FACTSET RESEARCH SYSTEMS INC - Quarter Report: 2019 February (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

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

 

For the quarterly period ended February 28, 2019

 

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

 

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FACTSET RESEARCH SYSTEMS INC.

 

(Exact name of registrant as specified in its charter)

 

 

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Delaware	13-3362547
(State or other jurisdiction of incorporation)	(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

 

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

 

Large accelerated filer ☒   Accelerated filer ☐   Non-accelerated filer ☐   Smaller reporting company ☐   Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

 

The number of shares outstanding of the registrant’s common stock, $.01 par value, as of March 29, 2019 was 38,239,923.

 

 

 

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		Three Months Ended February 28,								Six Months Ended February 28,
(In thousands, except per share data)		2019				2018				2019				2018
Revenues		$	354,895			$	335,231			$	706,535			$	664,372
Operating expenses
Cost of services			165,108				163,232				331,884				324,756
Selling, general and administrative			81,099				76,514				165,424				155,033
Total operating expenses			246,207				239,746				497,308				479,789
Operating income			108,688				95,485				209,227				184,583
Other (expense) income
Interest (expense), net of interest income			(4,339	)			(3,272	)			(8,935	)			(6,191	)
Income before income taxes			104,349				92,213				200,292				178,392
Provision for income taxes			19,647				39,076				31,294				54,876
Net income		$	84,702			$	53,137			$	168,998			$	123,516
Basic earnings per common share		$	2.23			$	1.36			$	4.44			$	3.16
Diluted earnings per common share		$	2.19			$	1.33			$	4.37			$	3.11
Basic weighted average common shares			38,055				38,991				38,081				39,038
Diluted weighted average common shares			38,619				39,846				38,714				39,763

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		Three Months Ended February 28,								Six Months Ended February 28,
(In thousands)		2019				2018				2019				2018
Net income		$	84,702			$	53,137			$	168,998			$	123,516
Other comprehensive income (loss), net of tax
Net unrealized gain (loss) on cash flow hedges*			527				(1,268	)			1,565				(1,744	)
Foreign currency translation adjustments			5,026				9,400				(4,478	)			17,866
Other comprehensive income (loss)			5,553				8,132				(2,913	)			16,122
Comprehensive income		$	90,255			$	61,269			$	166,085			$	139,638

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(In thousands, except share data)		February 28, 2019				August 31, 2018
ASSETS
Cash and cash equivalents		$	218,335			$	208,623
Investments			27,069				29,259
Accounts receivable, net of reserves of $5,376 at February 28, 2019 and $3,490 at August 31, 2018			176,356				156,639
Prepaid taxes			25,730				6,274
Prepaid expenses and other current assets			40,475				30,121
Total current assets			487,965				430,916
Property, equipment and leasehold improvements, net			104,829				100,545
Goodwill			700,029				701,833
Intangible assets, net			136,409				148,935
Deferred taxes			6,737				9,716
Other assets			29,025				27,502
TOTAL ASSETS		$	1,464,994			$	1,419,447
LIABILITIES
Accounts payable and accrued expenses		$	66,846			$	72,059
Accrued compensation			40,140				66,479
Deferred fees			59,178				49,700
Taxes payable			8,233				8,453
Dividends payable			24,385				24,443
Total current liabilities			198,782				221,134
Long-term debt			574,848				574,775
Deferred taxes			20,220				21,190
Deferred fees			8,475				7,833
Taxes payable			26,728				29,626
Deferred rent and other non-current liabilities			36,420				38,989
TOTAL LIABILITIES		$	865,473			$	893,547
Commitments and contingencies (see Note 17)
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		$	—			$	—
Common stock, $.01 par value, 150,000,000 shares authorized, 39,690,225 and 39,264,849 shares issued, 38,100,165 and 38,192,586 shares outstanding at February 28, 2019 and August 31, 2018, respectively			397				393
Additional paid-in capital			732,538				667,531
Treasury stock, at cost: 1,590,060 and 1,072,263 shares at February 28, 2019 and August 31, 2018, respectively			(324,167	)			(213,428	)
Retained earnings			244,388				122,843
Accumulated other comprehensive loss			(53,635	)			(51,439	)
TOTAL STOCKHOLDERS’ EQUITY		$	599,521			$	525,900
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,464,994			$	1,419,447

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		Six Months Ended February 28,
(in thousands)		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	168,998			$	123,516
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			29,052				28,372
Stock-based compensation expense			16,140				15,420
Deferred income taxes			1,088				2,934
Loss on sale of assets			196				25
Changes in assets and liabilities, net of effects of acquisitions
Accounts receivable, net of reserves			(19,676	)			(16,307	)
Accounts payable and accrued expenses			(5,423	)			147
Accrued compensation			(26,266	)			(23,595	)
Deferred fees			9,729				18,098
Taxes payable, net of prepaid taxes			(17,385	)			17,166
Prepaid expenses and other assets			(10,327	)			(11,915	)
Deferred rent and other non-current liabilities			(646	)			(186	)
Other working capital accounts, net			74				14
Net cash provided by operating activities			145,554				153,689
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments			(7,927	)			(9,487	)
Proceeds from maturity of investments			10,041				9,872
Purchases of property, equipment and leasehold improvements, net of proceeds from dispositions			(21,482	)			(12,375	)
Net cash used in investing activities			(19,368	)			(11,990	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend payments			(48,442	)			(43,406	)
Repurchases of common stock			(110,739	)			(113,906	)
Other financing activities			—				442
Proceeds from employee stock plans			43,362				48,784
Net cash used by financing activities			(115,819	)			(108,086	)
Effect of exchange rate changes on cash and cash equivalents			(655	)			5,284
Net increase in cash and cash equivalents			9,712				38,897
Cash and cash equivalents at beginning of period			208,623				194,731
Cash and cash equivalents at end of period		$	218,335			$	233,628

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(in thousands,		Common Stock								Additional Paid-in				Treasury Stock								Retained				Accumulated Other Comprehensive				Total Stockholders’
except per share data)		Shares				Par Value				Capital				Shares				Amount				Earnings				Loss				Equity
Balance as of November 30, 2018			39,447,491			$	394			$	694,078				1,366,613			$	(278,146	)		$	184,071			$	(59,188	)		$	541,209
Net income																							84,702								84,702
Other comprehensive (loss) income																											5,553				5,553
Common stock issued for employee stock plans			219,815				3				30,755																				30,758
Vesting of restricted stock			22,919												8,502				(1,878	)											(1,878	)
Repurchases of common stock															214,945				(44,143	)											(44,143	)
Stock-based compensation expense											7,705																				7,705
Dividends declared																							(24,385	)							(24,385	)
Balance as of February 28, 2019			39,690,225			$	397			$	732,538				1,590,060			$	(324,167	)		$	244,388			$	(53,635	)		$	599,521

(in thousands,		Common Stock								Additional Paid-in				Treasury Stock								Retained				Accumulated Other Comprehensive				Total Stockholders’
except per share data)		Shares				Par Value				Capital				Shares				Amount				Earnings				Loss				Equity
Balance as of August 31, 2018			39,264,849			$	393			$	667,531				1,072,263			$	(213,428	)		$	122,843			$	(51,439	)		$	525,900
Net income																							168,998								168,998
Other comprehensive (loss) income																											(2,913	)			(2,913	)
Common stock issued for employee stock plans			349,846				4				48,867																				48,871
Vesting of restricted stock			75,530												27,852				(6,155	)											(6,155	)
Repurchases of common stock															489,945				(104,584	)											(104,584	)
Stock-based compensation expense											16,140																				16,140
Dividends declared																							(48,756	)							(48,756	)
Cumulative effect of adoption of accounting standards*																							1,303				717				2,020
Balance as of February 28, 2019			39,690,225			$	397			$	732,538				1,590,060			$	(324,167	)		$	244,388			$	(53,635	)		$	599,521

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(in thousands,		Common Stock								Additional Paid-in				Treasury Stock Shares Amount								Retained				Accumulated Other Comprehensive				Total Stockholders’
except per share data)		Shares				Par Value				Capital				Shares				Amount				Earnings				Loss				Equity
Balance as of November 30, 2017			52,101,426			$	521			$	775,509				12,991,346			$	(1,638,384	)		$	1,507,301			$	(26,730	)		$	618,217
Net income																							53,137								53,137
Other comprehensive (loss) income																											8,132				8,132
Common stock issued for employee stock plans			234,855				2				28,664																				28,666
Vesting of restricted stock			3,561												1,343				(263	)											(263	)
Repurchases of common stock															420,000				(81,938	)											(81,938	)
Stock-based compensation expense											7,938																				7,938
Dividends declared																							(21,799	)							(21,799	)
Retirement of Treasury Shares			(13,292,689	)			(133	)			(186,717	)			(13,292,689	)			1,697,206				(1,510,356	)
Balance as of February 28, 2018			39,047,153			$	390			$	625,394				120,000			$	(23,379	)		$	28,283			$	(18,598	)		$	612,090

(in thousands,		Common Stock								Additional Paid-in				Treasury Stock								Retained				Accumulated Other Comprehensive				Total Stockholders’
except per share data)		Shares				Par Value				Capital				Shares				Amount				Earnings				Loss				Equity
Balance as of August 31, 2017			51,845,132			$	518			$	741,748				12,822,100			$	(1,606,678	)		$	1,458,823			$	(34,720	)		$	559,691
Net income																							123,516								123,516
Other comprehensive (loss) income																											16,122				16,122
Common stock issued for employee stock plans			479,871				5				54,943																				54,948
Vesting of restricted stock			14,839												5,563				(1,015	)											(1,015	)
Repurchases of common stock															585,026				(112,892	)											(112,892	)
Stock-based compensation expense											15,420																				15,420
Dividends declared																							(43,700	)							(43,700	)
Retirement of Treasury Shares			(13,292,689	)			(133	)			(186,717	)			(13,292,689	)			1,697,206				(1,510,355	)
Balance as of February 28, 2018			39,047,153			$	390			$	625,394				120,000			$	(23,379	)		$	28,283			$	(18,598	)		$	612,090

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1. ORGANIZATION AND NATURE OF BUSINESS

 

FactSet Research Systems Inc. (the “Company” or “FactSet”) is a global provider of integrated financial information, analytical applications and industry-leading service for the global investment community. These professionals include portfolio managers, investment research professionals, investment bankers, risk and performance analysts, and wealth advisors. From streaming real-time data to historical information, including quotes, estimates, news and commentary, FactSet offers proprietary and third-party content through desktop, web, mobile, and off-platform solutions. The Company’s broad 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. With recent acquisitions, FactSet has continued to expand its solutions across the investment lifecycle from idea generation to performance and client reporting. The Company delivers insight and information to investment professionals through key workflow solutions including Research, Analytics, Wealth, and Content and Technology Solutions (“CTS”). The Company’s revenue is primarily derived from subscriptions to products and services such as workstations, analytics, enterprise data, research management, and trade execution.

 

 

 

FactSet conducts business globally and is managed on a geographic basis. The accompanying unaudited consolidated financial statements and notes of FactSet and its wholly owned subsidiaries included in this Quarterly Report on Form 10-Q are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). All intercompany activity and balances have been eliminated from the consolidated financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements include all normal recurring adjustments, transactions or events discretely impacting the interim periods considered necessary to present fairly the Company’s financial position, results of operations, equity and cash flows. The information in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on October 30, 2018.

 

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

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

As of February 28, 2019, The Company 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 six months of fiscal 2019 that had a material impact on the consolidated financial statements.

 

New Accounting Standards or Updates Recently Adopted

 

Revenue Recognition

In May 2014 and July 2015, the FASB issued accounting standard updates which clarified principles for recognizing revenue arising from contracts with clients and superseded 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. The new guidance also requires increased disclosures including the nature, amount, timing, and uncertainty of revenue and cash flows related to contracts with clients.

 

The standard allows two methods of adoption: i) retrospectively to each prior period presented (“full retrospective method”), or ii) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption (“modified retrospective method”). FactSet adopted the new standard using the modified retrospective method as of the beginning of its first quarter of fiscal 2019.

 

FactSet’s implementation efforts include the evaluation of contract revenue under the new guidance. Additionally, an assessment of the qualitative and quantitative impacts of pricing changes during the contractual term and fulfillment costs was made.

 

 

The Company derives most of its revenues by providing client access to its hosted proprietary data and analytics platform, which can include various combinations of products and services available over the contractual term. The Company determined that the subscription-based service represents a single performance obligation covering a series of distinct products and services that are substantially the same and that have the same pattern of transfer to the client. FactSet recorded an opening cumulative increase to retained earnings of $2.5 million, or $2.0 million net of tax, during the first quarter of fiscal 2019, related to certain fulfillment costs, which include up-front costs to allow for the delivery of services and products that are expected to be recovered. Under the new standard, such up-front costs are recognized as an asset and amortized consistent with the associated revenue for providing the services. The adoption of the new standards did not materially change the Company’s accounting policy for revenue recognition and did not have a material impact on the Company’s consolidated financial statements. Refer to Note 4 Revenue Recognition for further details.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

During the first quarter of fiscal 2019, FactSet adopted the accounting standard update issued by the FASB in January 2016, which amended the recognition, measurement, presentation, and disclosure of certain financial instruments. Under the amended guidance, investments in equity securities, excluding equity method investments, will be measured at fair value with changes in fair value to be recognized in net income. This guidance was applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as permitted by the standard and did not have a material impact on the Company’s consolidated financial statements.

 

Cash Flow Simplification

During the first quarter of fiscal 2019, FactSet adopted the accounting standard update issued by the FASB in August 2016, which simplified how certain transactions are classified in the statement of cash flows. This included revised guidance on the cash flow classification of debt prepayments and debt extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investments. The guidance is intended to reduce diversity in practice across all industries. The adoption of this standard had no impact on the Company’s consolidated financial statements.

 

Income Taxes on Intra-Entity Transfers of Assets

During the first quarter of fiscal 2019, FactSet adopted the accounting standard update issued by the FASB in October 2016, which removed the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance was issued in order to reduce diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. The adoption of this standard had no impact on the Company’s consolidated financial statements.

 

Share-Based Payments

During the first quarter of fiscal 2019, FactSet adopted the accounting standard update issued by the FASB in May 2017, which amended the scope of modification accounting for share-based payment arrangements. The guidance focused on changes to the terms or conditions of share-based payment awards that would require the application of modification accounting and specifies that an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. The adoption of this standard had no impact on the Company’s consolidated financial statements.

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

During the first quarter of fiscal 2019, FactSet adopted the accounting standard update issued by the FASB in February 2018, which allowed companies to reclassify certain stranded income tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the "TCJA") from accumulated other comprehensive income to retained earnings. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

Implementation Costs in a Cloud Computing Arrangement

During the first quarter of fiscal 2019, FactSet adopted the accounting standard update issued by the FASB in August 2018, which related to a client’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the guidance for capitalizing implementation costs to develop or obtain internal-use software. Capitalized implementation costs will be amortized over the term of the arrangement. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021, however the Company elected to early adopt this standard on a prospective basis during the first quarter of fiscal 2019. There was no impact to the Company’s consolidated financial statements as a result of the adoption of this standard, as FactSet is currently accounting for costs incurred in a cloud computing arrangement in accordance with the guidance provided in this standard.

 

Recent Accounting Standards or Updates Not Yet Effective

 

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 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, including the transition method, but expects the adoption to have a material impact to its balance sheet. However, it does not expect the adoption to have a material impact on the statements of income, comprehensive income or cash flows. Refer to Note 17 Commitments and Contingencies for information regarding the Company’s undiscounted future lease commitments.

 

 

Goodwill Impairment Test

In January 2017, the FASB issued an accounting standard update which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021, with early adoption permitted for any impairment tests performed after January 1, 2017 and is not expected to have a material impact on the consolidated financial statements.

 

Hedge Accounting Simplification

In August 2017, the FASB issued an accounting standard update to reduce the complexity of and simplify the application of hedge accounting. The guidance refines and expands hedge accounting for both financial and nonfinancial risk components, eliminates the need to separately measure and report hedge ineffectiveness, and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This guidance will be effective for the Company beginning in the first quarter of fiscal 2020, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update but it is not expected to have a material impact on the consolidated financial statements.

 

No other new accounting pronouncements issued or effective as of February 28, 2019 have had or are expected to have an impact on the Company’s consolidated financial statements.

 

 

4. REVENUE RECOGNITION

 

In May 2014 and July 2015, the FASB issued accounting standard updates which clarified principles for recognizing revenue arising from contracts with customers (ASC 606) and superseded most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue standard 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. The new guidance applies a five-step model for revenue measurement and recognition and also requires increased disclosures including the nature, amount, timing, and uncertainty of revenue and cash flows related to contracts with clients.

 

The Company adopted the standard at the beginning of the first quarter of fiscal 2019, using the modified retrospective method of adoption and applied the guidance to those contracts that were not completed as of August 31, 2018. Under the modified retrospective method of adoption, the cumulative effect of applying the new standard is recorded at the date of initial application, with no restatement of the comparative prior periods presented. The Company assessed its revenue contracts with clients under the new standards and determined that the adoption did not materially change the timing or amount of revenue recognized.

 

The Company derives most of its revenues by providing client access to its hosted proprietary data and analytics platform which can include various combinations of products and services available over the contractual term. The hosted platform is a subscription-based service that consists primarily of providing access to products and services including workstations, analytics, enterprise data, research management, and trade execution. The Company determined that the subscription-based service represents a single performance obligation covering a series of distinct products and services that are substantially the same and that have the same pattern of transfer to the client. The Company determined that the nature of the promise to the client is to provide daily access to one overall data and analytics platform. This platform provides integrated financial information, analytical applications and industry-leading service for the investment community. Based on the nature of the services and products offered by FactSet, the Company applies an input time-based measure of progress as the client is simultaneously receiving and consuming the benefits of the platform. The Company records revenue for its contracts using the over-time revenue recognition model as a client is invoiced or performance in satisfied, which is comparable with how revenue is recognized today. FactSet does not consider payment terms a performance obligation for customers with contractual terms that are one year or less and has elected the practical expedient.

 

 

In FactSet’s assessment of contracts with clients, the Company did identify a small portion of contracts with certain fulfillment costs, which include up-front costs to allow for the delivery of services and products that are expected to be recovered. In connection with the adoption of the new standard, these fulfillment costs are recognized as an asset and amortized consistent with the associated revenue for providing the services, which prior to adoption were expensed. As a result, during the first quarter of fiscal 2019, FactSet recorded an opening cumulative increase to Retained earnings of $2.5 million, or $2.0 million net of tax, with an offsetting increase related to the current asset portion in Prepaid expenses and other current assets and the non-current asset portion in Other assets based on the term of the license period. Prospectively, fulfillment costs will continue to be recognized in the same accounts used for the adoption impact, which include the Prepaid expenses and other current assets account for the current portion and Other assets for the non-current portion, based on the term of the license period. The differences between the Company’s reported operating results for the three months and six months ended February 28, 2019, which reflect the application of the new standard on the Company’s contracts, and the results that would have been reported as if the accounting was performed pursuant to the accounting standards previously in effect, were not material. There are no significant judgements that would impact the timing of revenue recognition. The majority of client contracts have a duration of one year or less, or the amount FactSet is entitled to receive corresponds directly with the value of performance obligations completed to date, and therefore, the Company does not disclose the value of the remaining unsatisfied performance obligations.

 

Disaggregated Revenue

 

The Company disaggregates revenue from contracts with clients by demographic region which include U.S., Europe and Asia Pacific. FactSet believes these geographic regions are reflective of how the Company manages the business and the demographic markets in which it serves. The geographic regions best depict the nature, amount, timing and uncertainty of revenues and cash flows related to contracts with clients. Refer to Note 8 Segment Information for further information on revenues by geographic region.

 

The following table presents this disaggregation of revenue by geography:

 

 

 

5. 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. The Company 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 mutual funds, 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 February 28, 2019 or August 31, 2018.

 

 

(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 February 28, 2019 and August 31, 2018. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.

 

 

 

 

 

(1)

The Company’s corporate money market funds are readily convertible into cash 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 within the consolidated balance sheets.

 

(2)

The Company’s mutual funds have a fair value based on the fair value of the underlying investments held by the mutual funds, allocated to each share of the mutual fund using a net asset value approach. The fair value of the underlying investments is based on observable inputs. As such, the Company’s mutual funds are classified as Level 2 and are included as Investments (short-term) on the consolidated balance sheets.

 

(3)

The Company’s certificates of deposit held for investment are valued at amortized cost, which approximates fair value and, therefore, are classified as Level 2. These certificates of deposit are not debt securities and have original maturities greater than three months, but less than one year and, as such, are classified as Investments (short-term) within the consolidated balance sheets.

 

(4)

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.

 

(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 comparable information, 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 six months ended February 28, 2019, 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 February 28, 2019, and August 31, 2018, the fair value of the Company’s Long-term debt was $575.0 million, which approximated its carrying amount given the application of a floating interest rate equal to the daily LIBOR rate plus a spread using a debt leverage pricing grid. 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.

 

 

6. DERIVATIVE INSTRUMENTS

 

Cash Flow Hedges

 

FactSet conducts business outside the U.S. in several currencies including the Euro, British Pound Sterling, Indian Rupee, 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. See Note 17, Commitments and Contingencies – Concentrations of Credit Risk, for further discussion on counterparty credit risk.

 

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 six months of fiscal 2019 and 2018, and as such, no corresponding gains or losses related to changes in the value of the Company’s contracts were reclassified into earnings prior to settlement.

 

As of February 28, 2019, FactSet maintained the following foreign currency forward contracts to hedge its exposures:

 

●

Philippine Peso – foreign currency forward contracts to hedge approximately 75% of its Philippine Peso exposure through the fourth quarter of fiscal 2020.

 

●

Indian Rupee – foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the third quarter of fiscal 2019, 50% of its exposure from the fourth quarter of fiscal 2019 through the end of the second quarter of fiscal 2020, and 25% of its exposure from the third quarter of fiscal 2020 through the end of the fourth quarter of fiscal 2020.

 

●

Euro – foreign currency forward contracts to hedge approximately 78% of its Euro exposure through the third quarter of fiscal 2019.

 

●

British Pound Sterling – foreign currency forward contracts to hedge approximately 50% of its British Pound Sterling exposure through the third quarter of fiscal 2019.

 

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

 

 

As of February 28, 2019, the gross notional value of foreign currency forward contracts to purchase Philippine Pesos with U.S. dollars was PHP 2.1 billion. The gross notional value of foreign currency forward contracts to purchase Indian Rupees with U.S. dollars was Rs. 2.5 billion. The gross notional value of foreign currency forward contracts to purchase U.S. dollars with Euros was € 25.7 million. The gross notional value of foreign currency forward contracts to purchase U.S. dollars with British Pound Sterling was £ 4.9 million.

 

 

Fair Value of Derivative Instruments 

 

The following table provides a summary of the fair value amounts of derivative instruments:

 

 

All derivatives were designated as hedging instruments as of February 28, 2019 and August 31, 2018.

 

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, 2019 and 2018, respectively:

 

 

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the six months ended February 28, 2019 and 2018, respectively:

 

 

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, 2019, the Company estimates that $1.5 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, 2019, and August 31, 2018, there were no material amounts recorded net on the consolidated balance sheets.

 

 

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

 

The components of Other comprehensive income for the three months ended February 28, 2019 and 2018 are as follows:

 

 

 

 

The components of Other comprehensive (loss) income for the six months ended February 28, 2019 and 2018 are as follows:

 

 

The components of AOCL are as follows:

 

 

 

8. SEGMENT INFORMATION

 

Operating segments are defined as (i) components of an enterprise that engage in business activities from which they may earn revenue and incur expense, (ii) with operating results that are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (iii) for which discrete financial information is available. Executive management, along with the CEO, constitute FactSet’s chief operating decision making group (“CODMG”). Executive management consists of certain executives who directly report to the CEO, consisting of the Chief Financial Officer, Chief Technology and Product Officer, Global Head of Sales and Client Solutions, General Counsel, Chief Human Resources Officer and Head of Analytics & Trading. The CODMG reviews financial information at the operating segment level and is responsible for making decisions about resources allocated amongst the operating segments based on actual results.

 

The Company’s operating segments are aligned with how the Company, including its CODMG, manages the business and the demographic markets in which it serves. The Company’s internal financial reporting structure is based on three segments: the U.S., Europe and Asia Pacific. The Company believes this alignment helps to better manage the business and view the markets it 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. These functional groups provide global financial and economic information to investment managers, investment banks and other financial services professionals.

 

The U.S. segment serves investment professionals including financial institutions throughout the Americas. The Europe and Asia Pacific segments serve investment professionals located throughout Europe and Asia Pacific, respectively. Segment revenue reflects direct sales to clients based on their respective geographic locations. 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, 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, the Philippines, and Latvia, benefit all the Company’s operating segments and thus the expenses incurred at these locations are allocated to each segment based on a percentage of revenue. Of the total $700.0 million of goodwill reported by the Company at February 28, 2019, 55% was recorded in the U.S. segment, 44% in the Europe 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 structure. These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments.

 

 

 

 

 

 

9. GOODWILL

 

Changes in the carrying amount of goodwill by segment for the six months ended February 28, 2019 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 2018, consistent with the timing of previous years, at which time it was determined that there was no impairment, with the fair value of each of the Company’s reporting units significantly exceeding carrying value.

 

 

 

FactSet’s identifiable intangible assets consist of acquired content databases, client relationships, software technology, non-compete agreements and trade names resulting from previous acquisitions, which have been fully integrated into the Company’s operations. The weighted average useful life of FactSet’s acquired identifiable intangible assets at February 28, 2019 was 12.3 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 six months of fiscal 2019. If indicators of impairment are present, amortizable intangible assets are tested for impairment comparing the carrying value to 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:

 

 

 

Amortization expense recorded for intangible assets was $5.8 million and $6.2 million for the three months ended February 28, 2019 and 2018, respectively. Amortization expense recorded for intangible assets was $11.7 million and $12.4 million for the six months ended February 28, 2019 and 2018, respectively. As of February 28, 2019, estimated intangible asset amortization expense for each of the next five years and thereafter is as follows

 

 

 

11. COMMON STOCK AND EARNINGS PER SHARE

 

On February 15, 2019, FactSet’s Board of Directors approved a regular quarterly dividend of $0.64 per share. The cash dividend of $24.4 million was paid on March 19, 2019 to common stockholders of record at the close of business on February 28, 2019.

 

Shares of common stock outstanding were as follows:

 

 

 

(1)	For the six months ended February 28, 2019 and 2018, the Company repurchased 27,852 and 5,563 shares, or $6.1 million and $1.0 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. There were 447,709 stock options excluded from the calculation of diluted EPS for the three and six months ended February 28, 2019, because their inclusion would have been anti-dilutive. There were no stock options or unvested restricted stock awards excluded from the calculation of diluted EPS for the three and six months ended February 28, 2018.

 

Performance-based stock options are omitted from the calculation of diluted EPS until the performance criteria is probable of being achieved. For the three and six months ended February 28, 2019, the number of performance-based stock option grants excluded from the calculation of diluted EPS was 206,417. For the three and six months ended February 28, 2018, the number of performance-based stock option grants excluded from the calculation of diluted EPS was 309,800.

 

 

12. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

At February 28, 2019 and August 31, 2018, 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 February 28, 2019 and August 31, 2018, there were 150,000,000 shares of common stock ($.01 par value per share) authorized, of which 39,690,225 and 39,264,849 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

 

On January 31, 2018, FactSet retired 13,292,689 shares of treasury stock. These retired shares are now included in the Company’s pool of authorized but unissued shares. The retired treasury stock was initially recorded using the cost method and had a carrying value of $1.7 billion at January 31, 2018. The Company’s accounting policy upon the formal retirement of treasury stock is to deduct its par value from common stock ($0.1 million), reduce additional paid-in capital (“APIC”) by the average amount recorded in APIC when stock was originally issued ($186.7 million) and any remaining excess of cost as a reduction to retained earnings ($1.5 billion). As of February 28, 2019, and August 31, 2018, there were 1,590,060 and 1,072,263 shares of treasury stock (at cost) outstanding, respectively.

 

Share Repurchase Program

 

Repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. For the three months ended February 28, 2019 and 2018, the Company repurchased 214,945 shares for $44.1 million and 420,000 shares for $81.9 million, respectively. For the six months ended February 28, 2019 and 2018, the Company repurchased 489,945 shares for $104.6 million and 584,920 shares for $112.9 million, respectively. As of February 28, 2019, $137.2 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 six months of fiscal 2019, previously granted restricted stock awards of 75,530 shares vested and were included in common stock outstanding as of February 28, 2019 (recorded net of 27,852 shares repurchased from employees at a cost of $6.1 million to cover their cost of taxes upon vesting of the restricted stock). During the same comparable period a year ago, 14,839 shares of previously granted restricted stock awards vested and were included in common stock outstanding as of February 28, 2018 (recorded net of 5,563 shares repurchased from employees at a cost of $1.0 million to cover their cost of taxes upon vesting of the restricted stock).

 

Dividends

 

The Company’s Board of Directors declared the following dividends for the first six months of fiscal 2019 and 2018 respectively:

 

 

All the above cash dividends were paid from existing cash resources. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Company and is subject to final determination by the Company’s Board of Directors.

 

 

13. EMPLOYEE STOCK OPTION AND RETIREMENT PLANS

 

Stock Option Awards

 

The FactSet Research Systems Inc. Stock Option and Award Plan, as Amended and Restated (the “Long Term Incentive Plan” or “LTIP”) provides for the grant of share-based awards, including stock options and restricted stock awards to employees of FactSet. The expiration date of the Long Term Incentive Plan is December 19, 2027. Stock options granted under the LTIP expire not more than 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 six months of fiscal 2019, FactSet granted 460,713 stock options with a weighted average exercise price of $221.74 to existing employees of the Company.

 

A summary of stock option activity for the six months ended February 28, 2019 is as follows:

 

 

 

The total number of in-the-money options exercisable as of February 28, 2019 was 1.2 million with a weighted average exercise price of $138.41. The aggregate intrinsic value of in-the-money stock options exercisable at February 28, 2019 and August 31, 2018 was $116.5 million and $105.3 million, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price as of February 28, 2019 of $235.17, 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, 2019 and 2018 was $15.5 million and $17.2 million, respectively. The total pre-tax intrinsic value of stock options exercised during the six months ended February 28, 2019 and 2018 was $26.3 million and $35.2 million, respectively.

 

Performance-based Equity Awards

 

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

 

The following summarizes the material performance-based award outstanding as of February 28, 2019.

 

June 2017 Performance-based Option Grant Review

In connection with the acquisition of BISAM, FactSet granted 206,417 performance-based stock options in June 2017. These performance-based options will vest 40% on the second anniversary date of the grant and 20% on each subsequent anniversary date if certain BISAM revenue and operating income targets are achieved by March 31, 2019. The option holders must also remain employed by FactSet for the options to be eligible to vest. As of February 28, 2019, 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 BISAM 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 were a change in the vesting percentage as of February 28, 2019. 

 

 

Restricted Stock Awards

 

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

 

Restricted Stock Awards Activity

 

During the first six months of fiscal 2019, FactSet granted 41,153 restricted stock awards to employees of the Company at a weighted average grant date fair value of $212.66. These restricted stock awards vest over a weighted average period of 5.0 years from grant date.

 

As of February 28, 2019, a total of 106,558 restricted stock awards were unvested and outstanding, which results in unamortized stock-based compensation of $16.1 million to be recognized as stock-based compensation expense over the remaining weighted average vesting period of 3.6 years.

 

A summary of restricted stock award activity is as follows:

 

 

(1)

The majority of the vested restricted stock awards related to the final vesting of awards granted on November 1, 2013, which cliff vested 60% after three years on November 1, 2016 and 40% after five years on November 1, 2018.

 

(2)

The majority of the vested restricted stock awards related to the final vesting of awards granted on February 9, 2015, which vested 100% on the four year anniversary date of the grant.

 

As of February 28, 2019, and August 31, 2018, the aggregate fair value of unvested restricted stock was $25.1 million and $32.8 million, respectively. Aggregate fair value of unvested restricted stock represents the Company’s closing stock prices of $235.17 and $229.39 on February 28, 2019 and August 31, 2018, respectively, multiplied by the number of unvested restricted stock as of that date.

 

The total pre-tax fair value of restricted stock that vested during the three months ended February 28, 2019 and 2018 was $5.1 million and $0.7 million, respectively. The total pre-tax fair value of restricted stock that vested during the six months ended February 28, 2019 and 2018 was $16.7 million and $2.7 million, respectively.

 

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. Employee Stock Purchase Plan, as Amended and Restated (the “ESPP”) in three-month intervals. The purchase price is equal to 85% of the lesser of the fair market value of the Company’s common stock on the first day or the last day of each three-month offering period. Employee purchases may not exceed 10% of their gross compensation and a $25,000 contribution limit during an offering period.

 

During the three months ended February 28, 2019, employees purchased 12,624 shares at a price of $199.36 compared to 14,805 shares at a price of $171.23 for the three months ended February 28, 2018. During the six months ended February 28, 2019, employees purchased 25,719 shares at a price of $198.33 as compared to 34,394 shares at a price of $150.25 for the six months ended February 28, 2018. At February 28, 2019, the ESPP had 243,223 shares reserved for future issuance.

 

Employee Benefit Plans

 

FactSet sponsors benefit plans for the majority of its domestic and foreign employees. The Company contributed $2.6 million in employer matching contributions for its U.S. defined contribution plan for both the three months ended February 28, 2019 and 2018. During the six months ended February 28, 2019 and 2018, the Company contributed $5.2 million and $5.5 million in employer matching contributions for its U.S. defined contribution plan, respectively. Contributions to foreign benefit plans were not material to FactSet on either an individual or aggregate basis for any of the periods presented.

 

 

14. STOCK-BASED COMPENSATION

 

During the three months ended February 28, 2019 and 2018, the Company recognized total stock-based compensation expense of $7.7 million and $7.9 million, respectively. During the six months ended February 28, 2019 and 2018, the Company recognized total stock-based compensation expense of $16.1 million and $15.4 million, respectively. As of February 28, 2019, $87.2 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 for the three and six months ended February 28, 2019 or August 31, 2018, 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 several 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 2019	454,598 non-performance-based employee stock options were granted at a weighted average exercise price of $221.93 and a weighted average estimated fair value of $56.77 per share.
Q2 2019	6,115 non-performance-based employee stock options were granted at a weighted average exercise price of $207.84 and a weighted average estimated fair value of $53.18 per share.
Q1 2018	553,942 non-performance-based employee stock options were granted at a weighted average exercise price of $189.98 and a weighted average estimated fair value of $48.27 per share.
Q2 2018	15,363 non-performance-based employee stock options were granted at a weighted average exercise price of $192.11 and a weighted average estimated fair value of $48.82 per share.

 

 

The weighted average estimated fair value of employee stock options granted 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 terminations 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 employee 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 Non-Employee Directors’ Stock Option and Award Plan, as Amended and Restated (the “Director Plan”), provides for the grant of share-based awards, including stock options, to non-employee directors of FactSet. As of February 28, 2019, shares available for future grant under the Director Plan was 263,956. The expiration date of the Director Plan is December 19, 2027.

 

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 several 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 2019

On January 15, 2019, FactSet granted 20,576 stock options to the Company’s non-employee Directors. These options have a weighted average estimated fair value of $42.77 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

 

Fiscal 2018

On January 12, 2018, FactSet granted 18,963 stock options to the Company’s non-employee Directors. These options have a weighted average estimated fair value of $38.76 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 six months of fiscal 2019, there were 41,153 restricted stock awards granted, with a weighted average grant date fair value of $212.66. During the first six months of fiscal 2018, FactSet granted 961 restricted stock awards at a weighted average grant date fair value of $182.17.

 

Employee Stock Purchase Plan Fair Value Determinations

 

During the three months ended February 28, 2019, employees purchased 12,624 shares at a weighted average price of $199.36 as compared to 14,805 shares at a weighted average price of $171.23 for the three months ended February 28, 2018. During the six months ended February 28, 2019, employees purchased 25,719 shares at a weighted average price of $198.33 as compared to 34,394 shares at a weighted average price of $150.25 for the six months ended February 28, 2018. Stock-based compensation expense relating to the ESPP was $0.5 million for both the three months ended February 28, 2019 and 2018. Stock-based compensation expense related to the ESPP for the six months ended February 28, 2019 and 2018 was $1.0 million and $1.1 million, respectively.

 

The weighted average estimated fair value for the shares repurchased under the ESPP was calculated using the Black-Scholes model 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 several highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, interest rates, option forfeiture rates and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable.

 

 

 

15. INCOME TAXES

 

Income tax expense is based on taxable income determined in accordance with current enacted laws and tax rates. Deferred income taxes are recorded for the temporary differences between the financial statement and the tax bases of assets and liabilities using currently enacted tax rates.

 

Provision for Income Taxes

 

The provision for income taxes is as follows:

 

 

FactSet’s effective tax rate is based on recurring factors and nonrecurring events, including the taxation of foreign income. The Company’s effective tax rate will vary based on, among other things, changes in levels of foreign income, as well as discrete and other nonrecurring events that may not be predictable. The lower effective tax rate for both the three and six months ended February 28, 2019, compared to the same periods a year ago, is mainly due to the enactment of the Tax Cuts and Jobs Act (“TCJA”). The TCJA imposed a one-time transition tax expense, resulting in $23.2 million being recorded in the second quarter of fiscal 2018. This impact was revised during the first and second quarters of fiscal 2019, resulting in a benefit of $2.3 million and $1.1 million, respectively, which positively impacted the six months ended February 28, 2019. The TCJA also lowered the statutory U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Due to the timing of FactSet’s year end, the lower tax rate was fully applicable for the three and six months ended February 28, 2019, while being phased in during the same periods a year ago. The reduction in the U.S. corporate income tax rate required a remeasurement of the Company’s net U.S. deferred tax position, which resulted in a non-recurring tax charge of $2.2 million in the second quarter of fiscal 2018. FactSet’s effective tax rate is lower than the applicable U.S. corporate income tax rate for the three and six months ended February 28, 2019 due to R&D tax benefits and tax benefits associated with share-based payments. The decrease in the income tax provision for three and six months ended February 28, 2019 was partially offset by a $2.4 million income tax expense from the settlement with a tax authority recognized during the second quarter of fiscal 2019.

 

FactSet has finalized the accounting for the tax effects of the TCJA with respect to the one-time transition tax. The tax effects of the TCJA may be affected by changes in interpretations at the federal and state levels, and any additional regulatory guidance that may be issued.

 

Deferred Tax Assets and Liabilities

 

The significant components of Deferred tax assets recorded within the consolidated balance sheets were as follows:

 

 

The significant components of Deferred tax liabilities recorded within the consolidated balance sheets were as follows:

 

 

 

Unrecognized Tax Positions

 

Applicable accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions that a company has taken or expects to take on a tax return. A company can recognize the financial effect of an income tax position only if it is more likely than not (greater than 50%) that the tax position will prevail upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit or expense can be recognized in the consolidated financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

 

As of February 28, 2019, the Company had gross unrecognized tax benefits totaling $11.0 million recorded as non-current Taxes payable within the consolidated balance sheet. This amount includes $1.3 million of accrued interest. When applicable, the Company adjusts the previously recorded tax expense to reflect examination results when the position is ultimately settled. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. However, FactSet has no reason to believe that such audits will result in the payment of additional taxes and/or penalties that would have a material adverse effect on the Company’s results of operations or financial position, beyond current estimates. Any changes in accounting estimates resulting from new developments with respect to uncertain tax positions will be recorded as appropriate. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months.

 

The following table summarizes the changes in the balance of gross unrecognized tax benefits during the first six months of fiscal 2019:

 

 

In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. At February 28, 2019, the Company remained subject to examination in the following major tax jurisdictions for the tax years as indicated below: