fds20140228_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


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

 

For the quarterly period ended February 28, 2014

 

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 April 1, 2014 was 42,339,723.

 


 

 
 

 

 

FactSet Research Systems Inc.

Form 10-Q

For the Quarter Ended February 28, 2014

 

Index

 

 

 

Page 

Part I

FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements (Unaudited)

 
     

 

Consolidated Statements of Income for the three and six months ended February 28, 2014 and 2013

3

     
 

Consolidated Statements of Comprehensive Income for the three and six months ended February 28, 2014 and 2013

4

     

 

Consolidated Balance Sheets at February 28, 2014 and August 31, 2013

5

     

 

Consolidated Statements of Cash Flows for the six months ended February 28, 2014 and 2013

6

     

 

Notes to the Consolidated Financial Statements

7

     

Item 2.

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

28

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

     

Item 4.

Controls and Procedures

41

     

Part II

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

41

     

Item 1A.

Risk Factors

41

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

     

Item 3.

Defaults Upon Senior Securities

42

     

Item 4.

Mine Safety Disclosures

42

     

Item 5.

Other Information

42

     

Item 6.

Exhibits

42

     
 

Signatures

42

 

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 (Unaudited)

 

FactSet Research Systems Inc.

CONSOLIDATED STATEMENTS OF INCOME – Unaudited

 

   

Three Months Ended

February 28,

   

Six Months Ended

February 28,

 

(In thousands, except per share data)

 

2014

   

2013

   

2014

   

2013

 

Revenues

  $ 226,934     $ 213,083     $ 449,909     $ 424,167  
                                 

Operating expenses

                               

Cost of services

    87,254       75,842       170,504       149,427  

Selling, general and administrative

    64,626       81,077       129,610       147,492  

Total operating expenses

    151,880       156,919       300,114       296,919  
                                 

Operating income

    75,054       56,164       149,795       127,248  

Other income

    344       357       685       785  

Income before income taxes

    75,398       56,521       150,480       128,033  
                                 

Provision for income taxes

    22,972       11,982       45,876       33,726  

Net income

  $ 52,426     $ 44,539     $ 104,604     $ 94,307  
                                 

Basic earnings per common share

  $ 1.23     $ 1.02     $ 2.44     $ 2.14  

Diluted earnings per common share

  $ 1.22     $ 1.00     $ 2.41     $ 2.11  
                                 

Basic weighted average common shares

    42,547       43,813       42,840       44,065  

Diluted weighted average common shares

    43,107       44,455       43,432       44,788  

 

 

 

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

February 28,

   

Six Months Ended

February 28,

 

(In thousands)

 

2014

   

2013

   

2014

   

2013

 
                                 

Net income

  $ 52,426     $ 44,539     $ 104,604     $ 94,307  
                                 

Other comprehensive income (loss), net of tax

                               

Net unrealized gain on cash flow hedges*

    387       84       3,284       1,371  

Foreign currency translation adjustments

    3,506       (4,731 )     11,654       (1,657 )

Other comprehensive income (loss)

    3,893       (4,647 )     14,938       (286 )

Comprehensive income

  $ 56,319     $ 39,892     $ 119,542     $ 94,021  

 

 

* For the three and six months ended February 28, 2014, the unrealized gain on cash flow hedges was net of tax expense of $231 and $1,961, respectively. The unrealized gain on cash flow hedges disclosed above for the three and six months ended February 28, 2013, was net of tax expense of $50 and $822, respectively.

 

 

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

  

 
4

 

 

FactSet Research Systems Inc.

CONSOLIDATED BALANCE SHEETS – Unaudited

 

(In thousands, except share data)

 

February 28, 2014

   

August 31, 2013

 

ASSETS

               

Cash and cash equivalents

  $ 88,790     $ 196,627  

Investments

    14,185       12,725  

Accounts receivable, net of reserves of $1,653 at February 28, 2014 and $1,644 at August 31, 2013

    97,564       73,290  

Prepaid taxes

    14,487       16,937  

Deferred taxes

    3,474       2,803  

Prepaid expenses and other current assets

    13,536       15,652  

Total current assets

    232,036       318,034  
                 

Property, equipment and leasehold improvements, at cost

    192,478       192,338  

Less accumulated depreciation and amortization

    (131,851 )     (126,967 )

Property, equipment and leasehold improvements, net

    60,627       65,371  
                 

Goodwill

    287,545       244,573  

Intangible assets, net

    47,390       36,223  

Deferred taxes

    21,871       22,023  

Other assets

    4,496       3,973  

TOTAL ASSETS

  $ 653,965     $ 690,197  
                 

LIABILITIES

               

Accounts payable and accrued expenses

  $ 27,821     $ 29,864  

Accrued compensation

    24,649       40,137  

Deferred fees

    35,417       29,319  

Taxes payable

    6,576       3,769  

Dividends payable

    14,827       15,164  

Total current liabilities

    109,290       118,253  

Deferred taxes

    2,723       2,396  

Taxes payable

    5,345       5,435  

Deferred rent and other non-current liabilities

    18,953       22,334  

TOTAL LIABILITIES

  $ 136,311     $ 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, 48,499,353 and 48,110,740 shares issued; 42,361,734 and 43,324,410 shares outstanding at February 28, 2014 and August 31, 2013, respectively

    485       481  

Additional paid-in capital

    359,253       326,869  

Treasury stock, at cost: 6,137,619 and 4,786,330 shares at February 28, 2014 and August 31, 2013, respectively

    (601,101 )     (454,917 )

Retained earnings

    775,251       700,519  

Accumulated other comprehensive loss

    (16,234 )     (31,173 )

TOTAL STOCKHOLDERS’ EQUITY

  $ 517,654     $ 541,779  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 653,965     $ 690,197  

 

 

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

 

 
5

 

 

FactSet Research Systems Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited

 

   

Six Months Ended

February 28,

 

(In thousands)

 

2014

   

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 104,604     $ 94,307  

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

               

Depreciation and amortization

    17,442       18,010  

Stock-based compensation expense

    10,616       26,373  

Deferred income taxes

    (1,157 )     (2,394 )

Gain on sale of assets

    (64 )     (2 )

Tax benefits from share-based payment arrangements

    (4,984 )     (9,870 )

Changes in assets and liabilities, net of effects of acquisitions

               

Accounts receivable, net of reserves

    (20,466 )     (11,569 )

Accounts payable and accrued expenses

    (2,909 )     5,038  

Accrued compensation

    (15,949 )     (22,061 )

Deferred fees

    2,460       1,937  

Taxes payable, net of prepaid taxes

    9,754       (3,295 )

Prepaid expenses and other assets

    (331 )     772  

Deferred rent and other non-current liabilities

    (389 )     (282 )

Other working capital accounts, net

    100       74  

Net cash provided by operating activities

    98,727       97,038  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Acquisition of businesses, net of cash acquired

    (47,170 )     (705 )

Purchases of investments

    (7,487 )     (8,098 )

Proceeds from sales of investments

    6,871       7,500  

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

    (8,032 )     (9,084 )

Net cash used in investing activities

    (55,818 )     (10,387 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Dividend payments

    (30,011 )     (27,280 )

Repurchase of common stock

    (146,184 )     (139,010 )

Proceeds from employee stock plans

    16,881       31,306  

Tax benefits from share-based payment arrangements

    4,984       9,870  

Net cash used in financing activities

    (154,330 )     (125,114 )
                 

Effect of exchange rate changes on cash and cash equivalents

    3,584       733  

Net decrease in cash and cash equivalents

    (107,837 )     (37,730 )

Cash and cash equivalents at beginning of period

    196,627       189,044  

Cash and cash equivalents at end of period

  $ 88,790     $ 151,314  

 

 

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

 

 
6

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FactSet Research Systems Inc.

February 28, 2014

(Unaudited)

 

1. ORGANIZATION AND NATURE OF BUSINESS

 

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

 

2. BASIS OF PRESENTATION

 

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

 

The accompanying financial data as of February 28, 2014 and for the three and six months ended February 28, 2014 and 2013 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

 

Recently Adopted Accounting Standards or Updates

 

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. Other than the additional disclosure, the adoption of this accounting standard update did not have an impact on the Company’s consolidated financial statements.

 

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.

  

 
7

 

 

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 February 28, 2014 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 February 28, 2014.

 

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 February 28, 2014 or August 31, 2013.

 

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

The following tables show by level within the fair value hierarchy the Company’s assets and liabilities that are measured at fair value on a recurring basis at February 28, 2014 and August 31, 2013 (in thousands):

 

   

Fair Value Measurements at Reporting Date Using

 

February 28, 2014

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets

                               

Corporate money market funds (1)

  $ 43,020     $ 0     $ 0     $ 43,020  

Certificates of deposit (2)

    0       14,185       0       14,185  

Total assets measured at fair value

  $ 43,020     $ 14,185     $ 0     $ 57,205  
                                 

Liabilities

                               

Derivative instruments (3)

  $ 0     $ 2,494     $ 0     $ 2,494  

Total liabilities measured at fair value

  $ 0     $ 2,494     $ 0     $ 2,494  

  

 
8

 

 

   

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.

 

 

(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 February 28, 2014 and August 31, 2013 as follows (in thousands):

 

   

Fair Value Measurements at Reporting Date Using

 

February 28, 2014

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Cash and cash equivalents

  $ 43,020     $ 0     $ 0     $ 43,020  

Investments

    0       14,185       0       14,185  

Total assets measured at fair value

  $ 43,020     $ 14,185     $ 0     $ 57,205  
                                 

Accounts payable and accrued expenses

  $ 0     $ 1,316     $ 0     $ 1,316  

Deferred rent and other non-current liabilities

    0       1,178       0       1,178  

Total liabilities measured at fair value

  $ 0     $ 2,494     $ 0     $ 2,494  

 

   

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 and six months ended February 28, 2014, no fair value adjustments or fair value measurements were required for the Company’s non-financial assets or liabilities.

  

 
9

 

 

5. DERIVATIVE INSTRUMENTS

 

Cash Flow Hedges

FactSet conducts business outside the U.S. in several currencies including the British Pound Sterling, Euro, Japanese Yen, Indian Rupee and Philippine Peso. As such, it is exposed to movements in foreign currency exchange rates compared to the U.S. dollar. To manage the exposures related to the effects of foreign exchange rate fluctuations, the Company utilizes derivative instruments (foreign currency forward contracts). The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The Company does not enter into foreign exchange forward contracts for trading or speculative purposes. In designing a specific hedging approach, FactSet considered several factors, including offsetting exposures, significance of exposures, forecasting risk and potential effectiveness of the hedge. The gains and losses on foreign currency forward contracts offset the variability in operating expenses associated with currency movements. There was no discontinuance of cash flow hedges during the three and six months ended February 28, 2014 and 2013, 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 February 28, 2014 FactSet maintained foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the fourth quarter of fiscal 2016 and approximately 50% of its Philippines Peso exposure through the second quarter of fiscal 2015. At February 28, 2014, the notional principal and fair value of foreign exchange contracts to purchase Indian Rupees with U.S. dollars was Rs.3.1 billion and ($2.4) million, respectively. At February 28, 2014, the notional principal and fair value of foreign exchange contracts to purchase Philippine Pesos with U.S. dollars was Php547.1million and ($0.1) 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)

 

Feb 28, 2014

   

Aug 31, 2013

   

Feb 28, 2014

   

Aug 31, 2013

 

Indian Rupee

  $ 47,735     $ 47,388     $ (2,364 )   $ (7,693 )

Philippine Peso

    12,350       11,700       (130 )     (178 )

British Pound

    0       10,436       0       131  

Total

  $ 60,085     $ 69,524     $ (2,494 )   $ (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 tables provide a summary of the fair value amounts of derivative instruments and gains and losses on derivative instruments (in thousands):

 

Designation of Derivatives

 

Balance Sheet Location

 

Feb 28, 2014

   

Aug 31, 2013

 

Derivatives designated as hedging instruments

 

Liabilities: Foreign Currency Forward Contracts

               
   

Accounts payable and accrued expenses

  $ 1,316     $ 3,085  
   

Deferred Rent and other non-current liabilities

  $ 1,178     $ 4,655  

 

All derivatives were designated as hedging instruments as of February 28, 2014 and August 31, 2013, respectively.

  

 
10

 

 

Derivatives in Cash Flow Hedging Relationships

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the three months ended February 28, 2014 and 2013 (in thousands):

 

   

Gain Recognized

in AOCL on Derivatives
(Effective Portion)

 

Location of Gain

Reclassified from AOCL into Income

 

Gain Reclassified from AOCL into Income (Effective Portion)

 

Derivatives in Cash Flow Hedging Relationships

 

2014

   

2013

  (Effective Portion)  

2014

   

2013

 

Foreign currency forward contracts

  $ 761     $ 228  

SG&A

  $ 143     $ 94  

 

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the six months ended February 28, 2014 and 2013 (in thousands):

 

   

Gain Recognized

in AOCL on Derivatives
(Effective Portion)

 

Location of (Loss) Reclassified from AOCL into Income

 

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

 

Derivatives in Cash Flow Hedging Relationships

 

2014

   

2013

   (Effective Portion)  

2014

   

2013

 

Foreign currency forward contracts

  $ 4,988     $ 1,798  

SG&A

  $ (257 )   $ (397 )

 

No amount of ineffectiveness was recorded in the Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or loss was included in the assessment of hedge effectiveness. As of February 28, 2014, FactSet estimates that approximately $1.3 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 February 28, 2014 and August 31, 2013, information related to these offsetting arrangements was as follows (in thousands):

   

Derivatives Offset in Consolidated Balance Sheet

 

February 28, 2014

 

Gross Derivative Amount

   

Gross Derivative Amounts Offset in Balance Sheet

   

Net

Amount

 

Fair value of assets

  $ 0     $ 0     $ 0  

Fair value of liabilities

    (2,726 )     232       (2,494 )

Total

  $ ( 2,726 )   $ 232     $ (2,494 )

 

   

Derivatives Offset in Consolidated 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 (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of other comprehensive income (loss) and amounts reclassified out of accumulated other comprehensive loss into earnings during the three and six months ended February 28, 2014 and 2013 are as follows (in thousands):

 

   

Three Months Ended

February 28, 2014

   

Three Months Ended

February 28, 2013

 
   

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ 3,506     $ 3,506     $ (4,731 )   $ (4,731 )

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

    (143 )     (89 )     (94 )     (58 )

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

    761       476       228       142  

Other comprehensive income (loss)

  $ 4,124     $ 3,893     $ (4,597 )   $ (4,647 )

 

   

Six Months Ended

February 28, 2014

   

Six Months Ended

February 28, 2013

 
   

Pre-tax

   

Net of tax

   

Pre-tax

   

Net of tax

 

Foreign currency translation adjustments

  $ 11,654     $ 11,654     $ (1,657 )   $ (1,657 )

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

    257       161       397       247  

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

    4,988       3,123       1,798       1,124  

Other comprehensive income (loss)

  $ 16,899     $ 14,938     $ 538     $ (286 )

 

(1) Reclassified to Selling, General and Administrative Expenses

  

 
11

 

 

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

 

   

Feb 28, 2014

   

Aug 31, 2013

 

Accumulated unrealized losses on cash flow hedges, net of tax

  $ (1,562 )   $ (4,847 )

Accumulated foreign currency translation adjustments

    (14,672 )     (26,326 )

Total accumulated other comprehensive loss

  $ (16,234 )   $ (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, Singapore, Australia 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 $287.5 million of goodwill reported by the Company at February 28, 2014, 62% was recorded in the U.S. segment, 37% 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 February 28, 2014

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

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

Segment operating profit

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

Total assets

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

Capital expenditures

    2,186       106       302       2,594  

 

For the three months ended February 28, 2013

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 146,034     $ 51,650     $ 15,399     $ 213,083  

Segment operating profit

    24,525       24,219       7,420       56,164  

Total assets

    441,575       176,317       52,086       669,978  

Capital expenditures

    2,032       164       791       2,987  

  

 
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For the six months ended February 28, 2014

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

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

Segment operating profit

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

Capital expenditures

    7,430       192       410       8,032  

 

For the six months ended February 28, 2013

 

U.S.

   

Europe

   

Asia Pacific

   

Total

 

Revenues from clients

  $ 289,975     $ 103,280     $ 30,912     $ 424,167  

Segment operating profit

    64,125       48,942       14,181       127,248  

Capital expenditures

    5,309       717       3,058       9,084  

 

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 classifies companies into a unique industry taxonomy and offers a database of supply chain relationships that helps investors identify companies’ interrelationships and mutual dependencies. As of the date of acquisition, Revere had annual subscriptions of $4.9 million. The opportunity for FactSet to offer this robust data to new and existing clients contributed to a purchase price in excess of fair value of the Revere net tangible and intangible assets. As a result, FactSet recorded goodwill in connection with this transaction.

 

Allocation of the purchase price to the assets acquired and liabilities assumed was finalized during the second quarter of fiscal 2014. There were no significant adjustments between the preliminary and final allocation. The total 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 the valuation, the allocation is as follows (in thousands):

 

Tangible assets acquired

  $ 544  

Amortizable intangible assets

       

Data content

    2,799  

Client relationships

    827  

Non-compete agreements

    162  

Trade name

    293  

Goodwill

    11,612  

Total assets acquired

    16,237  

Liabilities assumed

    (949 )

Net assets acquired

  $ 15,288  

 

Intangible assets of $4.1 million have been allocated to amortizable intangible assets consisting of data content, amortized over five years using a straight-line amortization method; client relationships, amortized over seven years using an accelerated amortization method; non-compete agreements, amortized over two years using a straight-line amortization method; and trade name, amortized over four years using a straight-line amortization method.

 

Goodwill totaling $11.6 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the 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 and second quarters of fiscal 2014. Pro forma information has not been presented because the effects of this acquisition were not material to the Company’s consolidated financial results.

 

Matrix Data Limited

During the second quarter of fiscal 2014, FactSet acquired Matrix Data Limited (“Matrix”) for a total purchase price of $32.1 million. Matrix’ primary line of business is a provider of intelligence to the UK financial services industry, covering market share of mutual fund distribution. Matrix has developed customer, channel and market benchmarking solutions that help clients optimize product distribution and improve marketing effectiveness to drive revenue growth. At the time of acquisition, Matrix had annual subscriptions of $7.3 million. We expect that the acquisition of Matrix will allow FactSet to expand its current U.S. advisor-sold investments and insurance products to the UK, with the potential to ultimately expand this coverage throughout continental Europe. The opportunity for FactSet to develop an international presence and complement its existing U.S. product offerings contributed to a purchase price in excess of fair value of the Matrix net tangible and intangible assets. As a result, FactSet recorded goodwill in connection with this transaction.

  

 
13

 

 

Allocation of the purchase price to the assets acquired and liabilities assumed was not yet finalized as of February 28, 2014. The preliminary purchase price was allocated to Matrix’ 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

  $ 7,495  

Amortizable intangible assets

       

Data content

    3,508  

Client relationships

    3,060  

Software technology

    1,638  

Non-compete agreements

    746  

Trade name

    149  

Goodwill

    25,588  

Total assets acquired

    42,184  

Liabilities assumed

    (10,093 )

Net assets acquired

  $ 32,091  

 

Intangible assets of $9.1 million have been allocated to amortizable intangible assets consisting of data content, amortized over five years using a straight-line amortization method; client relationships, amortized over seven years using an accelerated amortization method; software technology, amortized over five years using a straight-line amortization method; non-compete agreements, amortized over three years using a 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 $25.6 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the Matrix acquisition is included in the Europe segment and is deductible for income tax purposes. The results of the operations of Matrix have been included in the Company’s Consolidated Statement of Income since the completion of the acquisition and did not have a material impact on the second quarter of fiscal 2014. Pro forma information has not been presented because the effects of this acquisition were not material to the Company’s consolidated financial results.

 

9. GOODWILL

 

Changes in the carrying amount of goodwill by segment for the six months ended February 28, 2014 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

    11,612       25,588       0       37,200  

Foreign currency translations

    0       5,901       (129 )     5,772  

Balance at February 28, 2014

  $ 179,434     $ 104,913     $ 3,198     $ 287,545  

 

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.

  

 
14

 

 

10. INTANGIBLE ASSETS

 

FactSet’s identifiable intangible assets consist of acquired content databases, client relationships, software technology, non-compete agreements and trade names resulting from acquisitions, which have been fully integrated into the Company’s operations. The weighted average useful life of FactSet’s acquired identifiable intangible assets at February 28, 2014 was 11.1 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 half 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 February 28, 2014

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Data content

  $ 58,009     $ 25,458     $ 32,551  

Client relationships

    26,322       16,524       9,798  

Software technology

    22,979       19,819       3,160  

Non-compete agreements

    3,080       1,628       1,452  

Trade names

    1,203       774       429  

Total

  $ 111,593     $ 64,203     $ 47,390  

 

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, $4.1 million of intangible assets were acquired with a weighted average useful life of 5.2 years due to the Revere acquisition. During the second quarter of fiscal 2014, FactSet acquired an additional $9.1 million of intangible assets in connection with the Matrix acquisition with a weighted average estimated useful life of 5.5 years.

 

Amortization expense recorded for intangible assets was $2.2 million and $1.9 million for the three months ended February 28, 2014 and 2013, respectively. Amortization expense recorded for intangible assets was $3.9 million and $3.8 million for the six months ended February 28, 2014 and 2013, respectively. As of February 28, 2014, 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 six months)

  $ 4,410  

2015

    7,782  

2016

    6,040  

2017

    5,735  

2018

    5,210  

Thereafter

    18,213  

Total

  $ 47,390  

 

11. COMMON STOCK AND EARNINGS PER SHARE

 

On February 11, 2014, 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 $14.8 million was paid on March 18, 2014, to common stockholders of record on February 28, 2014.

  

 
15

 

 

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

 

   

Six Months Ended February 28,

 
   

2014

   

2013

 

Balance at September 1

    43,324       44,279  

Common stock issued for employee stock plans

    368       780  

Repurchase of common stock

    (1,330 )     (1,480 )

Balance at February 28, 2014 and 2013, respectively

    42,362       43,579  

 

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):

 

   

Net Income

(Numerator)

   

Weighted Average Common Shares (Denominator)

   

Per Share

Amount

 

For the three months ended February 28, 2014

 

Basic EPS

                       

Income available to common stockholders

  $ 52,426       42,547     $ 1.23  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            560          

Income available to common stockholders plus assumed conversions

  $ 52,426       43,107     $ 1.22  

For the three months ended February 28, 2013

 

Basic EPS

                       

Income available to common stockholders

  $ 44,539       43,813     $ 1.02  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            642          

Income available to common stockholders plus assumed conversions

  $ 44,539       44,455     $ 1.00  

For the six months ended February 28, 2014

 

Basic EPS

                       

Income available to common stockholders

  $ 104,604       42,840     $ 2.44  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            592          

Income available to common stockholders plus assumed conversions

  $ 104,604       43,432     $ 2.41  

For the six months ended February 28, 2013

 

Basic EPS

                       

Income available to common stockholders

  $ 94,307       44,065     $ 2.14  

Diluted EPS

                       

Dilutive effect of stock options and restricted stock

            723          

Income available to common stockholders plus assumed conversions

  $ 94,307       44,788     $ 2.11  

 

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 months ended February 28, 2014 and 2013 was 49,738 and 476,657, respectively, because their inclusion would have been anti-dilutive. No stock options were excluded from the calculation of diluted earnings per share for the six months ended February 28, 2014, while 465,332 were excluded for the six months ended February 28, 2013, because their inclusion would have been anti-dilutive.

 

For the three and six months ended February 28, 2014 the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 1,394,821. Similarly, for the three and six months ended February 28, 2013, the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 1,920,874. Performance-based stock options are omitted from the calculation of diluted earnings per share until the performance criteria have been met. The criteria had not yet been met at February 28, 2014 and 2013 for these performance-based stock options.

  

 
16

 

 

12. STOCKHOLDERS’ EQUITY

 

Preferred Stock

At February 28, 2014 and 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 February 28, 2014 and August 31, 2013, there were 150,000,000 shares of common stock ($.01 par value per share) authorized, of which 48,499,353 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 February 28, 2014 and August 31, 2013, there were 6,137,619 and 4,786,330 shares of treasury stock (at cost) outstanding, respectively. As a result, 42,361,734 and 43,324,410 shares of FactSet common stock were outstanding at February 28, 2014 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 six months of fiscal 2014, the Company repurchased 1,330,000 shares for $143.8 million. At February 28, 2014, $218.6 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 1,330,000 shares under the existing share repurchase program, FactSet repurchased 21,289 shares for $2.3 million from employees to cover their cost of taxes upon the vesting of previously granted restricted stock during the first six months 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 six months of fiscal 2014, 79,774 of previously granted restricted stock awards vested and were included in common stock outstanding as of February 28, 2014 (less 21,289 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock). During the same period in fiscal 2013, 148,969 of previously granted restricted stock awards vested and were included in common stock outstanding as of February 28, 2013 (less 50,144 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

February 11, 2014

  $ 0.35  

Regular (cash)

 

February 28, 2014

  $ 14,827  

March 18, 2014

November 14, 2013

  $ 0.35  

Regular (cash)

 

November 29, 2013

  $ 15,046  

December 17, 2013

August 15, 2013

  $ 0.35  

Regular (cash)

 

August 31, 2013

  $ 15,164  

September 17, 2013

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

 

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.

   

 
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During the first six months of fiscal 2014, FactSet granted 391,478 stock options at a weighted average exercise price of $106.73 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  

Granted – non-performance-based

    139       102.01  

Granted – performance-based

    166       109.39  

Granted – non-employee Directors grant

    14       107.65  

Exercised

    (136 )     40.99  

Forfeited

    (24 )     86.75  

Balance at February 28, 2014

    4,814     $ 82.56  

 

The total number of in-the-money options exercisable as of February 28, 2014 was 2.2 million with a weighted average exercise price of $65.27. 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 February 28, 2014 and August 31, 2013 was $86.9 million and $82.1 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price of $105.29 at February 28, 2014 and the exercise price multiplied by the number of options exercisable as of that date. The total pre-tax intrinsic value of stock options exercised during the three months ended February 28, 2014 and 2013 was $9.0 million and $18.5 million, respectively. The total pre-tax intrinsic value of stock options exercised during the six months ended February 28, 2014 and 2013 was $16.0 million and $30.2 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 and diluted earnings per share during the two fiscal years ended August 31, 2014. At February 28, 2014, FactSet estimated that 20% or 202,302 of the performance-based stock options would vest which results in unamortized stock-based compensation expense of $2.8 million to be recognized over the remaining vesting period of 3.7 years. However, a change in the actual financial performance levels achieved over the next two 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 February 28, 2014

   

Cumulative Catch-up Adjustment*

   

Average Remaining Quarterly Expense to be Recognized

 

0%

  $ 0     $ (1,907 )   $ 0  

20%

  $ 2,840     $ 0     $ 194  

60%

  $ 8,521     $ 3,814     $ 582  

100%

  $ 14,202     $ 7,628     $ 970  

 

* Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of February 28, 2014.

  

 
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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 $1.1 million to be recognized over the remaining vesting period of 3.5 years. A change, up or down, in the actual financial performance levels achieved by StreetAccount in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense (in thousands):

 

Vesting

Percentage

 

Cumulative

Catch-up Adjustment**

   

Remaining Expense

to be Recognized

 

First 20%*

 

n/a 

   

n/a*

 

Second 20%

  $ (516 )   $ 1,084  

Third 20%

  $ 640     $ 2,044  

Fourth 20%

  $ 1,212     $ 3,072  

Fifth 20%

  $ 1,939     $ 3,945  

 

 

*The first 20% of the grant vested during fiscal 2013, and as such, there is no remaining expense to be recognized as of February 28, 2014.

** Amounts represent the cumulative catch-up adjustment to be recorded if there was a change in the vesting percentage as of February 28, 2014

 

Other Performance-based Option Grants

In connection with the acquisitions of Matrix and Revere during the first six months of fiscal 2014, FactSet granted 165,949 and 36,695 performance-based stock options, respectively. The performance-based options granted in connection with the acquisition of Matrix will vest only if ASV and operating margin targets related to the Matrix business are met during a five year measurement period ending December 23, 2018, and the option holders remain employed by FactSet. As of February 28, 2014 FactSet does not believe these targets are probable of being achieved, and as such, no stock-based compensation expense is expected to be realized in connection with these options. Of the 36,695 performance-based stock options granted in connection with the Revere acquisition, FactSet currently estimates that 18,553 options will vest based upon the achievement of certain ASV and operating margins during the measurement period ending August 31, 2015. This results in unamortized stock-based compensation expense of $0.5 million to be recognized over the remaining vesting period of 4.5 years.

 

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 six months of fiscal 2014, FactSet granted 204,124 restricted stock awards at a weighted average grant date fair value of $101.95 to employees of the Company. There were no restricted stock awards granted during the first six 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  

Granted (restricted stock and stock units)

    42     $ 100.70  

Vested*

    (17 )   $ 60.28  

Canceled/forfeited

    (4 )   $ 97.28  

Balance at February 28, 2014

    476     $ 89.79  

 

* The total 17,230 restricted stock awards that vested during the second quarter of fiscal 2014 related to awards granted on February 9, 2010 at the grant date price of $63.09. These restricted stock awards cliff vest 50% after four years (on February 9, 2014) and the remaining 50% will vest after six years on February 9, 2016. The awards were amortized to expense over the vesting period using the straight-line attribution method.

 

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 February 28, 2014 unamortized stock-based compensation expense of $12.6 million is to be amortized ratably to compensation expense over the remaining vesting period of 4.7 years.

  

 
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Revere and Matrix Performance-based Restricted Stock Units

In connection with the acquisitions of Matrix and Revere, FactSet granted 30,144 and 7,744 performance-based restricted stock units, respectively. The vesting restriction on the units granted in connection with the acquisition of Matrix will lapse only if ASV and operating margin targets related to the Matrix business are met during a five year measurement period ending December 23, 2018, and the holders remain employed by FactSet. As of February 28, 2014 FactSet does not believe these targets are probable of being achieved, and as such, no stock-based compensation expense is expected to be realized in connection with these restricted stock units. In addition, none of the 7,744 performance-based restricted stock units granted in connection with the Revere acquisition are estimated to vest as of February 28, 2014 based upon management’s belief that the ASV and operating margin targets will not be achieved during the measurement period ending August 31, 2017.

 

Other Restricted Stock Units

An additional 12,264 restricted stock awards were granted during the second quarter of fiscal 2014 existing employees of FactSet. The restricted stock awards cliff vest 60% upon the third-year anniversary date each grant, with the remaining 40% vesting on the fifth year anniversary date. As of February 28, 2014 unamortized stock-based compensation of $1.0 million will be amortized to compensation expense over the remaining vesting period of 4.9 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 )     0  

Granted – performance-based options

    (36 )     0  

Restricted stock awards granted*

    (404 )     0  

Share-based awards canceled/forfeited*

    16       0  

Balance at November 30, 2013

    2,656       107  

Granted – non performance-based options

    (139 )     (14 )

Granted – performance-based options

    (166 )     0  

Restricted stock awards granted*

    (106 )     0  

Share-based awards canceled/forfeited*

    35       9  

Balance at February 28, 2014

    2,280       102  

 

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

 

Employee Stock Purchase Plan

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 February 28, 2014, employees purchased 20,166 shares at a weighted average price of $89.50 as compared to 21,389 shares at a weighted average price of $78.56 in the same period a year ago. During the six months ended February 28, 2014, employees purchased 36,529 shares at a weighted average price of $88.18 as compared to 39,491 shares at a weighted average price of $78.55 in the same period a year ago. At February 28, 2014, 83,241 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 $3.7 million in matching contributions to employee 401(k) accounts during the six months ended February 28, 2014 and 2013.

  

 
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14. STOCK-BASED COMPENSATION

 

The Company recognized total stock-based compensation expense of $5.5 million and $10.6 million during the three and six months ended February 28, 2014, respectively. Similarly, the Company recognized total stock-based compensation expense of $21.2 million and $26.4 million during the three and six months ended February 28, 2013. The fiscal 2013 totals include a pre-tax charge of $15.7 million related to performance-based options granted in connection with the acquisition of Market Metrics in June 2010. These options vested during the second quarter of fiscal 2013 when the Market Metrics business accelerated to achieve stretch revenue growth targets established on the date of grant. As of February 28, 2014, $63.6 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 3.5 years. There was no stock-based compensation capitalized as of February 28, 2014 or August 31, 2013.

 

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.

 

-

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

 

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.

 

-

Q2 2013 – 9,367 non performance-based employee stock options were granted at a weighted average exercise price of $92.55 and a weighted average estimated fair value of $26.69 per share.

 

The weighted average estimated fair value of employee stock options granted during the first three and six months of fiscal 2014 and 2013 was determined using the binomial model with the following weighted average assumptions:

 

   

Three Months Ended

February 28,

   

Six Months Ended

February 28,

 
   

2014

   

2013

   

2014

   

2013

 

Term structure of risk-free interest rate

  0.01% - 2.48%     0.16% - 1.91%     0.01% - 2.61%     0.16% - 1.91%  
Expected life (in years)     7.6         7.6       7.6 7.8     7.6 7.8  

Term structure of volatility

  23% - 32%     24% - 33%     23% - 33%     24% - 33%  

Dividend yield

    1.35%         1.30%         1.35%         1.30%    

Weighted average estimated fair value

    $29.14         $26.69         $29.64         $26.87    

Weighted average exercise price

    $106.03         $92.55         $106.69         $92.22    

Fair value as a percentage of exercise price

    27.5%         28.8%         27.8%         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.

  

 
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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.

 

Fiscal 2014

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

 

Risk-free interest rate

    1.66

%

Expected life (in years)

    5.4  

Expected volatility

    28.9

%

Dividend yield

    1.35

%

 

 

Fiscal 2013

On January 15, 2013, FactSet granted 18,781 stock options to the Company’s non-employee Directors at a weighted average estimated fair value of $24.23 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

Risk-free interest rate

    0.89

%

Expected life (in years)

    5.4  

Expected volatility

    32.3

%

Dividend yield

    1.30

%

 

 

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

 

Restricted Stock Fair Value Determinations

Restricted stock granted to employees entitle the holder to shares of common stock as the award vests over time, but not to dividends declared on the underlying shares while the restricted stock is unvested. The grant date fair value of restricted stock awards are measured by reducing the grant date price of FactSet’s common stock by the present value of the dividends expected to be paid on the underlying stock during the requisite service period, discounted at the appropriate risk-free interest rate.

 

Employee Stock Purchase Plan Fair Value Determinations

During the three months ended February 28, 2014, employees purchased 20,166 shares at a weighted average price of $89.50 as compared to 21,389 shares at a weighted average price of $78.56 in the same period a year ago. During the six months ended February 28, 2014, employees purchased 36,529 shares at a weighted average price of $88.22 as compared to 39,491 shares at a weighted average price of $78.55 in the same period a year ago. Stock-based compensation expense recorded for the three months ended February 28, 2014 and 2013, relating to the employee stock purchase plan was $0.3 million, respectively.

  

 
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The Company u