SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended May 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11869
FactSet Research Systems Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3362547 | ||
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | ||
| incorporation or organization) | |||
| One Greenwich Plaza, Greenwich, Connecticut | 06830 | ||
| (Address of principal executive office) | (Zip Code) | ||
| Registrant’s telephone number, including area code: | (203) 863-1500 |
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No|_|
The total number of shares of the registrant’s Common Stock, $.01 par value, outstanding on May 31, 2001, was 33,217,000.
FactSet Research Systems Inc.
Form 10–Q
Table of Contents
| Part I | FINANCIAL INFORMATION | Page |
|---|---|---|
| Item 1. | Financial Statements | |
| Consolidated Statements of Income for the three months and nine months ended May 31, 2001 and 2000 |
3 | |
| Consolidated Statements of Comprehensive Income for the three months and nine months ended May 31, 2001 and 2000 |
3 | |
| Consolidated Statements of Financial Condition at May 31, 2001 and at August 31, 2000 | 4 | |
| Consolidated Statements of Cash Flows for the nine months ended May 31, 2001 and 2000 |
5 | |
| Notes to the Consolidated Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
| Part II | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 15 |
| Item 2. | Changes in Securities | 15 |
| Item 3. | Defaults Upon Senior Securities | 15 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 15 |
| Item 5. | Other Information | 15 |
| Item 6. | Exhibits and Reports on Form 8–K | 15 |
| Signatures | 16 |
| FactSet Research Systems Inc. | |||||||||
| CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION–Unaudited | |||||||||
| ASSETS | May 31, | August 31, | |||||||
| Thousands | 2001 | 2000 | |||||||
| CURRENT ASSETS | |||||||||
| Cash and Cash equivalents | $25,736 | $39,629 | |||||||
| Investments | 42,355 | 22,704 | |||||||
| Receivables from clients and clearing brokers | 32,579 | 28,449 | |||||||
| Receivables from employees | 493 | 789 | |||||||
| Deferred taxes | 5,384 | 7,365 | |||||||
| Other current assets | 2,069 | 937 | |||||||
| Total current assets | 108,616 | 99,873 | |||||||
| LONG–TERM ASSETS | |||||||||
| Property, equipment, and leasehold improvements, at cost | 86,473 | 66,637 | |||||||
| Less accumulated depreciation | (50,224 | ) | (45,749 | ) | |||||
| Property, equipment, and leasehold improvements, net | 36,249 | 20,888 | |||||||
| OTHER NON-CURRENT ASSETS | |||||||||
| Intangible assets, net | 12,237 | 10,734 | |||||||
| Deferred taxes | 2,588 | 2,232 | |||||||
| Other assets | 1,902 | 1,841 | |||||||
| TOTAL ASSETS | $161,592 | $135,568 | |||||||
| ======= | ======= | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | May 31, | August 31, | |||||||
| Thousands | 2001 | 2000 | |||||||
| CURRENT LIABILITIES | |||||||||
| Accounts Payable and accrued expenses | $ 5,374 | $9,874 | |||||||
| Accrued compensation | 10,857 | 9,576 | |||||||
| Deferred fees and commissions | 11,107 | 9,656 | |||||||
| Dividend payable | 1,328 | 985 | |||||||
| Current taxes payable | 3,018 | 1,854 | |||||||
| Total current liabilities | 31,684 | 31,945 | |||||||
| NON–CURRENT LIABILITIES | |||||||||
| Deferred Rent | 588 | 621 | |||||||
| Total liabilities | 32,272 | 32,566 | |||||||
| STOCKHOLDERS’ EQUITY | |||||||||
| Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued | –– | –– | |||||||
| Common stock, $.01 par value | 333 | 328 | |||||||
| Capital in excess of par value | 24,302 | 19,015 | |||||||
| Retained earnings | 107,402 | 86,011 | |||||||
| Unrealized gain on investments, net of taxes | 51 | 5 | |||||||
| 132,088 | 105,359 | ||||||||
| Less treasury stock, at cost | (2,768 | ) | (2,357 | ) | |||||
| Total stockholders’ equity | 129,320 | 103,002 | |||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $161,592 | $135,568 | |||||||
| ======= | ======= | ||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
May 31, 2001
(Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
FactSet Research Systems Inc. (the “Company”) provides online integrated database services to the investment community. The Company’s revenues are derived from subscription charges. Solely at the option of each client, these charges may be paid either in commissions on securities transactions (in which case subscription revenues are recorded as commissions) or on a cash basis (in which case subscription revenues are recorded as cash fees).
To facilitate the receipt of subscription revenues on a commission basis, the Company’s wholly owned subsidiary, FactSet Data Systems, Inc.(“FDS”), is a member of the National Association of Securities Dealers, Inc. and is a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934.
Subscription revenues paid in commissions are derived from securities transactions introduced and cleared on a fully disclosed basis primarily through two clearing brokers. That is, a client paying subscription charges on a commission basis directs the clearing broker, at the time the client executes a securities transaction, to credit the commission on the transaction to FDS.
FactSet Limited, FactSet Pacific, Inc., FactSet GMBH, and LionShares Europe SAS are wholly owned subsidiaries of the Company with foreign branch operations in London, Frankfurt, Tokyo, Hong Kong, Sydney, and Avon, France.
2. ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles in the United States, consistent in all material respects with those applied in the Annual Report on Form 10-K for the fiscal year ended August 31, 2000. Interim financial information is unaudited, but reflects all normal adjustments, which are, in the opinion of management, necessary to present fairly the results for the interim periods presented. The interim financial statements should be read in connection with the audited financial statements (including the footnotes thereto) in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2000.
The significant accounting policies of the Company and its subsidiaries are summarized below.
Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany activity and balances have been eliminated from the consolidated
financial statements.
As required by the Emerging Issues Task Force in 2000 (Issue 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefits Received by a Company upon Exercise of a Nonqualified Employee Stock Option) income tax benefits derived from the exercise of stock options are classified as cash from operations in the statement of cash flows. Prior period cash flow statements have been restated to conform with this presentation.
Cost of services is composed of employee compensation and benefits for the applications engineering and consulting groups, clearing fees, data costs, amortization of acquired technology, computer maintenance and depreciation expenses, and communication costs. Selling, general, and administrative expenses include employee compensation and benefits for the sales, product development and various other support departments, promotional expenses, rent, amortization of goodwill and leasehold improvements, depreciation of furniture and fixtures, office expenses, professional fees, and other expenses.
Use of Estimates
The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates have
been made in areas including deferred tax assets, depreciable lives of fixed
assets, accrued liabilities, income tax provision, allowances for doubtful
accounts and allocation of purchase price to assets and liabilities acquired.
Actual results could differ from those estimates.
Revenue Recognition
Subscription charges are
quoted to clients on an annual basis, but are earned monthly as services are
provided. Subscription revenues are earned each month, based on one-twelfth of
the annual subscription charge quoted to each client. Amounts that have been
earned but not yet paid through the receipt of commissions on securities
transactions or through cash payments are reflected on the Consolidated
Statements of Financial Condition as receivables from clients and clearing
brokers. Amounts that have been received through commissions on securities
transactions or through cash payments that are in excess of earned subscription
revenues are reflected on the Consolidated Statements of Financial Condition as
deferred fees and commissions.
Clearing Fees
When subscription charges
are paid on a commission basis, the Company incurs clearing fees, which are the
charges imposed by clearing brokers to execute and settle clients’
securities transactions. Clearing fees are recorded as expenses when the related
subscription revenues recorded as commissions are earned.
Cash and Cash Equivalents
Cash and cash equivalents
consists of demand deposits and money market investments with maturities of 90
days or less.
Investments
Investments that have
original maturities greater than 90 days are classified as available-for-sale
securities and are reported at fair value. Unrealized gains and losses on
available-for-sale securities are recognized as a separate component of
stockholders’ equity, net of income taxes. Fair value is determined for
most investments from readily available quoted market prices.
Property, Equipment, and Leasehold Improvements
Computers and related
equipment are depreciated on a straight-line basis over estimated useful lives
of three years. Depreciation of furniture and fixtures is recognized using the
double declining balance method over estimated useful lives of five years.
Leasehold improvements are amortized on a straight-line basis over the terms of
the related leases or estimated useful lives of the improvements, whichever
period is shorter.
Intangibles
Intangible assets consist
of goodwill and acquired technology. Amortization of goodwill and acquired
technology is calculated on a straight-line basis using estimated lives ranging between
five and fifteen years. During the third quarter of fiscal 2001, the Company
acquired LionShares, a division of Worldly Information Network, Inc., for $2.3 million
in cash and recorded the transaction using purchase accounting.
Income and Deferred Taxes
Deferred taxes are
determined by calculating the estimated future tax consequences associated with
differences between financial accounting and tax bases of assets and
liabilities. A valuation allowance is established to the extent management
considers it more likely than not that some portion or all of the deferred tax
assets will not be realized. The effect on deferred taxes from income tax law
changes is recognized immediately upon enactment. The deferred tax provision is
derived from changes in deferred taxes on the balance sheet and reflected on the
Consolidated Statements of Income as a component of income taxes. Income tax
benefits derived from the exercise of non-qualified stock options or the disqualifying
disposition of incentive stock options are recorded directly to capital in
excess of par value.
Earnings Per Share
The computation of basic
earnings per share in each year is based on the weighted average number of
common shares outstanding. The weighted average number of common shares
outstanding includes shares issued to the Company’s employee stock
ownership plan at the date authorized by the Board of Directors and the employee
stock purchase program on the date of grant. Diluted
earnings per share are based on the weighted average number of common shares and
potentially dilutive common shares outstanding. Shares available pursuant to
grants made under the Company’s stock option plans are included as common
share equivalents using the treasury stock method.
Stock-Based Compensation
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. The Company accounts for
stock-based compensation plans in accordance with APB Opinion No. 25, under which no compensation costs are
recorded when the exercise price of a stock option and fair market value of the underlying stock are identical on
the date of grant.
New Accounting Pronouncements
In December 1999, Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition
in Financial Statements, was issued. SAB No. 101 summarizes certain of the SEC’s
views in applying accounting principles generally accepted in the United States
to revenue recognition in financial statements. During the second quarter of fiscal 2001,
the Company implemented SAB No. 101. The application of SAB No. 101 resulted in no
material impact to the Company’s financial condition or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141 (SFAS 141), Business Combinations, and Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets. These standards will be adopted in fiscal 2002. The Company is currently evaluating the impact that these standards will have on its financial statements.
3. COMMON STOCK AND EARNINGS PER SHARE
In January 2001, the Company’s shareholders approved the Amendment of the Company’s Certificate of Incorporation resulting in an increase in the number of authorized shares of common stock from 40 million to 100 million.
| Shares of common stock outstanding were as follows: | Nine Months Ended May 31, | ||||||||
| Thousands | 2001 | 2000 | |||||||
| Balance at September 1 | 32,821 | 31,539 | |||||||
| Additional stock issued for employee stock plans | 56 | 49 | |||||||
| Exercise of stock options | 353 | 975 | |||||||
| Repurchase of common stock | ( 13 | ) | ( 24 | ) | |||||
| Balance at May 31 | 33,217 | 32,539 | |||||||
| ===== | ===== | ||||||||
A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows:
| Weighted Average | |||||||||
| Thousands, except per share data and unaudited | Net Income | Common Shares | Per Share | ||||||
| (Numerator) | (Denominator) | Amount | |||||||
| For the Three Months Ended May 31, 2001 | |||||||||
| Basic EPS | |||||||||
| Net income available to common stockholders | $8,572 | 33,173 | $0.26 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 1,553 | |||||||
| Net income available to common stockholders | $8,572 | 34,726 | $0.25 | ||||||
| ===== | ===== | ||||||||
| For the Three Months Ended May 31, 2000 | |||||||||
| Basic EPS | |||||||||
| Net income available to common stockholders | $5,150 | 32,431 | $0.16 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 2,074 | |||||||
| Net income available to common stockholders | $5,150 | 34,505 | $0.15 | ||||||
| ===== | ===== | ||||||||
| For the Nine Months Ended May 31, 2001 | |||||||||
| Basic EPS | |||||||||
| Net income available to common stockholders | $24,696 | 33,010 | $0.75 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 1,771 | |||||||
| Net income available to common stockholders | $24,696 | 34,781 | $0.71 | ||||||
| ===== | ===== | ||||||||
| For the Nine Months Ended May 31, 2000 | |||||||||
| Basic EPS | |||||||||
| Net income available to common stockholders | $17,990 | 31,933 | $0.56 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 2,592 | |||||||
| Net income available to common stockholders | $17,990 | 34,525 | $0.52 | ||||||
| ===== | ===== | ||||||||
4. SEGMENTS
The Company has three reportable segments based on geographic operations: the United States, Europe and Asia Pacific. Each segment markets online integrated database services to investment managers, investment banks and other financial services professionals. The U.S. segment services financial institutions throughout North America while the European and Asia Pacific segments serve investment professionals located in Europe and other non-U.S. regions. The European segment is headquartered in London, United Kingdom and maintains an office presence in Frankfurt, Germany and Avon, France. The Asia Pacific segment is headquartered in Tokyo, Japan with office locations in Hong Kong and Sydney, Australia. Mainly sales and consulting personnel staff each of these foreign branch operations. The Europe and Asia Pacific segments have similar market characteristics and each offers identical products and services through a common distribution method to financial services institutions. Segment revenues reflect direct sales of products and services to clients based in their geographic location. There are no intersegment or intercompany sales. Each segment records compensation, travel, office and other direct expenses related to its employees. Expenses for software development, expenditures related to the Company’s computing centers, data costs, clearing fees, income taxes and corporate headquarters charges are recorded by the U.S. segment and are not allocated to the European and Asia Pacific segments. The accounting policies of the segments are the same as those described in Note 2, “Accounting Policies.”
| Segment Information | |||||||||
| Thousands | U.S. | Europe | Asia Pacific | Total | |||||
| For the Three Months Ended May 31, 2001 | |||||||||
| Revenues from external clients | $ 36,575 | $ 6,596 | $ 2,203 | $ 45,374 | |||||
| Segment operating profit * | 9,329 | 2,742 | 916 | 12,987 | |||||
| Total assets at May 31, 2001 | 147,300 | 11,166 | 3,126 | 161,592 | |||||
| Capital expenditures | 9,738 | 308 | 75 | 10,121 | |||||
| For the Three Months Ended May 31, 2000 | |||||||||
| Revenues from external clients | $ 28,455 | $ 4,184 | $ 1,656 | $ 34,295 | |||||
| Segment operating profit * | 5,238 | 1,674 | 518 | 7,430 | |||||
| Total assets at May 31, 2000 | 110,089 | 6,907 | 1,561 | 118,557 | |||||
| Capital expenditures | 738 | 1,054 | 22 | 1,814 | |||||
| For the Nine Months Ended May 31, 2001 | |||||||||
| Revenues from external clients | $104,668 | $18,038 | $ 6,503 | $129,209 | |||||
| Segment operating profit * | 26,072 | 8,302 | 2,933 | 37,307 | |||||
| Capital expenditures | 25,216 | 1,075 | 317 | 26,608 | |||||
| For the Nine Months Ended May 31, 2000 | |||||||||
| Revenues from external clients | $ 81,312 | $ 11,120 | $ 4,632 | $ 97,064 | |||||
| Segment operating profit * | 19,104 | 4,341 | 1,914 | 25,359 | |||||
| Capital expenditures | 6,862 | 2,030 | 88 | 8,980 | |||||
| * Expenses are not allocated or charged between segments. Expenditures associated with the Company’s computer centers, software developments costs, clearing fees, data fees, income taxes, and corporate headquarters charges are recorded by the U.S. segment. | |||||||||
5. RETIREMENT BONUS
On May 22, 2000, the Company announced the retirement of Howard E. Wille as Chief Executive Officer of the Company. He retired as Chairman of the Board effective August 31, 2000. In recognition of his 22 years service and contributions to the Company, Mr. Wille was awarded a retirement bonus which was paid upon his retirement as Chairman of the Board on August 31, 2000. This resulted in a non-recurring charge of $2.75 million in the third quarter of fiscal 2000. Mr. Wille remains a director of the Company.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| RESULTS OF OPERATIONS – Unaudited | Three Months Ended May 31, | Nine Months Ended May 31, | |||||||||
| Thousands, except per share data | 2001 | 2000 | Change | 2001 | 2000 | Change | |||||
| Revenues | $45,374 | $34,295 | 32.3% | $129,209 | $97,064 | 33.1% | |||||
| Operating expenses | 32,387 | 24,115 | 34.3 | 91,902 | 68,955 | 33.3 | |||||
| Retirement bonus | –– | 2,750 | –– | 2,750 | |||||||
| Operating income | $12,987 | $ 7,430 | 74.8 | $37,307 | $25,359 | 47.1 | |||||
| Provision for income taxes | $ 5,245 | $ 3,238 | 62.0 | $15,314 | $10,833 | 41.4 | |||||
| Non-recurring tax benefit | –– | –– | –– | ( 1,119 | ) | ||||||
| Total income taxes | $ 5,245 | $ 3,238 | $15,314 | $ 9,714 | |||||||
| Net income | $ 8,572 | $ 5,150 | 66.4 | $24,696 | $17,990 | 37.3 | |||||
| Diluted earnings per common share | $0.25 | $0.15 | 66.7 | $0.71 | $0.52 | 36.5 | |||||
Revenues
Revenues
for the quarter ended May 31, 2001 were $45.4 million, an increase of 32.3% from
$34.3 million a year earlier. Revenues increased 33.1% to $129.2
million during the first nine months of fiscal 2001. Excluding the August 2000
acquisition of Insyte, revenues grew by 29.7% and 30.3%, respectively, for the
quarter and nine months ended May 31, 2001. Revenue growth was the result of
international expansion, incremental subscriptions to additional databases and
applications by existing clients, as well as the net addition of 89 clients over
the past twelve months.
Revenues from international operations for the quarter ended May 31, 2001 rose 50.7% to $8.8 million. Revenues from European operations grew 57.6%. Revenues in Asia Pacific increased 33.0%. Overseas revenues for the first nine months of fiscal 2001 totaled $24.5 million, up 55.8% from the year ago period. Revenues from international operations accounted for 19.4% of consolidated revenues for the third quarter of fiscal 2001 and 19.0% of consolidated revenues for the first nine months of fiscal 2001. Over 95% of the Company’s revenues are received in U.S. dollars. Net monetary assets held by FactSet’s international branch offices during the quarter ended May 31, 2001 were immaterial. Accordingly, the Company’s exposure to foreign currency fluctuations was not material.
Demand for the Company’s value added applications, including Data Warehousing, Premium Workstations, and, in particular, Portfolio Analytics continued to increase. At May 31, 2001, there were approximately 215 clients representing an estimated 1,800 subscribers to the Company’s Portfolio Analytics applications compared to approximately 160 clients and nearly 1,200 subscribers for the same period a year ago.
The Company had 806 clients at May 31, 2001 compared to 717 clients for the same period a year ago, a 12.4% increase. Passwords, a measure of users of FactSet, totaled approximately 24,300 at May 31, 2001 compared to approximately 25,700 at the end of the second fiscal quarter. The quarter-over-quarter decline resulted from large-scale mergers and cost-cutting measures, such as personnel reductions, by the Company’s investment banking clients. The decline in workstations was limited to the investment banking sector of the Company’s business, as the workstation count for the Company’s investment management clients increased from February 28, 2001. Passwords, at quarter end, increased 11.3% from the same period in fiscal 2000.
At May 31, 2001, client commitments grew to $185.7 million, an increase of 30.3% from the comparable period in fiscal 2000. (“Commitments” at a given point in time represent the forward-looking revenues for the next twelve months from all services being currently supplied to clients.) At the end of the third quarter of fiscal 2001, the average commitment per client was $230,000, a 16% increase from the same period a year ago. Commitments from international clients were $36.4 million, representing approximately 20% of total client commitments. No individual client accounted for more than 5% of total commitments. Commitments from the ten largest clients did not surpass 25% of total client commitments. Client retention for both the third quarter of fiscal 2001 and for the first nine months of the year continued at a rate in excess of 95%. As a matter of policy, the Company does not seek to enter into written contracts with its clients and clients may add, delete, or terminate services at any time.
OPERATING EXPENSES
Cost of Services
For the quarter ended May
31, 2001, cost of services grew to $15.9 million, a 39.0% increase compared to
the identical period in fiscal 2000. Cost of services increased 32.9% to $44.6
million for the first nine months of fiscal 2001. Increases in cost of services
for the third quarter and nine months ended were attributed primarily to higher employee compensation
and computer-related costs.
Employee Compensation and Benefits
During the third quarter of
fiscal 2001, employee compensation and benefits for the applications engineering
and consulting groups increased $2.1 million. For the nine months ended May 31,
2001, employee compensation and benefits related to the applications engineering
and consulting groups rose $5.4 million. This growth is primarily attributable
to the addition of new employees and increases in merit compensation. Employee
headcount in the applications engineering and the consulting groups grew 54.6%
over the past twelve months.
Computer-Related Costs
Computer-related costs
increased $1.7 million for the third quarter of fiscal 2001 compared to the same
period in the prior year. For the first nine months of the fiscal year,
computer-related costs grew $3.4 million. This increase was the result of the
Company’s investment in advanced technology. Thus far in fiscal 2001, the Company
made capital expenditures of $26.6 million primarily to purchase and install six
of Compaq’s new generation Wildfire mainframe machines. The implementation
of this new technology also resulted in accelerated depreciation of existing
mainframe equipment. Capital expenditures for the two previous fiscal years
totaled $11.3 million and $16.5 million, respectively.
Selling, General and Administrative
For the three months ended
May 31, 2001, selling, general, and administrative (SG&A) expenses grew to
$16.5 million, an increase of 30.1% from the comparable period a year ago. For
the first nine months of fiscal 2001, SG&A expenses were $47.3 million, up
33.7% from the first three quarters of fiscal 2000. The increase in the third quarter of
fiscal 2001 was due to higher costs related to employee compensation and
benefits and office expenses. The increase in the first nine months of the
fiscal year is the result of greater costs associated with employee compensation
and benefits, travel and entertainment, and office expenses.
Employee Compensation and Benefits
For the quarter ended May
31, 2001, employee compensation and benefits for the sales, product development
and other support departments increased $2.8 million compared to the third
quarter of fiscal 2000. During the first nine months of fiscal 2001, employee
compensation and benefits increased $8.2 million. Employee headcount for these
departments increased 37.3% during the past twelve months.
Travel and Entertainment Expense
Travel and entertainment
(“T&E”) expense for the three months ended May 31, 2001 was
virtually the same as the same period in the prior year. For the first nine
months of fiscal 2001, T&E increased $1.3 million. The increase in T&E
was the result of servicing an expanding global client base.
Office Expenses
For the quarter ended May
31, 2001, rent, amortization of leasehold improvements and depreciation of
furniture and fixtures rose $922,000 compared to the same period a year ago. At
the end of the first nine months of fiscal 2001, these expenses increased $2.2
million over the comparable period in fiscal 2000. Increases were the result of
expanding existing offices in Stamford, Connecticut, New York, New York and Tokyo, Japan
during the last twelve months and obtaining new office space in Frankfurt, Germany and
Chicago, Illinois during the last three months.
Non-Recurring Retirement Bonus
During the third quarter of
fiscal 2000, the Company recorded a non-recurring charge of $2.75 million in
connection with a retirement bonus awarded by the Board of Directors to Howard
E. Wille, Co-Founder, former Chief Executive Officer, and former Chairman of the
Board. Mr. Wille retired as Chief Executive Officer on May 22, 2000, and as
Chairman of the Board on August 31, 2000. Mr. Wille remains a director of the
Company.
Operating Margin
Operating margin for the
quarter ended May 31, 2001 was 28.6% compared to 21.7% for the same period a
year ago. Excluding the non-recurring retirement bonus, the operating margin for
the third quarter of fiscal 2000 was 29.7%, representing a year-over-year
decrease of approximately one percent for the third fiscal quarter.
The decrease in operating margin for the three
months ended May 31, 2001 is primarily attributable to increases in employee
compensation and benefits, computer-related costs, and rent as a
percentage of revenues, partially offset by decreases in clearing fees,
communication costs, and professional fees as a percentage of revenues.
Operating margin for the nine
months ended May 31, 2001 was 28.9%, up from the 26.1% operating margin in the
same period of fiscal 2000. Not including the non-recurring retirement bonus for
the first nine months of the prior fiscal year, operating margin decreased
slightly to 28.9% from 29.0%.
Clearing Fees
Clients who elect to pay
for FactSet services via commissions on securities transactions are charged a
greater amount than cash-paying clients to compensate for clearing broker fees
paid by the Company. Cash fees result in greater margin percentages than
commission revenues, however, revenues net of clearing fees are approximately
the same under both of these payment methods. Commission revenues, as a
percentage of total revenues, for the three months and nine months ended May 31,
2001, decreased to 32.5% from 36.0% and 32.3% from 36.3%, respectively.
Income Taxes
Income tax expense for the
third quarter of fiscal 2001 increased $2.0 million from the same period in
fiscal 2000. Pretax income grew $5.4 million compared to the year ago period.
The effective tax rate for the third quarter of fiscal 2001 was 38.0%. compared
to 38.6% for the same period a year ago.
Income tax expense for the nine month period ended May 31, 2001 was $15.3
million, an increase of $5.6 million. Income tax expense for the nine months
ended May 31, 2000 included a non-recurring income tax benefit of $1.1 million.
Excluding this one-time income tax benefit, the increase was $4.5 million. The
effective tax rate for the first nine months of fiscal 2001 was 38.3%. The
effective tax rate for the first nine months of fiscal 2000 was 39.1%, excluding
the non-recurring income tax benefit.
LIQUIDITY
Cash generated by operating
activities was $34.9 million, an increase of $13.9 million over the same period
in fiscal 2000. The increase resulted from higher profitability, timing of
income tax payments, and greater depreciation and amortization partially offset
by decreases in accounts payable, accrued expenses and accrued compensation
payable.
Capital Expenditures
The Company’s capital
expenditures for the nine months ended May 31, 2001 totaled $26.6 million. The
Company made significant technological upgrades related to its two data centers.
During the first nine months of fiscal 2001, the Company replaced six Compaq
Alpha GS 140 systems at each of the data centers with three Compaq GS 320 Wildfire
systems, enabling the Company to significantly increase capacity in the data centers by 50%
and double system-wide main memory to 576 gigabytes. Office expansions in
Stamford, Connecticut, New York, New York and Tokyo, Japan and the leasing of new office space
in Frankfurt, Germany and Chicago, Illinois also resulted in additional capital
expenditures during the first three quarters of 2001.
Acquisition of LionShares
During the third quarter of fiscal 2001, the Company acquired LionShares, a
division of Worldly Information Network, Inc., for $2.3 million in cash and recorded
the transaction using purchase accounting.
Financing Operations and Capital Needs
Cash, cash equivalents and
investments totaled $68.1 million or 42% of the Company’s total assets at
May 31, 2001. All the Company’s operating and capital expense
requirements were financed entirely from cash generated from the Company’s
operations. The Company has no outstanding indebtedness.
Revolving Credit Facilities
The Company is a party to
two credit facilities totaling $25.0 million for working capital and general
corporate purposes. Approximately $542,000 of the credit facility is reserved
for letters of credit issued during the ordinary course of business. The Company
has no present plans to utilize any portion of the remaining available credit of
approximately $24.5 million.
New Accounting Pronouncements
In December 1999, Staff Accounting Bulletin (“SAB”) No. 101, Revenue
Recognition in Financial Statements was issued. SAB No. 101 summarizes certain of
the SEC’s views in applying accounting principles generally accepted in the United States
to revenue recognition in financial statements. During the second quarter of fiscal 2001, the
Company implemented SAB No. 101. The application of SAB No. 101 resulted in no material
impact to the Company’s financial condition or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141 (SFAS 141), Business Combinations, and Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets. These standards will be adopted in fiscal 2002. The Company is currently evaluating the impact that these standards will have on its financial statements.
Forward-Looking Factors
Business Outlook
The following
forward-looking statements reflect FactSet’s expectations as of July 12,
2001. Given the number of risk factors, assumptions and uncertainties enumerated
and discussed below, actual results may differ materially. The Company does not
intend to update its forward-looking statements until its next quarterly results
announcement, other than in publicly available statements.
Full Year Fiscal 2001 Expectations
|
o Revenues are expected to range between $175 million and $177 million. o Earnings per share is expected to meet or slightly exceed the consensus estimate of $0.96 o Capital expenditures are anticipated to approximate $31 million. |
Recent Market Trends
In the ordinary course of
business, the Company is exposed to financial risks involving equity, foreign
currency and interest rate fluctuations. Since March 2000, major equity indices
(Dow Jones 30 Industrials, Russell 2000, NASDAQ Composite, MSCI European Index)
have experienced significant declines coupled with increased levels of
volatility. The Company expects that in fiscal 2002,
economic conditions may prompt some clients to curtail spending. Immediate returns
are also not expected from the recent strategic investments in LionShares and advanced mainframe
technology. These factors may result in a slightly lower rate of revenue growth and operating
margin in the first quarter of fiscal 2002 relative to recent quarters. Continued solid growth
from new products, new clients as well as our international operations is expected, which
together should cause revenue growth for the full fiscal year to approximate long
term historic levels in the mid 20 percentile range.
The fair market value of the Company’s investment portfolio at May 31, 2001 was $42.4 million. It is anticipated that the fair market value of the Company’s portfolio will continue to be immaterially affected by fluctuations in interest rates. Preservation of principal is the primary goal of the Company’s investment portfolio. Pursuant to the investment guidelines established by the Company, third-party managers construct portfolios to achieve high levels of credit quality, liquidity and diversification. The Company’s investment policy dictates that the weighted-average duration of short-term investments is not to exceed eighteen months. Investments such as puts, calls, strips, short sales, straddles, options, futures or investments on margin are not permitted by the Company’s investment guidelines. Because the Company has no outstanding debts and, for the reasons enumerated above, the Company’s financial exposure to fluctuations in interest rates is expected to continue to be low.
All of the Company’s investments are held in U.S. dollars and greater than 95% of the Company's revenues are transacted in U.S. dollars. Accordingly, the Company’s exposure to fluctuations in foreign currency rates is expected to continue to be immaterial.
Income Taxes
During the normal course of
business, the Company’s tax filings are subject to audit by federal and
state tax authorities. Audits by two taxing authorities are currently ongoing.
There is inherent uncertainty contained in the audit process but the Company has
no reason to believe that such audits will result in additional tax payments
that would have a material adverse effect on its results of operations or
financial position.
Forward-Looking Statements
This Management’s Discussion and Analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections. All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product development, market position, commitments and expected expenditures and financial results are forward-looking statements. Forward-looking statements may be identified by the words like “expected,” “anticipates,” “plans,” “intends,” “projects,” “should,” “indicates,” “continue,” “commitments” and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions (“future factors”). Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events, or otherwise.
These factors include, but are not limited to, the ability to hire qualified personnel; maintenance of the Company’s leading technological position; the impact of global market trends on the Company’s revenue growth rate and future results of operations; the negotiation of contract terms supporting new and existing databases; retention of key clients; the successful resolution of ongoing audits by tax authorities; the continued employment of key personnel; the absence of U.S. or foreign governmental regulation restricting international business; and the sustainability of historical levels of profitability and growth rates in cash flow generation.
(a) Exhibits
Exhibit Number
3.1 Restated Certificate of Incorporation (1)
3.2 By–laws (1)
4.1 Form of Common Stock (1)
10.1 Form of Consulting Agreement between the Company and Charles J. Snyder (2)
10.2 Letter of Agreement between the Company and Ernest S. Wong (1)
10.31 Amendment to 364–Day Credit Agreement, dated March 12, 2001 (5)
10.32 Three–Year Credit Agreement (3)
10.33 Retirement Agreement between the Company and Howard E. Wille (4)
10.4 The FactSet Research Systems Inc. 2000 Stock Option Plan (6)
10.41 The FactSet Research Systems Inc. 2001 Stock Purchase Plan (7)
10.5 The FactSet Research Systems Inc. Non–Employee Directors’ Stock Option Plan (8)
- Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-4238).
- Incorporated by reference to the Company’s annual report on Form 10-K for the fiscal year 1999.
- Incorporated by reference to the Company’s quarterly report on Form 10-Q for the first quarter of fiscal year 1999.
- Incorporated by reference to the Company’s quarterly report on Form 10-Q for the third quarter of fiscal year 2000.
- Incorporated by reference to the Company’s quarterly report on Form 10-Q for the second quarter of fiscal year 2001.
- Incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-56870).
- Incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-57880).
- Incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-59839).
(b) Reports on Form 8-K
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FACTSET RESEARCH SYSTEMS INC.
| Date: | July 12, 2001 | /s/ ERNEST S. WONG | |
| –––––––––––––––––––––––––––––––– | |||
| Ernest S. Wong, | |||
| Senior Vice President, Chief Financial Officer | |||
| and Secretary |