10-Q 1 fds20170531_10q.htm FORM 10-Q fds20170531_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 31, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______to ______

  

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

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

601 Merritt 7, Norwalk, Connecticut

06851

(Address of principal executive office)

(Zip Code)

 

Registrant’s telephone number, including area code: (203) 810-1000

 


 

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     No 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer  Non-accelerated filer Smaller reporting company ☐Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
   No

 

The number of shares outstanding of the registrant’s common stock, $.01 par value, as of June 30, 2017 was 39,228,289.

 



 
 

 

 

FactSet Research Systems Inc.

Form 10-Q

For the Quarter Ended May 31, 2017

 

Index

 

 

 

Page 

Part I

FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements

 
     

 

Consolidated Statements of Income for the three and nine months ended May 31, 2017 and 2016

3

     
 

Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2017 and 2016

4

     

 

Consolidated Balance Sheets at May 31, 2017 and August 31, 2016

5

     

 

Consolidated Statements of Cash Flows for the nine months ended May 31, 2017 and 2016

6

     

 

Notes to the Consolidated Financial Statements

7

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

     

Item 4.

Controls and Procedures

46

     

Part II

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

47

     

Item 1A.

Risk Factors

47

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

     

Item 3.

Defaults Upon Senior Securities

47

     

Item 4.

Mine Safety Disclosures

47

     

Item 5.

Other Information

47

     

Item 6.

Exhibits

48

     
 

Signatures

48

 

For additional information about FactSet Research Systems Inc. and access to its Annual Reports to Stockholders and Securities and Exchange Commission filings, free of charge, please visit the website at http://investor.factset.com. Any information on or linked from the website is not incorporated by reference into this Form 10‑Q.

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

FactSet Research Systems Inc.

CONSOLIDATED STATEMENTS OF INCOME – Unaudited

 

 

    Three Months Ended     Nine Months Ended  
(In thousands, except per share data)  

May 31,

2017

   

May 31,

2016

   

May 31,

2017

   

May 31,

2016

 

Revenues

  $ 312,120     $ 287,501     $ 894,537     $ 839,801  

Operating expenses

                               

Cost of services

    146,426       124,602       405,311       363,249  

Selling, general and administrative

    78,052       73,609       219,519       214,610  

Total operating expenses

    224,478       198,211       624,830       577,859  

Operating income

    87,642       89,290       269,707       261,942  

Other expense

                               

Loss on sale of business

                (1,223 )      

Interest expense, net of interest income

    (2,413 )     (433 )     (3,945 )     (765 )

Total other expense

    (2,413 )     (433 )     (5,168 )     (765 )
                                 

Income before income taxes

    85,229       88,857       264,539       261,177  
                                 

Provision for income taxes

    19,815       22,076       65,832       66,669  

Net income

  $ 65,414     $ 66,781     $ 198,707     $ 194,508  

Basic earnings per common share

  $ 1.66     $ 1.64     $ 5.03     $ 4.73  

Diluted earnings per common share

  $ 1.66     $ 1.62     $ 5.00     $ 4.68  
                                 

Basic weighted average common shares

    39,317       40,779       39,528       41,094  

Diluted weighted average common shares

    39,457       41,189       39,736       41,596  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
3

 

 

FactSet Research Systems Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Unaudited

 

 

    Three Months Ended     Nine Months Ended  
(In thousands)  

May 31,

2017

   

May 31,

2016

   

May 31,

2017

   

May 31,

2016

 

Net income

  $ 65,414     $ 66,781     $ 198,707     $ 194,508  
                                 

Other comprehensive income (loss), net of tax

                               

Net unrealized gain on cash flow hedges*

    2,385       2,464       4,233       229  

Foreign currency translation adjustments

    21,316       8,883       10,680       (7,867 )

Other comprehensive income (loss)

    23,701       11,347       14,913       (7,638 )

Comprehensive income

  $ 89,115     $ 78,128     $ 213,620     $ 186,870  

 

* For the three and nine months ended May 31, 2017, the unrealized gain on cash flow hedges was net of tax expense of $1,485 and $2,561, respectively. For the three and nine months ended May 31, 2016, the unrealized gain on cash flow hedges was net of tax expense of $1,448 and $135, respectively.

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
4

 

 

FactSet Research Systems Inc.

CONSOLIDATED BALANCE SHEETS

 

   

May 31,

2017

   

August 31,

2016

 

(In thousands, except share data)

 

(Unaudited)

         

ASSETS

               

Cash and cash equivalents

  $ 161,758     $ 228,407  

Investments

    31,927       24,217  

Accounts receivable, net of reserves of $1,691 at May 31, 2017 and $1,521 at August 31, 2016

    147,455       97,797  

Prepaid taxes

    5,344        

Deferred taxes

    2,623       3,158  

Prepaid expenses and other current assets

    24,076       15,697  

Total current assets

    373,183       369,276  

Property, equipment and leasehold improvements, net

    97,442       84,622  

Goodwill

    695,667       452,915  

Intangible assets, net

    175,534       93,161  

Deferred taxes

    5,099       13,406  

Other assets

    11,089       5,781  

TOTAL ASSETS

  $ 1,358,014     $ 1,019,161  
                 

LIABILITIES

               

Accounts payable and accrued expenses

  $ 63,611     $ 45,836  

Accrued compensation

    36,722       51,036  

Deferred fees

    51,210       33,247  

Deferred taxes

    1,781       291  

Taxes payable

    6,856       7,781  

Dividends payable

    21,951       20,019  

Total current liabilities

    182,131       158,210  
                 

Long-term debt

    575,000       300,000  

Deferred Fees

    2,476        

Deferred taxes

    23,039       1,708  

Taxes payable

    10,780       8,782  

Deferred rent and other non-current liabilities

    37,035       33,080  

TOTAL LIABILITIES

  $ 830,461       501,780  

Commitments and contingencies (See Note 18)

               

STOCKHOLDERS’ EQUITY

               

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued

  $     $  

Common stock, $.01 par value, 150,000,000 shares authorized, 51,737,696 and 51,150,978 shares issued; 39,198,325 and 40,038,225 shares outstanding at May 31, 2017 and August 31, 2016, respectively

    517       512  

Additional paid-in capital

    720,020       623,195  

Treasury stock, at cost: 12,539,371 and 11,112,753 shares at May 31, 2017 and August 31, 2016, respectively

    (1,560,466 )     (1,321,700 )

Retained earnings

    1,421,122       1,283,927  

Accumulated other comprehensive loss

    (53,640 )     (68,553 )

TOTAL STOCKHOLDERS’ EQUITY

  $ 527,553     $ 517,381  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 1,358,014     $ 1,019,161  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
5

 

 

FactSet Research Systems Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited

 

   

Nine months Ended

 

(in thousands)

 

May 31,

2017

   

May 31,

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 198,707     $ 194,508  

Adjustments to reconcile net income to net cash provided by operating activities

               

Depreciation and amortization

    33,770       28,222  

Stock-based compensation expense

    20,873       22,433  

Loss on sale of business

    1,223        

Deferred income taxes

    8,829       3,015  

Loss on disposition of assets

    33       2  

Tax benefits from share-based payment arrangements

    (9,798 )     (13,327 )

Changes in assets and liabilities, net of effects of acquisitions

               

Accounts receivable, net of reserves

    (29,310 )     (11,316 )

Accounts payable and accrued expenses

    1,548       3,474  

Accrued compensation

    (17,299 )     (1,809 )

Deferred fees

    2,638       3,696  

Taxes payable, net of prepaid taxes

    6,081       20,313  

Prepaid expenses and other assets

    440       1,250  

Deferred rent and other non-current liabilities

    2,766       10,812  

Other working capital accounts, net

    (189 )     (169 )

Net cash provided by operating activities

    220,312       261,104  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Acquisition of businesses, net of cash acquired

    (301,843 )     (264,087 )

Purchases of investments

    (29,982 )     (12,934 )

Proceeds from sales of investments

    23,399       12,423  

Purchases of property, equipment and leasehold improvements

    (25,981 )     (34,671 )

Net cash used in investing activities

    (334,407 )     (299,269 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Dividend payments

    (59,124 )     (54,042 )

Repurchases of common stock

    (214,766 )     (192,823 )

Proceeds from debt

    575,000       265,000  

Repayment of Debt

    (300,000 )      

Sale of business

    (1,223 )      

Debt issuance costs

    (437 )     (12 )

Proceeds from employee stock plans

    42,159       38,845  

Tax benefits from share-based payment arrangements

    9,798       13,327  

Net cash provided by financing activities

    51,407       70,295  
                 

Effect of exchange rate changes on cash and cash equivalents

    (3,961 )     (3,608 )

Net (decrease) increase in cash and cash equivalents

    (66,649 )     28,522  

Cash and cash equivalents at beginning of period

    228,407       158,914  

Cash and cash equivalents at end of period

  $ 161,758     $ 187,436  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
6

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FactSet Research Systems Inc.

May 31, 2017

(Unaudited)

 

1. ORGANIZATION AND NATURE OF BUSINESS

 

FactSet Research Systems Inc. (the “Company” or “FactSet”) is a global provider of integrated financial information, analytical applications and industry-leading service for the global investment community. The Company delivers insight and information to investment professionals through its analytics, service, content, and technology. By integrating comprehensive datasets and analytics across asset classes with client data, FactSet supports the workflow of both the buy-side and sell-side. These professionals include portfolio managers, wealth managers, research and performance analysts, risk managers, sell-side equity 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. The Company’s 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. The Company’s revenues are derived from subscriptions to products and services such as workstations, analytics, enterprise data, research management, and trade execution.

 

2. BASIS OF PRESENTATION

 

FactSet conducts business globally and is managed on a geographic basis. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany activity and balances have been eliminated from the consolidated financial statements.

 

The unaudited condensed consolidated financial statements of FactSet and the accompanying notes included in this Quarterly Report on Form 10-Q are prepared in accordance with generally accepted accounting principles in the United States ("GAAP").  In the opinion of management, the accompanying condensed consolidated financial statements include all normal recurring adjustments, transactions or events discretely impacting the interim periods considered necessary to fairly state our results of operations, financial position and cash flows. The information in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2016.

 

The Company has evaluated subsequent events through the date that the financial statements were issued.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

As of the beginning of fiscal 2017, FactSet implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board (“FASB”) that were in effect. There were no new standards or updates adopted during the first nine months of fiscal 2017 that had a material impact on the consolidated financial statements.

 

Revenue Recognition

In May 2014 and July 2015, the FASB issued accounting standard updates which provide clarified principles for recognizing revenue arising from contracts with clients and supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These accounting standard updates will be effective for FactSet beginning in the first quarter of fiscal 2019, with early adoption in fiscal 2018 permitted and allow for either full retrospective or modified retrospective adoption. The Company is currently evaluating the impact of these accounting standard updates on its consolidated financial statements and the method of adoption.

 

 
7

 

 

Balance Sheet Classification of Deferred Taxes

In November 2015, the FASB issued an accounting standard update to simplify the presentation of deferred taxes on the balance sheet. The accounting standard update will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under the new guidance. This guidance will be effective for FactSet beginning in the first quarter of fiscal 2018, with early adoption in fiscal 2017 permitted. The accounting standard update is a change in balance sheet presentation only and, as such, the Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued an accounting standard update to amend its current guidance on the classification and measurement of certain financial instruments. The accounting standard update significantly revises an entity’s accounting related to the presentation of certain fair value changes for financial liabilities measured at fair value. This guidance also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance will be effective for FactSet beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

 

Leases

In February 2016, the FASB issued an accounting standard update related to accounting for leases. The guidance introduces a lessee model that requires most leases to be reported on the balance sheet. The accounting standard update aligns many of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. The guidance also eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2020, with early adoption in fiscal 2019 permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

 

Share-Based Payments

In March 2016, the FASB issued an accounting standard update which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flow. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2018. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

 

On May 2017, the FASB issued an accounting standard updated, which amends the scope of modification accounting for share-based payment arrangements. The guidance focuses on changes to the terms or conditions of share-based payment awards that would require the application of modification accounting and specifies that an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements

 

Cash Flow Simplification

In August 2016, the FASB issued an accounting standard update which simplifies how certain transactions are classified in the statement of cash flows. This includes revised guidance on the cash flow classification of debt prepayments and debt extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investments. The guidance is intended to reduce diversity in practice across all industries. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

 

Income Taxes on Intra-Entity Transfers of Assets

In October 2016, the FASB issued an accounting standard update which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance is intended to reduce diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

 

 

 
8

 

 

Goodwill Impairment Test

In January 2017, the FASB issued an accounting standard update which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2021, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

 

No other new accounting pronouncements issued or effective as of May 31, 2017 have had or are expected to have an impact on the Company’s consolidated financial statements.

 

4. FAIR VALUE MEASURES

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the use of various valuation methodologies, including market, income and cost approaches is permissible. The Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. 

 

Fair Value Hierarchy

 

The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value based on the reliability of inputs. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels. FactSet has categorized its cash equivalents, investments and derivatives within the fair value hierarchy as follows:

 

Level 1 – applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. These Level 1 assets and liabilities include the Company’s corporate money market funds that are classified as cash equivalents.

 

Level 2 – applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. The Company’s certificates of deposit, mutual funds and derivative instruments are classified as Level 2.

 

Level 3 – applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. There were no Level 3 assets or liabilities held by the Company as of May 31, 2017 or August 31, 2016.

 

(a) Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following tables shows by level within the fair value hierarchy the Company’s assets and liabilities that are measured at fair value on a recurring basis at May 31, 2017 and August 31, 2016:

 

 

   

Fair Value Measurements at May 31, 2017

 

(in thousands)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets

                               

Corporate money market funds (1)

  $ 22,106     $     $     $ 22,106  

Mutual funds (2)

          15,542             15,542  

Certificates of deposit (3)

          16,385             16,385  

Derivative instruments (4)

          5,468             5,468  

Total assets measured at fair value

  $ 22,106     $ 37,396     $     $ 59,502  
                                 

Liabilities

                               

Derivative instruments (4)

  $     $ 596     $     $ 596  

Total liabilities measured at fair value

  $     $ 596     $     $ 596  

 

 

 
9

 

 

   

Fair Value Measurements at August 31, 2016

 

(in thousands)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets

                               

Corporate money market funds (1)

  $ 92,765     $     $     $ 92,765  

Certificates of deposit (3)

          24,217             24,217  

Derivative instruments (4)

          869             869  

Total assets measured at fair value

  $ 92,765     $ 25,086     $     $ 117,851  
                                 

Liabilities

                               

Derivative instruments (4)

  $     $ 2,791     $     $ 2,791  

Total liabilities measured at fair value

  $     $ 2,791     $     $ 2,791  

 

 

(1)

The Company’s corporate money market funds are traded in an active market and the net asset value of each fund on the last day of the quarter is used to determine its fair value. As such, the Company’s corporate money market funds are classified as Level 1 and included in cash and cash equivalents on the Consolidated Balance Sheets.

 

 

(2)

The Company’s mutual funds have a fair value based on the fair value of the underlying investments held by the mutual funds allocated to each share of the mutual fund using a net asset value approach. The fair value of the underlying investments is based on observable inputs. As such, the Company’s mutual funds are classified as Level 2 and are classified as investments (short-term) on the Consolidated Balance Sheets.

 

 

(3)

The Company’s certificates of deposit held for investment are not debt securities and are classified as Level 2. These certificates of deposit have original maturities greater than three months, but less than one year and, as such, are classified as investments (short-term) on the Consolidated Balance Sheets.

 

 

(4)

The Company utilizes the income approach to measure fair value for its derivative instruments (foreign currency forward contracts). The income approach uses pricing models that rely on market observable inputs such as spot, forward and interest rates, as well as credit default swap spreads and therefore are classified as Level 2.

 

The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.

 

(b) Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

 

Certain assets, including goodwill and intangible assets, and liabilities, are measured at fair value on a non-recurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as when they are deemed to be other-than-temporarily impaired. The fair values of these non-financial assets and liabilities are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost exceeds its fair value, based upon the results of such valuations. During the nine months ended May 31, 2017, no fair value adjustments or material fair value measurements were required for the Company’s non-financial assets or liabilities.

 

(c) Assets and Liabilities Measured at Fair Value for Disclosure Purposes only

 

As of May 31, 2017 and August 31, 2016, the fair value of the Company’s long-term debt was $575.0 million and $300.0 million, respectively, which approximated its carrying amount given its floating interest rate basis. The fair value of the Company’s long-term debt was determined based on quoted market prices for debt with a similar maturity, and thus categorized as Level 2 in the fair value hierarchy.

 

5. DERIVATIVE INSTRUMENTS

 

Cash Flow Hedges

 

FactSet conducts business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, Japanese Yen and Philippine Peso. As such, it is exposed to movements in foreign currency exchange rates compared to the U.S. dollar. The Company utilizes derivative instruments (foreign currency forward contracts) to manage the exposures related to the effects of foreign exchange rate fluctuations and reduce the volatility of earnings and cash flows associated with changes in foreign currency. The Company does not enter into foreign currency forward contracts for trading or speculative purposes. In designing a specific hedging approach, FactSet considered several factors, including offsetting exposures, the significance of exposures, the forecasting of risk and the potential effectiveness of the hedge. The gains and losses on foreign currency forward contracts offset the variability in operating expenses associated with currency movements. The changes in fair value for these foreign currency forward contracts are initially reported as a component of accumulated other comprehensive loss (“AOCL”) and subsequently reclassified into operating expenses when the hedged exposure affects earnings. There was no discontinuance of cash flow hedges during the first nine months of fiscal 2017 and 2016, and as such, no corresponding gains or losses related to changes in the value of the Company’s contracts were reclassified into earnings prior to settlement.

 

 

 
10

 

 

As of May 31, 2017, FactSet maintained the following foreign currency forward contracts to hedge its exposures:

 

 

British Pound Sterling - foreign currency forward contracts to hedge approximately 50% of its British Pound Sterling exposure through the fourth quarter of fiscal 2017.

 

 

Indian Rupee - foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the third quarter of fiscal 2019.

 

The following is a summary of all hedging positions and corresponding fair values:

 

(in thousands)

 

Gross Notional Value

   

Fair Value (Liability) Asset

 

Currency Hedged (in U.S. dollars)

 

May 31, 2017

   

August 31, 2016

   

May 31, 2017

   

August 31, 2016

 

British Pound Sterling

  $ 7,560     $ 33,280     $ (596 )   $ (2,791 )

Indian Rupee

    56,520       58,410       5,468       869  

Total

  $ 64,080     $ 91,690     $ 4,872     $ (1,922 )

 

As of May 31, 2017, the gross notional value of foreign currency forward contracts to purchase British Pound Sterling with U.S. dollars was £5.4 million. The gross notional value of foreign currency forward contracts to purchase Indian Rupees with U.S. dollars was Rs. 4.2 billion.

 

Counterparty Credit Risk

 

As a result of the use of derivative instruments, the Company is exposed to counterparty credit risk. FactSet has incorporated counterparty risk into the fair value of its derivative assets and its own credit risk into the value of the Company’s derivative liabilities. FactSet calculates credit risk from observable data related to credit default swaps (“CDS”) as quoted by publicly available information. Counterparty risk is represented by CDS spreads related to the senior secured debt of the respective bank with whom FactSet has executed these derivative transactions. Because CDS spread information is not available for FactSet, the Company’s credit risk is determined based on using a simple average of CDS spreads for peer companies. To mitigate counterparty credit risk, FactSet enters into contracts with large financial institutions and regularly reviews its credit exposure balances as well as the creditworthiness of the counterparties. The Company does not expect any losses as a result of default of its counterparties.

 

Fair Value of Derivative Instruments 

 

The following table provides the fair value of derivative instruments:

 

(in thousands)

             

Designation of Derivatives

Balance Sheet Location

 

May 31, 2017

   

August 31, 2016

 

Derivatives designated as hedging instruments

Assets: Foreign Currency Forward Contracts

               
 

Prepaid expenses and other current assets

  $ 2,738     $ 163  
 

Other assets

  $ 2,730     $ 706  
 

Liabilities: Foreign Currency Forward Contracts

               
 

Accounts payable and accrued expenses

  $ 596     $ 2,791  

 

All derivatives were designated as hedging instruments as of May 31, 2017 and August 31, 2016, respectively.

 

Derivatives in Cash Flow Hedging Relationships

 

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the three months ended May 31, 2017 and 2016:

 

(in thousands)

 

Gain Recognized

in AOCL on Derivatives
(Effective Portion)

 

Location of Loss
Reclassified from AOCL

into Income
(Effective Portion)

 

Loss Reclassified
from AOCL into Income
(Effective Portion)

 

Derivatives in Cash Flow Hedging Relationships

 

2017

   

2016

     

2017

   

2016

 

Foreign currency forward contracts

  $ 3,467     $ 3,900  

SG&A

  $ (403 )   $ (12 )

 

 
11

 

 

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the nine months ended May 31, 2017 and 2016:

 

(in thousands)

 

Gain Recognized

in AOCL on Derivatives
(Effective Portion)

 

Location of Loss
Reclassified from AOCL into Income
(Effective Portion)

 

(Loss) Gain Reclassified
from AOCL into Income
(Effective Portion)

 

Derivatives in Cash Flow Hedging Relationships

 

2017

   

2016

     

2017

   

2016

 

Foreign currency forward contracts

  $ 4,006     $ 404  

SG&A

  $ (2,788 )   $ 40  

 

No amount of ineffectiveness was recorded in the Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or loss was included in the assessment of hedge effectiveness. As of May 31, 2017, FactSet estimates that approximately $2.1 million of net derivative gains related to its cash flow hedges included in AOCL will be reclassified into earnings within the next 12 months.

 

Offsetting of Derivative Instruments

 

FactSet’s master netting and other similar arrangements with its respective counterparties allow for net settlement under certain conditions. As of May 31, 2017 and August 31, 2016, there were no net settlements recorded on Consolidated Balance Sheets.

 

6. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of other comprehensive income and amounts reclassified out of AOCL into earnings during the three months ended May 31, 2017 and 2016 are as follows:

 

   

May 31, 2017

   

May 31, 2016

 

(in thousands)

 

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ 21,316     $ 21,316     $ 8,883     $ 8,883  

Realized loss on cash flow hedges reclassified to earnings (1)

    403       247       12       7  

Unrealized gain on cash flow hedges recognized in AOCL

    3,467       2,138       3,900       2,457  

Other comprehensive income

  $ 25,186     $ 23,701     $ 12,795     $ 11,347  

 

 

(1)

Reclassified to Selling, General and Administrative Expenses

 

The components of other comprehensive income (loss) and amounts reclassified out of AOCL into earnings during the nine months ended May 31, 2017 and 2016 are as follows:

 

   

May 31, 2017

   

May 31, 2016

 

(in thousands)

 

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ 10,680     $ 10,680     $ (7,867 )   $ (7,867 )

Realized loss (gain) on cash flow hedges reclassified to earnings (1)

    2,788       1,755       (40 )     (25 )

Unrealized gain on cash flow hedges recognized in AOCL

    4,006       2,478       404       254  

Other comprehensive income (loss)

  $ 17,474     $ 14,913     $ (7,503 )   $ (7,638 )

 

 

(1)

Reclassified to Selling, General and Administrative Expenses

 

The components of AOCL are as follows:

 

(in thousands)

 

May 31, 2017

   

August 31, 2016

 

Accumulated unrealized gains (losses) on cash flow hedges, net of tax

  $ 3,018     $ (1,215 )

Accumulated foreign currency translation adjustments

    (56,658 )     (67,338 )

Total accumulated other comprehensive loss

  $ (53,640 )   $ (68,553 )

 

7. SEGMENT INFORMATION

 

Operating segments are defined as components of an enterprise that engage in business activities from which they may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Financial information at the operating segment level is reviewed jointly by the Chief Executive Officer (“CEO”) and senior management. Senior management consists of executives who directly report to the CEO, consisting of the Chief Financial Officer, Chief Operating Officer, Global Head of Sales and Client Solutions, General Counsel and Chief Human Resources Officer. Senior management, along with the CEO, constitute FactSet’s chief operating decision making group (“CODMG”) and is responsible for making decisions about resources allocated amongst the operating segments based on actual results.

 

 

 
12

 

 

FactSet’s operating segments are aligned with how the Company, including its CODMG, manages the business and the demographic markets in which FactSet serves. The Company’s internal financial reporting structure is based on three segments; the U.S., Europe and Asia Pacific. FactSet believes this alignment helps it better manage the business and view the markets the Company serves, which are centered on providing integrated global financial and economic information. Sales, consulting, data collection, product development and software engineering are the primary functional groups within the U.S., Europe and Asia Pacific segments that provide global financial and economic information to investment managers, investment banks and other financial services professionals. Effective September 1, 2016, FactSet realigned certain aspects of its global operations from its U.S. parent company to FactSet UK Limited, a U.K. operating company, to better position FactSet to serve its growing client base outside the U.S. While this realignment allows the Company to further implement strategic corporate objectives and helps achieve operational and financial efficiencies, it does not impact how the CODMG analyzes business performance within the segments.

 

The U.S. segment services finance professionals including financial institutions throughout the Americas, while the European and Asia Pacific segments service professionals and institutions located throughout Europe and the Asia Pacific region, respectively. The European segment is headquartered in London, England and maintains office locations in France, Germany, Ireland, Italy, Latvia, Luxembourg, the Netherlands, Spain, South Africa, Sweden, Switzerland and Dubai. The Asia Pacific segment is headquartered in Tokyo, Japan with office locations in Australia, Hong Kong, Singapore and India. Segment revenues reflect direct sales to clients based in their respective geographic locations. 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 the Company’s data centers, third party data costs and corporate 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 the Company’s operating segments and thus the expenses incurred at these locations are allocated to each segment based on a percentage of revenues. Of the total $695.7 million of goodwill reported by the Company at May 31, 2017, 55% was recorded in the U.S. segment, 44% in the European segment and the remaining 1% in the Asia Pacific segment.

 

The following reflects the results of operations of the segments consistent with the Company’s management system. These results are used by management, both in evaluating the performance of, and in allocating resources to, each of the segments.

 

(in thousands)

For the three months ended May 31, 2017

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 197,834     $ 87,327     $ 26,959     $ 312,120  

Segment operating profit

    34,382       37,766       15,494       87,642  

Total assets

    708,440       555,366       94,208       1,358,014  

Capital expenditures

    6,211       515       1,210       7,936  

 

For the three months ended May 31, 2016

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 193,166     $ 70,243     $ 24,092     $ 287,501  

Segment operating profit

    42,020       33,304       13,966       89,290  

Total assets

    696,832       264,910       77,233       1,038,975  

Capital expenditures

    6,060       913       1,260       8,233  

 

For the nine months ended May 31, 2017

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 580,090     $ 235,464     $ 78,983     $ 894,537  

Segment operating profit

    110,574       114,282       44,851       269,707  

Capital expenditures

    21,311       1,176       3,494       25,981  

 

For the nine months ended May 31, 2016

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 565,063     $ 206,198     $ 68,540     $ 839,801  

Segment operating profit

    127,479       95,536       38,927       261,942  

Capital expenditures

    29,133       2,181       3,357       34,671  

 

 

 
13

 

 

8. BUSINESS COMBINATIONS

 

BISAM

 

On March 17, 2017, FactSet acquired BI-SAM Technologies (“BISAM”) for a total purchase price of $216.9 million. BISAM is a global provider of portfolio performance and attribution, multi-asset risk, GIPS composites management and reporting. BISAM’s product offerings include B-One, BISAM’s cross-asset solution, which will serve as a complement to both FactSet’s portfolio analytics suite and client reporting solutions, and Cognity, which enhances FactSet’s risk analysis for derivatives and quantitative portfolio construction. These factors contributed to a purchase price in excess of fair value of BISAM’s net tangible and intangible assets, leading to the recognition of goodwill. At the time of acquisition, BISAM employed over 160 employees based primarily in its New York, Boston, Paris, London and Sofia offices. Total transaction costs related to the acquisition were $3.2 million in fiscal 2017 and were recorded within Selling, General and Administrative (“SG&A”) expenses in the Consolidated Statements of Income.

 

Allocation of the purchase price to the assets acquired and liabilities assumed was not yet finalized as of May 31, 2017 as it is subject to finalizing identified intangibles assets and income taxes, in addition to working capital adjustments. The preliminary purchase price was allocated to BISAM’s net tangible and intangible assets based upon their estimated fair value as of the date of acquisition. Based upon the purchase price and preliminary valuation, the allocation is as follows:

 

(in thousands)

 

Tangible assets acquired

  $ 27,642  

Amortizable intangible assets

       

Software technology

    18,261  

Client relationships

    37,597  

Trade name

    741  

Goodwill

    174,024  

Total assets acquired

  $ 258,265  

Liabilities assumed

    (41,372 )

Net assets acquired

  $ 216,893  

 

Intangible assets of $56.6 million have been allocated to amortizable intangible assets consisting of client relationships, amortized over 16 years using an accelerated amortization method; software technology, amortized over five years using a straight-line amortization method; and a trade name, amortized over four years using a straight-line amortization method.

 

Goodwill totaling $174.0 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the BISAM acquisition is included in the US and European segments and is not deductible for income tax purposes. The results of operations of BISAM have been included in the Company’s Consolidated Statements of Income since the completion of the acquisition on March 17, 2017. Pro forma information has not been presented because the effect of the BISAM acquisition is not material to the Company’s consolidated financial results.

 

Vermilion

 

On November 8, 2016, FactSet acquired Vermilion Holdings Limited (“Vermilion”) for a total purchase price of $67.9 million. Vermilion is a global provider of client reporting and communications software and services to the financial services industry. Client reporting is a growing area of the market as regulatory requirements rise and with the acquisition of Vermilion and its Vermilion Reporting Suite (“VRS”), FactSet now offers a workflow around all elements of the client reporting process, which it expects will expand as investors grow increasingly sophisticated. This factor contributed to a purchase price in excess of fair value of Vermilion’s net tangible and intangible assets, leading to the recognition of goodwill. At the time of acquisition, Vermilion employed 59 individuals in its London, Boston and Singapore offices. Total transaction costs related to the acquisition were $0.7 million and recorded within SG&A expenses in the Consolidated Statements of Income.

 

 

 
14

 

 

The total purchase price was allocated to Vermilion’s net tangible and intangible assets based upon their estimated fair value as of the date of acquisition. Based upon the purchase price and the valuation, the allocation is as follows:

 

(in thousands)

 

Tangible assets acquired

  $ 8,242  

Amortizable intangible assets

       

Software technology

    10,916  

Client relationships

    5,954  

Non-compete agreements

    806  

Trade name

    571  

Goodwill

    50,832  

Total assets acquired

  $ 77,321  

Liabilities assumed

    (9,434 )

Net assets acquired

  $ 67,887  

 

Intangible assets of $18.2 million have been allocated to amortizable intangible assets consisting of client relationships, amortized over 15 years using an accelerated amortization method; software technology, amortized over six years using a straight-line amortization method; non-compete agreements, amortized over three years using a straight-line amortization method; and a trade name, amortized over four years using a straight-line amortization method.

 

Goodwill totaling $50.8 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the Vermilion acquisition is included in the European segment and is not deductible for income tax purposes. The results of operations of Vermilion have been included in the Company’s Consolidated Statements of Income since the completion of the acquisition on November 8, 2016. Pro forma information has not been presented because the effect of the Vermilion acquisition is not material to the Company’s consolidated financial results.

 

Portware

 

On October 16, 2015, FactSet acquired Portware LLC (“Portware”) for a total purchase price of $263.6 million. Portware is a global provider of multi-asset trade automation solutions for mega and large asset managers. With the acquisition of Portware, FactSet began to offer a platform that it expects will increase value to global asset managers by expanding its capabilities to include multi-asset trade automation. This factor contributed to a purchase price in excess of fair value of Portware’s net tangible and intangible assets, leading to the recognition of goodwill. At the time of acquisition, Portware employed 166 individuals in its New York, London, Hong Kong, and Hyderabad offices. Total transaction costs related to the acquisition were $0.7 million in fiscal 2016 and were recorded within SG&A expenses in the Consolidated Statements of Income.

 

The total purchase price was allocated to Portware’s net tangible and intangible assets based upon their estimated fair value as of the date of acquisition. Based upon the purchase price and the valuation, the allocation is as follows:

 

(in thousands)

 

Tangible assets acquired

  $ 9,656  

Amortizable intangible assets

       

Software technology

    43,000  

Client relationships

    27,000  

Non-compete agreements

    3,500  

Trade name

    2,000  

Goodwill

    187,378  

Total assets acquired

  $ 272,534  

Liabilities assumed

    (8,951 )

Net assets acquired

  $ 263,583  

 

Intangible assets of $75.5 million have been allocated to amortizable intangible assets consisting of client relationships, amortized over 16 years using an accelerated amortization method; software technology, amortized over eight years using a straight-line amortization method; non-compete agreements, amortized over seven years using a straight-line amortization method; and a trade name, amortized over five years using a straight-line amortization method.

 

Goodwill totaling $187.4 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is included in the U.S. segment. Approximately 77% of the total goodwill generated from the Portware acquisition is deductible for income tax purposes. The results of operations of Portware have been included in the Company’s Consolidated Statements of Income since the completion of the acquisition on October 16, 2015. Pro forma information has not been presented because the effect of the Portware acquisition is not material to the Company’s consolidated financial results.

 

 

 
15

 

 

9. DISPOSITIONS

 

During the third quarter of fiscal 2016, the Company entered into a definitive stock purchase agreement (the “Purchase Agreement”) pursuant to which the Company agreed to sell its market research business, consisting of Market Metrics LLC and Matrix-Data Limited (collectively “Market Metrics” or the “disposal group”) and associated assets (the “Transaction”). On July 1, 2016, FactSet completed the Transaction and received $165.0 million in cash, less estimated working capital and certain adjustments set forth in the Purchase Agreement, including a $9.7 million bonus adjustment amount. The Company recognized a pre-tax gain on the sale of $112.5 million in fourth quarter of fiscal 2016. In the second quarter of fiscal 2017, the Company finalized the working capital adjustment and recognized a pre-tax loss of $1.2 million in Other Expense in the Consolidated Statements of Income.

 

The Company assessed the Transaction and the disposal group and determined that the sale did not represent a strategic shift in its business that has a major effect on its consolidated results of operations, financial position or cash flows. Accordingly, the disposal group was not presented in the consolidated financial statements as a discontinued operation. The results of the disposal group through the date the Transaction closed were reported within the U.S. segment (for Market Metrics LLC) and the European segment (for Matrix-Data Limited).

 

10. GOODWILL

 

Changes in the carrying amount of goodwill by segment for the nine months ended May 31, 2017 are as follows:

 

(in thousands)

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Balance at August 31, 2016

  $ 367,480     $ 82,280     $ 3,155     $ 452,915  

Goodwill acquired during the period

    18,233       215,822             234,055  

Foreign currency translations

          8,901       (204 )     8,697  

Balance at May 31, 2017

  $ 385,713     $ 307,003     $ 2,951     $ 695,667  

 

Goodwill is not amortized as it is estimated to have an indefinite life. At least annually, the Company is 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. The Company’s reporting units evaluated for potential impairment were the U.S., Europe and Asia Pacific, which reflect the level of internal reporting the Company uses to manage its business and operations. 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 Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2016, consistent with the timing of previous years, at which time it was determined that there was no impairment, with the fair value of each of the Company’s reporting units significantly exceeding carrying value. During the first nine months of fiscal 2017, the Company acquired goodwill of $234.1 million representing the excess of the purchase price over the fair value of the net tangible and intangible assets from acquisitions.

 

11. INTANGIBLE ASSETS

 

FactSet’s 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 the Company’s operations. The weighted average useful life of FactSet’s acquired identifiable intangible assets at May 31, 2017 was 11.5 years. The Company amortizes intangible assets over their estimated useful lives, which are evaluated quarterly to determine whether events and circumstances warrant a revision to the remaining period of amortization. There have been no changes to the estimate of the remaining useful lives during the first nine months of fiscal 2017. Amortizable intangible assets are tested for impairment, if indicators of impairment are present, based on undiscounted cash flows, and, if impaired, written down to fair value based on discounted cash flows. No impairment of intangible assets has been identified during any of the periods presented. The intangible assets have no assigned residual values.

 

 

 
16

 

 

During the nine months ended May 31, 2017, $92.8 million of intangible assets were acquired with a weighted average useful life of 11.5 years. The gross carrying amounts and accumulated amortization totals related to the Company’s identifiable intangible assets are as follows:

 

At May 31, 2017

(in thousands)

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Data content

  $ 33,393     $ 17,917     $ 15,476  

Client relationships

    97,322       20,291       77,031  

Software technology

    104,315       27,445       76,870  

Non-compete agreements

    4,779       1,303       3,476  

Trade names

    4,041       1,360       2,681  

Total

  $ 243,850     $ 68,316     $ 175,534  

 

At August 31, 2016

(in thousands)

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Data content

  $ 34,167     $ 16,758     $ 17,409  

Client relationships

    45,185       16,480       28,705  

Software technology

    62,560       20,545       42,015  

Non-compete agreements

    4,344       1,118       3,226  

Trade names

    2,728       922       1,806  

Total

  $ 148,984     $ 55,823     $ 93,161  

 

Amortization expense recorded for intangible assets was $5.8 million and $4.1 million for the three months ended May 31, 2017 and 2016, respectively. Amortization expense recorded for intangible assets was $13.8 million and $11.1 million for the nine months ended May 31, 2017 and 2016, respectively. As of May 31, 2017, estimated intangible asset amortization expense for each of the next five years and thereafter is as follows:

 

Fiscal Year (in thousands)

 

Estimated Amortization Expense

 

2017 (remaining three months)

  $ 6,108  

2018

    23,989  

2019

    23,148  

2020

    22,489  

2021

    20,927  

Thereafter

    78,873  

Total

  $ 175,534  

 

12. COMMON STOCK AND EARNINGS PER SHARE

 

On May 5, 2017, FactSet’s Board of Directors approved a regular quarterly dividend of $0.56 per share, or $2.24 per share per annum. The cash dividend of $22.0 million was paid on June 20, 2017 to common stockholders of record at the close of business on May 31, 2017.

 

Shares of common stock outstanding were as follows:

 

   

Nine months ended

 

(in thousands)

 

May 31,

2017

   

May 31,

2016

 

Balance at September 1

    40,038       41,317  

Common stock issued for employee stock plans

    585       579  

Repurchase of common stock from employees(1)

    (37

)

    (20

)

Repurchase of common stock under the share repurchase program

    (1,285

)

    (1,220

)

Repurchase of common stock under accelerated share repurchase agreement

    (103

)

     

Balance at May 31, 2017 and May 31, 2016, respectively

    39,198       40,656  

 

 

(1)

For the nine months ended May 31, 2017 and May 31, 2016, the Company repurchased 37,042 and 19,892 shares, or $5.7 million and $3.3million, of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.

 

 
17

 

 

A reconciliation of the weighted average shares outstanding used in the basic and diluted earnings per share (“EPS”) computations is as follows:

 

(in thousands, except per share data)

 

Net Income

(Numerator)

   

Weighted

Average

Common Shares

(Denominator)

   

Per Share

Amount

 

For the three months ended May 31, 2017

                       

Basic EPS

                       

Income available to common stockholders

  $ 65,414       39,317     $ 1.66  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            140          

Income available to common stockholders plus assumed conversions

  $ 65,414       39,457     $ 1.66  

For the three months ended May 31, 2016

                       

Basic EPS

                       

Income available to common stockholders

  $ 66,781       40,779     $ 1.64  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            410          

Income available to common stockholders plus assumed conversions

  $ 66,781       41,189     $ 1.62  

For the nine months ended May 31, 2017

                       

Basic EPS

                       

Income available to common stockholders

  $ 198,707       39,528     $ 5.03  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            208          

Income available to common stockholders plus assumed conversions

  $ 198,707       39,736     $ 5.00  

For the nine months ended May 31, 2016

                       

Basic EPS

                       

Income available to common stockholders

  $ 194,508       41,094     $ 4.73  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            502          

Income available to common stockholders plus assumed conversions

  $ 194,508       41,596     $ 4.68  

 

Dilutive potential common shares consist of stock options and unvested restricted stock awards. The number of stock options excluded from the calculation of diluted earnings per share for the three and nine months ended May 31, 2017 was 492,649, because their inclusion would have been anti-dilutive. The number of stock options excluded from the calculation of diluted earnings per share for the three and nine months ended May 31, 2016 was 688,538, because their inclusion would have been anti-dilutive.

 

For the three and nine months ended May 31, 2017, the number of performance-based stock option grants excluded from the calculation of diluted EPS was 754,561. For the three and nine months ended May 31, 2016, the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 937,089. Performance-based stock options are omitted from the calculation of diluted EPS until the performance criteria are probable of being achieved.

 

13. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

At May 31, 2017 and August 31, 2016, there were 10,000,000 shares of preferred stock ($0.01 par value per share) authorized, of which no shares were issued and outstanding. FactSet’s Board of Directors may from time to time authorize the issuance of one or more series of preferred stock and, in connection with the creation of such series, determine the characteristics of each such series including, without limitation, the preference and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the series.          

 

Common Stock

 

At May 31, 2017 and August 31, 2016, there were 150,000,000 shares of common stock ($.01 par value per share) authorized, of which 51,737,696 and 51,150,978 shares were issued, respectively. The authorized shares of common stock are issuable for any proper corporate purpose, including future stock splits, stock dividends, acquisitions, raising equity capital or to adopt additional employee benefit plans.

 

 

 
18

 

 

Treasury Stock

 

At May 31, 2017 and August 31, 2016, there were 12,539,371 and 11,112,753 shares of treasury stock (at cost) outstanding, respectively. As a result, 39,198,325 and 40,038,225 shares of FactSet common stock were outstanding at May 31, 2017 and August 31, 2016, respectively.

 

Share Repurchase Program

 

Repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. During the first nine months of fiscal 2017, the Company repurchased 1,284,822 shares for $208.8 million compared to 1,220,000 shares for $189.5 million in the prior year comparable period. On March 27, 2017, the Board of Directors of FactSet approved a $300.0 million expansion of to the existing share repurchase program. As of May 31, 2017, $288.2 million remains authorized for future share repurchases. No minimum number of shares to be repurchased has been fixed. There is no timeframe to complete the repurchase program and it is expected that share repurchases will be paid using existing and future cash generated by operations.

 

On July 1, 2016, FactSet entered into an accelerated share repurchase agreement (the “ASR Agreement”) to repurchase $120.0 million of FactSet common stock. The Company 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 its common stock.

 

Restricted Stock Vesting

 

Restricted stock awards entitle the holder to shares of common stock as the awards vest over time. During the first nine months of fiscal 2017, 101,234 of previously granted restricted stock awards vested and were included in common stock outstanding as of May 31, 2017 (less 37,042 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock). During the same period a year ago, 51,762 of previously granted restricted stock awards vested and were included in common stock outstanding as of May 31, 2016 (less 19,892 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock).

 

Dividends

 

The Company’s Board of Directors declared the following historical dividends: 

 

Declaration Date

 

Dividends Per
Share of
Common Stock

 

Type

Record Date

 

Total $ Amount
(in thousands)

 

Payment Date

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)

May 31, 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 dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Company and is subject to final determination by the Company’s Board of Directors.

 

14. EMPLOYEE STOCK OPTION AND RETIREMENT PLANS

 

Stock Option Awards

 

The FactSet Research Systems Inc. 2004 Stock Option and Award Plan, as Amended and Restated (the “Option Plan”) provides for the grant of share-based awards, including stock options and restricted stock awards to employees of FactSet. The expiration date of the Option Plan is December 14, 2020. Stock options granted under the Option Plan expire either seven or ten years from the date of grant and the majority vest ratably over a period of five years. Options become vested and exercisable provided the employee continues employment with the Company through the applicable vesting date and remain exercisable until expiration or cancellation. Options are not transferable or assignable other than by will or the laws of descent and distribution. During the grantee’s lifetime, the options may be exercised only by the grantee.

  

Stock Option Activity

 

During the first nine months of fiscal 2017, FactSet granted 767,071 stock options at a weighted average exercise price of $154.01 to existing employees of the Company. As of May 31, 2017, a total of 3,597,101 stock options were outstanding at a weighted average exercise price of $139.97. Unamortized stock-based compensation of $58.6 million is expected to be recognized as stock-based compensation expense over the remaining vesting period of 3.4 years.

 

 

 
19

 

 

A summary of stock option activity is as follows:

 

(in thousands, except per share data)

 

Number

Outstanding

   

Weighted Average

Exercise Price Per Share

 

Balance at August 31, 2016

    3,364     $ 129.54  

Granted – nonperformance-based

    671     $ 152.28  

Granted – performance-based

    23     $ 159.45  

Exercised

    (199

)

  $ 74.56  

Forfeited

    (26

)

  $ 147.22  

Balance at November 30, 2016

    3,833     $ 136.43  

Granted – performance-based

    62     $ 169.16  

Granted – non-employee Directors grant

    24     $ 170.24  

Exercised

    (170

)

  $ 89.62  

Forfeited

    (50

)

  $ 141.50  

Balance at February 28, 2017

    3,699     $ 139.27  

Granted – nonperformance-based

    12     $ 163.05  

Exercised

    (62 )   $ 93.25  

Forfeited

    (52 )   $ 151.65  

Balance at May 31, 2017

    3,597     $ 139.97  

 

The total number of in-the-money options exercisable as of May 31, 2017 was 0.8 million with a weighted average exercise price of $97.20. As of August 31, 2016, 1.0 million in-the-money outstanding options were exercisable with a weighted average exercise price of $89.42. The aggregate intrinsic value of in-the-money stock options exercisable at May 31, 2017 and August 31, 2016 was $57.1 million and $86.0 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock prices of $165.69 and $178.03 on May 31, 2017 and August 31, 2016, respectively, and the exercise price multiplied by the number of options exercisable as of that date. The total pre-tax intrinsic value of stock options exercised during the nine months ended May 31, 2017 and 2016 was $34.8 million and $43.0 million, respectively.

 

Performance-based Stock Options

 

Performance-based stock options require management to make assumptions regarding the likelihood of achieving Company performance targets. The number of performance-based options that vest will be predicated on the Company achieving performance levels during the measurement period subsequent to the date of grant. Dependent on the financial performance levels attained by FactSet, a percentage of the performance-based stock options will vest to the grantees of those stock options. However, there is no current guarantee that such options will vest in whole or in part.

 

July 2012 Performance-based Option Grant Review

In July 2012, FactSet granted 241,546 performance-based employee stock options, which are eligible to vest in 20% tranches depending upon future StreetAccount user growth through August 31, 2017. Through the third quarter of fiscal 2017, all five of the growth targets as outlined within the terms of the grant were achieved. As such, 80%, or 193,256, of the options granted have vested with the fifth tranche eligible to vest fully on August 31, 2017. Unamortized stock-based compensation expense of $0.1 million will be recognized over the remaining vesting period of 0.2 years.

 

February 2015 Performance-based Option Grant Review

In connection with the acquisition of Code Red, FactSet 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 May 31, 2017, total unamortized stock-based compensation of $0.9 million will be recognized as expense over the remaining vesting period of 1.7 years.

 

 

 
20

 

 

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 May 31, 2017, total unamortized stock-based compensation of $0.5 million will be recognized as expense over the remaining vesting period of 1.7 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%   $ (694 )      
10%   $ (520 )   $ 127  

40% (current expectation)

        $ 506  
70%   $ 520     $ 886  
100%   $ 1,041     $ 1,265  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of May 31, 2017.

 

October 2015 Performance-based Option Grant Review

In connection with the acquisition of Portware during the first quarter of fiscal 2016, FactSet granted 530,418 performance-based stock options. These performance-based options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date if certain Portware revenue and operating income targets are achieved by October 16, 2017. The option holders must also remain employed by FactSet for the options to be eligible to vest. As of May 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 Portware 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)

           
50%   $ 3,981     $ 8,269  
70%   $ 5,574     $ 11,577  
100%   $ 7,963     $ 16,538  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of May 31, 2017. 

 

FactSet granted 20,911 additional performance-based stock options to Portware employees in the fourth quarter of fiscal 2016. Similar to the October 2015 grant, these performance-based options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date if certain Portware revenue and operating income targets are achieved by October 16, 2017. The option holders must also remain employed by FactSet for the options to be eligible to vest. As of May 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 Portware 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)

           
50%   $ 83     $ 417  
70%   $ 116     $ 583  
100%   $ 166     $ 833  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of May 31, 2017

 

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 May 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%   $ 202     $ 2,502  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of May 31, 2017

 

 

 
21

 

 

Restricted Stock and Stock Unit Awards

 

The Company’s Option Plan permits the issuance of restricted stock and restricted stock units. Restricted stock awards are subject to continued employment over a specified period.

 

Restricted Stock and Stock Unit Awards Activity

 

During the first nine months of fiscal 2017, FactSet granted 12,927 restricted stock awards to employees of the Company at a weighted average grant date fair value of $157.50. These restricted stock awards vest over a weighted average period of 5.0 years from grant date.

 

As of May 31, 2017, a total of 168,096 shares of restricted stock and restricted stock units were unvested and outstanding, which results in unamortized stock-based compensation of $17.5 million to be recognized as stock-based compensation expense over the remaining weighted average vesting period of 2.9 years.

 

A summary of restricted stock award activity is as follows:

 

(in thousands, except per award data)

 

Number Outstanding

   

Weighted Average

Grant Date Fair Value Per Award

 

Balance at August 31, 2016

    262     $ 126.27  

Granted

    5     $ 151.63  

Vested(1)

    (95 )   $ 112.70  

Balance at November 30, 2016

    172     $ 134.02  

Granted

    8     $ 161.31  

Forfeited

    (3 )   $ 114.42  

Vested(2)

    (6 )   $ 105.91  

Balance at February 28, 2017

    171     $ 136.65  

Forfeited

    (3 )   $ 116.38  

Balance at May 31, 2017

    168     $ 136.95  

 

 

(1)

Of the 94,877 restricted stock awards that vested during the first quarter of fiscal 2017, 73,522 related to awards granted on November 1, 2013. The remaining 40% of these restricted stock awards cliff vest after five years on November 1, 2018 and are amortized to expense over the vesting period using the straight-line attribution method. The other restricted stock awards that vested related primarily to awards granted in November 2015, which vest 20% per year on the anniversary date of the award.

 

 

(2)

Of the 6,357 restricted stock awards that vested during the second quarter of fiscal 2017, 5,150 related to awards granted on February 3, 2014. The remaining 40% of these restricted stock awards cliff vest after five years on February 3, 2019 and are amortized to expense over the vesting period using the straight-line attribution method. The other restricted stock awards that vested related to awards granted in February 2015 in connection with the Code Red acquisition, which vested 100% on February 9, 2017.

 

Share-based Awards Available for Grant

 

A summary of share-based awards available for grant is as follows:

 

(in thousands)

 

Share-based Awards

Available for Grant under

the Employee Option Plan

   

Share-based Awards

Available for Grant under

the Non-Employee Directors Plan

 

Balance at August 31, 2016

    1,491       66  

Granted – nonperformance-based options

    (671 )      

Granted – performance-based options

    (23 )      

Granted – restricted stock awards(1)

    (12 )      

Share-based awards canceled/forfeited(2)

    29        

Balance at November 30, 2016

    814       66  

Granted – nonperformance-based options

          (24 )

Granted – performance-based options

    (62 )      

Granted – restricted stock awards(1)

    (20 )      

Share-based awards canceled/forfeited(2)

    56        

Balance at February 28, 2017

    788       42  

Granted – nonperformance-based options

    (12 )      

Share-based awards canceled/forfeited(2)

    58        

Balance at May 31, 2017

    834       42  

 

 

(1)

Each restricted stock award granted is equivalent to 2.5 shares granted under the Company’s Option Plan.

 

 

(2)

Under the Company’s Option Plan, for each restricted stock award canceled/forfeited, an equivalent of 2.5 shares is added back to the available share-based awards balance.

 

 

 
22

 

 

Employee Stock Purchase Plan

 

Shares of FactSet common stock may be purchased by eligible employees under the Amended and Restated FactSet Research Systems Inc. 2008 Employee Stock Purchase Plan (the “ESPP”) in three-month intervals at a purchase price equal to at least 85% of the lesser of the fair market value of the Company’s common stock on either the first day or the last day of each three-month offering period. Employee purchases may not exceed 10% of their gross compensation during an offering period.

 

During the three months ended May 31, 2017, employees purchased 17,314 shares at a weighted average price of $140.84 as compared to 17,538 shares at a weighted average price of $131.57 for the three months ended May 31, 2016. During the nine months ended May 31, 2017, employees purchased 54,554 shares at a weighted average price of $137.38 as compared to 53,711 shares at a weighted average price of $129.83 for the nine months ended May 31, 2016. At May 31, 2017, 353,990 shares were reserved for future issuance under the ESPP.

 

401(k) Plan

 

The Company established it 401(k) Plan in fiscal 1993. The 401(k) Plan is a defined contribution plan covering all full-time, U.S. employees of the Company and is subject to the provisions of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 (“IRC”). Each year, participants may contribute up to 60% of their eligible annual compensation, subject to annual limitations established by the IRC. The Company matches up to 4% of employees’ earnings, capped at the Internal Revenue Service annual maximum. Company matching contributions are subject to a five year graduated vesting schedule. All full-time, U.S. employees are eligible for the matching contribution by the Company. The Company contributed $7.3 million and $7.1 million in matching contributions to employee 401(k) accounts during the nine months ended May 31, 2017 and 2016, respectively.

 

15. STOCK-BASED COMPENSATION

 

The Company recognized total stock-based compensation expense of $7.3 million and $20.9 million during the three and nine months ended May 31, 2017, respectively. Similarly, the Company recognized total stock-based compensation expense of $7.4 million and $22.4 million during the three and nine months ended May 31, 2016, respectively. As of May 31, 2017, $76.1 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 3.3 years. There was no stock-based compensation capitalized as of May 31, 2017 or August 31, 2016, respectively.

 

Employee Stock Option Fair Value Determinations

 

The Company utilizes the lattice-binomial option-pricing model (“binomial model”) to estimate the fair value of new employee stock option grants. The Company’s determination of fair value of stock option awards on the date of grant using the binomial model is affected by the Company’s stock price as well as assumptions regarding a number of variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, interest rates, option forfeitures and employee stock option exercise behaviors.

 

Q1 2017

671,263 nonperformance-based employee stock options and 22,460 performance-based employee stock options were granted at a weighted average exercise price of $152.51 and a weighted average estimated fair value of $39.60 per share.

Q2 2017

61,744 performance-based employee stock options were granted at a weighted average exercise price of $169.16 and a weighted average estimated fair value of $43.81 per share.

Q3 2017

11,604 nonperformance-based employee stock options were granted at a weighted average exercise price of $163.05 and a weighted average estimated fair value of $42.23 per share.

Q1 2016

513,785 nonperformance-based employee stock options and 530,418 performance-based employee stock options were granted at a weighted average exercise price of $170.21 and a weighted average estimated fair value of $46.62 per share.

Q2 2016

4,073 nonperformance-based employee stock options were granted at an exercise price of $150.81 and an estimated fair value of $40.51 per share.

Q3 2016

103,903 nonperformance-based employee stock options were granted at an exercise price of $152.10 and an estimated fair value of $40.57 per share.

 

 

 
23

 

 

The weighted average estimated fair value of employee stock options granted was determined using the binomial model with the following weighted average assumptions:

 

Three months ended

 

May 31,

2017

   

May 31,

2016

 

Term structure of risk-free interest rate

    0.49% - 1.89%       0.40% 1.90%  

Expected life (years)

      7.4           7.5    

Term structure of volatility

    21% - 29%       24% - 30%   

Dividend yield

      1.18%           1.33%    

Weighted average estimated fair value

      $42.23           $40.57    

Weighted average exercise price

      $163.05           $152.10    

Fair value as a percentage of exercise price

      25.9%           26.7%    

 

 

Nine months ended

 

May 31,

2017

   

May 31,

2016

 

Term structure of risk-free interest rate

    0.07% - 2.09%       0.07% - 2.12%  

Expected life (years)

      7.4           7.7    

Term structure of volatility

    21% - 30%