filings.toolsItem 1. FINANCIAL STATEMENTS
98K characters. Original on sec.gov · Markdown
Item 1. FINANCIAL STATEMENTS
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME – Unaudited
| Three Months Ended | |||||||||||||||||
| November 30, | |||||||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | |||||||||||||||
| Revenues | $ | 424,725 | $ | 388,206 | |||||||||||||
| Operating expenses | |||||||||||||||||
| Cost of services | 207,149 | 188,088 | |||||||||||||||
| Selling, general and administrative | 94,915 | 79,087 | |||||||||||||||
| Total operating expenses | 302,064 | 267,175 | |||||||||||||||
| Operating income | 122,661 | 121,031 | |||||||||||||||
| Other income (expense) | |||||||||||||||||
| Interest expense, net | (1,494) | (1,029) | |||||||||||||||
| Other (expense) income, net | (1,237) | 230 | |||||||||||||||
| Income before income taxes | 119,930 | 120,232 | |||||||||||||||
| Provision for income taxes | 12,283 | 19,026 | |||||||||||||||
| Net income | $ | 107,647 | $ | 101,206 | |||||||||||||
| Basic earnings per common share | $ | 2.86 | $ | 2.66 | |||||||||||||
| Diluted earnings per common share | $ | 2.79 | $ | 2.62 | |||||||||||||
| Basic weighted average common shares | 37,678 | 38,007 | |||||||||||||||
| Diluted weighted average common shares | 38,641 | 38,697 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Unaudited
| Three Months Ended | |||||||||||||||||
| November 30, | |||||||||||||||||
| (In thousands) | 2021 | 2020 | |||||||||||||||
| Net income | $ | 107,647 | $ | 101,206 | |||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||
| Net unrealized gain (loss) on cash flow hedges* | 5 | (116) | |||||||||||||||
| Foreign currency translation adjustments | (18,713) | 333 | |||||||||||||||
| Other comprehensive (loss) income | (18,708) | 217 | |||||||||||||||
| Comprehensive income | $ | 88,939 | $ | 101,423 |
*For the three months ended November 30, 2021, the net unrealized gain on cash flow hedges were net of a tax expense of $1 thousand. For the three months ended November 30, 2020, the net unrealized loss on cash flow hedges were net of a tax benefit of $39 thousand.
The accompanying notes are an integral part of these Consolidated Financia**l Statements.
FactSet Research Systems Inc.
CONSOLIDATED BALANCE SHEETS – Unaudited
| (In thousands, except share data) | November 30, 2021 | August 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 673,900 | $ | 681,865 | |||||||
| Investments | 34,993 | 35,984 | |||||||||
| Accounts receivable, net of reserves of $4,433 at November 30, 2021 and $6,431 at August 31, 2021 | 157,390 | 151,187 | |||||||||
| Prepaid taxes | 23,840 | 13,917 | |||||||||
| Prepaid expenses and other current assets | 58,445 | 50,625 | |||||||||
| Total current assets | 948,568 | 933,578 | |||||||||
| Property, equipment and leasehold improvements, net | 122,407 | 131,377 | |||||||||
| Goodwill | 783,025 | 754,205 | |||||||||
| Intangible assets, net | 139,313 | 134,986 | |||||||||
| Deferred taxes | 2,125 | 2,250 | |||||||||
| Lease right-of-use assets, net | 227,904 | 239,064 | |||||||||
| Other assets | 31,022 | 29,480 | |||||||||
| TOTAL ASSETS | $ | 2,254,364 | $ | 2,224,940 | |||||||
| LIABILITIES | |||||||||||
| Accounts payable and accrued expenses | $ | 105,481 | $ | 85,777 | |||||||
| Current lease liabilities | 31,240 | 31,576 | |||||||||
| Accrued compensation | 50,088 | 104,403 | |||||||||
| Deferred revenues | 54,778 | 63,104 | |||||||||
| Dividends payable | 30,973 | 30,845 | |||||||||
| Total current liabilities | 272,560 | 315,705 | |||||||||
| Long-term debt | 574,580 | 574,535 | |||||||||
| Deferred taxes | 15,784 | 14,752 | |||||||||
| Deferred revenues, non-current | 7,720 | 8,394 | |||||||||
| Taxes payable | 31,305 | 30,279 | |||||||||
| Long-term lease liabilities | 249,752 | 259,980 | |||||||||
| Other liabilities | 3,768 | 4,942 | |||||||||
| TOTAL LIABILITIES | $ | 1,155,469 | $ | 1,208,587 | |||||||
| Commitments and contingencies (see Note 12) | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued | $ | — | $ | — | |||||||
| Common stock, $0.01 par value, 150,000,000 shares authorized, 41,372,890 and 41,163,192 shares issued, 37,772,170 and 37,615,419 shares outstanding at November 30, 2021 and August 31, 2021, respectively | 414 | 412 | |||||||||
| Additional paid-in capital | 1,094,467 | 1,048,305 | |||||||||
| Treasury stock, at cost: 3,600,720 and 3,547,773 shares at November 30, 2021 and August 31, 2021, respectively | (927,505) | (905,917) | |||||||||
| Retained earnings | 989,189 | 912,515 | |||||||||
| Accumulated other comprehensive loss | (57,670) | (38,962) | |||||||||
| TOTAL STOCKHOLDERS’ EQUITY | $ | 1,098,895 | $ | 1,016,353 | |||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,254,364 | $ | 2,224,940 | |||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited
| Three Months Ended | |||||||||||
| November 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 107,647 | $ | 101,206 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 19,432 | 15,290 | |||||||||
| Amortization of lease right-of-use assets | 11,117 | 10,697 | |||||||||
| Stock-based compensation expense | 10,401 | 11,317 | |||||||||
| Deferred income taxes | 1,507 | 437 | |||||||||
| Changes in assets and liabilities, net of effects of acquisitions | |||||||||||
| Accounts receivable, net of reserves | (5,268) | (342) | |||||||||
| Accounts payable and accrued expenses | 20,702 | 2,240 | |||||||||
| Accrued compensation | (53,457) | (45,858) | |||||||||
| Deferred fees | (10,248) | (9,724) | |||||||||
| Taxes payable, net of prepaid taxes | (9,524) | 13,302 | |||||||||
| Lease liabilities, net | (10,521) | (10,007) | |||||||||
| Other, net | (8,870) | 718 | |||||||||
| Net cash provided by operating activities | 72,918 | 89,276 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchases of property, equipment, leasehold improvements and internal-use software | (8,583) | (18,333) | |||||||||
| Acquisition of businesses, net of cash and cash equivalents acquired | (50,018) | (41,916) | |||||||||
| Purchases of investments | (250) | (250) | |||||||||
| Proceeds from maturity or sale of investments | — | 2,177 | |||||||||
| Net cash used in investing activities | (58,851) | (58,322) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Repurchases of common stock | (18,639) | (43,144) | |||||||||
| Dividend payments | (30,656) | (29,103) | |||||||||
| Proceeds from employee stock plans | 35,763 | 17,993 | |||||||||
| Other financing activities | (2,950) | (2,123) | |||||||||
| Net cash used by financing activities | (16,482) | (56,377) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (5,550) | (45) | |||||||||
| Net decrease in cash and cash equivalents | (7,965) | (25,468) | |||||||||
| Cash and cash equivalents at beginning of period | 681,865 | 585,605 | |||||||||
| Cash and cash equivalents at end of period | $ | 673,900 | $ | 560,137 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY- Unaudited
For the Three Months Ended November 30, 2021
| (in thousands, except share data) | Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | 41,163,192 | $ | 412 | $ | 1,048,305 | 3,547,773 | $ | (905,917) | $ | 912,515 | $ | (38,962) | $ | 1,016,353 | |||||||||||||||||||||||||||||||||
| Net income | 107,647 | 107,647 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (18,708) | (18,708) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for employee stock plans | 192,349 | 2 | 35,761 | 35,763 | |||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 17,349 | — | 6,747 | (2,949) | (2,949) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | 46,200 | (18,639) | (18,639) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 10,401 | 10,401 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (30,973) | (30,973) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | 41,372,890 | $ | 414 | $ | 1,094,467 | 3,600,720 | $ | (927,505) | $ | 989,189 | $ | (57,670) | $ | 1,098,895 | |||||||||||||||||||||||||||||||||
For the Three Months Ended November 30, 2020
| (in thousands, except share data) | Common Stock | Additional Paid-in Capital | Treasury Stock Shares Amount | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | 40,767,708 | $ | 408 | $ | 939,067 | 2,737,456 | $ | (636,956) | $ | 633,149 | $ | (39,293) | $ | 896,375 | |||||||||||||||||||||||||||||||||
| Net income | 101,206 | 101,206 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 217 | 217 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for employee stock plans | 98,459 | 1 | 17,991 | 17,992 | |||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 17,946 | — | 6,728 | (2,124) | (2,124) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | 131,800 | (43,144) | (43,144) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 11,317 | 11,317 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (29,266) | (29,266) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | 40,884,113 | $ | 409 | $ | 968,375 | 2,875,984 | $ | (682,224) | $ | 705,089 | $ | (39,076) | $ | 952,573 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
November 30, 2021
(Unaudited)
| Page | ||||||||
| Note 1 | Description of Business | 10 | ||||||
| Note 2 | Basis of Presentation | 10 | ||||||
| Note 3 | Recent Accounting Pronouncements | 11 | ||||||
| Note 4 | Revenue Recognition | 11 | ||||||
| Note 5 | Fair Value Measures | 12 | ||||||
| Note 6 | Derivative Instruments | 14 | ||||||
| Note 7 | Acquisition | 16 | ||||||
| Note 8 | Goodwill | 17 | ||||||
| Note 9 | Income Taxes | 18 | ||||||
| Note 10 | Leases | 18 | ||||||
| Note 11 | Debt | 20 | ||||||
| Note 12 | Commitments and Contingencies | 20 | ||||||
| Note 13 | Stockholders' Equity | 22 | ||||||
| Note 14 | Earnings Per Share | 24 | ||||||
| Note 15 | Stock-Based Compensation | 24 | ||||||
| Note 16 | Segment Information | 26 | ||||||
| Note 17 | Subsequent Event | 26 |
1. DESCRIPTION OF BUSINESS
FactSet Research Systems Inc. and its wholly-owned subsidiaries (collectively, "we," "our," "us," the "Company" or "FactSet") is a global financial data and analytics company with open and flexible technology and a purpose to drive the investment community to see more, think bigger, and do their best work. Our strategy is to become the leading open content and financial analytics platform in the industry that delivers differentiated advantage for our clients’ success.
For over 40 years, the FactSet platform has delivered expansive data, sophisticated analytics, and flexible technology that global financial professionals need to power their critical investment workflows. Over 162,000 investment professionals including asset managers, asset owners, bankers, wealth managers, corporate users, private equity and venture capital professionals, and others use our personalized solutions to identify opportunities, explore ideas, and gain a competitive advantage. Our solutions span investment research, portfolio construction and analysis, trade execution, performance measurement, risk management, and reporting across the investment lifecycle.
We provide financial data and market intelligence on securities, companies, industries and people to enable our clients to research investment ideas, as well as offering them the capabilities to analyze, monitor and manage their portfolios. We combine dedicated client service with open and flexible technology offerings, such as a configurable desktop and mobile platform, comprehensive data feeds, cloud-based digital solutions, and application programming interfaces ("APIs"). Our revenues are primarily derived from subscriptions to our products and services such as workstations, portfolio analytics, and market data.
We advance our industry by comprehensively understanding our clients’ workflows, solving their most complex challenges, and helping them achieve their goals. By providing them with the leading open content and analytics platform, an expansive universe of concorded data they can trust, next-generation workflow support designed to help them grow and see their next best action, and the industry’s most committed service specialists, FactSet puts our clients in a position to outperform.
We are focused on growing our business through three reportable segments ("segments"): the Americas, EMEA and Asia Pacific. Refer to Note 16, Segment Information, for further information. Within each of our segments, we primarily deliver insight and information through our three workflows: Research & Advisory Solutions; Analytics & Trading Solutions; and Content & Technology Solutions ("CTS").
2. BASIS OF PRESENTATION
We conduct business globally and manage our business on a geographic basis. The accompanying unaudited Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for annual financial statements, as such, 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 our Annual Report on Form 10-K for the fiscal year ended August 31, 2021. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries; all intercompany activity and balances have been eliminated.
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 our results of operations, financial position, cash flows and equity.
We have evaluated subsequent events through the date of issuance of the financial statements included in this Quarterly Report on Form 10-Q.
Use of Estimates
The preparation of our Consolidated Financial Statements and related disclosures, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates may have been made in areas that include income taxes, stock-based compensation, the valuation of goodwill and allocation of purchase price to acquired assets and liabilities, useful lives and impairments of
long-lived tangible and intangible assets and reserves for litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.
3. RECENT ACCOUNTING PRONOUNCEMENTS
As of November 30, 2021, we 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 three months ended November 30, 2021 that had a material impact on our Consolidated Financial Statements.
New Accounting Standards or Updates Recently Adopted
Income Tax Simplification
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740); Simplifying the Accounting for Income Taxes, to simplify various aspects related to accounting for income taxes, eliminating certain exceptions to the general principles in accounting for income taxes related to intraperiod tax allocation, simplifying when companies recognize deferred taxes in an interim period, and clarifying certain aspects of the current guidance to promote consistent application. We have adopted this standard effective September 1, 2021. The adoption of this standard did not have an impact on our Consolidated Financial Statements.
Recent Accounting Standards or Updates Not Yet Effective
Business Combinations
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) rather than adjust them to fair value at the acquisition date. We are currently evaluating the impact of this accounting standard, but it is not expected to have a material impact on our Consolidated Financial Statements.
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848); Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions affected by the anticipated transition from LIBOR. As a result of the reference rate reform initiative, certain widely used reference rates such as LIBOR are expected to be discontinued. The guidance is designed to simplify how entities account for contracts, such as receivables, debt, leases, derivative instruments and hedging, that are modified to replace LIBOR or other benchmark interest rates with new rates. The guidance is effective upon issuance and may be applied through December 31, 2022. We are currently evaluating the impact of this accounting standard, but it is not expected to have a material impact on our Consolidated Financial Statements.
No other new accounting pronouncements issued or effective as of November 30, 2021 have had, or are expected to have, a material impact on our Consolidated Financial Statements.
4. REVENUE RECOGNITION
We derive most of our revenues by providing client access to our 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, portfolio analytics and market data. We determined that the majority of our 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. We also determined the primary 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 us, we apply an output time-based measure of progress as the client is simultaneously receiving and consuming the benefits of the platform. We record revenues for our contracts using the over-time revenue recognition model as a client is invoiced or performance is satisfied. We do not consider payment terms as a performance obligation for clients with contractual terms that are one year or less and we have elected the practical expedient.
Contracts with clients can include certain fulfillment costs, comprised of up-front costs to allow for the delivery of services and products, which are recoverable. In connection with the adoption of the revenue recognition standard, fulfillment costs are recognized as an asset, recorded in 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, and amortized consistent with the associated revenues for providing the services. There are no significant judgments that would impact the timing of revenue recognition. The majority of client contracts have a duration of one year or less, or the amount we are entitled to receive corresponds directly with the value of performance obligations completed to date, and therefore, we do not disclose the value of the remaining unsatisfied performance obligations.
Disaggregated Revenues
We disaggregate revenues from contracts with clients by our reportable segments ("segments") which consist of the Americas, EMEA and Asia Pacific. We believe these segments are reflective of how we manage our business and the markets in which we serve and best depict the nature, amount, timing and uncertainty of revenues and cash flows related to contracts with clients. Refer to Note 16, Segment Information, for further information.
The following table presents this disaggregation by segment:
| Three Months Ended | |||||||||||||||||||||||
| November 30, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | |||||||||||||||||||||
| Americas | $ | 266,913 | $ | 244,337 | |||||||||||||||||||
| EMEA | 115,003 | 105,777 | |||||||||||||||||||||
| Asia Pacific | 42,809 | 38,092 | |||||||||||||||||||||
| Total Revenues | $ | 424,725 | $ | 388,206 |
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. We consider the principal or most advantageous market in which we would transact and consider 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. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy levels. We have categorized our 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 our 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. Our mutual funds 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. We held no Level 3 assets or liabilities as of November 30, 2021 or August 31, 2021.
(a) Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables show, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis at November 30, 2021 and August 31, 2021. We did not have any transfers between levels of fair value measurements during the periods presented.
| Fair Value Measurements at November 30, 2021 | |||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Total | ||||||||||||||
| Assets | |||||||||||||||||
| Corporate money market funds (1) | $ | 347,538 | $ | — | $ | 347,538 | |||||||||||
| Mutual funds (2) | — | 34,993 | 34,993 | ||||||||||||||
| Derivative instruments (3) | — | 1,669 | 1,669 | ||||||||||||||
| Total assets measured at fair value | $ | 347,538 | $ | 36,662 | $ | 384,200 | |||||||||||
| Liabilities | |||||||||||||||||
| Derivative instruments (3) | $ | — | $ | 4,459 | $ | 4,459 | |||||||||||
| Total liabilities measured at fair value | $ | — | $ | 4,459 | $ | 4,459 |
| Fair Value Measurements at August 31, 2021 | |||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Total | ||||||||||||||
| Assets | |||||||||||||||||
| Corporate money market funds (1) | $ | 232,519 | $ | — | $ | 232,519 | |||||||||||
| Mutual funds (2) | — | 35,984 | 35,984 | ||||||||||||||
| Derivative instruments (3) | — | 1,384 | 1,384 | ||||||||||||||
| Total assets measured at fair value | $ | 232,519 | $ | 37,368 | $ | 269,887 | |||||||||||
| Liabilities | |||||||||||||||||
| Derivative instruments (3) | $ | — | $ | 4,181 | $ | 4,181 | |||||||||||
| Total liabilities measured at fair value | $ | — | $ | 4,181 | $ | 4,181 |
*1.*Our 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. Our corporate money market funds are classified as Level 1 assets and are included in Cash and cash equivalents within the Consolidated Balance Sheets.
*2.*Our 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. Our mutual funds are classified as Level 2 and are included in Investments (short-term) within the Consolidated Balance Sheets.
*3.*Our derivative instruments include our foreign exchange forward contracts and interest rate swap agreements. We utilize the income approach to measure fair value for our 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 are classified as Level 2 assets. To estimate fair value for the interest rate swap agreement, we utilize a present value of future cash flows, leveraging a model-derived valuation that uses Level 2 observable inputs such as interest rate yield curves. Refer to Note 6, Derivative Instruments, for more information on our derivative instruments designed as cash flow hedges and their classification within the Consolidated Balance Sheets.
(b) Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis relate primarily to our tangible fixed assets, lease right-of-use ("ROU") assets, goodwill and intangible assets. 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. These non-financial assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill. During the three months ended November 30, 2021, no material fair value adjustments or material fair value measurements were required for our non-financial assets or liabilities.
(c) Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only
As of November 30, 2021 and August 31, 2021, the fair value of our 2019 Revolving Credit Facility (as defined below in Note 11, Debt), included in Long-term debt within the Consolidated Balance Sheets, was $575.0 million, which approximated its carrying amount given the application of a floating interest rate equal to LIBOR plus a spread using a debt leverage pricing grid. As the interest rate is a variable rate, adjusted based on market conditions, it approximates the current market-rate for similar instruments available to companies with comparable credit quality and maturity, and therefore, the long-term debt is categorized as Level 2 in the fair value hierarchy.
6. DERIVATIVE INSTRUMENTS
Cash Flow Hedges
Foreign Currency Forward Contracts
We conduct business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, and Philippine Peso. As such, we are exposed to movements in foreign currency exchange rates. We utilize 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. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, the degree to which the underlying exposure is committed to, and the availability, effectiveness, and cost of derivative instruments. Derivative instruments are only utilized for risk management purposes and are not used for speculative or trading purposes. We limit counterparties to credit-worthy financial institutions. Refer to Note 12, Commitments and Contingencies – Concentrations of Credit Risk, for further discussion on counterparty credit risk.
In designing a specific hedging approach, we 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 hedge is settled. There was no discontinuance of cash flow hedges during the three months ended November 30, 2021 or November 30, 2020, and as such, no corresponding gains or losses related to changes in the value of our contracts were reclassified into earnings prior to settlement.
As of November 30, 2021, we maintained foreign currency forward contracts to hedge a portion of our British Pound Sterling, Euro, Indian Rupee and Philippine Peso exposures. We entered into a series of forward contracts to mitigate our currency exposure ranging from 25% to 75% over their respective hedged periods. The current foreign currency forward contracts are set to mature at various points between the second quarter of fiscal 2022 through the first quarter of fiscal 2023.
As of November 30, 2021, the gross notional value of foreign currency forward contracts to purchase Philippine Pesos and Indian Rupees with U.S. dollars was ₱1.4 billion and Rs2.6 billion, respectively. The gross notional value of foreign currency forward contracts to purchase U.S. dollars with Euros and British Pound Sterling was €36.8 million and £38.7 million, respectively.
Interest Rate Swap Agreement
On March 5, 2020, we entered into an interest rate swap agreement with a notional amount of $287.5 million to hedge the variable interest rate obligation on a portion of our outstanding debt under our 2019 Revolving Credit Facility (as defined below in Note 11, Debt). As of November 30, 2021, we have borrowed $575.0 million of the available $750.0 million under the 2019 Revolving Credit Facility, which bears interest on the outstanding principal amount at a rate equal to contractual one month LIBOR plus a spread using a debt leverage pricing grid, which was 0.875% as of November 30, 2021. Refer to Note 11, Debt, for further discussion on the 2019 Revolving Credit Facility. Under the terms of the interest rate swap agreement, we will pay interest at a fixed rate of 0.7995% and receive variable interest payments based on the same one-month LIBOR utilized to calculate the interest expense from the 2019 Revolving Credit Facility. The interest rate swap agreement matures on March 29, 2024. Refer to Interest Rate Risk in Part I, Item 3 of this Quarterly Report on Form 10-Q for further discussion on our exposure to interest rate risk on our long-term debt outstanding.
As the terms for the interest rate swap agreement align with the 2019 Revolving Credit Facility, we do not expect any hedge ineffectiveness. We have designated and accounted for this instrument as a cash flow hedge with the unrealized gains or losses on the interest rate swap agreement recorded in AOCL in the Consolidated Balance Sheets. Realized gains or losses are subsequently reclassified into Interest expense, net in the Consolidated Statement of Income when settled.
The following is a summary of the gross notional values of the derivative instruments:
| (in thousands) | Gross Notional Value | ||||||||||
| November 30, 2021 | August 31, 2021 | ||||||||||
| Foreign currency forward contracts | $ | 158,357 | $ | 154,728 | |||||||
| Interest rate swap agreement | 287,500 | 287,500 | |||||||||
| Total cash flow hedges | $ | 445,857 | $ | 442,228 |
Fair Value of Derivative Instruments
The following is a summary of the fair values of the derivative instruments:
| Fair Value of Derivative Instruments | |||||||||||||||||||||||
| (in thousands) | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
| Derivatives designated as hedging instruments | Balance Sheet Classification | November 30, 2021 | August 31, 2021 | Balance Sheet Classification | November 30, 2021 | August 31, 2021 | |||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other current assets | $ | 193 | $ | 1,384 | Accounts payable and accrued expenses | $ | 3,102 | $ | 1,201 | |||||||||||||
| Interest rate swap agreement | Prepaid expenses and other current assets | — | — | Accounts payable and accrued expenses | 1,357 | 1,934 | |||||||||||||||||
| Other assets | 1,476 | — | Other liabilities | — | 1,045 | ||||||||||||||||||
| Total cash flow hedges | $ | 1,669 | $ | 1,384 | $ | 4,459 | $ | 4,181 |
All derivatives were designated as hedging instruments as of November 30, 2021 and August 31, 2021.
Derivatives in Cash Flow Hedging Relationships
The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the three months ended November 30, 2021 and November 30, 2020, respectively:
| (Loss) Gain Reclassified from AOCL into Income | Location of (Loss) Gain Reclassified from AOCL into Income | (Loss) Gain Reclassified from AOCL into Income | |||||||||||||||
| (in thousands) | November 30, | November 30, | |||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Foreign currency forward contracts | $ | (3,542) | $ | 248 | SG&A | $ | (449) | $ | 817 | ||||||||
| Interest rate swap agreement | 2,583 | (56) | Interest expense, net | (516) | (470) | ||||||||||||
| Total cash flow hedges | $ | (959) | $ | 192 | $ | (965) | $ | 347 | |||||||||
As of November 30, 2021, we estimate that net pre-tax derivative gains of $4.3 million included in AOCL will be reclassified
into earnings within the next 12 months. As of November 30, 2021, our cash flow hedges were effective, with no amount of ineffectiveness recorded in the Consolidated Statements of Income for these designated cash flow hedges, and all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Offsetting of Derivative Instruments
We enter into master netting arrangements designed to permit net settlement of derivative transactions among the respective counterparties, settled on the same date and in the same currency. As of November 30, 2021 and August 31, 2021, there were no material amounts recorded net on the Consolidated Balance Sheets.
7. ACQUISITIONS
During fiscal 2022 and 2021, we completed acquisitions of several businesses, with the most significant cash flows related to the acquisitions of Cobalt Software, Inc. ("Cobalt") and Truvalue Labs, Inc. ("TVL"). Refer to Note 17, Subsequent Event for more information on our proposed acquisition of CUSIP Global Services.
Cobalt Software, Inc.
On October 12, 2021, we acquired all of the outstanding shares of Cobalt for a purchase price of $50.0 million, net of cash acquired, subject to working capital and other adjustments. Cobalt is a leading portfolio monitoring solutions provider for the private capital industry. This acquisition advances our strategy to scale our data and workflow solutions through targeted investments as part of our multi-year investment plan and expand our private markets offering. The Cobalt purchase price was in excess of the fair value of net assets acquired, resulting in the recognition of goodwill. FactSet expects to finalize the allocation of the purchase price for Cobalt as soon as possible, but in any event, no later than one year from the acquisition date.
The acquisition date fair values of major classes of assets acquired and liabilities assumed are as follows:
| Acquisition Date Fair Value | Acquisition Date Useful Life | Amortization Method | |||||||||||||||
| (in thousands) | (in years) | ||||||||||||||||
| Current assets | $ | 519 | |||||||||||||||
| Amortizable intangible assets | |||||||||||||||||
| Software technology | 7,750 | 5 years | Straight-line | ||||||||||||||
| Client relationships | 4,800 | 11 years | Straight-line | ||||||||||||||
| Goodwill | 39,941 | ||||||||||||||||
| Other assets | 32 | ||||||||||||||||
| Current liabilities | (3,017) | ||||||||||||||||
| Other liabilities | (7) | ||||||||||||||||
| Total purchase price | $ | 50,018 |
Goodwill totaling $39.9 million represents the excess of the Cobalt purchase price over the fair value of net assets acquired and is included in the Americas and EMEA segments. Goodwill generated from the Cobalt acquisition is not deductible for income tax purposes. The results of Cobalt's operations have been included in our Consolidated Financial Statements, within the Americas and EMEA segments, beginning with its acquisition on October 12, 2021. Pro forma information has not been presented because the effect of the Cobalt acquisition is not material to our Consolidated Financial Statements.
Truvalue Labs, Inc.
On November 2, 2020, we acquired all of the outstanding shares of TVL for a purchase price of $41.9 million, net of cash acquired, subject to working capital and other adjustments. TVL is a leading provider of environmental, social, and governance ("ESG") information. TVL applies artificial intelligence driven technology to over 100,000 unstructured text sources in multiple languages, including news, trade journals, and non-governmental organizations and industry reports, to provide daily signals that identify positive and negative ESG behavior. The acquisition of TVL further enhances our commitment to providing industry leading access to ESG data across our platforms. The TVL purchase price was in excess of the fair value of net assets acquired, resulting in the recognition of goodwill. We finalized the purchase accounting for the TVL acquisition during the third quarter of fiscal 2021.
The acquisition date fair values of major classes of assets acquired and liabilities assumed are as follows:
| Acquisition Date Fair Value | Acquisition Date Useful Life | Amortization Method | |||||||||||||||
| (in thousands) | (in years) | ||||||||||||||||
| Current assets | $ | 812 | |||||||||||||||
| Amortizable intangible assets | |||||||||||||||||
| Software technology | 8,100 | 7 years | Straight-line | ||||||||||||||
| Client relationships | 900 | 12 years | Straight-line | ||||||||||||||
| Trade names | 2,800 | 15 years | Straight-line | ||||||||||||||
| Goodwill | 30,058 | ||||||||||||||||
| Other assets | 5,299 | ||||||||||||||||
| Current liabilities | (3,069) | ||||||||||||||||
| Other liabilities | (2,984) | ||||||||||||||||
| Total purchase price | $ | 41,916 |
Goodwill totaling $30.1 million represents the excess of the TVL purchase price over the fair value of net assets acquired and is included in the Americas segment. Goodwill generated from the TVL acquisition is not deductible for income tax purposes. The results of TVL's operations have been included in our Consolidated Financial Statements, within the Americas segment, beginning with its acquisition on November 2, 2020. Pro forma information has not been presented because the effect of the TVL acquisition is not material to our Consolidated Financial Statements.
8. GOODWILL
Changes in the carrying amount of goodwill by segment for the three months ended November 30, 2021 are as follows:
| (in thousands) | Americas | EMEA | Asia Pacific | Total | |||||||||||||||||||
| Balance at August 31, 2021 | $ | 430,088 | $ | 321,150 | $ | 2,967 | $ | 754,205 | |||||||||||||||
| Acquisitions | 39,454 | 487 | — | 39,941 | |||||||||||||||||||
| Foreign currency translations | — | (11,040) | (81) | (11,121) | |||||||||||||||||||
| Balance at November 30, 2021 | $ | 469,542 | $ | 310,597 | $ | 2,886 | $ | 783,025 |
Goodwill is not amortized as it is estimated to have an indefinite life. At least annually, we are required to test goodwill at the reporting unit level, which is consistent with our segments, for potential impairment, and, if impaired, write down to fair value based on the present value of discounted cash flows. We performed our annual goodwill impairment test during the fourth quarter of fiscal 2021 utilizing a qualitative analysis, consistent with the timing of previous years. We concluded it was more likely than not that the fair value of each of our segments was greater than its respective carrying value and no impairment charge was required.
9. 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:
| Three Months Ended | ||||||||||||||||||||
| November 30, | ||||||||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||||||||
| Income before income taxes | $ | 119,930 | $ | 120,232 | ||||||||||||||||
| Provision for income taxes | $ | 12,283 | $ | 19,026 | ||||||||||||||||
| Effective tax rate | 10.2 | % | 15.8 | % |
Our effective tax rate is based on recurring factors and non-recurring events, including the taxation of foreign income. Our effective tax rate will vary based on, among other things, changes in levels of foreign income, as well as discrete and other non-recurring events that may not be predictable. Our effective tax rate is lower than the applicable U.S. corporate income tax rate for the three months ended November 30, 2021, driven mainly by research and development ("R&D") tax credits and a foreign derived intangible income ("FDII") deduction. The effective tax rate for the three months ended November 30, 2021 is further reduced by windfall tax benefits associated with the employee exercise of stock options.
For the three months ended November 30, 2021, the provision for income taxes was $12.3 million, compared with $19.0 million for the same period a year ago. The provision decreased mainly due to $6.9 million in higher windfall tax benefits during the three months ended November 30, 2021, compared with the prior year period.
10. LEASES
On September 1, 2019, we adopted ASC 842, Leases ("ASC 842"). As part of this adoption, we elected to not record operating lease right-of-use assets or operating lease liabilities for leases with an initial term of 12 months or less. We elected the practical expedient not to separate lease components from non-lease components but, rather, to combine them into one single lease component, which we recognize over the expected term on a straight-line expense basis in occupancy costs (a component of SG&A expense). We review new arrangements at inception to evaluate whether we obtain substantially all the economic benefits of and have the right to control the use of an asset.
Our lease portfolio is primarily related to our office space, under various operating lease agreements. Our lease ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments at lease commencement (which includes fixed lease payments and certain qualifying index-based variable payments) over the reasonably certain lease term, leveraging an estimated incremental borrowing rate ("IBR"). Certain adjustments to our lease ROU assets may be required for items such as the payment of initial direct costs or incentives received.
As of November 30, 2021, we recognized $227.9 million of Lease right-of-use assets, net and $281.0 million of combined Current and Long-term lease liabilities in the Consolidated Balance Sheets. Such leases have a remaining lease term ranging from less than one year to just over 14 years and did not include any renewal or termination options that were not yet reasonably certain to be exercised.
The following table reconciles our future undiscounted cash flows related to our operating leases and the reconciliation to the Current and Long-term lease liabilities as of November 30, 2021:
| (in thousands) | Minimum Lease Payments | ||||
| Fiscal Years Ended August 31, | |||||
| 2022 (remaining nine months) | $ | 32,200 | |||
| 2023 | 39,966 | ||||
| 2024 | 37,460 | ||||
| 2025 | 35,648 | ||||
| 2026 | 35,022 | ||||
| Thereafter | 160,126 | ||||
| Total | $ | 340,422 | |||
| Less: Imputed interest | 59,430 | ||||
| Present value | $ | 280,992 |
The components of lease cost related to the operating leases were as follows:
| Three Months Ended | |||||||||||||||||
| November 30, | |||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||
| Operating lease cost1 | $ | 10.5 | $ | 10.7 | |||||||||||||
| Variable lease cost2 | $ | 2.9 | $ | 3.4 |
*1.*Operating lease costs included costs associated with fixed lease payments and index-based variable payments that qualified for lease accounting under ASC 842, Leases and complied with the practical expedients and exceptions elected by us.
*2.*Variable lease costs were not included in the measurement of lease liabilities. These costs primarily included variable non-lease costs and leases that qualified for the short-term lease exception. Our variable non-lease costs included costs that were not fixed at the lease commencement date and are not dependent on an index or rate. These costs relate to utilities, real estate taxes, insurance and maintenance.
The following table summarizes our lease term and discount rate assumptions related to the operating leases recorded on the Consolidated Balance Sheets:
| November 30, 2021 | August 31, 2021 | |||||||
| Weighted average remaining lease term (in years) | 9.2 | 9.4 | ||||||
| Weighted average discount rate (IBR) | 4.3 | % | 4.3 | % |
The following table summarizes supplemental cash flow information related to our operating leases:
| Three Months Ended | ||||||||
| November 30, | ||||||||
| (in millions) | 2021 | 2020 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 11.1 | $ | 9.7 | ||||
| Lease ROU assets obtained in exchange for lease liabilities | $ | 1.4 | $ | 1.1 |
11. DEBT
Our debt obligations at November 30, 2021 and August 31, 2021 consisted of the following:
| (in thousands) | November 30, 2021 | August 31, 2021 | ||||||
| 2019 Revolving Credit Facility | $ | 575,000 | $ | 575,000 | ||||
| 2019 Revolving Credit Facility debt issuance costs | (420) | (465) | ||||||
| Long-term debt | $ | 574,580 | $ | 574,535 |
2019 Credit Agreement
On March 29, 2019, we entered into a credit agreement, as the borrower, with PNC Bank, National Association ("PNC"), as the administrative agent and lender (the "2019 Credit Agreement"). The 2019 Credit Agreement provides for a $750.0 million revolving credit facility (the "2019 Revolving Credit Facility"). We may request borrowings under the 2019 Revolving Credit Facility until its maturity date of March 29, 2024. The 2019 Credit Agreement also allows us, subject to certain requirements, to arrange for additional borrowings with PNC for an aggregate amount up to $500.0 million, provided that any such request for additional borrowings must be in a minimum amount of $25.0 million.
We borrowed $575.0 million of the available $750.0 million provided by the 2019 Revolving Credit Facility, resulting in $175.0 million available to be withdrawn. We are required to pay a commitment fee using a pricing grid currently at 0.10% based on the daily amount by which the available balance in the 2019 Revolving Credit Facility exceeds the borrowed amount. All outstanding loan amounts are reported as Long-term debt within the Consolidated Balance Sheets at November 30, 2021. The principal balance is payable in full on the maturity date.
Borrowings under the 2019 Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to the daily LIBOR plus a spread using a debt leverage pricing grid, currently at 0.875%. For the three months ended November 30, 2021 and November 30, 2020, we recorded interest expense on our outstanding debt, including the amortization of debt issuance costs, net of the effects of the interest rate swap agreement of $1.9 million and $2.1 million, respectively. Including the effects of the interest rate swap agreement, the year-to-date weighted average interest rate on amounts outstanding under our 2019 Revolving Credit Facility was 1.36% and 1.38% as of November 30, 2021 and August 31, 2021, respectively. Refer to Note 6, Derivative Instruments for further discussion on the interest rate swap agreement. Interest on the loan outstanding under the 2019 Revolving Credit Facility is payable quarterly, in arrears, and on the maturity date.
During fiscal 2019, we incurred approximately $0.9 million in debt issuance costs related to the 2019 Credit Agreement. These costs were capitalized as debt issuance costs and are amortized into interest expense ratably over the term of the 2019 Credit Agreement.
The 2019 Credit Agreement contains covenants and requirements restricting certain of our activities, which are usual and customary for this type of loan. In addition, the 2019 Credit Agreement requires that we maintain a consolidated net leverage ratio, as measured by total net funded debt/EBITDA (as defined in the 2019 Credit Agreement) below a specified level as of the end of each fiscal quarter. We were in compliance with all covenants and requirements within the 2019 Credit Agreement as of November 30, 2021.
12. COMMITMENTS AND CONTINGENCIES
Commitments represent obligations, such as those for future purchases of goods or services, that are not yet recorded on the balance sheet as liabilities. We record liabilities for commitments when incurred (i.e., when the goods or services are received).
Purchase Commitments with Suppliers and Vendors
Purchase obligations represent payments due in future periods in respect of commitments to our various data vendors as well as commitments to purchase goods and services. These purchase commitments are agreements that are enforceable and legally binding on us, and they specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. As of August 31, 2021, we had total purchase commitments with suppliers of $191.9 million.
We also have contractual obligations related to our lease liabilities and outstanding debt. Refer to Note 10, Leases and Note 11, Debt for information regarding lease commitments and outstanding debt obligations, respectively.
Letters of Credit
From time to time, we are required to obtain letters of credit in the ordinary course of business. As of November 30, 2021, we had approximately $2.8 million of standby letters of credit outstanding. These standby letters of credit utilize the same covenants included in the 2019 Credit Agreement. Refer to Note 11, Debt for more information on these covenants.
Contingencies
Income Taxes
Uncertain income tax positions are accounted for in accordance with applicable accounting guidance, refer to Note 9, Income Taxes, for further details. We are currently under audit by tax authorities and have reserved for potential adjustments to our provision for income taxes that may result from examinations by, or any negotiated settlements with, these tax authorities. We believe that the final outcome of these examinations or settlements will not have a material effect on our results of operations or our cash flows. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of tax benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities are less than the ultimate assessment, additional expense would result.
Legal Matters
We accrue non-income tax liabilities for contingencies when management believes that a loss is probable, and the amounts can be reasonably estimated. Contingent gains are recognized only when realized. We are engaged in various legal proceedings, claims and litigation that have arisen in the ordinary course of business, including employment matters, commercial and intellectual property litigation. The outcome of all the matters against us are subject to future resolution, including the uncertainties of litigation. Based on information available at November 30, 2021, our management believes that the ultimate outcome of these unresolved matters against us, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, our results of operations or our cash flows.
Sales Tax Matters
On August 8, 2019, we received a Notice of Intent to Assess (the "First Notice") additional sales taxes, interest and underpayment penalties from the Commonwealth of Massachusetts Department of Revenue (the "Commonwealth") relating to the tax periods from January 1, 2006 through December 31, 2013. On July 20, 2021, we received a Notice of Intent to Assess (the "Second Notice", cumulatively with the First Notice, the "Notices") additional sales taxes, interest and underpayment penalties from the Commonwealth relating to the tax periods from January 1, 2014 through December 31, 2018. Based upon the Notices, it is the Commonwealth's intention to assess sales tax, interest and underpayment penalties on previously recorded sales transactions. We have filed an appeal to the Notices and intend to contest any such assessment, if assessed. We continue to cooperate with the Commonwealth's inquiry with respect to the Notices.
On August 10, 2021, we received a letter (the "Letter") from the Commonwealth relating to the tax periods from January 1, 2019 through June 30, 2021, requesting additional sales information to determine if a notice of intent to assess should be issued to FactSet with respect to these tax periods. Based upon a preliminary review of the Letter, we believe the Commonwealth might seek to assess sales tax, interest and underpayment penalties on previously recorded sales transactions. We are cooperating with the Commonwealth's inquiry with respect to the Letter.
Due to the uncertainty surrounding the assessment process for both the Notices and Letter, we are unable to reasonably estimate the ultimate outcome of these matters and, as such, have not recorded a liability for any of these matters as of November 30, 2021. We believe that we will ultimately prevail if we are presented with a formal assessment for any of these matters; however, if we do not prevail, the amount of any assessment could have a material impact on our consolidated financial position, results of operations and cash flows.
Indemnifications
As permitted or required under Delaware law and to the maximum extent allowable under that law, we have certain obligations to indemnify our current and former officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in, or not opposed to, the best interests of FactSet, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have a director and officer insurance policy that we believe mitigates our exposure and may enable us
to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification obligations is immaterial.
Concentrations of Credit Risk
Cash equivalents
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents. We are exposed to credit risk for cash and cash equivalents held in financial institutions in the event of a default, to the extent that such amounts are in excess of applicable insurance limits. We have not experienced any losses from maintaining cash accounts in excess of such limits. We do not believe our concentration of cash and cash equivalents present a significant credit risk as the counterparties to the instruments consist of multiple high-quality, credit-worthy financial institutions.
Accounts Receivable
Our accounts receivable are subject to collection risk as they are unsecured and derived from revenues earned from clients located around the globe. We do not require collateral from our clients. We maintain reserves for potential write-offs and evaluate the adequacy of the reserves periodically. These losses have historically been within expectations. No single client represented more than 3% of our total revenues in any period presented. As of November 30, 2021, the receivable reserve was $4.4 million compared with $6.4 million as of August 31, 2021.
Derivative Instruments
Our use of derivative instruments exposes us to credit risk to the extent counterparties may be unable to meet the terms of their agreements. To mitigate credit risk, we limit counterparties to credit-worthy financial institutions and distribute contracts among these institutions to reduce the concentration of credit risk. We do not expect any losses as a result of default by our counterparties.
Concentrations of Other Risk
Data Content Providers
We integrate data from various third-party sources into our hosted propriety data and analytics platform, which our clients access to perform their analyses. As certain data sources have a limited number of suppliers, we make every effort to assure that, where reasonable, alternative sources are available. We are not dependent on any individual third-party data supplier in order to meet the needs of our clients, with only two data suppliers representing more than 10% of our total data costs for the three months ended November 30, 2021.
13. STOCKHOLDERS’ EQUITY
Shares of common stock outstanding were as follows:
| Three Months Ended | ||||||||
| November 30, | ||||||||
| (in thousands) | 2021 | 2020 | ||||||
| Balance, beginning of period | 37,615 | 38,030 | ||||||
| Common stock issued for employee stock plans | 210 | 117 | ||||||
| Repurchase of common stock from employees(1) | (7) | (7) | ||||||
| Repurchase of common stock under the share repurchase program | (46) | (132) | ||||||
| Balance, end of period | 37,772 | 38,008 |
*(1)*For the three months ended November 30, 2021 and November 30, 2020, we repurchased 6,747 and 6,728 shares, or $2.9 million and $2.1 million of common stock, respectively, primarily to satisfy withholding tax obligations due upon the vesting of stock-based awards.
Share Repurchase Program
Under our share repurchase program, we may repurchase shares of our common stock from time to time in the open market and privately negotiated transactions, subject to market conditions. For the three months ended November 30, 2021 and November 30, 2020, we repurchased 46,200 shares for $18.6 million and 131,800 shares for $43.1 million, respectively.
As of November 30, 2021, a total of $181.3 million remained authorized for future share repurchases under this program. It is expected that share repurchases will be paid using existing and future cash generated by operations. Refer to Note 17, Subsequent Event for more information on our expectations around our share repurchase program for fiscal 2022.
Restricted Stock
Restricted stock awards entitle the holders to receive shares of common stock as the awards vest over time. For the three months ended November 30, 2021, 17,349 shares of previously granted restricted stock vested and were included in common stock outstanding as of November 30, 2021 (recorded net of 6,747 shares repurchased from employees at a cost of $2.9 million to cover their cost of taxes upon vesting of the restricted stock). During the three months ended November 30, 2020, 17,946 shares of previously granted restricted stock vested and were included in common stock outstanding as of November 30, 2020 (recorded net of 6,728 shares repurchased from employees at a cost of $2.1 million to cover their cost of taxes upon vesting of the restricted stock).
Dividends
Our Board of Directors declared dividends in the three months ended November 30, 2021 and November 30, 2020 as follows:
| Year Ended | Dividends per Share of Common Stock | Record Date | Total $ Amount (in thousands) | Payment Date | ||||||||||
| Fiscal 2022 | ||||||||||||||
| First Quarter | $ | 0.82 | November 30, 2021 | $ | 30,973 | December 16, 2021 | ||||||||
| Fiscal 2021 | ||||||||||||||
| First Quarter | $ | 0.77 | November 30, 2020 | $ | 29,266 | December 17, 2020 | ||||||||
Future cash dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us and are subject to final determination by our Board of Directors.
Accumulated Other Comprehensive Loss
The components of AOCL are as follows:
| (in thousands) | November 30, 2021 | August 31, 2021 | |||||||||
| Accumulated unrealized losses on cash flow hedges | $ | (2,090) | $ | (2,095) | |||||||
| Accumulated foreign currency translation adjustments | (55,580) | (36,867) | |||||||||
| Total AOCL | $ | (57,670) | $ | (38,962) |
14. EARNINGS PER SHARE
A reconciliation of the weighted average shares outstanding used in the basic and diluted earnings per share ("EPS") computations is as follows:
| Three Months Ended | ||||||||||||||
| November 30, | ||||||||||||||
| (in thousands, except per share data) | 2021 | 2020 | ||||||||||||
| Numerator | ||||||||||||||
| Net income used for calculating basic and diluted income per share | $ | 107,647 | $ | 101,206 | ||||||||||
| Denominator | ||||||||||||||
| Weighted average common shares used in the calculation of basic income per share | 37,678 | 38,007 | ||||||||||||
| Common stock equivalents associated with stock-based compensation plan | 963 | 690 | ||||||||||||
| Shares used in the calculation of diluted income per share | 38,641 | 38,697 | ||||||||||||
| Basic income per share | $ | 2.86 | $ | 2.66 | ||||||||||
| Diluted income per share | $ | 2.79 | $ | 2.62 |
Dilutive potential common shares consist of stock options and unvested performance-based awards. There were 298,900 stock options excluded from the calculation of diluted EPS for the three months ended November 30, 2021, because their inclusion would have been anti-dilutive. For the three months ended November 30, 2020, the number of stock options excluded from calculation of diluted EPS was 1,750.
Performance-based awards are omitted from the calculation of diluted EPS until it is determined that the performance criteria has been met at the end of the reporting period. For the three months ended November 30, 2021, there were 97,511 performance-based awards excluded from the calculation of diluted EPS. For the three months ended November 30, 2020, there were 72,090 performance-based awards excluded from the calculation of diluted EPS.
15. STOCK-BASED COMPENSATION
We recognized total stock-based compensation expense of $10.4 million and $11.3 million during the three months ended November 30, 2021 and November 30, 2020, respectively. As of November 30, 2021, $132.9 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 2.6 years. There was no stock-based compensation capitalized as of November 30, 2021 and November 30, 2020.
Employee Stock Option Awards
During the three months ended November 30, 2021, we granted 299,702 stock options under the FactSet Research Systems Inc. Stock Option and Award Plan, as Amended and Restated (the "LTIP") with a weighted average exercise price of $434.82 to existing employees of FactSet, using the lattice-binomial option-pricing model. The majority of the stock options granted during the three months ended November 30, 2021 are related to the annual employee grant on November 1, 2021 under the LTIP. The stock option awards granted on November 1, 2021 vest 20% annually on the anniversary date of the grant and are fully vested after five years, expiring ten years from the date of grant. As of November 30, 2021, we had 4.6 million share-based awards available for grant under the LTIP.
Employee Stock Option Fair Value Determinations
We utilize the lattice-binomial option-pricing model ("binomial model") to estimate the fair value of new employee stock option grants. The binomial model is affected by our stock price, as well as assumptions regarding several variables, which include, but are not limited to, our expected stock price volatility over the term of the awards, interest rates, option forfeitures and employee stock option exercise behaviors, to determine the grant date stock option award fair value.
The weighted average estimated fair value of employee stock options granted on November 1, 2021 was determined using the binomial model with the following weighted average assumptions:
| November 1, 2021 Grant Details | ||||||||
| Risk-free interest rate | 0.07% - 1.56% | |||||||
| Expected life (years) | 6.91 | |||||||
| Expected volatility | 24.4 | % | ||||||
| Dividend yield | 0.85 | % | ||||||
| Estimated fair value | $102.40 | |||||||
| Exercise price | $434.82 | |||||||
| Fair value as a percentage of exercise price | 23.5 | % | ||||||
Non-Employee Director Stock Option Grant
The FactSet Research Systems Inc. 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. The expiration date of the Director Plan is December 19, 2027. The non-qualified stock options granted to directors vest 100% after three years on the anniversary date of the grant and expire seven years from the date the options were granted. As of November 30, 2021, we had 237,749 shares available for future grant under the Director Plan.
Restricted Stock Units
During the three months ended November 30, 2021, we granted 43,613 non-performance based restricted stock units ("RSUs") and 30,460 performance-based restricted stock units ("PSUs"; RSUs and PSUs, collectively, "Restricted Stock Awards") under the LTIP. The Restricted Stock Awards granted under the LTIP during the three months ended November 30, 2021 had a weighted average grant date fair value of $424.14.
Restricted Stock Awards are subject to continued employment over a specified period and entitle the holders to shares of common stock as the Restricted Stock Awards vest over time. Vesting of the shares underlying the PSUs are also subject to achieving certain specified performance levels during the measurement period subsequent to the date of grant. The Restricted Stock Award holder is not entitled to dividends declared on the underlying shares while the stock subject to the Restricted Stock Award is unvested. The grant date fair value of Restricted Stock Awards is measured by reducing the grant date price of the common stock by the present value of the dividends expected to be paid on the underlying stock during the requisite service period, discounted at the appropriate risk-free interest rate. The expense associated with Restricted Stock Awards is amortized over the vesting period.
The Restricted Stock Awards granted during the three months ended November 30, 2021 were primarily related to the annual employee grant on November 1, 2021. With respect to the November 1, 2021 grant, RSUs granted vest 20% annually on the anniversary date of grant and are fully vested after five years and PSUs granted cliff vest on the third anniversary of the grant date, subject to the achievement of certain performance metrics.
Employee Stock Purchase Plan
Shares of FactSet common stock may be purchased by eligible employees under the 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 our 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 there is a $25,000 contribution limit per employee during an offering period. Dividends paid on shares held in the ESPP are used to purchase additional ESPP shares at the market price on the dividend payment date.
During the three months ended November 30, 2021, employees purchased 9,185 shares at a weighted average price of $330.87 compared with 9,269 shares at a weighted average price of $286.58 for the three months ended November 30, 2020. Stock-based compensation expense related to the ESPP was $0.5 million during both the three months ended November 30, 2021 and November 30, 2020. At November 30, 2021 the ESPP had 129,771 shares reserved for future issuance.
16. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that have the following characteristics: (i) they engage in business activities from which they may earn revenues and incur expenses, (ii) their operating results are regularly reviewed by the chief operating decision maker ("CODM") for resource allocation decisions and performance assessment, and (iii) their discrete financial information is available. At FactSet, our Chief Executive Officer functions as our CODM.
Our operating segments are consistent with our reportable segments and are how we, including our CODM, manage our business and the geographic markets in which we serve. Our internal financial reporting structure is based on three segments: the Americas; EMEA; and Asia Pacific.
The Americas segment serves our clients throughout North, Central, and South America. The EMEA segment serves our clients in Europe, the Middle East, and Africa. The Asia Pacific segment serves our clients in Asia and Australia. Segment revenues reflect sales to clients based in these respective geographic locations.
Each segment records expenses related to its individual operations with the exception of expenditures associated with our data centers, third-party data costs and corporate headquarters charges, which are recorded by the Americas segment and are not allocated to the other segments. The content collection centers, located in India, the Philippines and Latvia, benefit all our segments, and the expenses incurred at these locations are allocated to each segment based on a percentage of revenues.
The following tables reflect the results of operations of our segments as of November 30, 2021 and November 30, 2020:
| (in thousands) | Americas | EMEA | Asia Pacific | Total | ||||||||||
| For the three months ended November 30, 2021 | ||||||||||||||
| Revenues | $ | 266,913 | $ | 115,003 | $ | 42,809 | $ | 424,725 | ||||||
| Operating income | $ | 55,498 | $ | 40,654 | $ | 26,509 | $ | 122,661 | ||||||
| Capital expenditures | $ | 7,203 | $ | 110 | $ | 1,270 | $ | 8,583 | ||||||
| (in thousands) | ||||||||||||||
| For the three months ended November 30, 2020 | ||||||||||||||
| Revenues | $ | 244,337 | $ | 105,777 | $ | 38,092 | $ | 388,206 | ||||||
| Operating income | $ | 56,376 | $ | 40,634 | $ | 24,021 | $ | 121,031 | ||||||
| Capital expenditures | $ | 9,560 | $ | 319 | $ | 8,454 | $ | 18,333 | ||||||
The following table reflects the total assets for our segments:
| Segment Assets (in thousands) | November 30, 2021 | August 31, 2021 | |||||||||
| Americas | $ | 1,320,322 | $ | 1,144,693 | |||||||
| EMEA | 698,779 | 842,652 | |||||||||
| Asia Pacific | 235,263 | 237,595 | |||||||||
| Total assets | $ | 2,254,364 | $ | 2,224,940 |
17. Subsequent Event
As previously announced, on December 24, 2021, FactSet entered into a definitive agreement to acquire CUSIP Global Services ("CGS") from S&P Global Inc. for $1.925 billion in cash.
CGS manages a database of 60 different data elements uniquely identifying more than 50 million global financial instruments. It is the foundation for security master files relied on by critical front, middle and back-office functions. CGS is the exclusive provider of CUSIP and CINS identifiers globally and also acts as the official numbering agency for ISIN identifiers in the United States. The acquisition will significantly expand our critical role in the global capital markets, advancing our open data strategy.
We intend to fund this transaction through a combination of cash-on-hand and committed financing. In connection with entering into this agreement, we entered into a commitment letter under which PNC Bank and Bank of America will provide us with financing in the aggregate amount of up to $2.5 billion to assist with the acquisition, including a $500 million revolving credit facility. We intend to replace and refinance our existing revolving credit facility with proceeds from the new financing.
Revenues from CGS will be recognized based on geographic business activities in accordance with how our operating segments are currently aligned. CGS will function as part of CTS. While we have not yet completed a preliminary allocation of the purchase price to the assets and liabilities to be acquired, we expect the majority of the purchase price will be allocated to goodwill and acquired intangible assets. The acquisition is subject to customary closing conditions, including regulatory approvals and the consummation of the S&P Global and IHS Markit merger. The transaction is expected to close in the first quarter of calendar 2022.
Following the closing of this acquisition, we intend to suspend our share repurchase program for the remainder of fiscal 2022, except for potential minor repurchases to offset dilution from grants of stock options.
Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS