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 November 30, 2013
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 December 31, 2013 was 42,782,234.
FactSet Research Systems Inc.
Form 10-Q
For the Quarter Ended November 30, 2013
Index
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|
Page | |
Part I |
FINANCIAL INFORMATION |
| |
Item 1. |
Financial Statements (Unaudited) |
||
|
Consolidated Statements of Income for the three months ended November 30, 2013 and 2012 |
3 | |
Consolidated Statements of Comprehensive Income for the three months ended November 30, 2013 and 2012 |
4 | ||
|
Consolidated Balance Sheets at November 30, 2013 and August 31, 2013 |
5 | |
|
Consolidated Statements of Cash Flows for the three months ended November 30, 2013 and 2012 |
6 | |
|
Notes to the Consolidated Financial Statements |
7 | |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 | |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
36 | |
Item 4. |
Controls and Procedures |
37 | |
Part II |
OTHER INFORMATION |
||
Item 1. |
Legal Proceedings |
37 | |
Item 1A. |
Risk Factors |
37 | |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
37 | |
Item 3. |
Defaults Upon Senior Securities |
38 | |
Item 4. |
Mine Safety Disclosures |
38 | |
Item 5. |
Other Information |
38 | |
Item 6. |
Exhibits |
38 | |
Signatures |
38 |
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.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME – Unaudited
Three Months Ended November 30, |
||||||||
2013 |
2012 |
|||||||
(In thousands, except per share data) |
||||||||
Revenues |
$ | 222,975 | $ | 211,085 | ||||
Operating expenses |
||||||||
Cost of services |
83,250 | 73,586 | ||||||
Selling, general and administrative |
64,985 | 66,414 | ||||||
Total operating expenses |
148,235 | 140,000 | ||||||
Operating income |
74,740 | 71,085 | ||||||
Other income |
341 | 428 | ||||||
Income before income taxes |
75,081 | 71,513 | ||||||
Provision for income taxes |
22,903 | 21,744 | ||||||
Net income |
$ | 52,178 | $ | 49,769 | ||||
Basic earnings per common share |
$ | 1.21 | $ | 1.12 | ||||
Diluted earnings per common share |
$ | 1.19 | $ | 1.11 | ||||
Basic weighted average common shares |
43,134 | 44,316 | ||||||
Diluted weighted average common shares |
43,773 | 44,984 |
The accompanying notes are an integral part of these consolidated financial statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Unaudited
Three Months Ended November 30, |
||||||||
2013 |
2012 |
|||||||
(In thousands) | ||||||||
Net income |
$ | 52,178 | $ | 49,769 | ||||
Other comprehensive income, net of tax |
||||||||
Net unrealized gain on cash flow hedges* |
2,647 | 1,287 | ||||||
Foreign currency translation adjustments |
8,148 | 3,074 | ||||||
Other comprehensive income |
10,795 | 4,361 | ||||||
Comprehensive income |
$ | 62,973 | $ | 54,130 |
* The net unrealized gain on cash flow hedges disclosed above was net of tax expense of $1,980 and $775 for the three months ended November 30, 2013 and 2012, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
FactSet Research Systems Inc.
CONSOLIDATED BALANCE SHEETS – Unaudited
November 30, 2013 |
August 31, 2013 |
|||||||
(In thousands, except share data) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 174,021 | $ | 196,627 | ||||
Investments |
13,756 | 12,725 | ||||||
Accounts receivable, net of reserves of $1,631 at November 30, 2013 and $1,644 at August 31, 2013 |
76,348 | 73,290 | ||||||
Prepaid taxes |
821 | 16,937 | ||||||
Deferred taxes |
3,026 | 2,803 | ||||||
Prepaid expenses and other current assets |
12,997 | 15,652 | ||||||
Total current assets |
280,969 | 318,034 | ||||||
Property, equipment and leasehold improvements, at cost |
190,477 | 192,338 | ||||||
Less accumulated depreciation and amortization |
(126,193 | ) | (126,967 | ) | ||||
Property, equipment and leasehold improvements, net |
64,284 | 65,371 | ||||||
Goodwill |
259,345 | 244,573 | ||||||
Intangible assets, net |
40,216 | 36,223 | ||||||
Deferred taxes |
22,482 | 22,023 | ||||||
Other assets |
3,862 | 3,973 | ||||||
TOTAL ASSETS |
$ | 671,158 | $ | 690,197 | ||||
LIABILITIES |
||||||||
Accounts payable and accrued expenses |
$ | 29,711 | $ | 29,864 | ||||
Accrued compensation |
17,687 | 40,137 | ||||||
Deferred fees |
30,157 | 29,319 | ||||||
Taxes payable |
5,112 | 3,769 | ||||||
Dividends payable |
15,046 | 15,164 | ||||||
Total current liabilities |
97,713 | 118,253 | ||||||
Deferred taxes |
2,399 | 2,396 | ||||||
Taxes payable |
5,009 | 5,435 | ||||||
Deferred rent and other non-current liabilities |
19,415 | 22,334 | ||||||
TOTAL LIABILITIES |
$ | 124,536 | $ | 148,418 | ||||
Commitments and contingencies (See Note 16) |
||||||||
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, 48,325,476 and 48,110,740 shares issued; 42,988,369 and 43,324,410 shares outstanding at November 30, 2013 and August 31, 2013, respectively |
483 | 481 | ||||||
Additional paid-in capital |
343,593 | 326,869 | ||||||
Treasury stock, at cost: 5,337,107 and 4,786,330 shares at November 30, 2013 and August 31, 2013, respectively |
(514,979 | ) | (454,917 | ) | ||||
Retained earnings |
737,651 | 700,519 | ||||||
Accumulated other comprehensive loss |
(20,126 | ) | (31,173 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY |
$ | 546,622 | $ | 541,779 | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 671,158 | $ | 690,197 |
The accompanying notes are an integral part of these consolidated financial statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited
Three Months Ended November 30, |
||||||||
2013 |
2012 |
|||||||
(In thousands) |
||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 52,178 | $ | 49,769 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
8,763 | 8,917 | ||||||
Stock-based compensation expense |
5,116 | 5,203 | ||||||
Deferred income taxes |
(679 | ) | 1,766 | |||||
Gain on sale of assets |
(23 | ) | (2 | ) | ||||
Tax benefits from share-based payment arrangements |
(2,144 | ) | (4,032 | ) | ||||
Changes in assets and liabilities, net of effects of acquisition |
||||||||
Accounts receivable, net of reserves |
(2,612 | ) | (4,655 | ) | ||||
Accounts payable and accrued expenses |
(316 | ) | 2,851 | |||||
Accrued compensation |
(21,213 | ) | (26,501 | ) | ||||
Deferred fees |
(94 | ) | 410 | |||||
Taxes payable, net of prepaid taxes |
19,108 | 13,709 | ||||||
Prepaid expenses and other assets |
3,036 | 2,613 | ||||||
Deferred rent and other non-current liabilities |
(3,280 | ) | 997 | |||||
Other working capital accounts, net |
299 | (409 | ) | |||||
Net cash provided by operating activities |
58,139 | 50,636 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Acquisition of business, net of cash acquired |
(15,288 | ) | 0 | |||||
Purchases of investments |
(7,172 | ) | (7,795 | ) | ||||
Proceeds from sales of investments |
6,871 | 7,500 | ||||||
Purchases of property, equipment and leasehold improvements, net of proceeds from dispositions |
(5,438 | ) | (6,097 | ) | ||||
Net cash used in investing activities |
(21,027 | ) | (6,392 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Dividend payments |
(15,064 | ) | (13,631 | ) | ||||
Repurchase of common stock |
(60,062 | ) | (28,241 | ) | ||||
Proceeds from employee stock plans |
9,484 | 13,102 | ||||||
Tax benefits from share-based payment arrangements |
2,144 | 4,032 | ||||||
Net cash used in financing activities |
(63,498 | ) | (24,738 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
3,780 | 2,162 | ||||||
Net (decrease) increase in cash and cash equivalents |
(22,606 | ) | 21,668 | |||||
Cash and cash equivalents at beginning of period |
196,627 | 189,044 | ||||||
Cash and cash equivalents at end of period |
$ | 174,021 | $ | 210,712 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
November 30, 2013
(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 November 30, 2013 and for the three months ended November 30, 2013 and 2012 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, 2013 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, 2013.
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
Balance Sheet Offsetting
In December 2011, the FASB issued an accounting standard update requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the balance sheet or that are subject to enforceable master netting arrangements or similar agreements. In January 2013, the FASB issued a clarifying accounting standard update, which limited the scope of the previous guidance to only derivatives, repurchase type agreements and securities borrowing and lending transactions. These accounting standard updates were effective for FactSet beginning in the first quarter of fiscal 2014, and the additional disclosure has been included in Note 5, Derivative Instruments.
Indefinite-lived Intangible Assets
In July 2012, the FASB issued an accounting standard update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update became effective for FactSet beginning in the first quarter of fiscal 2014 and did not have an impact on the Company’s consolidated financial statements.
Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued an accounting standard update to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. This accounting standard update became effective for FactSet beginning in the first quarter of fiscal 2014 and the additional information has been disclosed in Note 6, Accumulated Other Comprehensive Loss.
Cumulative Translation Adjustments
In March 2013, the FASB issued an accounting standard update requiring an entity to release into net income the entire amount of a cumulative translation adjustment related to its investment in a foreign entity when as a parent it either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. This accounting standard update was adopted by FactSet beginning in the first quarter of fiscal 2014 and did not have an impact on the Company’s consolidated financial statements.
No other new accounting pronouncements issued or effective as of November 30, 2013 have had or are expected to have an impact on the Company’s consolidated financial statements. In addition, there were no recent accounting standards or updates not yet effective for the Company as of November 30, 2013.
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 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 November 30, 2013 or August 31, 2013.
(b) Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table 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 November 30, 2013 and August 31, 2013 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
November 30, 2013 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Assets |
||||||||||||||||
Corporate money market funds (1) |
$ | 128,131 | $ | 0 | $ | 0 | $ | 128,131 | ||||||||
Certificates of deposit (2) |
0 | 13,756 | 0 | 13,756 | ||||||||||||
Derivative instruments (3) |
0 | 443 | 0 | 443 | ||||||||||||
Total assets measured at fair value |
$ | 128,131 | $ | 14,199 | $ | 0 | $ | 142,330 | ||||||||
Liabilities |
||||||||||||||||
Derivative instruments (3) |
$ | 0 | $ | 3,556 | $ | 0 | $ | 3,556 | ||||||||
Total liabilities measured at fair value |
$ | 0 | $ | 3,556 | $ | 0 | $ | 3,556 |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
August 31, 2013 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Assets |
||||||||||||||||
Corporate money market funds (1) |
$ | 156,693 | $ | 0 | $ | 0 | $ | 156,693 | ||||||||
Certificates of deposit (2) |
0 | 12,725 | 0 | 12,725 | ||||||||||||
Total assets measured at fair value |
$ | 156,693 | $ | 12,725 | $ | 0 | $ | 169,418 | ||||||||
Liabilities |
||||||||||||||||
Derivative instruments (3) |
$ | 0 | $ | 7,740 | $ | 0 | $ | 7,740 | ||||||||
Total liabilities measured at fair value |
$ | 0 | $ | 7,740 | $ | 0 | $ | 7,740 |
(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 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. For the three months ended November 30, 2013, interest income earned from the certificates of deposit was $0.3 million. |
(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.
Assets and liabilities measured at fair value on a recurring basis were presented on the Company’s Consolidated Balance Sheets at November 30, 2013 and August 31, 2013 as follows (in thousands):
Fair Value Measurements at Reporting Date Using |
||||||||||||||||
November 30, 2013 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Cash and cash equivalents |
$ | 128,131 | $ | 0 | $ | 0 | $ | 128,131 | ||||||||
Investments |
0 | 13,756 | 0 | 13,756 | ||||||||||||
Other current assets (derivative assets) |
0 | 443 | 0 | 443 | ||||||||||||
Total assets measured at fair value |
$ | 128,131 | $ | 14,199 | $ | 0 | $ | 142,330 | ||||||||
Accounts payable and accrued expenses |
$ | 0 | $ | 1,466 | $ | 0 | $ | 1,466 | ||||||||
Deferred rent and other non-current liabilities |
0 | 2,090 | 0 | 2,090 | ||||||||||||
Total liabilities measured at fair value |
$ | 0 | $ | 3,556 | $ | 0 | $ | 3,556 |
Fair Value Measurements at Reporting Date Using |
||||||||||||||||
August 31, 2013 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Cash and cash equivalents |
$ | 156,693 | $ | 0 | $ | 0 | $ | 156,693 | ||||||||
Investments |
0 | 12,725 | 0 | 12,725 | ||||||||||||
Total assets measured at fair value |
$ | 156,693 | $ | 12,725 | $ | 0 | $ | 169,418 | ||||||||
Accounts payable and accrued liabilities |
$ | 0 | $ | 3,085 | $ | 0 | $ | 3,085 | ||||||||
Deferred rent and other non-current liabilities |
0 | 4,655 | 0 | 4,655 | ||||||||||||
Total liabilities measured at fair value |
$ | 0 | $ | 7,740 | $ | 0 | $ | 7,740 |
(c) 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 months ended November 30, 2013, no fair value adjustments or material fair value measurements were required for the Company’s non-financial assets or liabilities.
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. There was no discontinuance of cash flow hedges during the three months ended November 30, 2013 and 2012, respectively, and as such, no corresponding gains or losses were reclassified into earnings. 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.
As of November 30, 2013 FactSet maintained foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the end of the second quarter of fiscal 2016, 40% of its British Pound exposure through the end of the second quarter of fiscal 2014, and 50% of its Philippines Peso exposure through the end of fiscal 2014. At November 30, 2013 the notional principal and fair value of foreign exchange contracts to purchase Indian Rupees with U.S. dollars was Rs.2.7 billion and ($3.6) million, respectively. At November 30, 2013, the notional principal and fair value of foreign exchange contracts to purchase Philippine Pesos with U.S. dollars was Php377.5 million and $0.1 million, respectively. At November 30, 2013 the notional principal and fair value of foreign exchange contracts to purchase British Pounds with U.S. dollars was £3.2 million and $0.3 million, respectively.
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) |
Nov 30, 2013 |
Aug 31, 2013 |
Nov 30, 2013 |
Aug 31, 2013 |
||||||||||||
Indian Rupee |
$ | 42,407 | $ | 47,388 | $ | (3,556 | ) | $ | (7,693 | ) | ||||||
Philippine Peso |
8,550 | 11,700 | 106 | (178 | ) | |||||||||||
British Pound |
4,816 | 10,436 | 337 | 131 | ||||||||||||
Total |
$ | 55,773 | $ | 69,524 | $ | (3,113 | ) | $ | (7,740 | ) |
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.
Fair Value of Derivative Instruments
The following table provides 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 |
Nov 30, 2013 |
Aug 31, 2013 |
|||||||
Derivatives designated as hedging instruments |
Assets: Foreign Currency Forward Contracts |
|||||||||
Prepaid expenses and other current assets |
$ | 443 | $ | 0 | ||||||
Liabilities: Foreign Currency Forward Contracts |
||||||||||
Accounts payable and accrued expenses |
$ | 1,466 | $ | 3,085 | ||||||
Deferred Rent and other non-current liabilities |
$ | 2,090 | $ | 4,655 |
All derivatives were designated as hedging instruments as of November 30, 2013 and August 31, 2013, 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 November 30, 2013 and 2012 (in thousands):
Gain Recognized in AOCL on Derivatives |
Location of (Loss) into Income |
(Loss) Reclassified |
|||||||||||||||
Derivatives in Cash Flow Hedging Relationships |
FY14 |
FY13 |
(Effective Portion) |
FY14 |
FY13 |
||||||||||||
Foreign currency forward contracts |
$ | 4,227 | $ | 1,571 |
SG&A |
$ | (400 | ) | $ | (491 | ) |
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 November 30, 2013, FactSet estimates that approximately $1.0 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 November 30, 2013 and August 31, 2013, information related to these offsetting arrangements was as follows (in thousands):
Derivatives Offset in Balance Sheet |
||||||||||||
November 30, 2013 |
Gross Derivative Amount |
Gross Derivative Amounts Offset in Balance Sheet |
Net Amount |
|||||||||
Fair value of assets |
$ | 443 | $ | 0 | $ | 443 | ||||||
Fair value of liabilities |
(3,657 | ) | 101 | (3,556 | ) | |||||||
Total |
$ | (3,214 | ) | $ | 101 | $ | (3,113 | ) |
Derivatives Offset in Balance Sheet |
||||||||||||
August 31, 2013 |
Gross Derivative Amount |
Gross Derivative Amounts Offset in Balance Sheet |
Net Amount |
|||||||||
Fair value of assets |
$ | 131 | $ | 0 | $ | 131 | ||||||
Fair value of liabilities |
(7,871 | ) | 0 | (7,871 | ) | |||||||
Total |
$ | (7,740 | ) | $ | 0 | $ | (7,740 | ) |
6. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of other comprehensive income and amounts reclassified out of accumulated other comprehensive loss into earnings during the three months ended November 30, 2013 and 2012 are as follows (in thousands):
For the three months ended November 30, 2013 |
Pre-tax |
Net of tax |
||||||
Foreign currency translation adjustments |
$ | 8,148 | $ | 8,148 | ||||
Realized loss on cash flow hedges reclassified to earnings (1) |
400 | 252 | ||||||
Unrealized gain on cash flow hedges recognized in accumulated other comprehensive loss |
4,227 | 2,395 | ||||||
Other comprehensive income |
$ | 12,775 | $ | 10,795 |
For the three months November 30, 2012 |
Pre-tax |
Net of tax |
||||||
Foreign currency translation adjustments |
$ | 3,074 | $ | 3,074 | ||||
Realized loss on cash flow hedges reclassified to earnings (1) |
491 | 305 | ||||||
Unrealized gain on cash flow hedges recognized in accumulated other comprehensive loss |
1,571 | 982 | ||||||
Other comprehensive income |
$ | 5,136 | $ | 4,361 |
(1) Reclassified to Selling, General and Administrative Expense
The components of accumulated other comprehensive loss are as follows (in thousands):
Nov 30, 2013 |
Aug 31, 2013 |
|||||||
Accumulated unrealized losses on cash flow hedges, net of tax |
$ | (1,948 | ) | $ | (4,847 | ) | ||
Accumulated foreign currency translation adjustments |
(18,178 | ) | (26,326 | ) | ||||
Total accumulated other comprehensive loss |
$ | (20,126 | ) | $ | (31,173 | ) |
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 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, Dubai and Italy. The Asia Pacific segment is headquartered in Tokyo, Japan with office locations in Hong Kong, Australia, Manila and Mumbai. 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, 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 $259 million of goodwill reported by the Company at November 30, 2013, 69% was recorded in the U.S. segment, 30% in the European segment and the remaining 1% in the Asia Pacific segment.
The following reflects the results of operations of the segments consistent with the Company’s management system. These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments (in thousands).
For the three months ended November 30, 2013 |
U.S. |
Europe |
Asia Pacific |
Total |
||||||||||||
Revenues |
$ | 152,911 | $ | 53,706 | $ | 16,358 | $ | 222,975 | ||||||||
Segment operating profit |
40,790 | 26,245 | 7,705 | 74,740 | ||||||||||||
Total assets |
408,532 | 210,246 | 52,380 | 671,158 | ||||||||||||
Capital expenditures |
5,244 | 86 | 108 | 5,438 |
For the three months ended November 30, 2012 |
U.S. |
Europe |
Asia Pacific |
Total |
||||||||||||
Revenues |
$ | 143,941 | $ | 51,631 | $ | 15,513 | $ | 211,085 | ||||||||
Segment operating profit |
39,600 | 24,723 | 6,762 | 71,085 | ||||||||||||
Total assets |
389,558 | 272,544 | 49,754 | 711,856 | ||||||||||||
Capital expenditures |
3,277 | 553 | 2,267 | 6,097 |
8. BUSINESS COMBINATIONS
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 also offers a robust database of supply chain relationships that helps investors identify companies’ interrelationships and mutual dependencies. Revere classifies companies into a unique industry taxonomy and offers a database of supply chain relationships. As of the date of acquisition, Revere had annual subscriptions of $4.9 million. The opportunity for FactSet to offer this 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.
Allocation of the purchase price to the assets acquired and liabilities assumed was not yet finalized as of November 30, 2013. The preliminary purchase price was allocated to Revere’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 |
$ | 544 | ||
Amortizable intangible assets |
||||
Data content |
2,698 | |||
Client relationships |
1,252 | |||
Non-compete agreements |
391 | |||
Trade name |
179 | |||
Goodwill |
11,173 | |||
Total assets acquired |
16,237 | |||
Liabilities assumed |
(949 | ) | ||
Net assets acquired |
$ | 15,288 |
Intangible assets of $4.5 million have been allocated to amortizable intangible assets consisting of data content, amortized over seven years using a straight-line amortization method; client relationships, amortized over seven years using an accelerated amortization method; non-compete agreements, amortized over three years using accelerated straight-line amortization method; and trade name, amortized over three years using a straight-line amortization method. The valuation and estimated useful lives of the intangible assets acquired are provisional and subject to adjustment based upon additional information that the Company is in the process of obtaining.
Goodwill totaling $11.2 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill will not be amortized, but tested for impairment at least annually. Goodwill generated from the Revere acquisition is included in the U.S. segment and is deductible for income tax purposes. 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 first quarter of fiscal 2014. Pro forma information has not been presented because the effect of this acquisition was not material on the Company’s consolidated financial results.
9. GOODWILL
Changes in the carrying amount of goodwill by segment for the three months ended November 30, 2013 are as follows (in thousands):
U.S. |
Europe |
Asia Pacific |
Total |
|||||||||||||
Balance at August 31, 2013 |
$ | 167,822 | $ | 73,424 | $ | 3,327 | $ | 244,573 | ||||||||
Goodwill acquired during the period |
11,173 | - | - | 11,173 | ||||||||||||
Foreign currency translations |
- | 3,737 | (138 | ) | 3,599 | |||||||||||
Balance at November 30, 2013 |
$ | 178,995 | $ | 77,161 | $ | 3,189 | $ | 259,345 |
During the first quarter of fiscal 2014, $11.2 million of goodwill was acquired as a result of the purchase of the assets of Revere on September 1, 2013 for a total purchase price of $15.3 million.
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 years 2013 and 2012, 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.
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 previous acquisitions, which have been fully integrated into the Company’s operations. The weighted average useful life of FactSet’s acquired identifiable intangible assets at November 30, 2013 was 11.6 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 were no changes to the estimate of the remaining useful lives during the first quarter of fiscal 2014. 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 November 30, 2013 |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||
Data content |
$ | 53,591 | $ | 23,961 | $ | 29,630 | ||||||
Client relationships |
23,470 | 15,872 | 7,598 | |||||||||
Software technology |
21,187 | 19,516 | 1,671 | |||||||||
Non-compete agreements |
2,545 | 1,446 | 1,099 | |||||||||
Trade names |
936 | 718 | 218 | |||||||||
Total |
$ | 101,729 | $ | 61,513 | $ | 40,216 |
At August 31, 2013 |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||
Data content |
$ | 49,185 | $ | 22,419 | $ | 26,766 | ||||||
Client relationships |
22,915 | 16,185 | 6,730 | |||||||||
Software technology |
20,914 | 19,126 | 1,788 | |||||||||
Non-compete agreements |
2,154 | 1,293 | 861 | |||||||||
Trade names |
758 | 680 | 78 | |||||||||
Total |
$ | 95,926 | $ | 59,703 | $ | 36,223 |
During the first quarter of fiscal 2014, $4.5 million of intangible assets were acquired with a weighted average useful life of 6.5 years due to the acquisition of Revere on September 1, 2013.
Preliminary Revere Intangible Asset Allocation |
Weighted Average Amortization Period (years) |
Acquisition Cost |
||||||
Data content |
7.0 | $ | 2,698 | |||||
Client relationships |
7.0 | 1,252 | ||||||
Non-compete agreements |
3.0 | 391 | ||||||
Trade name |
3.0 | 179 | ||||||
Total |
6.5 | $ | 4,520 |
The remaining change of $1.3 million in the gross carrying amount of intangible assets November 30, 2013 as compared to August 31, 2013 was due to foreign currency translations.
Amortization expense recorded for intangible assets was $1.7 million and $1.9 million for the three months ended November 30, 2013 and 2012, respectively. As of November 30, 2013, estimated intangible asset amortization expense for each of the next five years and thereafter are as follows (in thousands):
Fiscal Year |
Estimated Amortization Expense |
|||
2014 (remaining nine months) |
$ | 5,114 | ||
2015 |
5,892 | |||
2016 |
4,247 | |||
2017 |
3,922 | |||
2018 |
3,949 | |||
Thereafter |
17,092 | |||
Total |
$ | 40,216 |
11. COMMON STOCK AND EARNINGS PER SHARE
On November 14, 2013, FactSet’s Board of Directors approved a regular quarterly dividend of $0.35 per share, or $1.40 per share per annum. The cash dividend of $15.0 million was paid on December 17, 2013 to common stockholders of record on November 29, 2013.
Shares of common stock outstanding were as follows (in thousands):
Three Months Ended November 30, |
||||||||
2013 |
2012 |
|||||||
Balance at September 1 |
43,324 | 44,279 | ||||||
Common stock issued for employee stock plans |
194 | 333 | ||||||
Repurchase of common stock under the share repurchase program |
(530 | ) | (270 | ) | ||||
Balance at November 30, 2013 and 2012, respectively |
42,988 | 44,342 |
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):
NetIncome (Numerator) |
Weighted Average
Common Shares (Denominator) |
Per Share Amount |
||||||||||
For the three months ended November 30, 2013 |
||||||||||||
Basic EPS |
||||||||||||
Income available to common stockholders |
$ | 52,178 | 43,134 | $ | 1.21 | |||||||
Diluted EPS |
||||||||||||
Dilutive effect of stock options and restricted stock |
639 | |||||||||||
Income available to common stockholders plus assumed conversions |
$ | 52,178 | 43,773 | $ | 1.19 | |||||||
For the three months ended November 30, 2012 |
||||||||||||
Basic EPS |
||||||||||||
Income available to common stockholders |
$ | 49,769 | 44,316 | $ | 1.12 | |||||||
Diluted EPS |
||||||||||||
Dilutive effect of stock options and restricted stock |
668 | |||||||||||
Income available to common stockholders plus assumed conversions |
$ | 49,769 | 44,984 | $ | 1.11 |
Dilutive potential common shares consist of stock options and unvested restricted stock awards. No stock options were excluded from the calculation of diluted earnings per shares for the three months ended November 30, 2013, as no outstanding stock options were determined to be anti-dilutive. The number of stock options excluded from the calculation of diluted earnings per share for the three months ended November 30, 2012 was 442,728, because their inclusion would have been anti-dilutive. The number of restricted stock awards excluded from the calculation of diluted earnings per share for the three months ended November 30, 2012 was 30,456 because their inclusion would have been anti-dilutive, while no restricted stock awards were excluded from the calculation of diluted earnings per share for the three months ended November 30, 2013.
As of November 30, 2013 and 2012, the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 1,237,514 and 2,669,380, respectively. Performance-based stock options are omitted from the calculation of diluted earnings per share until the performance criteria have been met.
12. STOCKHOLDERS’ EQUITY
Preferred Stock
At November 30, 2013 and August 31, 2013, there were 10,000,000 shares of preferred stock ($.01 par value per share) authorized, of which no shares were issued and outstanding. FactSet’s Board of Directors may from time to time authorize the issuance of one or more series of preferred stock and, in connection with the creation of such series, determine the characteristics of each such series including, without limitation, the preference and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the series.
Common Stock
At November 30, 2013 and August 31, 2013, there were 150,000,000 shares of common stock ($.01 par value per share) authorized, of which 48,325,476 and 48,110,740 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 November 30, 2013 and August 31, 2013, there were 5,337,107 and 4,786,330 shares of treasury stock (at cost) outstanding, respectively. As a result, 42,988,369 and 43,324,410 shares of FactSet common stock were outstanding at November 30, 2013 and August 31, 2013, respectively.
Share Repurchase Program
On December 16, 2013, FactSet’s Board of Directors approved a $300 million expansion to the existing share repurchase program. During the first three months of fiscal 2014, the Company repurchased 530,000 shares for $57.8 million. Including the recently approved $300 million expansion to the program, $304.7 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.
In addition to the purchase of 530,000 shares under the existing share repurchase program, FactSet repurchased 20,777 shares for $2.3 million from employees to cover their cost of taxes upon the vesting of previously granted restricted stock during the first quarter of fiscal 2014.
Restricted Stock
Restricted stock awards entitle the holder to shares of common stock as the awards vest over time. During the first three months of fiscal 2014, there were 161,716 restricted stock awards granted compared to none in the year ago quarter. During the first quarter of fiscal 2014, 62,544 of previously granted restricted stock awards vested and were included in common stock outstanding as of November 30, 2013 (less 20,777 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock). In the year ago quarter, 92,715 of previously granted restricted stock awards vested and were included in common stock outstanding as of November 30, 2012 (less 29,604 shares repurchased to cover the 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 |
Type |
Record Date |
Total $ Amount |
Payment Date | ||||||
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 | ||||
May 14, 2013 |
$ | 0.35 |
Regular (cash) |
May 31, 2013 |
$ | 15,413 |
June 18, 2013 | ||||
February 21, 2013 |
$ | 0.31 |
Regular (cash) |
February 28, 2013 |
$ | 13,510 |
March 19, 2013 | ||||
November 15, 2012 |
$ | 0.31 |
Regular (cash) |
November 30, 2012 |
$ | 13,746 |
December 18, 2012 | ||||
August 8, 2012 |
$ | 0.31 |
Regular (cash) |
August 31, 2012 |
$ | 13,727 |
September 18, 2012 | ||||
May 8, 2012 |
$ | 0.31 |
Regular (cash) |
May 31, 2012 |
$ | 13,893 |
June 19, 2012 | ||||
February 14, 2012 |
$ | 0.27 |
Regular (cash) |
February 29, 2012 |
$ | 12,085 |
March 20, 2012 | ||||
November 10, 2011 |
$ | 0.27 |
Regular (cash) |
November 30, 2011 |
$ | 12,181 |
December 20, 2011 | ||||
August 11, 2011 |
$ | 0.27 |
Regular (cash) |
August 31, 2011 |
$ | 12,165 |
September 20, 2011 |
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
Options granted without performance conditions under the Company’s stock option plans expire either seven or ten years from the date of grant and the majority vest at a rate of 20% after the first year and 1.67% per month thereafter for years two through five. 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. The majority of the options granted with performance conditions expire either seven or ten years from the date of grant and vest at a rate of 40% after the first two years and 1.67% per month thereafter for years three through five. Options are not transferable or assignable other than by will or the laws of descent and distribution. During the grantee’s lifetime, they may be exercised only by the grantee.
During the first three months of fiscal 2014, FactSet granted 72,203 stock option awards at a weighted average exercise price of $109.49 to existing employees of the Company.
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, 2013 |
4,729 | $ | 75.95 | |||||
Granted – non-performance-based |
36 | 108.64 | ||||||
Granted – performance-based |
36 | 110.31 | ||||||
Exercised |
(136 | ) | 59.38 | |||||
Forfeited |
(10 | ) | 79.22 | |||||
Balance at November 30, 2013 |
4,655 | $ | 76.94 |
The total number of in-the-money options exercisable as of November 30, 2013 was 2.1 million with a weighted average exercise price of $62.94. As of August 31, 2013, 1.9 million in-the-money outstanding options were exercisable with a weighted average exercise price of $59.70. The aggregate intrinsic value of in-the-money stock options exercisable at November 30, 2013 and August 31, 2013 was $102.6 million and $82.1 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price of $113.00 at November 30, 2013 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 November 30, 2013 and 2012 was $6.9 million and $11.7 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.
November 2012 Annual Employee Performance-based Option Grant Review
In November 2012, FactSet granted 1,011,510 performance-based employee stock options. The number of performance-based options that vest is based on the Company achieving performance levels for both organic annual subscription value (“ASV”) and diluted earnings per share during the two fiscal years ended August 31, 2014. At November 30, 2013, FactSet estimated that 20% or 202,302 of the performance-based stock options would vest which results in unamortized stock-based compensation expense of $3.2 million to be recognized over the remaining vesting period. However, a change in the actual financial performance levels achieved over the next three fiscal quarters of 2014 could result in the following changes to the Company’s current estimate of the vesting percentage and related expense (in thousands):
Vesting Percentage |
Total Unamortized Stock-based Compensation Expense at November 30, 2013 |
Cumulative Catch-up Adjustment* |
Average Remaining Quarterly Expense to be Recognized |
|||||||||||
0% | $ | - | $ | (1,550 | ) | $ | - | |||||||
20% | $ | 3,198 | $ | - | $ | 204 | ||||||||
60% | $ | 9,594 | $ | 3,100 | $ | 612 | ||||||||
100% | $ | 15,990 | $ | 6,200 | $ | 1,020 |
* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of November 30, 2013.
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. The Company estimates that the second 20% tranche will vest by August 31, 2017, which results in unamortized stock-based compensation expense of $1.2 million to be recognized over the remaining vesting period of 3.8 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 |
||||||
First 20%* |
n/a |
n/a* | ||||||
Second 20% |
$ | (439 | ) | $ | 1,161 | |||
Third 20% |
$ | 544 | $ | 2,217 | ||||
Fourth 20% |
$ | 1,029 | $ | 3,332 | ||||
Fifth 20% |
$ | 1,648 | $ | 4,313 |
*The first 20% of the grant vested during fiscal 2013, and as such, there is no remaining expense to be recognized as of November 30, 2013.
** Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of November 30, 2013.
Revere Data Performance-based Option Grant
In connection with the acquisition of Revere Data during the first quarter of fiscal 2014, FactSet granted 36,695 performance-based employee stock options, which would vest only if certain ASV and operating margins related to the Revere business were achieved during the subsequent two and four year measurement periods and the option holders remained employed by FactSet. At November 30, 2013, the Company estimated that approximately 50% or 18,553 performance-based stock options will vest, which results in unamortized stock-based compensation expense of $0.6 million to be recognized over the remaining vesting period of 4.8 years.
Other Performance-based Option Grants
FactSet granted 41,725 performance-based employee stock options between January 2011 and July 2011 that vest based on achieving certain ASV targets. Of this total, 8,634 vested prior to the beginning of fiscal 2014. At November 30, 2013, the Company estimated that from the remaining 33,091 performance-based stock options, 7,964 will vest based on forecasted ASV growth, resulting in unamortized stock-based compensation expense of $0.1 million to be recognized over the remaining vesting period. The remaining 25,127 performance-based stock options outstanding are expected to be forfeited.
Restricted Stock and Stock Unit Awards
The Company’s stock option and award 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 three months of fiscal 2014, FactSet granted 161,716 restricted stock awards at a weighted average grant date fair value of $102.27 to existing employees of the Company. There were no restricted stock awards granted during the first three months of fiscal 2013.
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, 2013 |
358 | $ | 80.43 | |||||
Granted (restricted stock and stock units) |
162 | $ | 102.27 | |||||
Vested* |
(63 | ) | $ | 83.49 | ||||
Canceled/forfeited |
(2 | ) | $ | 69.27 | ||||
Balance at November 30, 2013 |
455 | $ | 87.69 |
* The 62,544 restricted stock awards that vested during the first quarter of fiscal 2014 related to awards granted on November 8, 2010. These restricted stock awards cliff vested 60% after three years (on November 8, 2013) with the remaining 40% cliff vesting after five years (on November 8, 2015). The awards are amortized to expense over the vesting period using the straight-line attribution method. As of November 30, 2013, unamortized stock-based compensation expense of $3.2 million is to be amortized to compensation expense over the remaining vesting period of 1.9 years.
November 2013 Employee Restricted Stock Award
On November 1, 2013, FactSet granted 153,972 restricted stock awards with a fair value of $102.22, which entitle the holder to shares of common stock as the awards vest over time. These restricted stock awards cliff vest 60% after three years (on November 1, 2016) and the remaining 40% after five years (on November 1, 2018). As of November 30, 2013, unamortized stock-based compensation expense of $13.7 million is to be amortized ratably to compensation expense over the remaining vesting period of 4.9 years.
September 2013 Revere Data Restricted Stock Units
An additional 7,744 performance-based restricted stock units were granted during the first quarter of fiscal 2014 in connection with the acquisition of Revere Data. The units cliff vest 80% upon the four-year anniversary date of the grant, September 17, 2017, with the remaining 20% vesting on the fifth anniversary date, September 17, 2018, based upon the achievement of certain ASV and operating margin targets by the end of fiscal 2017 and the unit holders remaining employed by FactSet. As of November 30, 2013, unamortized stock-based compensation of $0.4 million will be amortized to compensation expense over the remaining vesting period of 4.8 years.
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, 2013 |
3,116 | 107 | ||||||
Granted – non performance-based options |
(36 | ) | - | |||||
Granted – performance-based options |
(36 | ) | - | |||||
Restricted stock awards granted* |
(404 | ) | - | |||||
Share-based awards canceled/forfeited* |
16 | - | ||||||
Balance at November 30, 2013 |
2,656 | 107 |
* Under the Company’s stock option and award plan, for each restricted stock award granted/canceled/forfeited, an equivalent of 2.5 shares is added back to or removed from the available share-based awards balance.
Employee Stock Purchase Plan
On December 16, 2008, the Company’s stockholders ratified the adoption of the FactSet Research Systems Inc. 2008 Employee Stock Purchase Plan (the “Purchase Plan”). A total of 500,000 shares have been reserved for issuance under the Purchase Plan. 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 November 30, 2013, employees purchased 16,363 shares at a weighted average price of $86.65 as compared to 18,102 shares at a weighted average price of $78.53 in the same period a year ago. At November 30, 2013, 103,407 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 $1.8 million in matching contributions to employee 401(k) accounts during the three months ended November 30, 2013 and 2012, respectively.
14. STOCK-BASED COMPENSATION
The Company recognized total stock-based compensation expense of $5.1 million and $5.2 million during the three months ended November 30, 2013 and 2012, respectively. As of November 30, 2013, $61.4 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 3.8 years. There was no stock-based compensation capitalized as of November 30, 2013 or August 31, 2013, respectively.
Employee Stock Option Fair Value Determinations
The Company utilizes the lattice-binomial option-pricing model (“binomial model”) to estimate the fair value of new employee stock option grants. The Company’s determination of fair value of stock option awards on the date of grant using the binomial model is affected by the Company’s stock price as well as assumptions regarding a number of variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, interest rates, option forfeitures and employee stock option exercise behaviors.
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. |
Fiscal 2013
- |
Q1 2013 – 635,308 non performance-based employee stock options and 1,011,510 performance-based employee stock options were granted at a weighted average exercise price of $92.22 and a weighted average estimated fair value of $26.87 per share. |
The weighted average estimated fair value of employee stock options granted during the first three months of fiscal 2014 and 2013 was determined using the binomial model with the following weighted average assumptions:
Three Months Ended November 30, |
||||||||||||
2013 |
2012 |
|||||||||||
Term structure of risk-free interest rate |
0.08% | - | 2.61% | 0.16% | - | 1.91% | ||||||
Expected life (in years) |
7.6 | - |
7.8 |
7.6 | - |
7.8 |
||||||
Term structure of volatility |
23% | - | 33% | 24% | - | 33% | ||||||
Dividend yield |
1.35 | % | 1.30 | % | ||||||||
Weighted average estimated fair value |
$ | 31.78 | $ | 26.87 | ||||||||
Weighted average exercise price |
$ | 109.49 | $ | 92.22 | ||||||||
Fair value as a percentage of exercise price |
29.0 | % | 29.1 | % |
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.
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. A total of 250,000 shares of FactSet common stock have been reserved for issuance under the Directors’ Plan. The expiration date of the Directors’ Plan is December 1, 2018.
The Company utilizes the Black-Scholes model to estimate the fair value of new 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.
There were no stock options granted to the Company’s non-employee Directors during the three months ended November 30, 2013 and 2012, respectively.
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 share 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. There were 161,716 restricted stock awards granted during the first quarter of fiscal 2014 with a weighted average grant date fair value of $102.27. There were no restricted stock awards granted during the three months ended November 30, 2012.
Employee Stock Purchase Plan Fair Value Determinations
During the three months ended November 30, 2013, employees purchased 16,363 shares at a weighted average price of $86.65 as compared to 18,102 shares at a weighted average price of $78.53 in the same period a year ago. Stock-based compensation expense recorded during each of the three months ended November 30, 2013 and 2012, relating to the employee stock purchase plan was $0.3 million.
The Company uses the Black-Scholes model to calculate the estimated fair value for the employee stock purchase plan. The weighted average estimated fair value of employee stock purchase plan grants during the three months ended November 30, 2013 and 2012 were $16.64 and $15.74 per share, respectively, with the following weighted average assumptions:
Three Months Ended November 30, |
||||||||
2013 |
2012 |
|||||||
Risk-free interest rate |
0.04 | % |
|
0.10 | % |
| ||
Expected life (in months) |
3 | 3 | ||||||
Expected volatility |
8.66 | % |
|
10 | % |
| ||
Dividend yield |
1.37 | % |
|
1.32 | % |
|
Accuracy of Fair Value Estimates
The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective 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 forfeiture rates and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable.
15. INCOME TAXES
Income tax expense is based on taxable income determined in accordance with current enacted laws and tax rates. Deferred income taxes are recorded for the temporary differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.
Provision for Income Taxes
The provision for income taxes is as follows (in thousands):
Three Months Ended November 30 |
||||||||
2013 |
2012 |
|||||||
U.S. operations |
$ | 60,258 | $ | 61,067 | ||||
Non-U.S. operations |
14,823 | 10,446 | ||||||
Income before income taxes |
$ | 75,081 | $ | 71,513 | ||||
U.S. operations |
$ | 19,653 | $ | 19,340 | ||||
Non-U.S. operations |
3,250 | 2,404 | ||||||
Total provision for income taxes |
$ | 22,903 | $ | 21,744 | ||||
Effective tax rate |
30.5 | % | 30.4 | % |
FactSet's effective tax rate is based on recurring factors and nonrecurring events, including the taxation of foreign income. The Company's effective tax rate will vary based upon changes in levels of foreign income, as well as discrete and other nonrecurring events that may not be predictable. For the three months ended November 30, 2013 and 2012, the effective tax rate was lower than the U.S. statutory rate primarily due to foreign income, which is subject to lower statutory tax rates than in the U.S., benefits from foreign tax credits and the U.S. Federal R&D tax credit which lapsed on December 31, 2013.
The components of the provision for income taxes consist of the following (in thousands):
Three Months Ended November 30, |
||||||||
2013 |
2012 |
|||||||
Current |
||||||||
U.S. federal |
$ | 18,117 | $ | 16,358 | ||||
U.S. state and local |
1,197 | 1,289 | ||||||
Non-U.S. |
3,187 | 2,684 | ||||||
Total current taxes |
$ | 22,501 | $ | 20,331 | ||||
Deferred |
||||||||
U.S. federal |
$ | 311 | $ | 1,576 | ||||
U.S. state and local |
28 | 117 | ||||||
Non-U.S. |
63 | (280 | ) | |||||
Total deferred taxes |
$ | 402 | $ | 1,413 | ||||
Total provision for income taxes |
$ | 22,903 | $ | 21,744 |
Deferred Tax Assets and Liabilities
The significant components of deferred tax assets that are recorded in the Consolidated Balance Sheets were as follows (in thousands):
Nov 30, 2013 |
Aug 31, 2013 |
|||||||
Deferred tax assets |
||||||||
Current |
||||||||
Receivable reserve |
$ | 610 | $ | 614 | ||||
Deferred rent |
2,036 | 2,191 | ||||||
Deferred fees |
(2 | ) | (2 | ) | ||||
Other |
382 | 0 | ||||||
Net current deferred taxes |
$ | 3,026 | $ | 2,803 | ||||
Non-current |
||||||||
Depreciation on property, equipment and leasehold improvements |
$ | 8,077 | $ | 6,329 | ||||
Deferred rent |
2,772 | 2,772 | ||||||
Stock-based compensation |
18,667 | 19,828 | ||||||
Purchased intangible assets, including acquired technology |
(9,358 |
) |
(8,401 |
) | ||||
Other |
2,324 | 1,495 | ||||||
Net non-current deferred taxes |
$ | 22,482 | $ | 22,023 | ||||
Total deferred tax assets |
$ | 25,508 | $ | 24,826 |
The significant components of deferred tax liabilities that are recorded in the Consolidated Balance Sheets were as follows (in thousands):
Nov 30, 2013 |
Aug 31, 2013 |
|||||||
Deferred tax liabilities (non-current) |
||||||||
Purchased intangible assets, including acquired technology |
$ | 2,775 | $ | 2,761 | ||||
Stock-based compensation |
(376 | ) | (365 | ) | ||||
Total deferred tax liabilities (non-current) |
$ | 2,399 | $ | 2,396 |
A provision has not been made for additional U.S. Federal taxes as of November 30, 2013 as all undistributed earnings of foreign subsidiaries are considered to be invested indefinitely or will be repatriated free of additional tax. The amount of such undistributed earnings of these foreign subsidiaries included in consolidated retained earnings was immaterial at November 30, 2013 and August 31, 2013. As such, the unrecognized deferred tax liability on those undistributed earnings was immaterial. These earnings could become subject to additional tax if they are remitted as dividends, loaned to FactSet, or upon sale of the subsidiary’s stock.
Unrecognized Tax Positions
Applicable accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions that a company has taken or expects to take on a tax return. A company can recognize the financial effect of an income tax position only if it is more likely than not (greater than 50%) that the tax position will prevail upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit or expense can be recognized in the consolidated financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.
As of November 30, 2013, the Company had gross unrecognized tax benefits totaling $5.0 million, including $1.1 million of accrued interest, recorded as non-current taxes payable in the consolidated balance sheet. Unrecognized tax benefits represent tax positions taken on tax returns but not yet recognized in the consolidated financial statements. When applicable, the Company adjusts the previously recorded tax expense to reflect examination results when the position is effectively settled. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. However, FactSet has no reason to believe that such audits will result in the payment of additional taxes and/or penalties that would have a material adverse effect on the Company’s results of operations or financial position, beyond current estimates. Any changes in accounting estimates resulting from new developments with respect to uncertain tax positions will be recorded as appropriate. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months.
The following table summarizes the changes in the balance of gross unrecognized tax benefits during the first three months of fiscal 2014 (in thousands):
Unrecognized income tax benefits at August 31, 2013 |
$ | 5,435 | ||
Additions based on tax positions related to the current year |
117 | |||
Additions for tax positions of prior years |
218 | |||
Reductions from settlements with taxing authorities |
(761 | ) | ||
Unrecognized income tax benefits at November 30, 2013 |
$ | 5,009 |
In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. At November 30, 2013, the Company remained subject to examination in the following major tax jurisdictions for the tax years as indicated below:
Major Tax Jurisdictions |
|
Open Tax Years |
U.S. |
|
|
Federal |
|
2010 through 2013 |
State (various) |
|
2010 through 2013 |
Europe |
|
|
France |
|
2010 through 2013 |
United Kingdom |
|
2011 through 2013 |
16. COMMITMENTS AND CONTINGENCIES
Commitments represent obligations, such as those for future purchases of goods or services that are not yet recorded on the balance sheet as liabilities. FactSet records liabilities for commitments when incurred (i.e., when the goods or services are received).
Lease Commitments
At November 30, 2013, the Company leases approximately 193,000 square feet of office space at its headquarters in Norwalk, Connecticut. In addition, FactSet leases office space for its U.S. reportable segment in New York, New York; Boston, Massachusetts; Chicago, Illinois; San Francisco, California; Austin, Texas; Jackson, Wyoming; Atlanta, Georgia; Tuscaloosa, Alabama; Newark, Ridgewood and Piscataway, New Jersey; Manchester, New Hampshire; Reston, Virginia, and Youngstown, Ohio. The Company’s European segment operates in leased office space in London, England; Paris and Avon, France; Amsterdam, the Netherlands; Frankfurt, Germany; Dubai, United Arab Emirates; Milan, Italy; Stockholm, Sweden; and Riga, Latvia. Office space in Tokyo, Japan; Hong Kong; Mumbai, India; Manila, the Philippines; and Sydney, Australia are leased by FactSet for its Asia Pacific operating segment. The data content collection centers located in Hyderabad, India and Manila, the Philippines benefit all of the Companies operating segments. The leases expire on various dates through 2024. Total minimum rental payments associated with the leases are recorded as rent expense (a component of selling, general and administrative expenses) on a straight-line basis over the periods of the respective non-cancelable lease terms. At November 30, 2013, FactSet leases approximately 814,000 square feet of office space, which the Company believes is adequate for its current needs and that additional space is available for lease to meet any future needs.
In connection with the acquisition of the assets of Revere Data in September 2013, FactSet assumed the leases of existing offices in Youngstown, Ohio and New York, New York, which increased the rental square footage by approximately 5,000 square feet and minimum rental payments by less than $0.1 million. No other material new leases were entered into during the first three months of fiscal 2014.
For the three months ended November 30, 2013 and 2012, rent expense (including operating costs) for all operating leases amounted to $8.9 million and $9.3 million, respectively. Approximately $2.2 million of standby letters of credit have been issued during the ordinary course of business in connection with the Company’s current leased office space as of November 30, 2013. These standby letters of credit contain covenants that, among other things, require the Company to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios. As of November 30, 2013, FactSet was in compliance with all covenants contained in the standby letters of credit.
At November 30, 2013, the Company’s lease commitments for office space provide for the following future minimum rental payments under non-cancelable operating leases with remaining terms in excess of one year (in thousands):
Years August 31, |
Minimum Lease Payments |
|||
2014 (remaining nine months) |
$ | 20,877 | ||
2015 |
23,917 | |||
2016 |
17,941 | |||
2017 |
16,599 | |||
2018 |
15,647 | |||
Thereafter |
29,604 | |||
Total |
$ | 124,585 |
Purchase Commitments with Suppliers
Purchase obligations represent payment due in future periods in respect of commitments to the Company’s various data vendors as well as commitments to purchase goods and services such as telecommunication and computer maintenance services. These purchase commitments are agreements that are enforceable and legally binding on FactSet and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. As of August 31, 2013, the Company had total purchase commitments of $50.2 million. There were no material changes in FactSet’s purchase commitments during the first three months of fiscal 2014.
Contingencies
Legal Matters
FactSet accrues non income-tax liabilities for contingencies when management believes that a loss is probable and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. Based on currently available information at November 30, 2013, FactSet’s management does not believe that the ultimate outcome of these unresolved matters against the Company, individually or in the aggregate, is likely to have a material adverse effect on the Company’s consolidated financial position, its results of operations or its cash flows.
Income Taxes
Uncertain income tax positions are accounted for in accordance with applicable accounting guidance (see Note 15). FactSet is currently under audit by tax authorities. The Company has reserved for potential adjustments to its provision for income taxes that may result from examinations by, or any negotiated settlements with, these tax authorities, and the Company believes that the final outcome of these examinations or settlements will not have a material effect on its results of operations. If events o