Note 15. Income Taxes

3 Months Ended

Nov. 30, 2012

Income Tax Disclosure [Text Block]

15. INCOME TAXES

Income tax expense is based on taxable income determined in accordance with current enacted laws and tax rates. Deferred income taxes are recorded for the temporary differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.

Provision for Income Taxes

The provision for income taxes is as follows (in thousands):

	Three Months Ended November 30,
	2012			2011			Change
U.S. operations	$	61,067		$	57,088			7.0	%
Non-U.S. operations		10,446			9,942			5.1	%
Income before income taxes	$	71,513		$	67,030			6.7	%
U.S. operations	$	19,340		$	19,363			(0.1	) %
Non-U.S. operations		2,404			2,123			13.2	%
Total provision for income taxes	$	21,744		$	21,486			1.2	%
Effective tax rate		30.4	%*		32.1	%

* In the first quarter of fiscal 2013 FactSet decided to repatriate cash from its wholly owned UK subsidiary. This distribution was completed in early January 2013 and resulted in a net tax benefit of approximately $1.3 million during the three months ended November 30, 2012 since the foreign tax credits associated with the distribution were greater than the tax due on the distribution of the foreign earnings. The first quarter fiscal 2013 effective tax rate before the discrete item of $1.3 million was 32.2% or 10 basis points higher than the 2012 effective tax rate. The expiration of the U.S. Federal R&D tax credit on December 31, 2011 negatively impacted the fiscal 2013 first quarter effective tax rate by 180 basis points compared to 130 basis points in the year ago first quarter.

The components of the provision for income taxes consist of the following (in thousands):

	Three Months Ended November 30,
	2012			2011
Current
U.S. federal	$	16,358		$	17,586
U.S. state and local		1,289			1,470
Non-U.S.		2,684			2,272
Total current taxes	$	20,331		$	21,328
Deferred
U.S. federal	$	1,576		$	280
U.S. state and local		117			27
Non-U.S.		(280	)		(149	)
Total deferred taxes	$	1,413		$	158
Total provision for income taxes	$	21,744		$	21,486

Deferred Tax Assets and Liabilities

The significant components of deferred tax assets that are recorded in the Consolidated Balance Sheets were as follows (in thousands):

	November 30, 2012			August 31, 2012
Deferred tax assets
Current
Receivable reserve	$	639		$	687
Deferred rent		3,076			3,175
Deferred fees		642			1,223
Net current deferred taxes	$	4,357		$	5,085
Non-current
Depreciation on property, equipment and leasehold improvements	$	3,898		$	2,498
Deferred rent		2,778			2,782
Stock-based compensation		21,241			23,395
Purchased intangible assets, including acquired technology		(7,139	)		(6,801	)
Other		1,286			1,239
Net non-current deferred taxes	$	22,064		$	23,113
Total deferred tax assets	$	26,421		$	28,198

The significant components of deferred tax liabilities that are recorded in the Consolidated Balance Sheets were as follows (in thousands):

	November 30, 2012			August 31, 2012
Deferred tax liabilities (non-current)
Purchased intangible assets, including acquired technology	$	2,953		$	2,936
Stock-based compensation		(371	)		(343	)
Total deferred tax liabilities (non-current)	$	2,582		$	2,593

As disclosed above, FactSet decided to repatriate cash from its wholly owned UK subsidiary during the first quarter of fiscal 2013, which resulted in a recognized tax benefit of $1.3 million. With the exception of the Company’s UK and French subsidiaries, a provision has not been made for additional U.S. Federal taxes as of November 30, 2012 on undistributed earnings of foreign subsidiaries because FactSet intends to reinvest these funds indefinitely to support foreign growth opportunities. The amount of such undistributed earnings of these foreign subsidiaries included in consolidated retained earnings was immaterial at November 30, 2012 and August 31, 2012. As such, the unrecognized deferred tax liability on those undistributed earnings was immaterial. These earnings could become subject to additional tax if they are remitted as dividends, loaned to FactSet, or upon sale of the subsidiary’s stock.

Unrecognized Tax Positions

Applicable accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions that a company has taken or expects to take on a tax return. A company can recognize the financial effect of an income tax position only if it is more likely than not (greater than 50%) that the tax position will prevail upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit or expense can be recognized in the consolidated financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

As of November 30, 2012, the Company had gross unrecognized tax benefits totaling $5.7 million, including $1.1 million of accrued interest, recorded as non-current taxes payable in 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, the Company adjusts the previously recorded tax expense to reflect examination results when the position is effectively settled. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. However, FactSet has no reason to believe that such audits will result in the payment of additional taxes and/or penalties that would have a material adverse effect on the Company’s results of operations or financial position, beyond current estimates. Any changes in accounting estimates resulting from new developments with respect to uncertain tax positions will be recorded as appropriate. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months.

The following table summarizes the changes in the balance of gross unrecognized tax benefits during the first three months of fiscal 2013 (in thousands):

Unrecognized income tax benefits at August 31, 2012	$	5,464
Additions based on tax positions related to the current year		112
Additions for tax positions of prior years		123
Unrecognized income tax benefits at November 30, 2012	$	5,699

In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. At November 30, 2012, the Company remained subject to examination in the following major tax jurisdictions for the tax years as indicated below:

Major Tax Jurisdictions	Open Tax Years
U.S.
Federal	2009 through 2012
State (various)	2008 through 2012
Europe
France	2010 through 2012
United Kingdom	2011 through 2012