FACTSET RESEARCH SYSTEMS INC - Quarter Report: 2016 May (Form 10-Q)

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		Three Months Ended May 31,								Nine Months Ended May 31,
(In thousands, except per share data)		2016				2015				2016				2015
Revenues		$	287,501			$	254,522			$	839,801			$	744,990
Operating expenses
Cost of services			124,602				100,686				363,249				297,745
Selling, general and administrative			73,609				68,480				214,610				200,980
Total operating expenses			198,211				169,166				577,859				498,725
Operating income			89,290				85,356				261,942				246,265
Other (expense) income			(433	)			482				(765	)			1,445
Income before income taxes			88,857				85,838				261,177				247,710
Provision for income taxes			22,076				24,429				66,669				68,843
Net income		$	66,781			$	61,409			$	194,508			$	178,867
Basic earnings per common share		$	1.64			$	1.48			$	4.73			$	4.29
Diluted earnings per common share		$	1.62			$	1.45			$	4.68			$	4.23
Basic weighted average common shares			40,779				41,628				41,094				41,648
Diluted weighted average common shares			41,189				42,297				41,596				42,317

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		Three Months Ended May 31,								Nine Months Ended May 31,
(In thousands)		2016				2015				2016				2015
Net income		$	66,781			$	61,409			$	194,508			$	178,867
Other comprehensive income (loss), net of tax
Net unrealized gain (loss) on cash flow hedges*			2,464				(1,020	)			229				(289	)
Foreign currency translation adjustments			8,883				(4,187	)			(7,867	)			(25,753	)
Other comprehensive income (loss)			11,347				(5,207	)			(7,638	)			(26,042	)
Comprehensive income		$	78,128			$	56,202			$	186,870			$	152,825

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		May 31, 2016				August 31, 2015
(In thousands, except share data)		(Unaudited)
ASSETS
Cash and cash equivalents		$	187,436			$	158,914
Investments			23,720				23,497
Accounts receivable, net of reserves of $1,482 at May 31, 2016 and $1,580 at August 31, 2015			104,666				95,064
Prepaid taxes			—				4,808
Deferred taxes			2,521				2,105
Prepaid expenses and other current assets			15,736				19,786
Assets held for sale			48,940				—
Total current assets			383,019				304,174
Property, equipment and leasehold improvements, at cost			241,351				213,279
Less accumulated depreciation and amortization			(163,269	)			(154,015	)
Property, equipment and leasehold improvements, net			78,082				59,264
Goodwill			460,393				308,287
Intangible assets, net			97,978				40,052
Deferred taxes			14,257				20,599
Other assets			5,246				4,295
TOTAL ASSETS		$	1,038,975			$	736,671
LIABILITIES
Accounts payable and accrued expenses		$	38,033			$	33,880
Accrued compensation			43,393				44,916
Deferred fees			34,076				38,488
Deferred taxes			425				562
Taxes payable			4,333				3,755
Dividends payable			20,328				18,179
Liabilities held for sale			14,110				—
Total current liabilities			154,698				139,780
Long-term debt			300,000				35,000
Deferred taxes			1,543				1,697
Taxes payable			8,200				6,776
Deferred rent and other non-current liabilities			30,877				21,834
TOTAL LIABILITIES		$	495,318			$	205,087
Commitments and contingencies (See Note 18)
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		$	—			$	—
Common stock, $.01 par value, 150,000,000 shares authorized, 50,907,581 and 50,328,423 shares issued; 40,656,168 and 41,316,902 shares outstanding at May 31, 2016 and August 31, 2015, respectively			509				503
Additional paid-in capital			616,954				542,355
Treasury stock, at cost: 10,251,413 and 9,011,521 shares at May 31, 2016 and August 31, 2015, respectively			(1,181,695	)			(988,873	)
Retained earnings			1,159,579				1,021,651
Accumulated other comprehensive loss			(51,690	)			(44,052	)
TOTAL STOCKHOLDERS’ EQUITY		$	543,657			$	531,584
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,038,975			$	736,671

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		Nine Months Ended May 31,
(in thousands)		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	194,508			$	178,867
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			28,222				24,229
Stock-based compensation expense			22,433				17,112
Deferred income taxes			3,015				3,041
Loss (gain) on sale of assets			2				(17	)
Tax benefits from share-based payment arrangements			(13,327	)			(23,926	)
Changes in assets and liabilities, net of effects of acquisitions
Accounts receivable, net of reserves			(11,316	)			(1,159	)
Accounts payable and accrued expenses			3,474				5,973
Accrued compensation			(1,809	)			(5,496	)
Deferred fees			3,696				5,951
Taxes payable, net of prepaid taxes			20,313				16,213
Prepaid expenses and other assets			1,250				78
Deferred rent and other non-current liabilities			10,812				1,873
Other working capital accounts, net			(169	)			103
Net cash provided by operating activities			261,104				222,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired			(264,087	)			(33,556	)
Purchases of investments			(12,934	)			(12,437	)
Proceeds from sales of investments			12,423				7,535
Purchases of property, equipment and leasehold improvements, net of proceeds from dispositions			(34,671	)			(15,391	)
Net cash used in investing activities			(299,269	)			(53,849	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend payments			(54,042	)			(48,404	)
Repurchase of common stock			(192,823	)			(177,556	)
Proceeds from debt			265,000				35,000
Debt issuance costs			(12	)			(32	)
Proceeds from employee stock plans			38,845				51,852
Tax benefits from share-based payment arrangements			13,327				23,926
Net cash provided by (used in) financing activities			70,295				(115,214	)
Effect of exchange rate changes on cash and cash equivalents			(3,608	)			(12,262	)
Net increase in cash and cash equivalents			28,522				41,517
Cash and cash equivalents at beginning of period			158,914				116,378
Cash and cash equivalents at end of period		$	187,436			$	157,895

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1. ORGANIZATION AND NATURE OF BUSINESS

 

FactSet Research Systems Inc. (the “Company” or “FactSet”) is a provider of integrated financial information and analytical applications for the global investment community. FactSet delivers insight and information to investment professionals through its analytics, service, content, and technology. By integrating comprehensive datasets and analytics across asset classes with client data, FactSet supports the workflow of both the buy-side and sell-side. These professionals include portfolio managers, wealth managers, research and performance analysts, risk managers, sell-side equity research professionals, investment bankers, and fixed income professionals. From streaming real-time data to historical information, including quotes, estimates, news and commentary, FactSet offers unique and third-party content through desktop, wireless and off-platform solutions. The Company’s wide application suite offers tools and resources including company and industry analyses, full screening tools, portfolio analysis, risk profiles, alpha-testing, portfolio optimization and research management solutions. Recent additions to FactSet’s offering include a complete services solution focused on verifying, cleaning and loading portfolio data across asset classes, and an execution management system through its acquisition of Portware. The Company’s revenues are derived from subscriptions to products and services such as workstations, analytics, enterprise data, research management, and trade execution.

 

2. BASIS OF PRESENTATION

 

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

 

The accompanying financial data as of May 31, 2016 and for the three and nine months ended May 31, 2016 and 2015 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The August 31, 2015 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The information in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2015.

 

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

 

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

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

As of the beginning of fiscal 2016, FactSet implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board (“FASB”) that were in effect. There were no new standards or updates adopted during the first nine months of fiscal 2016 that had a material impact on the consolidated financial statements.

 

Revenue Recognition

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

 

 

Going Concern

In August 2014, the FASB issued an accounting standard update that requires management to evaluate and disclose whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after financial statements are issued. The evaluation and disclosure will be required to be made for both annual and interim reporting periods, if applicable, along with an evaluation as to whether management’s plans alleviate that doubt. This accounting standard update will be effective for FactSet beginning in the first quarter of fiscal 2017. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.

 

Income Statement Presentation – Extraordinary and Unusual Items

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

 

Simplification Guidance on Debt Issuance Costs

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

 

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

 

Customers’ Accounting for Cloud Computing Costs

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

 

Simplification of the Accounting for Measurement-Period Adjustments

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

 

Balance Sheet Classification of Deferred Taxes

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

 

Recognition and Measurement of Financial Assets and Financial Liabilities

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

 

 

Leases

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

 

Share-Based Payments

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

 

No other new accounting pronouncements issued or effective as of May 31, 2016 have had or are expected to have an impact on the Company’s consolidated financial statements.

 

4. FAIR VALUE MEASURES

 

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

 

Fair Value Hierarchy

 

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

 

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

 

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

 

Level 3 – applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. There were no Level 3 assets or liabilities held by the Company as of May 31, 2016 or August 31, 2015.

 

 

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

 

The following tables shows by level within the fair value hierarchy the Company’s assets and liabilities that are measured at fair value on a recurring basis at May 31, 2016 and August 31, 2015:

 

 

 

 

 

(1)

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

 

(2)

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

 

(3)

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

 

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

 

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

 

Certain assets, including goodwill and intangible assets, and liabilities, are measured at fair value on a non-recurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as when they are deemed to be other-than-temporarily impaired. The fair values of these non-financial assets and liabilities are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost exceeds its fair value, based upon the results of such valuations. During the three and nine months ended May 31, 2016, no fair value adjustments or material fair value measurements were required for the Company’s non-financial assets or liabilities.

 

 

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

 

As of May 31, 2016 and August 31, 2015, the fair value of the Company’s long-term debt was $300.0 million and $35.0 million, respectively, which approximated its carrying amount given its floating interest rate basis. The fair value of the Company’s long-term debt was determined based on quoted market prices for debt with a similar maturity, and thus categorized as Level 2 in the fair value hierarchy.

 

5. DERIVATIVE INSTRUMENTS

 

Cash Flow Hedges

 

FactSet conducts business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, Japanese Yen and Philippine Peso. As such, it is exposed to movements in foreign currency exchange rates compared to the U.S. dollar. The Company utilizes derivative instruments (foreign currency forward contracts) to manage the exposures related to the effects of foreign exchange rate fluctuations and reduce the volatility of earnings and cash flows associated with changes in foreign currency. The Company does not enter into foreign currency forward contracts for trading or speculative purposes. In designing a specific hedging approach, FactSet considered several factors, including offsetting exposures, the significance of exposures, the forecasting of risk and the potential effectiveness of the hedge. The gains and losses on foreign currency forward contracts offset the variability in operating expenses associated with currency movements. The changes in fair value for these foreign currency forward contracts are initially reported as a component of accumulated other comprehensive loss (“AOCL”) and subsequently reclassified into operating expenses when the hedged exposure affects earnings. There was no discontinuance of cash flow hedges during the first nine months of fiscal 2016 and 2015, and as such, no corresponding gains or losses related to changes in the value of the Company’s contracts were reclassified into earnings prior to settlement.

 

As of May 31, 2016, FactSet maintained the following foreign currency forward contracts to hedge its British Pound Sterling, Euro and Indian Rupee exposures:

 

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

 

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

 

●

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

 

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

 

 

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

 

Counterparty Credit Risk

 

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

 

 

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:

 

 

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

 

Derivatives in Cash Flow Hedging Relationships

 

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

 

 

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

 

 

No amount of ineffectiveness was recorded in the Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or loss was included in the assessment of hedge effectiveness. As of May 31, 2016, FactSet estimates that approximately $0.4 million of net derivative losses related to its cash flow hedges included in AOCL will be reclassified into earnings within the next 12 months.

 

Offsetting of Derivative Instruments

 

FactSet’s master netting and other similar arrangements with its respective counterparties allow for net settlement under certain conditions. As of May 31, 2016 and August 31, 2015, information related to these offsetting arrangements was as follows:

 

 

 

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

 

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

 

 

(1)

Reclassified to Selling, General and Administrative Expenses

 

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

 

(1)

Reclassified to Selling, General and Administrative Expenses

 

The components of AOCL are as follows:

 

 

7. SEGMENT INFORMATION

 

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

 

FactSet’s operating segments are aligned with how the Company, including its CODM, manages the business and the demographic markets in which FactSet serves. The Company’s internal financial reporting structure is based on three segments; the U.S., Europe and Asia Pacific. FactSet believes this alignment helps it better manage the business and view the markets the Company serves, which are centered on providing integrated global financial and economic information. Sales, consulting, data collection, product development and software engineering are the primary functional groups within the U.S., Europe and Asia Pacific segments that provide global financial and economic information to investment managers, investment banks and other financial services professionals. The U.S. segment services finance professionals including financial institutions throughout the Americas, while the European and Asia Pacific segments service investment professionals located throughout Europe and the Asia Pacific region, respectively.

 

The European segment is headquartered in London, England and maintains office locations in France, Germany, Ireland, Italy, Latvia, Luxembourg, the Netherlands, Spain, South Africa, Sweden and Dubai. The Asia Pacific segment is headquartered in Tokyo, Japan with office locations in Australia, Hong Kong, Singapore and India. Segment revenues reflect direct sales to clients based in their respective geographic locations. There are no intersegment or intercompany sales of FactSet services. Each segment records compensation expense, including stock-based compensation, amortization of intangible assets, depreciation of furniture and fixtures, amortization of leasehold improvements, communication costs, professional fees, rent expense, travel, marketing, office and other direct expenses. Expenditures associated with the Company’s data centers, third party data costs and corporate headquarters charges are recorded by the U.S. segment and are not allocated to the other segments. The content collection centers located in India and the Philippines benefit all of the Company’s operating segments and thus the expenses incurred at these locations are allocated to each segment based on a percentage of revenues. Of the total $460.4 million of goodwill reported by the Company at May 31, 2016, 80% was recorded in the U.S. segment, 19% in the European segment and the remaining 1% in the Asia Pacific segment.

 

 

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

 

 

 

 

 

8. BUSINESS COMBINATIONS

 

Portware LLC

 

On October 16, 2015, FactSet acquired Portware LLC (“Portware”) for a total purchase price of $264.8 million. At the time of acquisition, Portware employed 166 individuals in its New York, London, Hong Kong, and Hyderabad, India offices. Portware is a global provider of multi-asset trade automation solutions for mega and large asset managers. With the acquisition of Portware, FactSet now offers a platform that it expects will increase value to global asset managers by expanding its capabilities to include multi-asset trade automation. This factor contributed to a purchase price in excess of fair value of Portware’s net tangible and intangible assets, leading to the recognition of goodwill. Total transaction costs related to the acquisition were $0.7 million for the nine months ended May 31, 2016. These transaction expenses were recorded within Selling, General and Administrative (“SG&A”) expenses in the Consolidated Statement of Income.

 

Allocation of the purchase price to the assets acquired and liabilities assumed was not yet finalized as of May 31, 2016 as it is subject to finalizing certain acquired assets and liabilities in addition to working capital adjustments. The preliminary purchase price was allocated to Portware’s net tangible and intangible assets based upon their estimated fair value as of the date of acquisition. Based upon the purchase price and preliminary valuation, the allocation is as follows:

 

 

 

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

 

Goodwill totaling $188.4 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is included in the U.S. segment. Approximately 95% of the total goodwill generated from the Portware acquisition is deductible for income tax purposes. The results of operations of Portware have been included in the Company’s Consolidated Statements of Income since the completion of the acquisition on October 16, 2015. Pro forma information has not been presented because the effect of the Portware acquisition is not material to the Company’s consolidated financial results.

 

Code Red, Inc.

 

On February 6, 2015, FactSet acquired Code Red, Inc. (“Code Red”) for $36.0 million. At the time of acquisition, Code Red employed 32 individuals in its Boston, New York and London offices. Code Red provides research management technologies to the investment community, including endowments and foundations, institutional asset managers, sovereign wealth funds, pensions, and hedge funds. With the addition of Code Red to FactSet's existing Research Management Solutions (“RMS”), FactSet now offers an RMS for all its clients' workflows, which is consistent with the Company’s strategy of offering software and tools to make client workflows more efficient. This factor contributed to a purchase price in excess of fair value of Code Red’s net tangible and intangible assets, leading to the recognition of goodwill.

 

The total purchase price of Code Red is as follows:

 

 

Allocation of the purchase price to the assets acquired and liabilities assumed was finalized during the second quarter of fiscal 2016. There were no significant adjustments between the preliminary and final allocation. The total purchase price was allocated to Code Red’s net tangible and intangible assets based upon their estimated fair value as of the date of acquisition.

 

Based upon the purchase price and the valuation, the allocation is as follows:

 

 

Intangible assets of $8.3 million have been allocated to amortizable intangible assets consisting of software technology, amortized over six years using a straight-line amortization method; client relationships, amortized over eight years using an accelerated amortization method; non-compete agreements, amortized over four years using a straight-line amortization method; and a trade name, amortized over three years using a straight-line amortization method.

 

Goodwill totaling $29.6 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the Code Red acquisition is included in the U.S. segment and is not deductible for income tax purposes. The results of operations of Code Red have been included in the Company’s Consolidated Statements of Income since the completion of the acquisition on February 6, 2015 and the results did not have a material impact on the third quarter of fiscal 2016. Pro forma information has not been presented because the effect of the Code Red acquisition was not material to the Company’s consolidated financial results.

 

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9. ASSETS HELD FOR SALE

 

During the third quarter of fiscal 2016, the Company entered into a definitive stock purchase agreement (the “Purchase Agreement”) pursuant to which the Company agreed to sell its market research business, consisting of Market Metrics LLC and Matrix-Data Limited (collectively the “disposal group”) and associated assets (the “Transaction”). The total purchase price was approximately $165.0 million less certain adjustments set forth in the Purchase Agreement with an additional earn-out of $10.0 million based upon the achievement of certain growth targets over the next two years by the market research business that has been sold. The Purchase Agreement and the Transaction contemplated thereby were approved by the Board of Directors of FactSet on May 19, 2016. The Transaction subsequently closed on July 1, 2016 as further described in Note 19, Subsequent Events.

 

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

 

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

 

 

10. GOODWILL

 

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

 

 

Goodwill is not amortized as it is estimated to have an indefinite life. At least annually, the Company is required to test goodwill at the reporting unit level for potential impairment, and, if impaired, write down to fair value based on the present value of discounted cash flows. The Company’s reporting units evaluated for potential impairment were the U.S., Europe and Asia Pacific, which reflect the level of internal reporting the Company uses to manage its business and operations. The three reporting units are consistent with the operating segments reported as there is no discrete financial information available for the subsidiaries within each operating segment. The Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2015, consistent with the timing of previous years, at which time it was determined that there were no indications of impairment, with the fair value of each of the Company’s reporting units significantly exceeding carrying value. Goodwill acquired during the first nine months of fiscal 2016 of $188.4 million represents the excess of the preliminary purchase price over the fair value of the net tangible and intangible assets from the Portware acquisition completed in October 2015.

 

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11. INTANGIBLE ASSETS

 

FactSet’s identifiable intangible assets consist of acquired content databases, client relationships, software technology, non-compete agreements and trade names resulting from acquisitions, which have been fully integrated into the Company’s operations. The weighted average useful life of FactSet’s acquired identifiable intangible assets at May 31, 2016 was 11.4 years. The Company amortizes intangible assets over their estimated useful lives, which are evaluated quarterly to determine whether events and circumstances warrant a revision to the remaining period of amortization. There have been no changes to the estimate of the remaining useful lives during the first nine months of fiscal 2016. Amortizable intangible assets are tested for impairment based on undiscounted cash flows, and, if impaired, written down to fair value based on discounted cash flows. No impairment of intangible assets has been identified during any of the periods presented. The intangible assets have no assigned residual values.

 

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

 

 

 

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

 

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

 

 

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12. COMMON STOCK AND EARNINGS PER SHARE

 

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

 

Shares of common stock outstanding were as follows:

 

 

(1)

For the nine months ended May 31, 2016 and 2015, the Company repurchased 19,892 and 23,192 shares, or $3.3 million and $3.1 million, of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.

 

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

 

 

Dilutive potential common shares consist of stock options and unvested restricted stock awards. The number of stock options excluded from the calculation of diluted earnings per share for the three and nine months ended May 31, 2016 was 688,538 because their inclusion would have been anti-dilutive. No stock options were excluded from the calculation of diluted earnings per share for the three and nine months ended May 31, 2015.

 

 

For the three and nine months ended May 31, 2016, the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 937,089. For the three and nine months ended May 31, 2015, the number of performance-based stock option grants excluded from the calculation of diluted earnings per share was 485,129. Performance-based stock options are omitted from the calculation of diluted earnings per share until the performance criteria are probable of being achieved. The criterion was not yet probable of being achieved as of May 31, 2016 and 2015 for these performance-based stock options.

 

13. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

At May 31, 2016 and August 31, 2015, there were 10,000,000 shares of preferred stock ($0.01 par value per share) authorized, of which no shares were issued and outstanding. FactSet’s Board of Directors may from time to time authorize the issuance of one or more series of preferred stock and, in connection with the creation of such series, determine the characteristics of each such series including, without limitation, the preference and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the series.          

 

Common Stock

 

At May 31, 2016 and August 31, 2015, there were 150,000,000 shares of common stock ($.01 par value per share) authorized, of which 50,907,581 and 50,328,423 shares were issued, respectively. The authorized shares of common stock are issuable for any proper corporate purpose, including future stock splits, stock dividends, acquisitions, raising equity capital or to adopt additional employee benefit plans.

 

Treasury Stock

 

At May 31, 2016 and August 31, 2015, there were 10,251,413 and 9,011,521 shares of treasury stock (at cost) outstanding, respectively. As a result, 40,656,168 and 41,316,902 shares of FactSet common stock were outstanding at May 31, 2016 and August 31, 2015, respectively.

 

Share Repurchase Program

 

Repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. During the first nine months of fiscal 2016, the Company repurchased 1,220,000 shares for $189.5 million. On May 19, 2016, the Company’s Board of Directors approved a $165.0 million expansion of the existing share repurchase program. Including this expansion, $359.7 million remains authorized for future share repurchases. No minimum number of shares to be repurchased has been fixed. There is no timeframe to complete the repurchase program and it is expected that share repurchases will be paid using existing and future cash generated by operations.

 

Restricted Stock

 

Restricted stock awards entitle the holder to shares of common stock as the awards vest over time. During the first nine months of fiscal 2016, 51,762 of previously granted restricted stock awards vested and were included in common stock outstanding as of May 31, 2016 (less 19,892 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock). During the same period a year ago, 68,178 of previously granted restricted stock awards vested and were included in common stock outstanding as of May 31, 2015 (less 23,192 shares repurchased from employees to cover their cost of taxes upon vesting of the restricted stock).

 

Dividends

 

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

 

 

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.

 

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14. EMPLOYEE STOCK OPTION AND RETIREMENT PLANS

 

Stock Option Awards

 

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

  

Stock Option Activity

 

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

 

A summary of stock option activity is as follows:

 

 

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

 

Performance-based Stock Options

 

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

 

 

July 2012 Performance-based Option Grant Review

In July 2012, FactSet granted 241,546 performance-based employee stock options, which are eligible to vest in 20% tranches depending upon future StreetAccount user growth through August 31, 2017. Through the third quarter of fiscal 2016, three of the growth targets as outlined within the terms of the grant were achieved. As such, 60%, or 144,942, of the options granted have vested. As of May 31, 2016, the fourth tranche is expected to vest on August 31, 2016 while the fifth tranche is expected to vest on August 31, 2017, resulting in unamortized stock-based compensation expense of $0.5 million to be recognized over the remaining vesting period of 1.2 years. A change in the actual financial performance levels achieved by StreetAccount in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense:

 

 

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

 

February 2015 Performance-based Option Grant Review

In connection with the acquisition of Code Red during the second quarter of fiscal 2015, FactSet granted 137,522 performance-based stock options. These performance-based options are eligible to vest four years from date of grant if certain Code Red ASV and operating margin targets are achieved over the measurement period. The option holders must also remain employed by FactSet to be eligible to vest. Of the total grant, 68,761 performance-based options are eligible for vesting based on achieving the growth targets over a two year measurement period ending February 28, 2017 and the remaining 68,761 options are eligible to cliff vest based on a four year measurement period ending February 28, 2019. As of May 31, 2016, total unamortized stock-based compensation of $1.6 million will be recognized as expense over the remaining vesting period of 2.7 years. A change, up or down, in the actual financial performance levels achieved by Code Red in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense:

 

 

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

 

October 2015 Performance-based Option Grant Review

In connection with the acquisition of Portware during the first quarter of fiscal 2016, FactSet granted 530,418 performance-based stock options. These performance-based options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date if certain Portware revenue and operating income targets are achieved by October 16, 2017. The option holders must also remain employed by FactSet to be eligible to vest. As of May 31, 2016, FactSet does not believe these growth targets are probable of being achieved, and as such, no stock-based compensation expense is expected to be recognized in connection with these performance-based options. A change in the actual financial performance levels achieved by Portware in future fiscal years could result in the following changes to the current estimate of the vesting percentage and related expense:

 

 

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

 

Restricted Stock and Stock Unit Awards

 

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

 

Restricted Stock and Stock Unit Awards Activity

 

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

 

 

As of May 31, 2016, a total of 341,333 shares of restricted stock and restricted stock units were unvested and outstanding, which results in unamortized stock-based compensation of $28.4 million to be recognized as stock-based compensation expense over the remaining vesting period of 3.4 years.

 

A summary of restricted stock award activity is as follows:

 

(1)

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

 

Share-based Awards Available for Grant

 

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

 

 

(1)

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

 

(2)

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

 

Employee Stock Purchase Plan

 

Shares of FactSet common stock may be purchased by eligible employees under the Amended and Restated FactSet Research Systems Inc. 2008 Employee Stock Purchase Plan (the “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 May 31, 2016, employees purchased 17,538 shares at a weighted average price of $131.57 as compared to 13,877 shares at a weighted average price of $132.48 for the three months ended May 31, 2015. During the nine months ended May 31, 2016, employees purchased 53,711 shares at a weighted average price of $129.83 as compared to 47,085 shares at a weighted average price of $118.82 in the same period a year ago. At May 31, 2016, 427,905 shares were reserved for future issuance under the Purchase Plan.

 

 

401(k) Plan

 

The Company established it 401(k) Plan in fiscal 1993. The 401(k) Plan is a defined contribution plan covering all full-time, U.S. employees of the Company and is subject to the provisions of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 (“IRC”). Each year, participants may contribute up to 60% of their eligible annual compensation, subject to annual limitations established by the IRC. The Company matches up to 4% of employees’ earnings, capped at the Internal Revenue Service annual maximum. Company matching contributions are subject to a five year graduated vesting schedule. All full-time, U.S. employees are eligible for the matching contribution by the Company. The Company contributed $7.1 million and $6.3 million in matching contributions to employee 401(k) accounts during the nine months ended May 31, 2016 and 2015, respectively.

 

15. STOCK-BASED COMPENSATION

 

The Company recognized total stock-based compensation expense of $7.4 million and $22.4 million during the three and nine months ended May 31, 2016, respectively. Similarly, the Company recognized total stock-based compensation expense of $6.1 million and $17.1 million during the three and nine months ended May 31, 2015, respectively. As of May 31, 2016, $82.5 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 3.3 years. There was no stock-based compensation capitalized as of May 31, 2016 or August 31, 2015, respectively.

 

Employee Stock Option Fair Value Determinations

 

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

 

Q1 2016	513,785 non performance-based employee stock options and 530,418 performance-based employee stock options were granted at a weighted average exercise price of $170.21 and a weighted average estimated fair value of $46.62 per share.
Q2 2016	4,073 non performance-based employee stock options were granted at an exercise price of $150.81 and an estimated fair value of $40.51 per share.
Q3 2016	103,903 non performance-based employee stock options were granted at an exercise price of $152.10 and an estimated fair value of $40.57 per share.
Q1 2015	462,913 non performance-based employee stock options were granted at a weighted average exercise price of $131.31 and a weighted average estimated fair value of $37.67 per share.
Q2 2015	25,075 non performance-based employee stock options and 137,522 performance-based employee stock options were granted at a weighted average exercise price of $147.05 and a weighted average estimated fair value of $43.05 per share.
Q3 2015	61,210 non performance-based employee stock options were granted at a weighted average exercise price of $159.14 and a weighted average estimated fair value of $44.95 per share.

 

 

 

 

The weighted average estimated fair value of employee stock options granted during the three and nine months ended May 31, 2016 and 2015 was determined using the binomial model with the following weighted average assumptions:

 

 

 

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 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. An initial 250,000 shares of FactSet common stock were reserved for issuance under the Directors’ Plan, of which 66,031 remain available for future grant as of May 31, 2016. The expiration date of the Directors’ Plan is December 1, 2018.

 

The Company utilizes the Black-Scholes model to estimate the fair value of non-employee Director stock option grants. The Company’s determination of fair value of share-based payment awards on the date of grant is affected by the Company’s stock price as well as assumptions regarding a number of variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, interest rates, option forfeitures and employee stock option exercise behaviors.

 

Fiscal 2016

 

On January 15, 2016, FactSet granted 22,559 stock options to the Company’s non-employee Directors, including a one-time new Director grant of 2,417 for Laurie Siegel, who was elected to FactSet’s Board of Directors on December 15, 2015. All of the options granted on January 15, 2016 have a weighted average estimated fair value of $31.03 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

 

Fiscal 2015

 

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

 

 

Restricted Stock Fair Value Determinations

 

Restricted stock granted to employees entitles 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 is 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. During the first nine months of fiscal 2016, there were 93,375 restricted stock awards granted with a weighted average grant date fair value of $159.42. During the first nine months of fiscal 2015, FactSet granted 49,158 restricted stock awards at a weighted average grant date fair value of $135.96.

 

Employee Stock Purchase Plan Fair Value Determinations

 

During the three months ended May 31, 2016, employees purchased 17,538 shares at a weighted average price of $131.57 as compared to 13,877 shares at a weighted average price of $132.48 for the three months ended May 31, 2015. During the nine months ended May 31, 2016, employees purchased 53,711 shares at a weighted average price of $129.83 as compared to 47,085 shares at a weighted average price of $118.82 for the nine months ended May 31, 2015. Stock-based compensation expense recorded for each of the three months ended May 31, 2016 and 2015, relating to the employee stock purchase plan (the “ESPP”) was $0.4 million. Stock-based compensation expense recorded for the nine months ended May 31, 2016 and 2015, relating to the ESPP was $1.4 million and $1.1 million, respectively.

 

The Company uses the Black-Scholes model to calculate the estimated fair value for the ESPP. The weighted average estimated fair value of ESPP grants during the three months ended May 31, 2016 and 2015 were $26.07 and $25.11 per share, respectively, with the following assumptions:

 

 

The weighted average estimated fair value of ESPP grants during the nine months ended May 31, 2016 and 2015 were $27.19 and $22.68 per share, respectively, with the following assumptions:

 

 

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.