAM.
All outstanding loan amounts are reported as Long-term debt within the Consolidated Balance Sheet at August 31, 2017. During fiscal 2017 and 2016, we paid approximately $8.4 million and $3.1 million, respectively, in interest on our outstanding Loan amounts. The principal balance is payable in full on the maturity date.
As of August 31, 2017, no commitment fee was owed by FactSet since it borrowed the full amount under the 2017 Credit Agreement. In fiscal 2017, FactSet incurred approximately $0.4 million in legal costs to draft and review the 2017 Credit Agreement. These costs were capitalized as loan origination fees and are amortized into interest expense over the term of the loan using the effective interest method.
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 FactSet maintain a consolidated leverage ratio, as measured by total funded debt/EBITDA below a specified level as of the end of each fiscal quarter. The Company was in compliance with all of the covenants of the 2017 Credit Agreement as of August 31, 2017.
As of August 31, 2017, the fair value of our long-term debt was $575.0 million, which we believe approximates carrying amount as the terms and interest rates approximate market rates given its floating interest rate basis.
Letters of Credit
From time to time, we are required to obtain letters of credit in the ordinary course of business. Approximately $1.9 million of standby letters of credit have been issued in connection with various current leased office spaces as of August 31, 2017. 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 August 31, 2017 and 2016, we were in compliance with all covenants contained in the standby letters of credit.
Foreign Currency
Foreign Currency Exposure
Certain wholly owned subsidiaries within the European and Asia Pacific segments operate under a functional currency different from the U.S. dollar. The financial statements of these foreign subsidiaries are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates for the period for revenues and expenses. Translation gains and losses that arise from translating assets, liabilities, revenues and expenses of foreign operations are recorded in accumulated other comprehensive loss as a component of stockholders’ equity.
As of August 31, 2017, our non-U.S. dollar denominated revenues expected to be recognized are estimated to be approximately $90 million while our non-U.S. dollar denominated expenses are approximately $300 million, which translates into a net foreign currency exposure of approximately $210 million per year. Our foreign currency exchange exposure is related to our operating expense base in countries outside the U.S., where 73% of our employees were located as of August 31, 2017. During fiscal 2017, foreign currency movements decreased operating income by $7.1 million, compared to $11.6 million a year ago.
Foreign Currency Hedges
As of August 31, 2017, FactSet maintained foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the third quarter of fiscal 2019. The gross notional value of foreign currency forward contracts to purchase Indian Rupees with U.S. dollars was Rs. 3.8 billion.
There were no other outstanding foreign currency forward contracts as of August 31, 2017. A loss on derivatives of $2.9 million was recorded into operating income during fiscal 2017, compared to a loss of $0.5 million in fiscal 2016.
Off-Balance Sheet Arrangements
At August 31, 2017 and 2016, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually limited purposes.
Share Repurchase Program
In fiscal 2017, we repurchased 1.6 million shares for $252.8 million compared to 1.5 million shares for $232.3 million in fiscal 2016 under the our existing share repurchase program. Over the last 12 months, we have returned $341.9 million to stockholders in the form of share repurchases and dividends, funded by cash generated from operations. On March 27, 2017, the Board of Directors of FactSet approved a $300.0 million expansion of to the existing share repurchase program. Including this expansion, $244.1 million is available for future share repurchases as of August 31, 2017.
On July 1, 2016, we entered into an ASR Agreement to repurchase $120.0 million of our common stock. We received 595,607 shares of common stock on July 5, 2016, which was approximately 80% of the total number of shares of common stock expected to be repurchased under the ASR Agreement. The final settlement of the ASR Agreement occurred in the first quarter of fiscal 2017 with us receiving an additional 102,916 shares of our common stock.
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.
The following table summarizes our significant contractual obligations as of August 31, 2017 and the corresponding effect that these obligations will have on our liquidity and cash flows in future periods:
| Payments due by period | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2018 | 2019-2020 | 2021-2022 | 2023 and thereafter | Total | |||||||||||||||
| Operating lease obligations(1) | $ | 38.1 | $ | 63.5 | $ | 41.0 | $ | 139.1 | $ | 281.7 | ||||||||||
| Purchase commitments(2) | 74.9 | 3.6 | 2.5 | — | 81.0 | |||||||||||||||
| Loan outstanding(3) | — | 575.0 | — | — | 575.0 | |||||||||||||||
| Total contractual obligations by period(4) | $ | 113.0 | $ | 642.1 | $ | 43.5 | $ | 139.1 | $ | 937.7 |
| (1) | Operating lease amounts include future minimum lease payments under all our non-cancelable operating leases with an initial term in excess of one year. For more information on o__ur operating leases, see Note 19_, Commitments and Contingencies, in the Notes to the Company’s Consolidated Financial Statements included in Item 8._ |
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| (2) | Purchase commitments represent payment__s due in future periods in respect of obligations to our various data vendors as well as commitments to purchase goods and services such as telecommunication and computer maintenance services. |
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| (3) | Represents the amount due under the Company’s 2017 Credit Agreement_._ |
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| (4) | _Non-current income taxes payable of $_11.5 _million and non-current deferred tax liabilities of $_24.9 million have been excluded in the table above due to uncertainty regarding the timing of future payments. |
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Purchase orders do not necessarily reflect a binding commitment but are merely indicative of authorizations and intention to conclude purchases in the future. For the purpose of this tabular disclosure, purchase obligations for goods and services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. It is expected that all the contractual obligations noted in the table will be funded from existing cash and cash flows from operations. Expected timing pertaining to the contractual obligations included in the table above has been estimated based on information currently available. The amounts paid and the timing of those payments may differ based on when the goods and services provided by our vendors to whom we are contractually obligated are actually received as well as due to changes to agreed-upon amounts for any of our obligations.
At August 31, 2017, we leased approximately 1,143,000 square feet of office space, which we believe is adequate for our current needs and that additional space is available for lease to meet any future needs. Including new lease agreements executed during fiscal 2017, our worldwide-leased office space increased by approximately 71,000 square feet, or 7%, from August 31, 2016. This increase was primarily due to leases related to acquisitions completed in fiscal 2017 as well as expanded office space in India, offset by the consolidation of certain other office spaces.
As disclosed earlier in the Capital Resources section of this MD&A, FactSet entered into the 2017 Credit Agreement on March 17, 2017 and borrowed $575.0 million. In conjunction with the 2017 Credit Agreement, FactSet retired its outstanding loan amount of $365.0 million under the previous credit agreement.
With the exception of the new leases entered into in the ordinary course of business and the 2017 Credit Agreement, there were no other significant changes to our contractual obligations during fiscal 2017.
Dividends
On May 5, 2017, our Board of Directors approved a 12.0% increase in the regular quarterly dividend beginning with the dividend payment on June 2017 which was $0.56 per share, or $2.24 per share per annum. With our dividends and our share repurchases, in the aggregate, we have returned $341.9 million to shareholders over the past 12 months. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors we considered relevant and is subject to final determination by our Board of Directors.
During fiscal years 2017 and 2016, our Board of Directors declared the following dividends:
| Declaration Date | Dividends Per Share of Common Stock | Type | Record Date | Total $ Amount (in thousands) | Payment Date | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| August 10, 2017 | $ | 0.56 | Regular (cash) | August 31, 2017 | $ | 21,853 | September 19, 2017 | ||||
| May 5, 2017 | $ | 0.56 | Regular (cash) | May 31, 2017 | $ | 21,951 | June 20, 2017 | ||||
| February 6, 2017 | $ | 0.50 | Regular (cash) | February 28, 2017 | $ | 19,709 | March 21, 2017 | ||||
| November 10, 2016 | $ | 0.50 | Regular (cash) | November 30, 2016 | $ | 19,852 | December 20, 2016 | ||||
| August 5, 2016 | $ | 0.50 | Regular (cash) | August 31, 2016 | $ | 20,019 | September 20, 2016 | ||||
| May 6, 2016 | $ | 0.50 | Regular (cash) | May 31, 2016 | $ | 20,171 | June 21, 2016 | ||||
| February 5, 2016 | $ | 0.44 | Regular (cash) | February 29, 2016 | $ | 18,044 | March 15, 2016 | ||||
| November 6, 2015 | $ | 0.44 | Regular (cash) | November 30, 2015 | $ | 18,208 | December 15, 2015 | ||||
| August 10, 2015 | $ | 0.44 | Regular (cash) | August 31, 2015 | $ | 18,179 | September 15, 2015 |
All of the above cash dividends were paid from existing cash resources. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors we considered relevant and is subject to final determination by our Board of Directors.
Significant Accounting Policies
We describe our significant accounting policies in Note 3, Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements included in Item 8 below.
Critical Accounting Estimates
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our consolidated financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.
Business Combinations
We record acquisitions using the purchase method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies and contingent consideration are recognized at their fair value on the acquisition date. The application of the purchase method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. Our estimates are based on historical experience, information obtained from the management of the acquired companies and when appropriate, includes assistance from independent third party appraisal firms. Our significant assumptions and estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.
Performance-based Equity Awards
We have an employee stock-based compensation plan, which allows for the issuance of performance-based equity awards to employees. Accounting guidance requires the measurement and recognition of compensation expense for all performance-based equity awards made to employees based on the estimated fair values of the awards that are expected to vest. At the end of each reporting period, management must make assumptions regarding the likelihood of achieving our performance targets because the number of stock options that vest will be predicated on us achieving these levels. However, there is no current guarantee that such options will vest in whole or in part.
February 2015 Performance-based Option Grant Review
In connection with the acquisition of Code Red, we granted 137,522 performance-based stock options during the second quarter of fiscal 2015. Of the total amount granted, 68,761 performance-based options were eligible to vest if certain Code Red ASV and operating margin targets were achieved over a two-year measurement period ending February 28, 2017. At the conclusion of the measurement period, 70% of the options were deemed eligible to vest, with the remaining options being forfeited. The option holders must remain employed by FactSet through February 28, 2019 in order for the options to vest. As of August 31, 2017, total unamortized stock-based compensation of $0.8 million will be recognized as expense over the remaining vesting period of 1.4 years.
The remaining 68,761 options granted in February 2015 are eligible to cliff vest based on a four-year measurement period ending February 28, 2019. As of August 31, 2017, total unamortized stock-based compensation of $0.4 million will be recognized as expense over the remaining vesting period of 1.4 years. A change, up or down, in the actual financial performance levels achieved by Code Red in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense:
| Vesting Percentage (in thousands) | Cumulative Catch-up Adjustment* | Remaining Expense to be Recognized | |||||||
|---|---|---|---|---|---|---|---|---|---|
| 0% | $ | (769 | ) | $ | — | ||||
| 10% | $ | (577 | ) | $ | 108 | ||||
| 40% (current expectation) | $ | — | $ | 431 | |||||
| 70% | $ | 577 | $ | 755 | |||||
| 100% | $ | 1,153 | $ | 1,078 |
* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of August 31, 2017_._
October 2015 and August 2016 Performance-based Option Grant Review
In connection with the acquisition of Portware during the first quarter of fiscal 2016, we granted 530,418 performance-based stock options. In the fourth quarter of fiscal 2017, we modified the vesting of these grants to allow 70% of the options to become eligible to vest, with the remaining options being forfeited. In conjunction with this modification, we recognized a cumulative catch-up adjustment of $1.8 million. The remaining options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date provided the option holders remain employed by FactSet. As of August 31, 2017, total unamortized stock-based compensation of $2.9 million will be recognized as expense over the remaining vesting period of 3.1 years.
We granted 20,911 additional performance-based stock options to Portware employees in the fourth quarter of fiscal 2016 with similar performance conditions. In the fourth quarter of fiscal 2017, FactSet modified the vesting of these grants to allow 70% of the options to become eligible to vest, with the remaining options being forfeited. In conjunction with this modification, FactSet recognized a cumulative catch-up adjustment of $0.1 million. The remaining options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date provided the option holders remain employed by FactSet. As of August 31, 2017, total unamortized stock-based compensation of $0.4 million will be recognized as expense over the remaining vesting period of 3.9 years.
January 2017 Performance-based Option Grant Review
In connection with the acquisition of Vermilion, FactSet granted 61,744 performance-based stock options in January 2017. These performance-based options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date if certain Vermilion revenue and operating income targets are achieved by November 30, 2018. The option holders must also remain employed by FactSet for the options to be eligible to vest. As of August 31, 2017, FactSet does not believe these growth targets are probable of being achieved, and as such, no stock-based compensation expense is expected to be recognized in connection with these performance-based options. A change in the actual financial performance levels achieved by Vermilion in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense:
| Vesting Percentage (in thousands) | Cumulative Catch-up Adjustment* | Remaining Expense to be Recognized | |||||||
|---|---|---|---|---|---|---|---|---|---|
| 0% (current expectation) | — | — | |||||||
| 100% | $ | 338 | $ | 2,367 |
* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of August 31, 2017.
J****une 2017 Performance-based Option Grant Review
In connection with the acquisition of BISAM, FactSet granted 206,417 performance-based stock options in June 2017. These performance-based options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date if certain BISAM revenue and operating income targets are achieved by March 31, 2019. The option holders must also remain employed by FactSet for the options to be eligible to vest. As of August 31, 2017, FactSet does not believe these growth targets are probable of being achieved, and as such, no stock-based compensation expense is expected to be recognized in connection with these performance-based options. A change in the actual financial performance levels achieved by BISAM in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense:
| Vesting Percentage (in thousands) | Cumulative Catch-up Adjustment* | Remaining Expense to be Recognized | |||||||
|---|---|---|---|---|---|---|---|---|---|
| 0% (current expectation) | — | — | |||||||
| 80% | $ | 237 | $ | 6,870 | |||||
| 90% | $ | 267 | $ | 7,729 | |||||
| 100% | $ | 296 | $ | 8,588 |
* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of August 31, 2017.
Accrued Compensation
We make significant estimates in determining our accrued compensation. Approximately 15% of our total employee compensation is variable and discretionary. We conduct a final review of Company and departmental individual performance each year end to determine the amount of discretionary employee compensation. We also review compensation throughout the year to determine how overall performance tracks against management’s expectations. Management takes these and other factors, including historical performance, into account in reviewing accrued compensation estimates on a quarterly basis and adjusts accrual rates as appropriate. As of August 31, 2017 and 2016 the amount of the variable employee compensation recorded within accrued compensation was $39.2 million and $38.2 million, respectively.
Goodwill and Intangible Assets
Goodwill is not amortized as it is estimated to have an indefinite life. At least annually, we are required to test goodwill at the reporting unit level for potential impairment, and, if impaired, write down to fair value based on the present value of discounted cash flows. Our reporting units evaluated for potential impairment were the U.S., Europe and Asia Pacific, which is aligned with how the chief operating decision making group (“CODMG”), composed of the CEO and senior management, manages the business and the demographic markets in which FactSet serves. The three reporting units are consistent with the operating segments reported as there is no discrete financial information available for the subsidiaries within each operating segment. The impairment test requires management to make judgments in connection with these reporting units, including assigning assets, liabilities, goodwill and other indefinite-lived intangible assets to reporting units and determining the fair value of each reporting unit.
Our impairment analysis contains uncertainties as it requires management to make assumptions and apply judgment to estimate industry and economic factors including market conditions, legal and technological factors and the profitability of our business strategies. It is our policy to conduct impairment testing based on our current business strategies taking into consideration present industry and economic conditions, as well as future expectations. We have not made any material changes in our impairment analysis methodology during the past three fiscal years. While we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for goodwill impairment losses, we may be exposed to an impairment charge that could be material if actual results are not consistent with our estimates and assumptions. Future events could cause us to conclude that indicators of impairment do exist and that goodwill associated with our previous acquisitions is impaired, which could result in an impairment loss in our Consolidated Statements of Income and a write-down of the related asset.
We performed our annual goodwill impairment test during the fourth quarter of fiscal 2017, consistent with previous years, it was determined that there was no impairment, with the fair value of each of the Company’s reporting units significantly exceeding carrying value. The carrying value of goodwill as of August 31, 2017 and 2016, was $707.6 million and $452.9 million, respectively.
Our identifiable intangible assets consist of acquired content databases, client relationships, software technology, non-compete agreements and trade names resulting from acquisitions, which have been fully integrated into our operations. Depending on the nature of the intangible asset, it is amortized on either a straight-line or an accelerated basis using estimated useful lives ranging from two to twenty years. These useful lives are evaluated quarterly to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. There were no adjustments to the useful lives of intangible assets subject to amortization during any of the periods presented. These intangible assets have no assigned residual values as of August 31, 2017 and 2016.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for intangible assets that management expects to hold and use is based on the amount the carrying value exceeds the fair value of the asset. No indicators of impairment of intangible assets has been identified during any of the periods presented. Our ongoing consideration of the recoverability could result in impairment charges in the future, which could adversely affect our results of operations. The carrying value of intangible assets as of August 31, 2017 and 2016, was $173.5 million and $93.2 million, respectively.
Long-lived Assets
Long-lived assets, comprised of property, equipment and leasehold improvements are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that may cause an impairment review include significant changes in technology that make current computer-related assets that we use in our operations obsolete or less useful and significant changes in the way we use these assets in our operations. When evaluating long-lived assets for potential impairment if impairment indicators are present, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. The new cost basis will be depreciated (amortized) over the remaining useful life of that asset. Using the impairment evaluation methodology described here, there have been no long-lived asset impairment charges for each of the last three years. The carrying value of long-lived assets as of August 31, 2017 and 2016, was $100.5 million and $84.6 million, respectively.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.
Estimated Tax Provision and Tax Contingencies
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our tax provision is an estimate based on our understanding of laws in Federal, state and foreign tax jurisdictions. These laws can be complicated and are difficult to apply to any business including ours. The tax laws also require us to allocate our taxable income to many jurisdictions based on subjective allocation methodologies and information collection processes. Our effective tax rates differ from the statutory rate primarily due to the impact of state taxes, foreign operations, R&D and other tax credits, tax audit settlements, incentive-stock options and domestic production activities deductions. Our annual effective tax rate was 25.0%, 26.5% and 27.8% in fiscal 2017, 2016 and 2015, respectively.
We recognize the benefit of an income tax position only if it is more likely than not that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position as of the reporting date. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We will classify the liability for unrecognized tax benefits as current to the extent that we anticipate payment of cash within one year. Additionally, we accrue interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest is classified as income tax expense in the financial statements.
As of August 31, 2017, we had gross unrecognized tax benefits totaling $11.5 million, including $1.5 million of accrued interest, recorded as Taxes Payable (non-current) within the Consolidated Balance Sheet. Unrecognized tax benefits represent tax positions taken on tax returns but not yet recognized in the consolidated financial statements. When applicable, we adjust the previously recorded tax expense to reflect examination results when the position is effectively settled. If recognized, the unrecognized tax benefits and related interest would be recorded as a benefit to tax expense on the Consolidated Statements of Income. Audits by multiple tax authorities are currently ongoing. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. For this reason, we regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
Our provision for income taxes is subject to volatility and could be adversely impacted by numerous factors such as changes in tax laws, regulations, or accounting principles, including accounting for uncertain tax positions or interpretations of them. Significant judgment is required to determine recognition and measurement. Further, as a result of certain ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely affect our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse impact on our operating results and financial condition.
New Accounting Pronouncements
See Note 3, Summary of Significant Accounting Policies, in the Notes to the Company’s Consolidated Financial Statements included in Item 8 for a full description of recent accounting pronouncements, including the expected dates of adoption, which we include here by reference.
Market Trends
In the ordinary course of business, we are exposed to financial risks involving the volatility of equity markets as well as foreign currency and interest rate fluctuations.
Approximately 84.1% of our ASV is derived from our investment management clients. The prosperity of these clients is tied to equity assets under management. An equity market decline not only depresses assets under management but could cause a significant increase in redemption requests. Moreover, extended declines in the equity markets may reduce new fund or client creation, resulting in lower demand for services from investment management clients. Our investment banking clients that perform M&A advisory work, provide capital markets services and equity research, account for approximately 15.9% of our ASV. A significant portion of these revenues relate to services deployed by the largest banks. Credit continues to impact many of the large banking clients due to the amount of leverage deployed in past operations. Clients could encounter similar problems. A lack of confidence in the global banking system could cause declines in M&A funded by debt. Additional uncertainty, consolidation and business failures in the global investment banking sector could adversely affect our financial results and future growth. Regardless, the size of banks in general is shrinking as they deleverage their balance sheets and adjust their expense bases to future revenue opportunities. Our revenues may decline if banks, including those involved in recent merger activity, significantly reduce headcount in the areas of corporate M&A, capital markets and equity research to compensate for the issues created by other departments.
Due to the global nature of our operations, we conduct business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, Japanese Yen and Philippine Peso. To the extent that our international activities increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase. To manage this exposure, we utilize derivative instruments (foreign currency forward contracts). By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. Credit risk is managed through the continuous monitoring of exposure to the counterparties associated with these instruments. Our primary objective in holding derivatives is to reduce the volatility of earnings associated with changes in foreign currency.
On June 23, 2016, the United Kingdom (“UK”) held a referendum in which British citizens approved an exit from the European Union (“EU”), commonly referred to as “Brexit.” As a result of the referendum, the global markets and currencies had been adversely impacted, including a sharp decline in the value of the British Pound Sterling as compared to the U.S. dollar at that time. Volatility in exchange rates is expected to continue in the short term as the UK negotiates its exit from the EU. The UK inflation rate has also experienced significant price level increase compared to the past four years. As the negotiation process continues and the timeframe from the initial vote increases, the UK economic performance has been stronger than originally expected. Increased European confidence and UK consumer spending has contributed to the recovery of the economic outlook. In the longer term, as negotiations continue, any impact from Brexit on us will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect our operations and financial results. While we evaluate our own risks and uncertainty related to Brexit, we will continue to partner with our clients to help them navigate the fluctuating international markets. Our products, including our datasets such as GeoRev, allow our clients to understand geographic exposure and assess the risks of operating on a global scale so they may make informed business decisions.
Forward-Looking Factors
Forward-Looking Statements
In addition to current and historical information, this Annual Report on Form 10-K, 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 in Part 1 Item 1A, Risk Factors_,_ of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Annual Report to reflect actual results or future events or circumstances.
Business Outlook
The following forward-looking statements reflect our expectations as of September 26, 2017. Given the number of 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.
First Quarter Fiscal 201****8 Expectations
| ● | GAAP Revenues are expected to be in the range of $327 million and $333 million. |
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| ● | GAAP operating margin is expected to be in the range of 28% and 29%. Adjusted operating margin is expected to be in the range of 31% and 32%. |
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| ● | The annual effective tax rate is expected to be in the range of 25% and 26%. |
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| ● | GAAP diluted EPS is expected to be in the range of $1.75 and $1.81. Adjusted diluted EPS is expected to be in the range of $1.93 and $1.99. The midpoint of the adjusted EPS range represents 12% growth over the prior year. |
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Dividend Payment
On August 10, 2017, we declared a regular quarterly dividend of $0.56 per share. The cash dividend of $21.9 million was paid on September 19, 2017, to common stockholders of record on August 31, 2017 using our existing cash generated by operations.
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