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EX-32.2 - EXHIBIT 32.2 - FACTSET RESEARCH SYSTEMS INCex32-2.htm
EX-32.1 - EXHIBIT 32.1 - FACTSET RESEARCH SYSTEMS INCex32-1.htm
EX-31.2 - EXHIBIT 31.2 - FACTSET RESEARCH SYSTEMS INCex31-2.htm
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 May 31, 2016

 

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 June 30, 2016 was 40,651,578.

 



 

 
 

 

 

FactSet Research Systems Inc.

Form 10-Q

For the Quarter Ended May 31, 2016

 

Index

 

 

 

Page 

     

Part I

FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements

 
     

 

Consolidated Statements of Income for the three and nine months ended May 31, 2016 and 2015

3

     
 

Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2016 and 2015

4

     

 

Consolidated Balance Sheets at May 31, 2016 and August 31, 2015

5

     

 

Consolidated Statements of Cash Flows for the nine months ended May 31, 2016 and 2015

6

     

 

Notes to the Consolidated Financial Statements

7

     

Item 2.

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

32

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

     

Item 4.

Controls and Procedures

47

     

Part II

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

48

     

Item 1A.

Risk Factors

48

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

     

Item 3.

Defaults Upon Senior Securities

48

     

Item 4.

Mine Safety Disclosures

48

     

Item 5.

Other Information

48

     

Item 6.

Exhibits

49

     
 

Signatures

49

 

 

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

May 31,

   

Nine Months Ended

May 31,

 
(In thousands, except per share data)  

2016

   

2015

   

2016

   

2015

 

Revenues

  $ 287,501     $ 254,522     $ 839,801     $ 744,990  

Operating expenses

                               

Cost of services

    124,602       100,686       363,249       297,745  

Selling, general and administrative

    73,609       68,480       214,610       200,980  

Total operating expenses

    198,211       169,166       577,859       498,725  
                                 

Operating income

    89,290       85,356       261,942       246,265  

Other (expense) income

    (433 )     482       (765 )     1,445  

Income before income taxes

    88,857       85,838       261,177       247,710  
                                 

Provision for income taxes

    22,076       24,429       66,669       68,843  

Net income

  $ 66,781     $ 61,409     $ 194,508     $ 178,867  
                                 

Basic earnings per common share

  $ 1.64     $ 1.48     $ 4.73     $ 4.29  

Diluted earnings per common share

  $ 1.62     $ 1.45     $ 4.68     $ 4.23  
                                 

Basic weighted average common shares

    40,779       41,628       41,094       41,648  

Diluted weighted average common shares

    41,189       42,297       41,596       42,317  

 

 

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

May 31,

   

Nine Months Ended

May 31,

 
(In thousands)  

2016

   

2015

   

2016

   

2015

 

Net income

  $ 66,781     $ 61,409     $ 194,508     $ 178,867  
                                 

Other comprehensive income (loss), net of tax

                               

Net unrealized gain (loss) on cash flow hedges*

    2,464       (1,020 )     229       (289 )

Foreign currency translation adjustments

    8,883       (4,187 )     (7,867 )     (25,753 )

Other comprehensive income (loss)

    11,347       (5,207 )     (7,638 )     (26,042 )

Comprehensive income

  $ 78,128     $ 56,202     $ 186,870     $ 152,825  

 

 

* 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 unrealized loss on cash flow hedges disclosed above for the three and nine months ended May 31, 2015, was net of tax benefits of $606 and $172, respectively.

 

 

 

 

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

 

 
4

 

 

FactSet Research Systems Inc.

CONSOLIDATED BALANCE SHEETS

 

   

May 31,

2016

   

August 31,

2015

 

(In thousands, except share data)

 

(Unaudited)

         

ASSETS

               

Cash and cash equivalents

  $ 187,436     $ 158,914  

Investments

    23,720       23,497  

Accounts receivable, net of reserves of $1,482 at May 31, 2016 and $1,580 at August 31, 2015

    104,666       95,064  

Prepaid taxes

          4,808  

Deferred taxes

    2,521       2,105  

Prepaid expenses and other current assets

    15,736       19,786  

Assets held for sale

    48,940        

Total current assets

    383,019       304,174  
                 

Property, equipment and leasehold improvements, at cost

    241,351       213,279  

Less accumulated depreciation and amortization

    (163,269 )     (154,015 )

Property, equipment and leasehold improvements, net

    78,082       59,264  
                 

Goodwill

    460,393       308,287  

Intangible assets, net

    97,978       40,052  

Deferred taxes

    14,257       20,599  

Other assets

    5,246       4,295  

TOTAL ASSETS

  $ 1,038,975     $ 736,671  
                 

LIABILITIES

               

Accounts payable and accrued expenses

  $ 38,033     $ 33,880  

Accrued compensation

    43,393       44,916  

Deferred fees

    34,076       38,488  

Deferred taxes

    425       562  

Taxes payable

    4,333       3,755  

Dividends payable

    20,328       18,179  

Liabilities held for sale

    14,110        

Total current liabilities

    154,698       139,780  
                 

Long-term debt

    300,000       35,000  

Deferred taxes

    1,543       1,697  

Taxes payable

    8,200       6,776  

Deferred rent and other non-current liabilities

    30,877       21,834  

TOTAL LIABILITIES

  $ 495,318     $ 205,087  

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, 50,907,581 and 50,328,423 shares issued; 40,656,168 and 41,316,902 shares outstanding at May 31, 2016 and August 31, 2015, respectively

    509       503  

Additional paid-in capital

    616,954       542,355  

Treasury stock, at cost: 10,251,413 and 9,011,521 shares at May 31, 2016 and August 31, 2015, respectively

    (1,181,695 )     (988,873 )

Retained earnings

    1,159,579       1,021,651  

Accumulated other comprehensive loss

    (51,690 )     (44,052 )

TOTAL STOCKHOLDERS’ EQUITY

  $ 543,657     $ 531,584  
                 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 1,038,975     $ 736,671  

 

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

May 31,

 

(in thousands)

 

2016

   

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 194,508     $ 178,867  

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

               

Depreciation and amortization

    28,222       24,229  

Stock-based compensation expense

    22,433       17,112  

Deferred income taxes

    3,015       3,041  

Loss (gain) on sale of assets

    2       (17 )

Tax benefits from share-based payment arrangements

    (13,327 )     (23,926 )

Changes in assets and liabilities, net of effects of acquisitions

               

Accounts receivable, net of reserves

    (11,316 )     (1,159 )

Accounts payable and accrued expenses

    3,474       5,973  

Accrued compensation

    (1,809 )     (5,496 )

Deferred fees

    3,696       5,951  

Taxes payable, net of prepaid taxes

    20,313       16,213  

Prepaid expenses and other assets

    1,250       78  

Deferred rent and other non-current liabilities

    10,812       1,873  

Other working capital accounts, net

    (169 )     103  

Net cash provided by operating activities

    261,104       222,842  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Acquisition of businesses, net of cash acquired

    (264,087 )     (33,556 )

Purchases of investments

    (12,934 )     (12,437 )

Proceeds from sales of investments

    12,423       7,535  

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

    (34,671 )     (15,391 )

Net cash used in investing activities

    (299,269 )     (53,849 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Dividend payments

    (54,042 )     (48,404 )

Repurchase of common stock

    (192,823 )     (177,556 )

Proceeds from debt

    265,000       35,000  

Debt issuance costs

    (12 )     (32 )

Proceeds from employee stock plans

    38,845       51,852  

Tax benefits from share-based payment arrangements

    13,327       23,926  

Net cash provided by (used in) financing activities

    70,295       (115,214 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (3,608 )     (12,262 )

Net increase in cash and cash equivalents

    28,522       41,517  

Cash and cash equivalents at beginning of period

    158,914       116,378  

Cash and cash equivalents at end of period

  $ 187,436     $ 157,895  

 

 

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, 2016

(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 for the global investment community. FactSet 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. Recent additions to FactSet’s offering include a complete services solution focused on verifying, cleaning and loading portfolio data across asset classes, and an execution management system through its acquisition of Portware. 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 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 May 31, 2016 and for the three and nine months ended May 31, 2016 and 2015 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, 2015 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, 2015.

 

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.

 

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 2016, 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 2016 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

 

 

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. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.

 

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. 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.

 

Simplification Guidance on Debt Issuance Costs

In April 2015, the FASB issued an accounting standard update which changes the presentation of debt issuance costs in the applicable financial statements. Under the accounting standard update, an entity should present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2017, with early adoption in fiscal 2016 permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.

 

In August 2015, the FASB issued an accounting standard update to amend the previous guidance issued in April 2015 and address debt issuance costs related to line-of-credit arrangements. The accounting standard update allows an entity to present debt issuance costs related to a line-of-credit as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. This accounting standard update did not impact the effective date of the previously issued guidance and the Company does not believe it will have a material impact on its consolidated financial statements.

 

Customers’ Accounting for Cloud Computing Costs

In April 2015, the FASB issued an accounting standard update to provide guidance on a customer’s accounting for cloud computing costs. Under the accounting standard update, a customer must determine whether a cloud computing arrangement contains a software license. If so, the customer would account for the fees related to the software license element in a manner consistent with internal-use software guidance. This new guidance will be effective for FactSet beginning in the first quarter of fiscal 2017. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.

 

Simplification of the Accounting for Measurement-Period Adjustments

In September 2015, the FASB issued an accounting standard update to simplify the accounting for measurement-period adjustments related to a business combination. Under the accounting standard update, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The accounting standard update also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance will be effective for FactSet beginning in the first quarter of fiscal 2017. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.

 

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.

 

 
8

 

 

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.

 

No other new accounting pronouncements issued or effective as of May 31, 2016 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 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, 2016 or August 31, 2015.

 

 
9

 

 

(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, 2016 and August 31, 2015:

 

 

 

   

Fair Value Measurements at May 31, 2016

 

(in thousands)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets

                               

Corporate money market funds (1)

  $ 83,989     $     $     $ 83,989  

Certificates of deposit (2)

          23,720             23,720  

Derivative instruments (3)

          330             330  

Total assets measured at fair value

  $ 83,989     $ 24,050     $     $ 108,039  
                                 
                                 

Liabilities

                               

Derivative instruments (3)

  $     $ 532     $     $ 532  
                                 

Total liabilities measured at fair value

  $     $ 532     $     $ 532  

 

   

Fair Value Measurements at August 31, 2015

 

(in thousands)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets

                               

Corporate money market funds (1)

  $ 89,443     $     $     $ 89,443  

Certificates of deposit (2)

          23,497             23,497  

Derivative instruments (3)

          1,035             1,035  

Total assets measured at fair value

  $ 89,443     $ 24,532     $     $ 113,975  
                                 
                                 

Liabilities

                               

Derivative instruments (3)

  $     $ 1,602     $     $ 1,602  
                                 

Total liabilities measured at fair value

  $     $ 1,602     $     $ 1,602  

 

 

(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 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.

 

 

(3)

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 three and nine months ended May 31, 2016, no fair value adjustments or material fair value measurements were required for the Company’s non-financial assets or liabilities.

 

 
10

 

 

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

 

As of May 31, 2016 and August 31, 2015, the fair value of the Company’s long-term debt was $300.0 million and $35.0 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 2016 and 2015, 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 May 31, 2016, FactSet maintained the following foreign currency forward contracts to hedge its British Pound Sterling, Euro and Indian Rupee 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.

 

 

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

 

 

Indian Rupee - foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the fourth quarter of fiscal 2018.

 

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, 2016

   

August 31, 2015

   

May 31, 2016

   

August 31, 2015

 

British Pound Sterling

  $ 41,071     $ 15,831     $ (234 )   $ 280  

Euro

    4,975       20,263       64       143  

Indian Rupee

    55,510       56,320       (32 )     (990 )

Total

  $ 101,556     $ 92,414     $ (202 )   $ (567 )

 

As of May 31, 2016, the gross notional value of foreign currency forward contracts to purchase British Pound Sterling with U.S. dollars was £28.3 million. The gross notional value of foreign currency forward contracts to purchase Euros with U.S. dollars was €4.5 million. The gross notional value of foreign currency forward contracts to purchase Indian Rupees with U.S. dollars was Rs. 4.0 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.

 

 
11

 

 

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

 

May 31,

2016

   

August 31,

2015

 

Derivatives designated as hedging instruments

Assets: Foreign Currency Forward Contracts

                 
 

Prepaid expenses and other current assets

  $ 76     $ 1,035  
 

Other assets

  $ 254     $  
                     
 

Liabilities: Foreign Currency Forward Contracts

                 
 

Accounts payable and accrued expenses

  $ 488     $  
 

Deferred rent and other non-current liabilities

  $ 44     $ 1,602  

 

All derivatives were designated as hedging instruments as of May 31, 2016 and August 31, 2015, 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, 2016 and 2015:

 

(in thousands)

 

Gain (Loss) 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

 

2016

   

2015

    (Effective Portion)    

2016

   

2015

 

Foreign currency forward contracts

  $ 3,900     $ (1,903 )     SG&A     $ (12 )   $ (277 )

 

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the nine months ended May 31, 2016 and 2015:

 

(in thousands)

 

Gain (Loss) Recognized

in AOCL on Derivatives
(Effective Portion)

   

Location of Gain (Loss)
Reclassified from AOCL into Income

   

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

 

Derivatives in Cash Flow Hedging Relationships

 

2016

   

2015

    (Effective Portion)    

2016

   

2015

 

Foreign currency forward contracts

  $ 404     $ (929 )     SG&A     $ 40     $ (468 )

 

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, 2016, FactSet estimates that approximately $0.4 million of net derivative losses 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, 2016 and August 31, 2015, information related to these offsetting arrangements was as follows:

 

(in thousands)

 

Derivatives Offset in Consolidated Balance Sheets

 

May 31, 2016

 

Gross Derivative

Amounts

   

Gross Derivative

Amounts Offset in

Balance Sheet

   

Net

Amounts

 

Fair value of assets

  $ 1,094     $ (764 )   $ 330  

Fair value of liabilities

    (1,296 )     764       (532 )

Total

  $ (202 )   $     $ (202 )

 

(in thousands)

 

Derivatives Offset in Consolidated Balance Sheets

 

August 31, 2015

 

Gross Derivative

Amounts

   

Gross Derivative

Amounts Offset in

Balance Sheet

   

Net

Amounts

 

Fair value of assets

  $ 1,040     $ (5 )   $ 1,035  

Fair value of liabilities

    (1,607 )     5       (1,602 )

Total

  $ (567 )   $     $ (567 )

 

 
12

 

 

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

 

The components of other comprehensive income (loss) and amounts reclassified out of AOCL into earnings during the three months ended May 31, 2016 and 2015 are as follows:

 

   

May 31, 2016

   

May 31, 2015

 

(in thousands)

 

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ 8,883     $ 8,883     $ (4,187 )   $ (4,187 )

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

    12       7       277       174  

Unrealized gain (loss) on cash flow hedges recognized in AOCL

    3,900       2,457       (1,903 )     (1,194 )

Other comprehensive income (loss)

  $ 12,795     $ 11,347     $ (5,813 )   $ (5,207 )

 

 

(1)

Reclassified to Selling, General and Administrative Expenses

 

The components of other comprehensive loss and amounts reclassified out of AOCL into earnings during the nine months ended May 31, 2016 and 2015 are as follows:

   

May 31, 2016

   

May 31, 2015

 

(in thousands)

 

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ (7,867 )   $ (7,867 )   $ (25,753 )   $ (25,753 )

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

    (40 )     (25 )     468       294  

Unrealized gain (loss) on cash flow hedges recognized in AOCL

    404       254       (929 )     (583 )

Other comprehensive loss

  $ (7,503 )   $ (7,638 )   $ (26,214 )   $ (26,042 )

 

 

(1)

Reclassified to Selling, General and Administrative Expenses

 

The components of AOCL are as follows:

 

(in thousands)

 

May 31, 2016

   

August 31, 2015

 

Accumulated unrealized losses on cash flow hedges, net of tax

  $ (129 )   $ (358 )

Accumulated foreign currency translation adjustments

    (51,561 )     (43,694 )

Total accumulated other comprehensive loss

  $ (51,690 )   $ (44,052 )

 

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 (“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; 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. 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 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 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. There are no intersegment or intercompany sales of FactSet services. 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 $460.4 million of goodwill reported by the Company at May 31, 2016, 80% was recorded in the U.S. segment, 19% in the European segment and the remaining 1% in the Asia Pacific segment.

 

 
13

 

 

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, 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 three months ended May 31, 2015

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 172,070     $ 63,156     $ 19,296     $ 254,522  

Segment operating profit

    43,332       31,187       10,837       85,356  

Total assets

    433,177       232,171       62,728       728,076  

Capital expenditures

    2,977       142       508       3,627  

 

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  

 

For the nine months ended May 31, 2015

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 502,271     $ 186,320     $ 56,399     $ 744,990  

Segment operating profit

    130,271       85,675       30,319       246,265  

Capital expenditures

    13,808       350       1,233       15,391  

 

8. BUSINESS COMBINATIONS

 

Portware LLC

 

On October 16, 2015, FactSet acquired Portware LLC (“Portware”) for a total purchase price of $264.8 million. At the time of acquisition, Portware employed 166 individuals in its New York, London, Hong Kong, and Hyderabad, India offices. Portware is a global provider of multi-asset trade automation solutions for mega and large asset managers. With the acquisition of Portware, FactSet now offers 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. Total transaction costs related to the acquisition were $0.7 million for the nine months ended May 31, 2016. These transaction expenses were recorded within Selling, General and Administrative (“SG&A”) expenses in the Consolidated Statement of Income.

 

Allocation of the purchase price to the assets acquired and liabilities assumed was not yet finalized as of May 31, 2016 as it is subject to finalizing certain acquired assets and liabilities in addition to working capital adjustments. The preliminary 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 preliminary 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

    188,417  

Total assets acquired

  $ 273,573  

Liabilities assumed

    8,812  

Net assets acquired

  $ 264,761  

 

 
14

 

 

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 $188.4 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 95% 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.

 

Code Red, Inc.

 

On February 6, 2015, FactSet acquired Code Red, Inc. (“Code Red”) for $36.0 million. At the time of acquisition, Code Red employed 32 individuals in its Boston, New York and London offices. 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 purchase price of Code Red is as follows:

 

(in thousands)

 

Cash consideration

  $ 32,962  

Fair value of FactSet stock issued

    2,991  

Total purchase price

  $ 35,953  

 

Allocation of the purchase price to the assets acquired and liabilities assumed was finalized during the second quarter of fiscal 2016. There were no significant adjustments between the preliminary and final allocation. The total purchase price was allocated to Code Red’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

  $ 3,090  

Amortizable intangible assets

       

Software technology

    4,359  

Client relationships

    3,546  

Non-compete agreements

    201  

Trade name

    155  

Goodwill

    29,602  

Total assets acquired

  $ 40,953  

Liabilities assumed

    (5,000 )

Net assets acquired

  $ 35,953  

 

Intangible assets of $8.3 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 eight years using an accelerated amortization method; non-compete agreements, amortized over four years using a straight-line amortization method; and a 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 the results did not have a material impact on the third quarter of fiscal 2016. Pro forma information has not been presented because the effect of the Code Red acquisition was not material to the Company’s consolidated financial results.

 

 
15

 

 

9. ASSETS HELD FOR SALE

 

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 the “disposal group”) and associated assets (the “Transaction”). The total purchase price was approximately $165.0 million less certain adjustments set forth in the Purchase Agreement with an additional earn-out of $10.0 million based upon the achievement of certain growth targets over the next two years by the market research business that has been sold. The Purchase Agreement and the Transaction contemplated thereby were approved by the Board of Directors of FactSet on May 19, 2016. The Transaction subsequently closed on July 1, 2016 as further described in Note 19, Subsequent Events.

 

As of May 31, 2016, the Company classified the disposal group’s assets and liabilities as held for sale in the Consolidated Balance Sheet. The Company assessed the Transaction and the disposal group and determined that the sale does not represent a strategic shift in its business nor will it have a major effect on its consolidated results of operations, financial position or cash flows. Accordingly, the disposal group is not presented in the consolidated financial statements as a discontinued operation. The results of the disposal group are reported within the U.S. segment (for Market Metrics LLC) and the European segment (for Matrix-Data Limited).

 

The following table summarizes the carrying value of the assets and liabilities held for sale as of May 31, 2016:

 

(in thousands)

 

Accounts receivable

  $ 7,034  

Prepaid expenses and other current assets

    2,670  

Property, equipment and leasehold improvements, net

    224  

Goodwill

    32,406  

Intangible assets, net

    5,509  

Deferred taxes

    866  

Other assets

    231  

Total assets held for sale

  $ 48,940  
         

Accounts payable and accrued expenses

    792  

Accrued compensation

    289  

Deferred fees

    12,928  

Deferred rent and other non-current liabilities

    101  

Total liabilities held for sale

  $ 14,110  

 

10. GOODWILL

 

Changes in the carrying amount of goodwill by segment for the nine months ended May 31, 2016 are as follows:

 

(in thousands)

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Balance at August 31, 2015

  $ 211,869     $ 93,725     $ 2,693     $ 308,287  

Goodwill acquired during the period

    188,417                   188,417  

Foreign currency translations

          (4,129 )     249       (3,880 )

Assets held for sale

    (31,741 )     (665 )           (32,406 )

Other adjustments

    (25 )                 (25 )

Balance at May 31, 2016

  $ 368,520     $ 88,931     $ 2,942     $ 460,393  

 

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 2015, consistent with the timing of previous years, at which time it was determined that there were no indications of impairment, with the fair value of each of the Company’s reporting units significantly exceeding carrying value. Goodwill acquired during the first nine months of fiscal 2016 of $188.4 million represents the excess of the preliminary purchase price over the fair value of the net tangible and intangible assets from the Portware acquisition completed in October 2015.

 

 
16

 

 

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, 2016 was 11.4 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 2016. 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:

 

At May 31, 2016 (in thousands)

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Data content

  $ 36,218     $ 16,996     $ 19,222  

Client relationships

    45,532       15,791       29,741  

Software technology

    62,596       18,905       43,691  

Non-compete agreements

    4,344       969       3,375  

Trade names

    2,739       790       1,949  

Total

  $ 151,429     $ 53,451     $ 97,978  

 

At August 31, 2015 (in thousands)

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Data content

  $ 39,911     $ 16,667     $ 23,244  

Client relationships

    27,873       18,241       9,632  

Software technology

    21,203       15,042       6,161  

Non-compete agreements

    1,058       637       421  

Trade names

    1,614       1,020       594  

Total

  $ 91,659     $ 51,607     $ 40,052  

 

During the nine months ended May 31, 2016, $75.5 million of intangible assets were acquired with a weighted average useful life of 10.7 years.

 

Amortization expense recorded for intangible assets was $4.1 million and $2.3 million for the three months ended May 31, 2016 and 2015, respectively. Amortization expense recorded for intangible assets was $11.1 million and $6.4 million for the nine months ended May 31, 2016 and 2015, respectively. As of May 31, 2016, estimated intangible asset amortization expense for each of the next five years and thereafter is as follows:

 

Fiscal Year (in thousands)

 

Estimated Amortization Expense

 

2016 (remaining three months)

  $ 3,699  

2017

    14,024  

2018

    13,264  

2019

    12,295  

2020

    12,327  

Thereafter

    42,369  

Total

  $ 97,978  

 

 
17

 

 

12. COMMON STOCK AND EARNINGS PER SHARE

 

On May 6, 2016, FactSet’s Board of Directors approved a regular quarterly dividend of $0.50 per share, or $2.00 per share per annum. The cash dividend of $20.2 million was paid on June 21, 2016 to common stockholders of record at the close of business on May 31, 2016.

 

Shares of common stock outstanding were as follows:

 

   

Nine Months ended

May 31,

 

(in thousands)

 

2016

   

2015

 

Balance at September 1

    41,317       41,793  

Common stock issued for employee stock plans

    579       951  

Stock issued for acquisition of a business

          20  

Repurchase of common stock from employees(1)

    (20

)

    (23

)

Repurchase of common stock under the share repurchase program

    (1,220

)

    (1,210

)

Balance at May 31, 2016 and 2015, respectively

    40,656       41,531  

 

 

(1)

For the nine months ended May 31, 2016 and 2015, the Company repurchased 19,892 and 23,192 shares, or $3.3 million and $3.1 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 (“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, 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 three months ended May 31, 2015

                       

Basic EPS

                       

Income available to common stockholders

  $ 61,409       41,628     $ 1.48  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            669          

Income available to common stockholders plus assumed conversions

  $ 61,409       42,297     $ 1.45  

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  

For the nine months ended May 31, 2015

                       

Basic EPS

                       

Income available to common stockholders

  $ 178,867       41,648     $ 4.29  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            669          

Income available to common stockholders plus assumed conversions

  $ 178,867       42,317     $ 4.23  

 

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, 2016 was 688,538 because their inclusion would have been anti-dilutive. No stock options were excluded from the calculation of diluted earnings per share for the three and nine months ended May 31, 2015.

 

 
18

 

 

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. For the three and nine months ended May 31, 2015, the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 485,129. 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 May 31, 2016 and 2015 for these performance-based stock options.

 

13. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

At May 31, 2016 and August 31, 2015, 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, 2016 and August 31, 2015, there were 150,000,000 shares of common stock ($.01 par value per share) authorized, of which 50,907,581 and 50,328,423 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 May 31, 2016 and August 31, 2015, there were 10,251,413 and 9,011,521 shares of treasury stock (at cost) outstanding, respectively. As a result, 40,656,168 and 41,316,902 shares of FactSet common stock were outstanding at May 31, 2016 and August 31, 2015, 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 2016, the Company repurchased 1,220,000 shares for $189.5 million. On May 19, 2016, the Company’s Board of Directors approved a $165.0 million expansion of the existing share repurchase program. Including this expansion, $359.7 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.

 

Restricted Stock

 

Restricted stock awards entitle the holder to shares of common stock as the awards vest over time. During the first nine months of fiscal 2016, 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). During the same period a year ago, 68,178 of previously granted restricted stock awards vested and were included in common stock outstanding as of May 31, 2015 (less 23,192 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 6, 2016

  $ 0.50  

Regular (cash)

May 31, 2016

  $ 20,171  

June 21, 2016

February 5, 2016

  $ 0.44  

Regular (cash)

February 29, 2016

  $ 18,044  

March 15, 2016

November 6, 2015

  $ 0.44  

Regular (cash)

November 30, 2015

  $ 18,208  

December 15, 2015

August 10, 2015

  $ 0.44  

Regular (cash)

August 31, 2015

  $ 18,179  

September 15, 2015

May 12, 2015

  $ 0.44  

Regular (cash)

May 29, 2015

  $ 18,274  

June 16, 2015

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

 

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.

 

 
19

 

 

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 2016, FactSet granted 1,152,179 stock options at a weighted average exercise price of $168.51 to existing employees of the Company. As of May 31, 2016, a total of 3,753,264 stock options were outstanding at a weighted average exercise price of $125.52. Unamortized stock-based compensation of $54.2 million is expected to be recognized as stock-based compensation expense over the remaining vesting period of 3.3 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, 2015

    3,117     $ 100.71  

Granted – non performance-based

    514     $ 175.20  

Granted – performance-based

    530     $ 165.37  

Exercised

    (277

)

  $ 63.72  

Forfeited

    (8

)

  $ 108.32  

Balance at November 30, 2015

    3,876     $ 122.06  

Granted – non performance-based

    4     $ 150.81  

Granted – non-employee Directors grant

    23     $ 146.82  

Exercised

    (70

)

  $ 63.77  

Forfeited

    (45

)

  $ 127.82  

Balance at February 29, 2016

    3,788     $ 123.24  

Granted – non performance-based

    104     $ 152.10  

Exercised

    (127 )   $ 78.63  

Forfeited

    (12 )   $ 132.68  

Balance at May 31, 2016

    3,753     $ 125.52  

 

The total number of in-the-money options exercisable as of May 31, 2016 was 1.1 million with a weighted average exercise price of $86.61. As of August 31, 2015, 1.4 million in-the-money outstanding options were exercisable with a weighted average exercise price of $78.70. The aggregate intrinsic value of in-the-money stock options exercisable at May 31, 2016 and August 31, 2015 was $80.8 million and $107.1 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price of $159.07 on May 31, 2016 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 May 31, 2016 and 2015 was $9.3 million and $32.1 million, respectively. The total pre-tax intrinsic value of stock options exercised during the nine months ended May 31, 2016 and 2015 was $43.0 million and $70.9 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.

 

 
20

 

 

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 2016, three of the growth targets as outlined within the terms of the grant were achieved. As such, 60%, or 144,942, of the options granted have vested. As of May 31, 2016, the fourth tranche is expected to vest on August 31, 2016 while the fifth tranche is expected to vest on August 31, 2017, resulting in unamortized stock-based compensation expense of $0.5 million to be recognized over the remaining vesting period of 1.2 years. A change 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

 

Fourth 20%

  $ (1,213 )   $ 96  

Fifth 20% (current expectation)

  $     $ 483  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of May 31, 2016

 

February 2015 Performance-based Option Grant Review

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. The option holders must also remain employed by FactSet to be eligible to vest. Of the total grant, 68,761 performance-based options are eligible for vesting based on achieving the growth targets over a two year measurement period ending February 28, 2017 and the remaining 68,761 options are eligible to cliff vest based on a four year measurement period ending February 28, 2019. As of May 31, 2016, total unamortized stock-based compensation of $1.6 million will be recognized as expense over the remaining vesting period of 2.7 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:

 

(in thousands)

Vesting

Percentage

 

Cumulative

Catch-up Adjustment*

   

Remaining Expense

to be Recognized

 

0%

  $ (788 )   $  

10%

  $ (591 )   $ 403  

40% (current expectation)

  $     $ 1,612  

70%

  $ 591     $ 2,821  

100%

  $ 1,182     $ 4,030  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of May 31, 2016

 

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 to be eligible to vest. As of May 31, 2016, 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:

 

(in thousands)

Vesting

Percentage

 

Cumulative

Catch-up Adjustment*

   

Remaining Expense

to be Recognized

 

0% (current expectation)

  $     $  

50%

  $ 1,531     $ 10,719  

70%

  $ 2,143     $ 15,007  

100%

  $ 3,062     $ 21,438  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of May 31, 2016. 

 

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 2016, FactSet granted 93,375 restricted stock awards to employees of the Company at a weighted average grant date fair value of $159.42. These restricted stock awards vest over a weighted average period of 4.9 years from grant date.

 

 
21

 

 

As of May 31, 2016, a total of 341,333 shares of restricted stock and restricted stock units were unvested and outstanding, which results in unamortized stock-based compensation of $28.4 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, 2015

    313     $ 103.34  

Granted

    93     $ 159.46  

Vested(1)

    (37 )   $ 84.38  

Canceled/forfeited

    (1 )   $ 97.92  

Balance at November 30, 2015

    368     $ 119.44  

Canceled/forfeited

    (10 )   $ 115.03  

Balance at February 29, 2016

    358     $ 119.55  

Vested

    (15 )   $ 85.80  

Canceled/forfeited

    (2 )   $ 121.43  

Balance at May 31, 2016

    341     $ 121.01  

 

 

(1)

All of the 37,079 restricted stock awards that vested during the first quarter of fiscal 2016 related to awards granted on November 8, 2010. The remaining 40% of these restricted stock awards cliff vested after five years on November 8, 2015 and were amortized to expense over the vesting period using the straight-line attribution method. 

 

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, 2015

    2,441