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EX-31.1 - EXHIBIT 31.1 - FACTSET RESEARCH SYSTEMS INCex31-1.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 February 28, 2015

 

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 or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer  Non-accelerated filer Smaller reporting company 

 

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 March 31, 2015 was 41,766,013.

 



 

 
 

 

 

FactSet Research Systems Inc.

Form 10-Q

For the Quarter Ended February 28, 2015

 

Index

 

 

 

Page  

Part I

FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements

 
     

 

Consolidated Statements of Income for the three and six months ended February 28, 2015 and 2014

3

     
 

Consolidated Statements of Comprehensive Income for the three and six months ended February 28, 2015 and 2014

4

     

 

Consolidated Balance Sheets at February 28, 2015 and August 31, 2014

5

     

 

Consolidated Statements of Cash Flows for the six months ended February 28, 2015 and 2014

6

     

 

Notes to the Consolidated Financial Statements

7

     

Item 2.

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

30

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

     

Item 4.

Controls and Procedures

45

     

Part II

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

46

     

Item 1A.

Risk Factors

46

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

     

Item 3.

Defaults Upon Senior Securities

46

     

Item 4.

Mine Safety Disclosures

46

     

Item 5.

Other Information

46

     

Item 6.

Exhibits

47

     
 

Signatures

47

 

 

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

February 28,

   

Six Months Ended

February 28,

 

(In thousands, except per share data)

 

2015

   

2014

   

2015

   

2014

 

Revenues

  $ 247,792     $ 226,934     $ 490,468     $ 449,909  
                                 

Operating expenses

                               

Cost of services

    99,516       87,254       197,059       170,504  

Selling, general and administrative

    67,628       64,626       132,501       129,610  

Total operating expenses

    167,144       151,880       329,560       300,114  
                                 

Operating income

    80,648       75,054       160,908       149,795  
                                 

Other income

    534       344       964       685  

Income before income taxes

    81,182       75,398       161,872       150,480  
                                 

Provision for income taxes

    19,584       22,972       44,414       45,876  

Net income

  $ 61,598     $ 52,426     $ 117,458     $ 104,604  
                                 

Basic earnings per common share

  $ 1.48     $ 1.23     $ 2.82     $ 2.44  

Diluted earnings per common share

  $ 1.46     $ 1.22     $ 2.78     $ 2.41  
                                 

Basic weighted average common shares

    41,630       42,547       41,658       42,840  

Diluted weighted average common shares

    42,306       43,107       42,324       43,432  

 

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     Six Months Ended  
    February 28,     February 28,  

(In thousands)

 

2015

   

2014

   

2015

   

2014

 
                                 

Net income

  $ 61,598     $ 52,426     $ 117,458     $ 104,604  
                                 

Other comprehensive (loss) income, net of tax

                               

Net unrealized gain on cash flow hedges*

    843       387       731       3,284  

Foreign currency translation adjustments

    (8,011 )     3,506       (21,566 )     11,654  

Other comprehensive (loss) income

    (7,168 )     3,893       (20,835 )     14,938  

Comprehensive income

  $ 54,430     $ 56,319     $ 96,623     $ 119,542  

 

* For the three and six months ended February 28, 2015, the unrealized gain on cash flow hedges was net of tax expense of $501 and $434, respectively. The unrealized gain on cash flow hedges disclosed above for the three and six months ended February 28, 2014, was net of tax expense of $231 and $1,961, respectively.

 

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

 

 
4

 

 

FactSet Research Systems Inc.

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

 

February 28,

2015

   

August 31,

2014

 
   

(Unaudited)

         
                 

ASSETS

               

Cash and cash equivalents

  $ 122,070     $ 116,378  

Investments

    25,335       20,008  

Accounts receivable, net of reserves of $1,641 at February 28, 2015 and $1,662 at August 31, 2014

    100,038       90,354  

Prepaid taxes

    15,282       6,532  

Deferred taxes

    1,617       1,841  

Prepaid expenses and other current assets

    17,583       14,662  

Total current assets

    281,925       249,775  
                 

Property, equipment and leasehold improvements, at cost

    203,431       201,713  

Less accumulated depreciation and amortization

    (146,738 )     (144,072 )

Property, equipment and leasehold improvements, net

    56,693       57,641  
                 

Goodwill

    305,893       285,608  

Intangible assets, net

    43,313       41,855  

Deferred taxes

    16,782       22,377  

Other assets

    4,966       5,956  

TOTAL ASSETS

  $ 709,572     $ 663,212  
                 

LIABILITIES

               

Accounts payable and accrued expenses

  $ 30,290     $ 26,971  

Accrued compensation

    28,959       42,481  

Deferred fees

    40,577       36,504  

Taxes payable

    4,590       5,036  

Deferred taxes

    1,047       0  

Dividends payable

    16,234       16,299  

Total current liabilities

    121,697       127,291  
                 

Deferred taxes

    2,097       2,921  

Taxes payable

    6,907       5,501  

Long-term debt

    35,000       0  

Deferred rent and other non-current liabilities

    14,787       16,417  

TOTAL LIABILITIES

  $ 180,488     $ 152,130  
                 

Commitments and contingencies (See Note 17)

               
                 

STOCKHOLDERS’ EQUITY

               

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

  $ 0     $ 0  

Common stock, $.01 par value, 150,000,000 shares authorized, 49,714,486 and 49,110,218 shares issued; 41,630,258 and 41,792,802 shares outstanding at February 28, 2015 and August 31, 2014, respectively

    497       491  

Additional paid-in capital

    471,805       413,754  

Treasury stock, at cost: 8,084,228 and 7,317,416 shares at February 28, 2015 and August 31, 2014, respectively

    (838,972 )     (734,746 )

Retained earnings

    934,510       849,504  

Accumulated other comprehensive loss

    (38,756 )     (17,921 )

TOTAL STOCKHOLDERS’ EQUITY

  $ 529,084     $ 511,082  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 709,572     $ 663,212  

 

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

 

 
5

 

 

FactSet Research Systems Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited

 

   

Six Months Ended

February 28,

 

(In thousands)

 

2015 

   

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 117,458     $ 104,604  

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

               

Depreciation and amortization

    16,222       17,442  

Stock-based compensation expense

    11,037       10,616  

Deferred income taxes

    2,697       (1,157 )

Gain on sale of assets

    (4 )     (64 )

Tax benefits from share-based payment arrangements

    (11,743 )     (4,984 )

Changes in assets and liabilities, net of effects of acquisitions

               

Accounts receivable, net of reserves

    (9,280 )     (20,466 )

Accounts payable and accrued expenses

    4,206       (2,909 )

Accrued compensation

    (12,753 )     (15,949 )

Deferred fees

    2,624       2,460  

Taxes payable, net of prepaid taxes

    3,139       9,754  

Prepaid expenses and other assets

    (1,664 )     (331 )

Deferred rent and other non-current liabilities

    (1,172 )     (389 )

Other working capital accounts, net

    (27 )     100  

Net cash provided by operating activities

    120,740       98,727  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Acquisition of businesses, net of cash acquired

    (30,133 )     (47,170 )

Purchases of investments

    (12,437 )     (7,487 )

Proceeds from sales of investments

    7,535       6,871  

Purchases of property, equipment and leasehold improvements, net of proceeds from dispositions

    (11,764 )     (8,032 )

Net cash used in investing activities

    (46,799 )     (55,818 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Dividend payments

    (32,286 )     (30,011 )

Repurchase of common stock

    (106,317 )     (146,184 )

Proceeds from debt

    35,000       0  

Debt issuance costs

    (32 )     0  

Proceeds from employee stock plans

    34,393       16,881  

Tax benefits from share-based payment arrangements

    11,743       4,984  

Net cash used in financing activities

    (57,499 )     (154,330 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (10,750 )     3,584  

Net increase (decrease) in cash and cash equivalents

    5,692       (107,837 )

Cash and cash equivalents at beginning of period

    116,378       196,627  

Cash and cash equivalents at end of period

  $ 122,070     $ 88,790  

 

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

 

 
6

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FactSet Research Systems Inc.

February 28, 2015

(Unaudited)

 

1. ORGANIZATION AND NATURE OF BUSINESS

 

FactSet Research Systems Inc. (the “Company” or “FactSet”) is a provider of integrated financial information and analytical applications to the global investment community. FactSet combines content regarding companies and securities from major markets all over the globe into a single online platform of information and analytics. By consolidating content from hundreds of databases with powerful analytics, FactSet supports the investment process from initial research to published results for buy and sell-side professionals. These professionals include portfolio managers, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers and fixed income professionals. The Company’s applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alphatesting, portfolio optimization and simulation, real-time news and quotes and tools to value and analyze fixed income securities and portfolios. With Microsoft Office integration, wireless access and customizable options, FactSet offers a complete financial workflow solution. The Company’s revenues are derived from subscriptions to services such as workstations, content and applications.

 

2. BASIS OF PRESENTATION

 

FactSet conducts business globally and is managed on a geographic basis. The 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 accompanying financial data as of February 28, 2015 and for the three and six months ended February 28, 2015 and 2014 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The August 31, 2014 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. 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, 2014.

 

In the opinion of management, the accompanying balance sheets and related interim statements of income, comprehensive income and cash flows include all normal adjustments in order to present fairly the results of the Company’s operations for the periods presented in conformity with accounting principles generally accepted in the United States.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

New Accounting Standards or Updates Recently Adopted

 

As of the beginning of fiscal 2015, FactSet implemented all 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 six months of fiscal 2015 that had a material impact on the consolidated financial statements.

 

Recent Accounting Standards or Updates Not Yet Effective

 

Reporting Discontinued Operations

In April 2014, the FASB issued an accounting standard update that changes the criteria for reporting discontinued operations. Under the accounting standard update, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results when either it qualifies as held for sale, disposed of by sale, or disposed of other than by sale. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2016.

 

 
7

 

 

Revenue Recognition

In May 2014, the FASB issued an accounting standard update which provides clarified principles for recognizing revenue arising from contracts with clients and supersedes 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. In applying the revenue model to contracts within its scope, an entity will identify the contract with a client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. 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.

 

Going Concern

In August 2014, the FASB issued an accounting standard update that requires management to evaluate and disclose whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after financial statements are issued. The evaluation and disclosure will be required to be made for both annual and interim reporting periods, if applicable, along with an evaluation as to whether management’s plans alleviate that doubt. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2017.

 

Income Statement Presentation – Extraordinary and Unusual Items

In January 2015, the FASB issued an accounting standard update that eliminates from GAAP the concept of extraordinary items. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2017, with early adoption permitted. The standard primarily involves presentation and disclosure and, therefore, is not expected to have a material impact on the Company’s financial condition, results of operations or its cash flows.

 

No other new accounting pronouncements issued or effective as of February 28, 2015 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. 

 

(a) 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 FactSet’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 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 FactSet as of February 28, 2015 or August 31, 2014.

 

 
8

 

 

(b) 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 February 28, 2015 and August 31, 2014 (in thousands):

 

   

Fair Value Measurements at Reporting Date Using

 

February 28, 2015

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets

                               

Corporate money market funds (1)

  $ 79,641     $ 0     $ 0     $ 79,641  

Certificates of deposit (2)

    0       25,335       0       25,335  

Derivative instruments (3)

    0       2,151       0       2,151  

Total assets measured at fair value

  $ 79,641     $ 27,486     $ 0     $ 107,127  
                                 

Liabilities

                               

Derivative instruments (3)

  $ 0     $ 171     $ 0     $ 171  

Total liabilities measured at fair value

  $ 0     $ 171     $ 0     $ 171  

 

   

Fair Value Measurements at Reporting Date Using

 

August 31, 2014

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets

                               

Corporate money market funds (1)

  $ 75,363     $ 0     $ 0     $ 75,363  

Certificates of deposit (2)

    0       20,008       0       20,008  

Derivative instruments (3)

    0       1,406       0       1,406  

Total assets measured at fair value

  $ 75,363     $ 21,414     $ 0     $ 96,777  
                                 

Liabilities

                               

Derivative instruments (3)

  $ 0     $ 591     $ 0     $ 591  

Total liabilities measured at fair value

  $ 0     $ 591     $ 0     $ 591  

 

 

(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 sheet.

 

 

(2)

The Company’s certificates of deposit are held to maturity 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 Company’s consolidated balance sheet.

 

 

(3)

The Company utilizes the income approach to measure fair value for its derivative instruments (foreign exchange 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.

 

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

Certain assets, including goodwill and intangible assets, and liabilities, including long-term debt, 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 three and six months ended February 28, 2015, no fair value adjustments were required for the Company’s non-financial assets or liabilities.

 

As of February 28, 2015, the fair value of the Company’s long-term debt was $35.0 million, which approximated its carrying amount. FactSet did not have any long-term debt as of August 31, 2014. The fair value of the Company’s long-term debt was determined based on the current rates offered to FactSet for debt with a similar maturity, and thus categorized as Level 2 in the fair value hierarchy.

 

 
9

 

 

5. DERIVATIVE INSTRUMENTS

 

Cash Flow Hedges

FactSet conducts business outside the U.S. in several currencies including the British Pound Sterling, Euro, Japanese Yen, Indian Rupee and Philippine Peso. As such, it is exposed to movements in foreign currency exchange rates compared to the U.S. dollar. To manage the exposures related to the effects of foreign exchange rate fluctuations, the Company utilizes derivative instruments (foreign currency forward contracts). The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The Company does not enter into foreign exchange forward contracts for trading or speculative purposes. In designing a specific hedging approach, FactSet considered several factors, including offsetting exposures, significance of exposures, forecasting risk and 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 three and six months ended February 28, 2015 and 2014, respectively, 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.

 

As of February 28, 2015, FactSet maintained the following foreign currency forward contracts to hedge its Indian Rupee, Philippine Peso, British Pound and Euro exposure:

 

 

Indian Rupee - foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the fourth quarter of fiscal 2016 and approximately 50% of its exposure through the second quarter of fiscal 2017.

 

 

Philippine Peso - foreign currency forward contracts to hedge approximately 50% of its Philippine Peso exposure through the fourth quarter of fiscal 2015.

 

 

British Pound - foreign currency forward contracts to hedge approximately 50% of its British Pound exposure through the second quarter of fiscal 2016.

 

 

Euro - foreign currency forward contracts to hedge approximately 50% of its Euro exposure through the second quarter of fiscal 2016.

 

The following is a summary of all hedging positions and corresponding fair values (in thousands):

 

   

Gross Notional Value

   

Fair Value Asset (Liability)

 

Currency Hedged (in U.S. dollars)

 

Feb 28, 2015

   

Aug 31, 2014

   

Feb 28, 2015

   

Aug 31, 2014

 

Indian Rupee

  $ 37,005     $ 38,479     $ 1,335     $ 700  

Philippine Peso

    6,500       6,500       128       115  

Euro

    19,877       0       (171 )     0  

British Pound

    30,539       0       688       0  

Total

  $ 93,921     $ 44,979     $ 1,980     $ 815  

 

As of February 28, 2015, the gross notional value of foreign exchange contracts to purchase Indian Rupees with U.S. dollars was Rs.2.5 billion. The gross notional value of foreign exchange contracts to purchase Philippine Pesos with U.S. dollars was Php292.8 million. The gross notional value of foreign exchange contracts to purchase British Pound with U.S. dollars was £20.3 million. The gross notional value of foreign exchange contracts to purchase Euros with U.S. dollars was €17.6 million.

 

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. The Company 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.

 

 
10

 

 

Fair Value of Derivative Instruments

The following tables provide a summary of the fair value amounts of derivative instruments and gains and losses on derivative instruments (in thousands):

 

Designation of Derivatives

 

Balance Sheet Location

 

Feb 28, 2015

   

Aug 31, 2014

 

Derivatives designated as hedging instruments

 

Assets: Foreign Currency Forward Contracts

               
   

Prepaid expenses and other current assets

  $ 1,377     $ 114  
   

Other assets

  $ 774     $ 1,292  
   

Liabilities: Foreign Currency Forward Contracts

               
   

Accounts payable and accrued expenses

  $ 171     $ 591  

 

All derivatives were designated as hedging instruments as of February 28, 2015 and August 31, 2014, 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 February 28, 2015 and 2014 (in thousands):

 

   

Gain Recognized

in AOCL on Derivatives
(Effective Portion)

 

Location of Gain
Reclassified from AOCL into Income

 

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

 

Derivatives in Cash Flow Hedging Relationships

 

2015

   

2014

  (Effective Portion)  

2015

   

2014

 

Foreign currency forward contracts

  $ 1,192     $ 761  

SG&A

  $ (152 )   $ 143  

 

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the six months ended February 28, 2015 and 2014 (in thousands):

 

   

Gain Recognized

in AOCL on Derivatives
(Effective Portion)

 

Location of (Loss)
Reclassified from AOCL into Income

 

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

 

Derivatives in Cash Flow Hedging Relationships

 

2015

   

2014

  (Effective Portion)  

2015

   

2014

 

Foreign currency forward contracts

  $ 974     $ 4,988  

SG&A

  $ (191 )   $ (257 )

 

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 February 28, 2015, FactSet estimates that approximately $1.2 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 February 28, 2015 and August 31, 2014, information related to these offsetting arrangements was as follows (in thousands):

 

   

Derivatives Offset in Consolidated Balance Sheets

 

February 28, 2015

 

Gross Derivative

Amounts

   

Gross Derivative Amounts Offset in Balance Sheet

   

Net

Amounts

 

Fair value of assets

  $ 2,477     $ (326 )   $ 2,151  

Fair value of liabilities

    (497 )     326       (171 )

Total

  $ 1,980     $ 0     $ 1,980  

 

   

Derivatives Offset in Consolidated Balance Sheets

 

August 31, 2014

 

Gross Derivative

Amounts

   

Gross Derivative Amounts Offset in Balance Sheet

   

Net

Amounts

 

Fair value of assets

  $ 1,406     $ 0     $ 1,406  

Fair value of liabilities

    (626 )     35       (591 )

Total

  $ 780     $ 35     $ 815  

 

 
11

 

 

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

 

The components of other comprehensive income (loss) and amounts reclassified out of accumulated other comprehensive loss into earnings during the three and six months ended February 28, 2015 and 2014 are as follows (in thousands):

 

   

Three Months Ended

February 28, 2015

   

Three Months Ended

February 28, 2014

 
   

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ (8,011 )   $ (8,011 )   $ 3,506     $ 3,506  

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

    152       95       (143 )     (89 )

Unrealized gain on cash flow hedges recognized in accumulated other comprehensive loss

    1,192       748       761       476  

Other comprehensive income (loss)

  $ (6,667 )   $ (7,168 )   $ 4,124     $ 3,893  

 

   

Six Months Ended

February 28, 2015

   

Six Months Ended

February 28, 2014

 
   

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ (21,566 )   $ (21,566 )   $ 11,654     $ 11,654  

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

    191       120       257       161  

Unrealized gain on cash flow hedges recognized in accumulated other comprehensive loss

    974       611       4,988       3,123  

Other comprehensive (loss) income

  $ (20,401 )   $ (20,835 )   $ 16,899     $ 14,938  

 

(1) Reclassified to Selling, General and Administrative Expenses

 

The components of accumulated other comprehensive loss is as follows (in thousands): 

 

   

Feb 28, 2015

   

Aug 31, 2014

 

Accumulated unrealized gains on cash flow hedges, net of tax

  $ 1,241     $ 510  

Accumulated foreign currency translation adjustments

    (39,997 )     (18,431 )

Total accumulated other comprehensive loss

  $ (38,756 )   $ (17,921 )

 

7. SEGMENT INFORMATION

 

Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. FactSet’s CODM is its Chief Executive Officer, who is responsible for making decisions about resources allocated amongst the operating segments based on actual results.

 

FactSet’s operating segments are aligned with how the Company, including its CODM, manages the business and the demographic markets in which FactSet serves. The Company’s internal financial reporting structure is based on three segments; 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. The U.S. segment services finance professionals including financial institutions throughout the Americas, while the European and Asia Pacific segments service investment professionals located throughout Europe and Asia, respectively.

 

The European segment is headquartered in London, England and maintains office locations in France, Germany, the Netherlands, Latvia, Sweden, Spain, Dubai and Italy. The Asia Pacific segment is headquartered in Tokyo, Japan with office locations in Australia, Hong Kong, Singapore and Mumbai, India. Segment revenues reflect direct sales to clients based in their respective geographic locations. There are no intersegment or intercompany sales of the FactSet service. 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 headquarters charges are recorded by the U.S. segment and are not allocated to the other segments. The content collection centers located in India and the Philippines benefit all of 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 $305.9 million of goodwill reported by the Company at February 28, 2015, 68% was recorded in the U.S. segment, 31% in the European segment and the remaining 1% in the Asia Pacific segment.

 

 
12

 

 

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 February 28, 2015

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 166,539     $ 62,554     $ 18,699     $ 247,792  

Segment operating profit

    42,503       27,899       10,246       80,648  

Total assets

    410,524       236,313       62,735       709,572  

Capital expenditures

    6,506       123       321       6,950  

 

For the three months ended February 28, 2014

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 154,266     $ 56,023     $ 16,645     $ 226,934  

Segment operating profit

    41,935       24,178       8,941       75,054  

Total assets

    378,440       218,671       56,854       653,965  

Capital expenditures

    2,186       106       302       2,594  

 

For the six months ended February 28, 2015

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 330,201     $ 123,164     $ 37,103     $ 490,468  

Segment operating profit

    86,938       54,488       19,482       160,908  

Capital expenditures

    10,831       208       725       11,764  

 

For the six months ended February 28, 2014

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 307,178     $ 109,728     $ 33,003     $ 449,909  

Segment operating profit

    82,725       50,423       16,647       149,795  

Capital expenditures

    7,430       192       410       8,032  

 

8. BUSINESS COMBINATIONS

 

Code Red, Inc.

On February 6, 2015, FactSet acquired Code Red, Inc. (“Code Red”) for $34.6 million. At the time of acquisition, Code Red employed 32 individuals in the U.S. and Europe and had annual subscriptions of $9.3 million. Code Red provides research management technologies to the investment community, including endowments and foundations, institutional asset managers, sovereign wealth funds, pensions, and hedge funds. With the addition of Code Red to FactSet's existing Research Management Solutions (“RMS”), FactSet now offers an RMS for all its clients' workflows, which is consistent with the Company’s strategy of offering software and tools to make client workflows more efficient. This factor contributed to a purchase price in excess of fair value of Code Red’s net tangible and intangible assets, leading to the recognition of goodwill.

 

The total preliminary purchase price of the acquisition is as follows (in thousands):

 

Cash consideration

  $ 32,000  

Fair value of FactSet stock issued

    2,990  

Adjustment for changes in working capital

    (374 )

Total preliminary purchase price

  $ 34,616  

 

Allocation of the purchase price to the assets acquired and liabilities assumed was not yet finalized as of February 28, 2015. The preliminary purchase price was allocated to Code Red net tangible and intangible assets based upon their estimated fair value as of the date of acquisition. The purchase price is subject to finalizing working capital adjustments.

 

 
13

 

 

Based upon the purchase price and preliminary valuation, the allocation is as follows (in thousands):

 

Tangible assets acquired

  $ 2,469  

Amortizable intangible assets

       

Software technology

    4,728  

Client relationships

    3,089  

Non-compete agreements

    277  

Trade name

    127  

Goodwill

    29,624  

Total assets acquired

    40,314  

Liabilities assumed

    (5,698 )

Net assets acquired

  $ 34,616  

 

Intangible assets of $8.2 million have been allocated to amortizable intangible assets consisting of software technology, amortized over six years using a straight-line amortization method; client relationships, amortized over seven years using an accelerated amortization method; non-compete agreements, amortized over four years using a straight-line amortization method; and trade name, amortized over three years using a straight-line amortization method.

 

Goodwill totaling $29.6 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the Code Red acquisition is included in the U.S. segment and is not deductible for income tax purposes. The results of operations of Code Red have been included in the Company’s Consolidated Statements of Income since the completion of the acquisition on February 6, 2015 and did not have a material impact on the second quarter of fiscal 2015. Pro forma information has not been presented because the effect of this acquisition was not material on the Company’s consolidated financial results.

 

Matrix Data Limited

During the second quarter of fiscal 2014, FactSet acquired Matrix Data Limited (“Matrix”) for a total purchase price of $31.8 million. Matrix’ primary line of business is a provider of intelligence to the UK financial services industry, covering market share of mutual fund distribution. Matrix has developed customer, channel and market benchmarking solutions that help clients optimize product distribution and improve marketing effectiveness to drive revenue growth. At the time of acquisition, Matrix had annual subscriptions of $7 million. The acquisition of Matrix allows FactSet to expand its current U.S. advisor-sold investments and insurance products to the UK, with the potential to ultimately expand this coverage throughout continental Europe. The opportunity for FactSet to develop an international presence and complement its existing U.S. product offerings contributed to a purchase price in excess of fair value of the Matrix net tangible and intangible assets, leading to the recognition of goodwill.

 

 
14

 

 

The results of operations of Matrix have been included in the Company’s Consolidated Statements of Income since the completion of the acquisition and did not have a material impact on the Company’s operations. Pro forma information has not been presented because the effect of this acquisition was not material on the Company’s consolidated financial results.

 

Revere Data

On September 1, 2013, FactSet acquired the assets of Revere Data, LLC (“Revere”) to complement the Company's commitment to provide its clients with insightful content sets, for $15.3 million in cash. Revere classifies companies into a unique industry taxonomy and offers a database of supply chain relationships that helps investors identify companies’ interrelationships and mutual dependencies. As of the date of acquisition, Revere had annual subscriptions of $4.9 million. The opportunity for FactSet to offer this robust data to new and existing clients contributed to a purchase price in excess of fair value of the Revere net tangible and intangible assets. As a result, FactSet recorded goodwill in connection with this transaction. The results of the operations of Revere have been included in the Company’s Consolidated Statement of Income since the completion of the acquisition on September 1, 2013 and did not have a material impact on the Company’s operations. Pro forma information has not been presented because the effect of this acquisition was not material to the Company’s consolidated financial results.

 

9. GOODWILL

 

Changes in the carrying amount of goodwill by segment for the six months ended February 28, 2015 are as follows (in thousands):

 

   

U.S.

   

Europe

   

Asia

Pacific

   

Total

 

Balance at August 31, 2014

  $ 179,434     $ 103,032     $ 3,142     $ 285,608  

Goodwill acquired during the period

    29,624       0       0       29,624  

Foreign currency translations

    0       (8,927 )     (412 )     (9,339 )

Balance at February 28, 2015

  $ 209,058     $ 94,105     $ 2,730     $ 305,893  

 

Goodwill is not amortized as it has an estimated indefinite life. At least annually, the Company evaluates goodwill at the reporting unit level for potential impairment. Goodwill is tested for impairment based on the present value of discounted cash flows, and, if impaired, written down to fair value based on discounted cash flows. The Company has three reporting units, which are consistent with the operating segments reported because there is no discrete financial information available for the subsidiaries within each operating segment. The Company’s reporting units evaluated for potential impairment were the U.S., Europe and Asia Pacific, which reflects the level of internal reporting the Company uses to manage its business and operations. The Company performed an annual goodwill impairment test during the fourth quarter of fiscal year 2014, which determined that there were no reporting units that were deemed at risk. The fair value of each of the Company’s reporting units significantly exceeded carrying value, thus there had been no impairment.

 

Goodwill acquired during the period of $29.6 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired from the Code Red acquisition on February 6, 2015.

 

10. 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 February 28, 2015 was 10.5 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 fiscal 2015. If indicators of impairment appear to exist, amortizable intangible assets are tested for impairment 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.

 

The gross carrying amounts and accumulated amortization totals related to the Company’s identifiable intangible assets are as follows (in thousands):

 

At February 28, 2015

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Data content

  $ 53,039     $ 28,482     $ 24,557  

Client relationships

    27,861       17,383       10,478  

Software technology

    26,877       19,912       6,965  

Trade names

    1,809       1,072       737  

Non-compete agreements

    2,732       2,156       576  

Total

  $ 112,318     $ 69,005     $ 43,313  

 

At August 31, 2014

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Data content

  $ 56,974     $ 27,644     $ 29,330  

Client relationships

    25,821       17,443       8,378  

Software technology

    22,881       20,089       2,792  

Non-compete agreements

    2,465       1,881       584  

Trade names

    1,729       958       771  

Total

  $ 109,870     $ 68,015     $ 41,855  

 

 
15

 

 

During the second quarter of fiscal 2015, $8.2 million of intangible assets were acquired with a weighted average useful life of 6.3 years due to the acquisition of Code Red on February 6, 2015.

 

Amortization expense recorded for intangible assets was $2.0 million and $2.2 million for the three months ended February 28, 2015 and 2014, respectively. Amortization expense recorded for intangible assets was $4.1 million and $3.9 million for the six months ended February 28, 2015 and 2014, respectively. As of February 28, 2015, estimated intangible asset amortization expense for each of the next five years and thereafter are as follows (in thousands):

 

Fiscal Year

 

Estimated Amortization

Expense

 

2015 (remaining six months)

  $ 4,023  

2016

    6,895  

2017

    6,813  

2018

    5,688  

2019

    4,376  

Thereafter

    15,518  

Total

  $ 43,313  

 

11. COMMON STOCK AND EARNINGS PER SHARE

 

On February 11, 2015, FactSet’s Board of Directors approved a regular quarterly dividend of $0.39 per share, or $1.56 per share per annum. The cash dividend of $16.2 million was paid on March 17, 2015 to common stockholders of record at the close of business on February 27, 2015.

 

Shares of common stock outstanding were as follows (in thousands): 

 

   

Six Months Ended

February 28,

 
   

2015

   

2014

 

Balance at September 1

    41,793       43,324  

Common stock issued for employee stock plans

    604       389  

Stock issued for acquisition of a business

    20       0  

Repurchase of common stock from employees*

    (17 )     (21 )

Repurchase of common stock under the share repurchase program

    (770 )     (1,330 )

Balance at February 28, 2015 and 2014, respectively

    41,630       42,362  

 

* For the six months ended February 28, 2015 and 2014, the Company repurchased 17,165 and 21,289 shares, or $2.2 million and $2.3 million, of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.

 

A reconciliation of the weighted average shares outstanding used in the basic and diluted earnings per share computations is as follows (in thousands, except per share data):

 

           

Weighted

         
          Average        
   

Net Income

   

 Common Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 

For the three months ended February 28, 2015

 

Basic EPS

                       

Income available to common stockholders

  $ 61,598       41,630     $ 1.48  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            676          

Income available to common stockholders plus assumed conversions

  $ 61,598       42,306     $ 1.46  

For the three months ended February 28, 2014

 

Basic EPS

                       

Income available to common stockholders

  $ 52,426       42,547     $ 1.23  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            560          

Income available to common stockholders plus assumed conversions

  $ 52,426       43,107     $ 1.22  

For the six months ended February 28, 2015

 

Basic EPS

                       

Income available to common stockholders

  $ 117,458       41,658     $ 2.82  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            666          

Income available to common stockholders plus assumed conversions

  $ 117,458       42,324     $ 2.78  

For the six months ended February 28, 2014

 

Basic EPS

                       

Income available to common stockholders

  $ 104,604       42,840     $ 2.44  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            592          

Income available to common stockholders plus assumed conversions

  $ 104,604       43,432     $ 2.41  

 

 
16

 

 

Dilutive potential common shares consist of stock options and unvested restricted stock awards. No stock options were excluded from the calculation of diluted EPS for the three and six months ended February 28, 2015, while 49,738 were excluded for the three months ended February 28, 2014, because their inclusion would have been anti-dilutive. No stock options were excluded from calculation of diluted EPS for the six months ended February 28, 2014.

 

For the three and six months ended February 28, 2015, the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 494,297. For the three and six months ended February 28, 2014 the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 1,394,821. Performance-based stock options are omitted from the calculation of diluted earnings per share until the performance criteria are probable of being achieved. The criterion was not yet probable of being achieved as of February 28, 2015 and 2014 for these performance-based stock options.

 

12. STOCKHOLDERS’ EQUITY

 

Preferred Stock

At February 28, 2015 and August 31, 2014, there were 10,000,000 shares of preferred stock ($.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 February 28, 2015 and August 31, 2014, there were 150,000,000 shares of common stock ($.01 par value per share) authorized, of which 49,714,486 and 49,110,218 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.

 

Treasury Stock

At February 28, 2015 and August 31, 2014, there were 8,084,228 and 7,317,416 shares of treasury stock (at cost) outstanding, respectively. As a result, 41,630,258 and 41,792,802 shares of FactSet common stock were outstanding at February 28, 2015 and August 31, 2014, respectively. In connection with the acquisition of Code Red on February 6, 2015, FactSet issued 20,207 shares of treasury stock with a fair value of $3.0 million.

 

Share Repurchase Program

On December 15, 2014, the Company’s Board of Directors approved a $300 million expansion of the existing share repurchase program. During the first six months of fiscal 2015, the Company repurchased 769,854 shares for $104.1 million. At February 28, 2015, $282.9 million remains authorized for future share repurchases. Repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. 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.

 

Restricted Stock

Restricted stock awards entitle the holder to shares of common stock as the awards vest over time. During the first six months of fiscal 2015, 53,495 of previously granted restricted stock awards vested and were included in common stock outstanding as of February 28, 2015 (less 17,165 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock). During the same period in fiscal 2014, 79,774 of previously granted restricted stock awards vested and were included in common stock outstanding as of February 28, 2014 (less 21,289 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock).

 

 
17

 

 

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

February 11, 2015

  $ 0.39  

Regular (cash)

 

February 27, 2015

  $ 16,236  

March 17, 2015

November 12, 2014

  $ 0.39  

Regular (cash)

 

November 28, 2014

  $ 16,216  

December 16, 2014

August 14, 2014

  $ 0.39  

Regular (cash)

 

August 29, 2014

  $ 16,299  

September 16, 2014

May 5, 2014

  $ 0.39  

Regular (cash)

 

May 30, 2014

  $ 16,386  

June 17, 2014

February 11, 2014

  $ 0.35  

Regular (cash)

 

February 28, 2014

  $ 14,827  

March 18, 2014

November 14, 2013

  $ 0.35  

Regular (cash)

 

November 29, 2013

  $ 15,046  

December 17, 2013

August 15, 2013

  $ 0.35  

Regular (cash)

 

August 31, 2013

  $ 15,164  

September 17, 2013

 

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.

 

13. 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.

  

During the first six months of fiscal 2015, FactSet granted 625,510 stock options at a weighted average exercise price of $135.40 to existing employees of the Company.

 

As of February 28, 2015, a total of 3,540,039 stock options were outstanding at a weighted average exercise price of $91.67. Unamortized stock-based compensation of $38.6 million is expected to be recognized as stock-based compensation expense over the remaining vesting period of 3.5 years.

 

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, 2014

    3,482     $ 79.67  

Granted – non-performance based

    463       131.31  

Exercised

    (114 )     73.53  

Forfeited

    (33 )     98.28  

Balance at November 30, 2014

    3,798     $ 85.98  

Granted – non-performance-based

    25       139.02  

Granted – performance-based

    138       148.52  

Granted – non-employee Directors grant

    14       138.48  

Exercised

    (403 )     61.63  

Forfeited

    (32 )     97.08  

Balance at February 28, 2015

    3,540     $ 91.67  

 

The total number of in-the-money options exercisable as of February 28, 2015 was 1.6 million with a weighted average exercise price of $73.17. As of August 31, 2014, 1.9 million in-the-money outstanding options were exercisable with a weighted average exercise price of $68.78. The aggregate intrinsic value of in-the-money stock options exercisable at February 28, 2015 and August 31, 2014 was $133.1 million and $111.3 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price of $155.55 on February 27, 2015 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 three months ended February 28, 2015 and 2014 was $32.8 million and $9.0 million, respectively. The total pre-tax intrinsic value of stock options exercised during the six months ended February 28, 2015 and 2014 was $38.8 million and $16.0 million, respectively.

 

 
18

 

 

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

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. During the fourth quarter of fiscal 2013, the first growth target as outlined within the terms of the grant was achieved, thus 20% or 48,314 options vested on August 31, 2013. The second 20% tranche vested on August 31, 2014 as a result of accelerated expansion of Street Account users during fiscal 2014. Due to this accelerated growth and forecasted future usage, the Company estimates that the third 20% tranche will vest by August 31, 2017. Total unamortized stock-based compensation expense as of February 28, 2015 of $0.8 million will be recognized over the remaining vesting period of 2.5 years. A change, up or down, in the actual financial performance levels achieved by StreetAccount in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense (in thousands):

 

Vesting

Percentage

 

Cumulative

Catch-up Adjustment*

   

Remaining Expense

to be Recognized

 

Third 20%

  $ 0     $ 774  

Fourth 20%

  $ 948     $ 1,426  

Fifth 20%

  $ 2,274     $ 1,701  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of February 28, 2015

 

February 2015 Performance-based Option Grant

In connection with the acquisition of Code Red during the second quarter of fiscal 2015, FactSet granted 137,522 performance-based stock options. These performance-based options are eligible to vest four years from date of grant if certain Code Red ASV and operating margin targets are achieved over the measurement period. Of the total grant, 68,761 performance-based options are eligible for vesting based on achieving the growth targets over a four year measurement period ending February 28, 2019 and the remaining 68,761 options are eligible to cliff vest based on a two year measurement period ending February 28, 2017. For all Code Red options granted, the option holders must also remain employed by FactSet to be eligible to vest. As of February 28, 2015, total unamortized stock-based compensation of $2.4 million will be recognized as expense over the remaining vesting period of 3.9 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 (in thousands):

 

Vesting

Percentage

 

Cumulative

Catch-up Adjustment*

   

Remaining Expense

to be Recognized

 

10%

  $ (38 )   $ 0  

40% (current expectation)

  $ 0     $ 2,363  

70%

  $ 66     $ 4,134  

100%

  $ 94     $ 5,906  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of February 28, 2015

 

Other Performance-based Option Grants

In connection with the acquisitions of Matrix and Revere, FactSet granted 165,949 and 36,695 performance-based stock options, respectively, during fiscal 2014. The performance-based options granted in connection with the acquisition of Matrix will vest only if ASV and operating margin targets related to the Matrix business are met during a five year measurement period ending December 23, 2018, and the option holders remain employed by FactSet. As of February 28, 2015 FactSet does not believe these targets are probable of being achieved, and as such, no stock-based compensation expense is expected to be realized in connection with these options. Of the 36,695 performance-based stock options granted in connection with the Revere acquisition, FactSet currently estimates that 18,553 options will vest based upon the achievement of certain ASV and operating margins during the measurement period ending August 31, 2015. This results in unamortized stock-based compensation expense of $0.4 million to be recognized over the remaining vesting period of 3.5 years.

 

 
19

 

 

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. During the first six months of fiscal 2015, FactSet granted 48,313 restricted stock awards to employees of the Company at a weighted average grant date fair value of $135.66. These restricted stock awards vest over a weighted average period of 3.9 years from grant date.

 

As of February 28, 2015, a total of 357,321 shares of restricted stock and restricted stock units were unvested and outstanding, which results in unamortized stock-based compensation of $24.8 million to be recognized as stock-based compensation expense over the remaining vesting period of 3.4 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, 2014

    368     $ 89.77  

Granted

    10     $ 127.58  

Vested*

    (53 )   $ 62.85  

Canceled/forfeited

    (1 )   $ 93.76  

Balance at November 30, 2014

    324     $ 95.40  

Granted

    38     $ 137.83  

Canceled/forfeited

    (5 )   $ 95.43  

Balance at February 28, 2015

    357     $ 99.85  

 

* All of the 53,495 restricted stock awards that vested during the first quarter of fiscal 2015 related to awards granted on October 23, 2009. These restricted stock awards cliff vested 100% after five years on October 23, 2014 and were amortized to expense over the vesting period using the straight-line attribution method.

 

Performance-based Restricted Stock Units

Performance-based restricted stock units require management to make assumptions regarding the likelihood of achieving Company performance targets. The number of performance-based units 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 units will vest to the grantees. However, there is no current guarantee that such restricted stock will vest in whole or in part.

 

September 2013 Grant of Restricted Stock Units

In connection with the acquisition of Revere in the first quarter of fiscal 2014, FactSet granted 7,744 performance-based restricted stock units on September 17, 2013. Of the 7,744 performance-based restricted stock units granted, 3,872 are estimated to vest based upon the Company’s belief that certain ASV and operating margin targets will be achieved during the measurement period ending August 31, 2017. As of February 28, 2015, unamortized stock-based compensation of $0.3 million will be amortized to compensation expense over the remaining vesting period of 3.5 years. The remaining 3,872 performance-based restricted stock units are expected to be forfeited.

 

February 2015 Grant of Restricted Stock Units

In connection with the acquisition of Code Red during the second quarter of fiscal 2015, FactSet granted 1,724 performance-based restricted stock units. Of the 1,724 performance-based restricted stock units granted, 690 are estimated to vest based upon the Company’s belief that certain Code Red ASV and operating margin targets will be achieved during the measurement period ending February 28, 2017. As of February 28, 2015, unamortized stock-based compensation of $0.1 million will be amortized to compensation expense over the remaining vesting period of 2.0 years. The remaining 1,034 performance-based restricted stock units are expected to be forfeited.

 

 
20

 

 

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, 2014

    3,222       102  

Granted – non performance-based options

    (463 )     0  

Granted – performance-based options

    0       0  

Restricted stock awards granted*

    (26 )     0  

Share-based awards canceled/forfeited*

    35       0  

Balance at November 30, 2014

    2,768       102  

Granted – non performance-based options

    (25 )     (14 )

Granted – performance-based options

    (138 )     0  

Restricted stock awards granted*

    (95 )     0  

Share-based awards canceled/forfeited*

    44       0  

Balance at February 28, 2015

    2,554       88  

 

 

* 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.

 

Employee Stock Purchase Plan

At the 2014 Annual Meeting of Stockholders of FactSet held on December 16, 2014, the stockholders of FactSet voted on and approved the Amended and Restated FactSet Research Systems Inc. 2008 Employee Stock Purchase Plan (the “Purchase Plan”), including the reservation of an additional 500,000 shares of common stock for issuance thereunder. The amendment and restatement of the Purchase Plan was approved by FactSet’s Board of Directors on October 23, 2014, subject to the approval of the Company’s stockholders, and became effective with such stockholder approval on December 16, 2014. As a result of such stockholder approval, the Purchase Plan was amended and modified to increase the maximum number of shares of common stock authorized for issuance over the term of the Purchase Plan by 500,000 shares. There is no expiration date for the Purchase Plan.

 

Shares of FactSet common stock may be purchased by eligible employees under the Purchase Plan 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 February 28, 2015, employees purchased 17,811 shares at a weighted average price of $116.95 as compared to 20,166 shares at a weighted average price of $89.50 in the same period a year ago. During the six months ended February 28, 2015, employees purchased 33,208 shares at a weighted average price of $113.12 as compared to 36,529 shares at a weighted average price of $88.22 in the same period a year ago. At February 28, 2015, 511,673 shares were reserved for future issuance under the Purchase Plan.

 

401(k) Plan

The Company established a 401(k) Plan (the “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. Each year, participants may contribute up to 60% of their eligible annual compensation, subject to annual limitations established by the Internal Revenue Code. The Company matches up to 4% of employees’ earnings, capped at the IRS 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 $4.0 million and $3.7 million in matching contributions to employee 401(k) accounts during the six months ended February 28, 2015 and 2014, respectively.

 

14. STOCK-BASED COMPENSATION

 

The Company recognized total stock-based compensation expense of $5.8 million and $11.0 million during the three and six months ended February 28, 2015, respectively. Similarly, the Company recognized total stock-based compensation expense of $5.5 million and $10.6 million during the three and six months ended February 28, 2014, respectively. As of February 28, 2015, $63.4 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 3.5 years. There was no stock-based compensation capitalized as of February 28, 2015 or August 31, 2014, respectively.

 

 
21

 

 

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.

 

Fiscal 2015

 

Q1 2015 – 462,913 non performance-based employee stock options were granted at a weighted average exercise price of $131.31 and a weighted average estimated fair value of $37.67 per share.

 

Q2 2015 – 25,075 non performance-based employee stock options and 137,522 performance-based employee stock options were granted at a weighted average exercise price of $147.05 and a weighted average estimated fair value of $43.05 per share.

 

Fiscal 2014

 

Q1 2014 – 35,508 non performance-based employee stock options and 36,695 performance-based employee stock options were granted at a weighted average exercise price of $109.49 and a weighted average estimated fair value of $31.78 per share.

 

Q2 2014 – 138,902 non performance-based employee stock options and 165,949 performance-based employee stock options were granted at a weighted average exercise price of $106.03 and a weighted average estimated fair value of $29.14 per share.

 

The weighted average estimated fair value of employee stock options granted during the first six months of fiscal 2015 and 2014 was determined using the binomial model with the following weighted average assumptions:

 

   

Three Months Ended

February 28,

 

Six Months Ended

February 28,

 
   

2015

 

2014

 

2015

 

2014

 

Term structure of risk-free interest rate

 

0.06% - 2.34%

 

0.01% - 2.48%

 

0.06% - 2.34%

 

0.01% - 2.61%

 

Expected life (in years)

 

8.3

 

7.6

 

8.2

 

7.6

 

Term structure of volatility

 

21% - 31%

 

23% - 32%

 

21% - 31%

 

23% - 33%

 

Dividend yield

 

1.29%

 

1.35%

 

1.35%

 

1.35%

 

Weighted average estimated fair value

 

$43.05

 

$29.14

 

$39.07

 

$29.64

 

Weighted average exercise price

 

$147.05

 

$106.03

 

$135.40

 

$106.69

 

Fair value as a percentage of exercise price

 

29.3%

 

27.5%

 

28.9%

 

27.8%

 

 

The risk-free interest rate assumption for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on a combination of historical volatility of the Company’s stock and implied volatilities of publicly traded options to buy FactSet common stock with contractual terms closest to the expected life of options granted to employees. The approach to utilize a mix of historical and implied volatility was based upon the availability of actively traded options on the Company’s stock and the Company’s assessment that a combination of implied volatility and historical volatility is best representative of future stock price trends. The Company uses historical data to estimate option exercises and employee termination within the valuation model. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the binomial model. The binomial model estimates employees exercise behavior is based on the option’s remaining vested life and the extent to which the option is in-the-money. The binomial model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations of all past option grants made by the Company.

 

Restricted Stock Fair Value Determinations

Restricted stock granted to employees entitle the holder to shares of common stock as the award vests over time, but not to dividends declared on the underlying shares while the restricted stock is unvested. The grant date fair value of restricted stock awards are measured by reducing the grant date price of FactSet’s common stock by the present value of the dividends expected to be paid on the underlying stock during the requisite service period, discounted at the appropriate risk-free interest rate. Restricted stock awards are amortized to expense over the vesting period. During the first six months of fiscal 2015, there were 48,313 restricted stock awards granted with a weighted average grant date fair value of $135.66. During the first six months of fiscal 2014, FactSet granted 204,124 restricted stock awards at a weighted average grant date fair value of $101.95.

 

 
22

 

 

Non-Employee Director Stock Option Fair Value Determinations

The 2008 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) provides for the grant of share-based awards, including stock options, to non-employee directors of FactSet. An initial 250,000 shares of FactSet common stock were reserved for issuance under the Directors’ Plan, of which 88,590 remain available for future grant as of February 28, 2015. The expiration date of the Directors’ Plan is December 1, 2018.

 

The Company utilizes the Black-Scholes model to estimate the fair value of non-employee Director stock option grants. The Company’s determination of fair value of share-based payment awards on the date of grant 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.

 

Fiscal 2015

On January 15, 2015, FactSet granted 13,842 stock options to the Company’s non-employee Directors. All of the options granted on January 15, 2015 have a weighted average estimated fair value of $28.18 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

Risk-free interest rate

    1.45

%

Expected life (in years)

    5.4  

Expected volatility

    23.5

%

Dividend yield

    1.30

%

 

Fiscal 2014

On January 15, 2014, FactSet granted 14,424 stock options to the Company’s non-employee Directors. All of the options granted on January 15, 2014 have a weighted average estimated fair value of $27.04 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

Risk-free interest rate

    1.66

%

Expected life (in years)

    5.4  

Expected volatility

    28.9

%

Dividend yield

    1.35

%

 

The risk-free interest rate assumption for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and non-employee director terminations within the valuation model. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

 

Employee Stock Purchase Plan Fair Value Determinations

During the three months ended February 28, 2015, employees purchased 17,811 shares at a weighted average price of $116.95 as compared to 20,166 shares at a weighted average price of $89.50 in the same period a year ago. During the six months ended February 28, 2015, employees purchased 33,208 shares at a weighted average price of $113.12 as compared to 36,529 shares at a weighted average price of $88.22 in the same period a year ago. Stock-based compensation expense recorded for the three months ended February 28, 2015 and 2014, relating to the employee stock purchase plan was $0.4 million and $0.3 million, respectively.

 

The Company uses the Black-Scholes model to calculate the estimated fair value for the employee stock purchase plan. The estimated fair value of employee stock purchase plan grants during the three months ended February 28, 2015 and 2014 were $22.37 and $19.04 per share, respectively, with the following assumptions:

 

   

Three Months Ended

February 28,

   

2015

 

2014

Risk-free interest rate

    0.03

%

    0.05

%

Expected life (in months)

    3       3  

Expected volatility

    8.1

%

    10.3

%

Dividend yield

    1.13

%

    1.23

%

 

 
23

 

 

The weighted average estimated fair value of employee stock purchase plan grants during the six months ended February 28, 2015 and 2014 were $21.67 and $17.96 per share, respectively, with the following weighted average assumptions:

 

   

Six Months Ended

February 28,

   

2015

 

2014

Risk-free interest rate

    0.02

%

    0.05

%

Expected life (in months)

    3