filings.toolsItem 1. FINANCIAL STATEMENTS
133K characters. Original on sec.gov · Markdown
Item 1. FINANCIAL STATEMENTS
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME – Unaudited
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| May 31, | May 31, | ||||||||||||||||
| (In thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | 488,751 | $ | 399,558 | $ | 1,344,595 | $ | 1,179,551 | |||||||||
| Operating expenses | |||||||||||||||||
| Cost of services | 222,618 | 205,257 | 629,162 | 588,868 | |||||||||||||
| Selling, general and administrative | 119,881 | 76,599 | 309,185 | 235,818 | |||||||||||||
| Long-lived asset impairments | 48,998 | — | 62,985 | — | |||||||||||||
| Total operating expenses | 391,497 | 281,856 | 1,001,332 | 824,686 | |||||||||||||
| Operating income | 97,254 | 117,702 | 343,263 | 354,865 | |||||||||||||
| Other income (expense), net | |||||||||||||||||
| Interest expense, net | (12,051) | (1,839) | (15,218) | (4,682) | |||||||||||||
| Other income (expense), net | 77 | (1,587) | (879) | (1,009) | |||||||||||||
| Income before income taxes | 85,280 | 114,276 | 327,166 | 349,174 | |||||||||||||
| Provision for income taxes | 10,370 | 13,597 | 34,671 | 50,646 | |||||||||||||
| Net income | $ | 74,910 | $ | 100,679 | $ | 292,495 | $ | 298,528 | |||||||||
| Basic earnings per common share | $ | 1.97 | $ | 2.66 | $ | 7.76 | $ | 7.87 | |||||||||
| Diluted earnings per common share | $ | 1.93 | $ | 2.62 | $ | 7.58 | $ | 7.73 | |||||||||
| Basic weighted average common shares | 37,934 | 37,806 | 37,716 | 37,910 | |||||||||||||
| Diluted weighted average common shares | 38,720 | 38,488 | 38,607 | 38,602 |
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 | Nine Months Ended | ||||||||||||||||
| May 31, | May 31, | ||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income | $ | 74,910 | $ | 100,679 | $ | 292,495 | $ | 298,528 | |||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||
| Net unrealized gain (loss) on cash flow hedges* | 810 | 1,017 | 5,620 | 2,204 | |||||||||||||
| Foreign currency translation adjustment | (22,096) | 8,221 | (43,792) | 17,831 | |||||||||||||
| Other comprehensive income (loss) | (21,286) | 9,238 | (38,172) | 20,035 | |||||||||||||
| Comprehensive income | $ | 53,624 | $ | 109,917 | $ | 254,323 | $ | 318,563 |
*For the three and nine months ended May 31, 2022, the net unrealized gain on cash flow hedges were net of a tax expense of $1,350 thousand and a tax expense of $1,819 thousand, respectively. For the three and nine months ended May 31, 2021, the net unrealized gain on cash flow hedges were net of a tax expense of $344 thousand and a tax expense of $746 thousand, respectively.
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) | May 31, 2022 | August 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 526,966 | $ | 681,865 | |||||||
| Investments | 33,580 | 35,984 | |||||||||
| Accounts receivable, net of reserves of $3,387 at May 31, 2022 and $6,431 at August 31, 2021 | 226,488 | 151,187 | |||||||||
| Prepaid taxes | 31,366 | 13,917 | |||||||||
| Prepaid expenses and other current assets | 55,070 | 50,625 | |||||||||
| Total current assets | 873,470 | 933,578 | |||||||||
| Property, equipment and leasehold improvements, net | 85,625 | 131,377 | |||||||||
| Goodwill | 978,860 | 754,205 | |||||||||
| Intangible assets, net | 1,912,738 | 134,986 | |||||||||
| Deferred taxes | 3,262 | 2,250 | |||||||||
| Lease right-of-use assets, net | 176,884 | 239,064 | |||||||||
| Other assets | 37,725 | 29,480 | |||||||||
| TOTAL ASSETS | $ | 4,068,564 | $ | 2,224,940 | |||||||
| LIABILITIES | |||||||||||
| Accounts payable and accrued expenses | $ | 100,319 | $ | 85,777 | |||||||
| Current lease liabilities | 30,757 | 31,576 | |||||||||
| Accrued compensation | 78,483 | 104,403 | |||||||||
| Deferred revenues | 169,361 | 63,104 | |||||||||
| Dividends payable | 33,795 | 30,845 | |||||||||
| Total current liabilities | 412,715 | 315,705 | |||||||||
| Long-term debt | 2,105,142 | 574,535 | |||||||||
| Deferred taxes | 14,973 | 14,752 | |||||||||
| Deferred revenues, non-current | 8,172 | 8,394 | |||||||||
| Taxes payable | 29,095 | 30,279 | |||||||||
| Long-term lease liabilities | 227,047 | 259,980 | |||||||||
| Other liabilities | 3,698 | 4,942 | |||||||||
| TOTAL LIABILITIES | $ | 2,800,842 | $ | 1,208,587 | |||||||
| Commitments and contingencies (see Note 13) | |||||||||||
| 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, 41,572,771 and 41,163,192 shares issued, 37,971,366 and 37,615,419 shares outstanding at May 31, 2022 and August 31, 2021, respectively | 416 | 412 | |||||||||
| Additional paid-in capital | 1,163,081 | 1,048,305 | |||||||||
| Treasury stock, at cost: 3,601,405 and 3,547,773 shares at May 31, 2022 and August 31, 2021, respectively | (927,818) | (905,917) | |||||||||
| Retained earnings | 1,109,177 | 912,515 | |||||||||
| Accumulated other comprehensive loss | (77,134) | (38,962) | |||||||||
| TOTAL STOCKHOLDERS’ EQUITY | $ | 1,267,722 | $ | 1,016,353 | |||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 4,068,564 | $ | 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
| Nine Months Ended | |||||||||||
| May 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 292,495 | $ | 298,528 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 60,176 | 48,185 | |||||||||
| Amortization of lease right-of-use assets | 32,936 | 32,241 | |||||||||
| Stock-based compensation expense | 40,604 | 33,356 | |||||||||
| Deferred income taxes | (5,488) | (2,271) | |||||||||
| Impairment charge | 62,985 | — | |||||||||
| Changes in assets and liabilities, net of effects of acquisitions | |||||||||||
| Accounts receivable, net of reserves | (39,005) | (6,795) | |||||||||
| Accounts payable and accrued expenses | 15,292 | (1,712) | |||||||||
| Accrued compensation | (23,992) | (11,066) | |||||||||
| Deferred fees | 4,091 | 8,898 | |||||||||
| Taxes payable, net of prepaid taxes | (18,552) | 8,766 | |||||||||
| Lease liabilities, net | (35,961) | (31,156) | |||||||||
| Other, net | 1,343 | (6,725) | |||||||||
| Net cash provided by operating activities | 386,924 | 370,249 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchases of property, equipment, leasehold improvements and internal-use software | (35,950) | (47,414) | |||||||||
| Acquisition of businesses, net of cash and cash equivalents acquired | (1,981,641) | (41,916) | |||||||||
| Purchases of investments | (678) | (1,250) | |||||||||
| Proceeds from maturity or sale of investments | — | 2,176 | |||||||||
| Net cash used in investing activities | (2,018,269) | (88,404) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from debt | 2,238,355 | — | |||||||||
| Repayments of debt | (700,000) | — | |||||||||
| Payments of debt issuance costs | (9,736) | — | |||||||||
| Dividend payments | (92,334) | (87,144) | |||||||||
| Proceeds from employee stock plans | 74,173 | 46,962 | |||||||||
| Repurchases of common stock | (18,639) | (172,210) | |||||||||
| Other financing activities | (3,263) | (2,366) | |||||||||
| Net cash provided by / (used in) financing activities | 1,488,556 | (214,758) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (12,110) | 5,648 | |||||||||
| Net (decrease) increase in cash and cash equivalents | (154,899) | 72,735 | |||||||||
| Cash and cash equivalents at beginning of period | 681,865 | 585,605 | |||||||||
| Cash and cash equivalents at end of period | $ | 526,966 | $ | 658,340 |
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 May 31, 2022
| (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 as of February 28, 2022 | 41,485,261 | $ | 415 | $ | 1,131,166 | 3,601,395 | $ | (927,814) | $ | 1,068,062 | $ | (55,848) | $ | 1,215,981 | |||||||||||||||||||||||||||||||||
| Net income | 74,910 | 74,910 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (21,286) | (21,286) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for employee stock plans | 87,486 | 1 | 17,248 | — | — | 17,249 | |||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 24 | — | 10 | (4) | (4) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 14,667 | 14,667 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (33,795) | (33,795) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2022 | 41,572,771 | $ | 416 | $ | 1,163,081 | 3,601,405 | $ | (927,818) | $ | 1,109,177 | $ | (77,134) | $ | 1,267,722 | |||||||||||||||||||||||||||||||||
| For the Nine Months Ended May 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| (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 as of August 31, 2021 | 41,163,192 | $ | 412 | $ | 1,048,305 | 3,547,773 | $ | (905,917) | $ | 912,515 | $ | (38,962) | $ | 1,016,353 | |||||||||||||||||||||||||||||||||
| Net income | 292,495 | 292,495 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (38,172) | (38,172) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for employee stock plans | 391,195 | 4 | 74,172 | 260 | (128) | 74,048 | |||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 18,384 | — | 7,172 | (3,134) | (3,134) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | 46,200 | (18,639) | (18,639) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 40,604 | 40,604 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (95,833) | (95,833) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2022 | 41,572,771 | $ | 416 | $ | 1,163,081 | 3,601,405 | $ | (927,818) | $ | 1,109,177 | $ | (77,134) | $ | 1,267,722 | |||||||||||||||||||||||||||||||||
For the Three Months Ended May 31, 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 as of February 28, 2021 | 40,943,660 | $ | 409 | $ | 989,918 | 3,098,662 | $ | (753,954) | $ | 772,591 | $ | (28,496) | $ | 980,468 | |||||||||||||||||||||||||||||||||
| Net income | 100,679 | 100,679 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 9,238 | 9,238 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for employee stock plans | 103,912 | 1 | 18,434 | 18,435 | |||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 52 | — | 22 | (7) | (7) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | 178,100 | (57,571) | (57,571) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 11,029 | 11,029 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (30,972) | (30,972) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2021 | 41,047,624 | $ | 410 | $ | 1,019,381 | 3,276,784 | $ | (811,532) | $ | 842,298 | $ | (19,258) | $ | 1,031,299 | |||||||||||||||||||||||||||||||||
| For the Nine Months Ended May 31, 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 as of August 31, 2020 | 40,767,708 | $ | 408 | $ | 939,067 | 2,737,456 | $ | (636,956) | $ | 633,149 | $ | (39,293) | $ | 896,375 | |||||||||||||||||||||||||||||||||
| Net income | 298,528 | 298,528 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | 20,035 | 20,035 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for employee stock plans | 260,921 | 2 | 46,959 | 318 | (104) | 46,857 | |||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 18,995 | — | 7,151 | (2,262) | (2,262) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | 531,859 | (172,210) | (172,210) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 33,355 | 33,355 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (89,379) | (89,379) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2021 | 41,047,624 | $ | 410 | $ | 1,019,381 | 3,276,784 | $ | (811,532) | $ | 842,298 | $ | (19,258) | $ | 1,031,299 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
May 31, 2022
(Unaudited)
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 an open and flexible digital platform which focuses on driving the investment community to see more, think bigger, and do its best work. Our strategy is to build the leading open content and analytics platform that delivers a 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. Approximately 174,000 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"). We are a central figure within the global securities marketplace and a foundation for security master files relied on by critical front, middle and back-office functions around the world through CUSIP Global Services ("CGS"). 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 connected 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, we put 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 17, Segment Information, for further information. Within each of our segments, we 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.
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 May 31, 2022, 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 and nine months ended May 31, 2022 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.
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 (“ASU 2021-08”), 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 elected to early adopt this accounting standard in the second quarter of fiscal 2022, with retrospective application to business combinations that occurred in the current fiscal year. Results of operations for quarterly periods prior to September 1, 2021 remain unchanged as a result of the adoption of ASU No. 2021-08. The acquisitions of CGS and Cobalt Software, Inc (“Cobalt”), and all future acquisitions, will be accounted for in accordance with ASU 2021-08. Refer to Note 7, Acquisitions for further information. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
Recent Accounting Standards or Updates Not Yet Effective
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 the London Interbank Offered Rate ("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.
On March 1, 2022, we repaid in full and terminated the 2019 Credit Agreement, which bore interest based on the LIBOR rate. Concurrently, on March 1, 2022, we entered into the 2022 Credit Agreement, which bears interest based on rates other than LIBOR. As such, the adoption of this standard will not have an impact on our Consolidated Financial Statements.
Refer to Note 12, Debt for definitions of these terms and more information on the 2019 Credit Agreement and 2022 Credit Agreement.
No other new accounting pronouncements issued or effective as of May 31, 2022 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, content and services available over the contractual term (referred to as the "hosted platform"). The hosted platform is a subscription-based service that consists primarily of providing client access to products, content and services including workstations, portfolio analytics and market data. We also provide subscription access to a database of universally recognized identifiers reflecting differentiating characteristics for issuers and their financial instruments (referred to as the "identifier platform").
We determined that the majority of each of our hosted platform and identifier platform services 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 each of these data and analytics platforms. These platforms provide 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 these 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. Fulfillment costs are recognized as an asset, with the current portion recorded in the Prepaid expenses and other current assets and the non-current portion recorded in Other assets, based on the term of the license period. The fulfillment costs are 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 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 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 17, Segment Information, for further information.
The following table presents this disaggregation by segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, | May 31, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Americas | $ | 309,740 | $ | 253,786 | $ | 850,312 | $ | 746,112 | |||||||||||||||
| EMEA | 128,326 | 106,833 | 357,920 | 318,103 | |||||||||||||||||||
| Asia Pacific | 50,685 | 38,939 | 136,363 | 115,336 | |||||||||||||||||||
| Total Revenues | $ | 488,751 | $ | 399,558 | $ | 1,344,595 | $ | 1,179,551 |
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.
(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 as of May 31, 2022 and August 31, 2021. We did not have any transfers between levels of fair value measurements during the periods presented. We held no Level 3 assets or liabilities measured at fair value on a recurring basis as of May 31, 2022 or August 31, 2021.
| Fair Value Measurements as of May 31, 2022 | |||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Total | ||||||||||||||
| Assets | |||||||||||||||||
| Corporate money market funds (1) | $ | 237,803 | $ | — | $ | 237,803 | |||||||||||
| Mutual funds (2) | — | 33,580 | 33,580 | ||||||||||||||
| Derivative instruments (3) | — | 8,605 | 8,605 | ||||||||||||||
| Total assets measured at fair value | $ | 237,803 | $ | 42,185 | $ | 279,988 | |||||||||||
| Liabilities | |||||||||||||||||
| Derivative instruments (3) | $ | — | $ | 3,963 | $ | 3,963 | |||||||||||
| Total liabilities measured at fair value | $ | — | $ | 3,963 | $ | 3,963 |
| Fair Value Measurements as of 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 our interest rate swap agreements, 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 and nine months ended May 31, 2022, we incurred an impairment charge of $48.8 million and $62.2 million, respectively, related to our lease ROU assets and Property, equipment and leasehold improvements associated with vacating certain leased office space. For those locations we anticipate subleasing, we estimated the fair value of the lease ROU assets as of the cease use date, using a market approach, based on expected future cash flows from sublease income. To complete this assessment we relied on certain assumptions, which included estimates of the rental rate, period of vacancy, incentives and annual rent increases. We fully impaired the lease ROU assets for locations we will not sublease and substantially all the Property, equipment and leasehold improvements associated with the related vacated leased office space as there are no expected cash flows related to these items. Due to the subjective nature of the unobservable inputs used, the fair value measurement for the asset impairments are classified within Level 3 of the fair value hierarchy.
(c) Assets and Liabilities Measured at Fair Value for Disclosure Purposes Only
We elected not to carry our Long-term debt at fair value. The carrying value of our Long-term debt is net of related unamortized discount and debt issuance costs.
The fair value of our Senior Notes is estimated based on quoted prices in active markets as of the reporting date, given that the Senior Notes are publicly traded, which are considered Level 1 inputs. The fair value of our 2022 Credit Facilities is estimated based on quoted market prices for similar instruments, adjusted for unobservable inputs to ensure comparability to our investment rating, maturity terms and principal outstanding, which are considered Level 3 inputs.
The fair value of our 2019 Revolving Credit Facility approximated its carrying value as it bore interest at a floating interest rate, which is considered a Level 2 input. On March 1, 2022, we repaid in full and terminated the 2019 Credit Agreement.
Refer to Note 12, Debt for definitions of these terms and more information on the Senior Notes, 2022 Credit Facilities, 2019 Revolving Credit Facility and 2019 Credit Agreement.
The following table summarizes the outstanding principal amount, estimated fair value and related hierarchy level, unamortized discounts and debt issuance costs and net carrying value of our debt as of May 31, 2022:
| May 31, 2022 | August 31, 2021 | |||||||||||||||||||
| (in thousands) | Fair Value Hierarchy | Principal Amount | Estimated Fair Value | Principal Amount | Estimated Fair Value | |||||||||||||||
| 2027 Notes | Level 1 | $ | 500,000 | $ | 475,275 | $ | — | $ | — | |||||||||||
| 2032 Notes | Level 1 | 500,000 | 451,730 | — | — | |||||||||||||||
| 2022 Term Facility | Level 3 | 875,000 | 872,813 | — | — | |||||||||||||||
| 2022 Revolving Facility | Level 3 | 250,000 | 248,125 | — | — | |||||||||||||||
| 2019 Revolving Credit Facility | Level 2 | — | — | 575,000 | 575,000 | |||||||||||||||
| Total principal amount | $ | 2,125,000 | $ | 2,047,943 | $ | 575,000 | $ | 575,000 | ||||||||||||
| Total unamortized discounts and debt issuance costs | (19,858) | (465) | ||||||||||||||||||
| Total net carrying value of debt | $ | 2,105,142 | $ | 574,535 |
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, Indian Rupee, Euro, 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 13, 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 and nine months ended May 31, 2022 or May 31, 2021, 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 May 31, 2022, we maintained foreign currency forward contracts to hedge a portion of our exposures primarily related to the British Pound Sterling, Indian Rupee, Euro and Philippine Peso. We entered into a series of forward contracts to mitigate our currency exposure ranging from 25% to 75%, as of May 31, 2022, over their respective hedged periods. The current foreign currency forward contracts are set to mature at various points between the fourth quarter of fiscal 2022 through the third quarter of fiscal 2023.
As of May 31, 2022, 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 Euros and British Pound Sterling with U.S. dollars was €37.4 million and £41.2 million, respectively.
Swap Agreement
2020 Swap Agreement
On March 5, 2020, we entered into an interest rate swap agreement ("2020 Swap Agreement") with a notional amount of $287.5 million. The 2020 Swap Agreement hedged a portion of our then outstanding floating LIBOR rate debt with a fixed interest rate of 0.7995% to mitigate our interest rate exposure. On March 1, 2022, we terminated the 2020 Swap Agreement, which resulted in a one-time benefit of $3.5 million recognized in Interest expense, net in the Consolidated Statements of Income during the third quarter of fiscal 2022, based on its fair market value.
2022 Swap Agreement
On March 1, 2022, we entered into an interest rate swap agreement ("2022 Swap Agreement") with a notional amount of $800.0 million. The 2022 Swap Agreement hedges a portion of our outstanding floating Secured Overnight Financing Rate ("SOFR") rate debt with a fixed interest rate of 1.162% to maintain an intended fixed to floating interest rate ratio. The notional amount of the 2022 Swap Agreement will decline by $100.0 million on a quarterly basis, to align with our expected debt balances, beginning May 31, 2022 and maturing on February 28, 2024. As of May 31, 2022, the notional amount of the 2022 Swap Agreement was $700.0 million.
We have designated and accounted for this instrument as a cash flow hedge with the unrealized gains or losses on the 2022 Swap Agreement recorded in AOCL in the Consolidated Balance Sheets. Realized gains or losses are subsequently reclassified into Interest expense, net in the Consolidated Statements of Income when settled. Since its inception on March 1, 2022 and through May 31, 2022, the interest rate swap was considered highly effective. Refer to Note 12, Debt, for further discussion of the 2022 Credit Facilities.
Refer to Interest Rate Risk in Part I, Item 3 of this Quarterly Report on Form 10-Q for further discussion of our exposure to interest rate risk on our long-term debt outstanding.
The following is a summary of the gross notional values of the derivative instruments:
| (in thousands) | Gross Notional Value | ||||||||||
| May 31, 2022 | August 31, 2021 | ||||||||||
| Foreign currency forward contracts | $ | 156,097 | $ | 154,728 | |||||||
| Interest rate swap agreement | 700,000 | 287,500 | |||||||||
| Total cash flow hedges | $ | 856,097 | $ | 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 | May 31, 2022 | August 31, 2021 | Balance Sheet Classification | May 31, 2022 | August 31, 2021 | |||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other current assets | $ | 554 | $ | 1,384 | Accounts payable and accrued expenses | $ | 3,963 | $ | 1,201 | |||||||||||||
| Interest rate swap agreement | Prepaid expenses and other current assets | 5,447 | — | Accounts payable and accrued expenses | — | 1,934 | |||||||||||||||||
| Other assets | 2,604 | — | Other liabilities | — | 1,045 | ||||||||||||||||||
| Total cash flow hedges | $ | 8,605 | $ | 1,384 | $ | 3,963 | $ | 4,181 |
All derivatives were designated as hedging instruments as of May 31, 2022 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 May 31, 2022 and May 31, 2021, respectively:
| Gain (Loss) Reclassified in AOCL on Derivatives | Location of Gain (Loss) Reclassified from AOCL into Income | Gain (Loss) Reclassified from AOCL into Income | |||||||||||||||
| (in thousands) | May 31, | May 31, | |||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Foreign currency forward contracts | $ | (4,114) | $ | 3,214 | SG&A | $ | (2,635) | $ | 1,672 | ||||||||
| Interest rate swap agreement | 5,629 | (683) | Interest expense, net | 1,990 | (502) | ||||||||||||
| Total cash flow hedges | $ | 1,515 | $ | 2,531 | $ | (645) | $ | 1,170 |
| The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the nine months ended May 31, 2022 and May 31, 2021, respectively: | |||||||||||||||||
| Gain (Loss) Reclassified in AOCL on Derivatives | Location of Gain (Loss) Reclassified from AOCL into Income | Gain (Loss) Reclassified from AOCL into Income | |||||||||||||||
| (in thousands) | May 31, | May 31, | |||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Foreign currency forward contracts | $ | (7,690) | $ | 5,341 | SG&A | $ | (4,098) | $ | 4,558 | ||||||||
| Interest rate swap agreement | 12,007 | 723 | Interest expense, net | 976 | (1,444) | ||||||||||||
| Total cash flow hedges | $ | 4,317 | $ | 6,064 | $ | (3,122) | $ | 3,114 |
As of May 31, 2022, 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.
As of May 31, 2022, we estimate that net pre-tax derivative gains of $2.0 million related to the cash flow hedges included in AOCL will be reclassified into earnings within the next 12 months.
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 May 31, 2022 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 CUSIP Global Services ("CGS"), Cobalt Software, Inc. ("Cobalt") and Truvalue Labs, Inc. ("TVL").
CUSIP Global Services
On March 1, 2022, we completed the acquisition of CGS, previously operated by S&P Global Inc. on behalf of the American Bankers Association ("ABA"), for a cash purchase price of $1.932 billion, inclusive of preliminary working capital adjustments. 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 Committee on Uniform Security Identification Procedures ("CUSIP") and CUSIP International Number System ("CINS") identifiers globally and also acts as the official numbering agency for International Securities Identification Number ("ISIN") identifiers in the United States and as a substitute number agency for more than 35 other countries. We anticipate that the CGS acquisition will significantly expand our critical role in the global capital markets. The CGS purchase price was in excess of the fair value of net assets acquired, resulting in the recognition of goodwill. We expect to finalize the allocation of the purchase price for CGS as soon as possible, but in any event, no later than one year from the acquisition date. The preliminary purchase price allocation is subject to change pending a final valuation of the assets and liabilities acquired and the finalization of working capital adjustments.
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 assets1 | $ | 38,111 | |||||||||||||||
| Amortizable intangible assets | |||||||||||||||||
| Revenues-generating contract | 1,583,000 | 36 years | Straight-line | ||||||||||||||
| Client relationships | 164,000 | 26 years | Straight-line | ||||||||||||||
| Acquired databases | 46,000 | 15 years | Straight-line | ||||||||||||||
| Goodwill | 206,981 | ||||||||||||||||
| Current liabilities2 | (104,354) | ||||||||||||||||
| Deferred revenues, long-term | (1,482) | ||||||||||||||||
| Total purchase price | $ | 1,932,256 |
*1.*Includes an accounts receivable balance of $38.0 million.
*2.*Includes a deferred revenues balance of $98.8 million.
Goodwill totaling $207.0 million represents the excess of the CGS purchase price over the fair value of net assets acquired, representing future economic benefits that we expect to achieve as a result of the acquisition, and is included in the Americas segment. Goodwill generated from the CGS acquisition is deductible for income tax purposes. The majority of the net assets acquired relate to a Revenues-generating contract intangible which is a renewable license agreement with the ABA to manage the issuance, maintenance and access to the CUSIP numbering system and related database of CUSIP identifiers. This intangible asset's valuation and associated useful life considers the term of the current agreement and the likelihood of renewals. The useful life assigned to the Client relationships intangible asset considers the strong historical client retention as a basis for expected future retention. The useful life assigned to Acquired databases considers there are limited changes to the data on an annual basis, which extends the life of the acquired asset.
The results of CGS's operations have been included in our Consolidated Financial Statements, within the Americas, EMEA, and Asia Pacific segments, beginning with the closing of the acquisition on March 1, 2022. Pro forma information has not been presented because the effect of the CGS acquisition is not material to our Consolidated Financial Statements.
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. 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 expands 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. We expect 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 preliminary purchase price allocation is subject to change due to the finalization of deferred tax balances.
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 | $ | 540 | |||||||||||||||
| Amortizable intangible assets | |||||||||||||||||
| Software technology | 7,750 | 5 years | Straight-line | ||||||||||||||
| Client relationships | 4,800 | 11 years | Straight-line | ||||||||||||||
| Goodwill | 43,554 | ||||||||||||||||
| Other assets | 34 | ||||||||||||||||
| Current liabilities | (6,653) | ||||||||||||||||
| Other liabilities | (7) | ||||||||||||||||
| Total purchase price | $ | 50,018 |
Goodwill totaling $43.6 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. 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 | ||||||||||||||
| Trade names | 2,800 | 15 years | Straight-line | ||||||||||||||
| Client relationships | 900 | 12 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 nine months ended May 31, 2022 are as follows:
| (in thousands) | Americas | EMEA | Asia Pacific | Total | |||||||||||||||||||
| Balance at August 31, 2021 | $ | 430,088 | $ | 321,150 | $ | 2,967 | $ | 754,205 | |||||||||||||||
| Acquisitions | 250,749 | 428 | — | 251,177 | |||||||||||||||||||
| Foreign currency translations | — | (26,092) | (430) | (26,522) | |||||||||||||||||||
| Balance at May 31, 2022 | $ | 680,837 | $ | 295,486 | $ | 2,537 | $ | 978,860 |
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, we write down our goodwill 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. INTANGIBLE ASSETS
We amortize intangible assets on a straight line basis over their estimated useful lives. The estimated useful life, gross carrying amounts and accumulated amortization totals related to our identifiable intangible assets are as follows:
| May 31, 2022 | August 31, 2021 | |||||||||||||||||||||||||
| (in thousands, except useful lives) | Estimated Useful Life (years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Revenue-generating contract | 36 | $ | 1,583,000 | $ | 10,993 | $ | 1,572,007 | $ | — | $ | — | $ | — | |||||||||||||
| Client relationships | 8 to 26 | 264,931 | 53,485 | 211,446 | 101,077 | 49,139 | 51,938 | |||||||||||||||||||
| Software technology | 5 to 9 | 124,710 | 95,725 | 28,985 | 121,556 | 87,207 | 34,349 | |||||||||||||||||||
| Developed technology | 3 to 5 | 73,704 | 30,574 | 43,130 | 57,666 | 21,278 | 36,388 | |||||||||||||||||||
| Acquired databases | 15 | 46,000 | 767 | 45,233 | — | — | — | |||||||||||||||||||
| Data content | 5 to 20 | 35,814 | 26,186 | 9,628 | 36,681 | 26,835 | 9,846 | |||||||||||||||||||
| Trade names | 15 | 6,781 | 4,472 | 2,309 | 6,900 | 4,435 | 2,465 | |||||||||||||||||||
| Total | $ | 2,134,940 | $ | 222,202 | $ | 1,912,738 | $ | 323,880 | $ | 188,894 | $ | 134,986 |
The weighted average useful life of our intangible assets at May 31, 2022 was 32.8 years. As described in Note 7, Acquisitions, we acquired several intangible assets as part of the CGS acquisition. The weighted average useful life of our intangible assets excluding those acquired from CGS at May 31, 2022 was 9.9 years. We assess intangible assets for indicators of impairment on a quarterly basis, including an evaluation of our useful lives to determine if events and circumstances warrant a revision to the remaining period of amortization. If indicators of impairment are present, amortizable intangible assets are tested for impairment by comparing the carrying value to undiscounted cash flows and, if impaired, written down to fair value based on discounted cash flows. We have not identified a material impairment, nor a material change to the estimated remaining useful lives of our intangible assets, during fiscal years 2022 and 2021. The intangible assets have no assigned residual values.
Intangible asset amortization expense recorded during the three months ended May 31, 2022 and May 31, 2021 was $21.5 million and $8.2 million, respectively. For the nine months ended May 31, 2022 and May 31, 2021, intangible asset amortization expense was $40.6 million and $23.4 million, respectively.
As of May 31, 2022, estimated intangible asset amortization expense for each of the next five years and thereafter are as follows:
| Fiscal Year (in thousands) | Estimated Amortization Expense | ||||
| 2022 (remaining three months) | $ | 22,725 | |||
| 2023 | 87,328 | ||||
| 2024 | 78,287 | ||||
| 2025 | 71,340 | ||||
| 2026 | 65,451 | ||||
| Thereafter | 1,587,607 | ||||
| Total | $ | 1,912,738 |
10. 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 | Nine Months Ended | |||||||||||||||||||
| May 31, | May 31, | |||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Income before income taxes | $ | 85,280 | $ | 114,276 | $ | 327,166 | $ | 349,174 | ||||||||||||
| Provision for income taxes | $ | 10,370 | $ | 13,597 | $ | 34,671 | $ | 50,646 | ||||||||||||
| Effective tax rate | 12.2 | % | 11.9 | % | 10.6 | % | 14.5 | % |
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 and nine months ended May 31, 2022, 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 and nine months ended May 31, 2022 is further reduced by windfall tax benefits associated with the employee exercise of stock options.
For the three months ended May 31, 2022, the provision for income taxes was $10.4 million, compared with $13.6 million for the same period a year ago. The provision decreased mainly due to lower pretax income for the three months ended May 31, 2022, compared with the prior year period.
For the nine months ended May 31, 2022, the provision for income taxes was $34.7 million, compared with $50.6 million for the same period a year ago. The provision decreased mainly due to lower pretax income and $12.0 million in higher windfall tax benefits for the nine months ended May 31, 2022, compared with the prior year period.
11. LEASES
On September 1, 2019, we adopted ASC 842, Leases ("ASC 842"). As part of this adoption, we elected not to record operating lease ROU 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 May 31, 2022, we recognized $176.9 million of Lease right-of-use assets, net and $257.8 million of combined Current lease liabilities 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 under 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 combined Current lease liabilities and Long-term lease liabilities in the Consolidated Balance Sheets as of May 31, 2022:
| (in thousands) | Minimum Lease Payments | ||||
| Fiscal Years Ended August 31, | |||||
| 2022 (remaining three months) | $ | 10,286 | |||
| 2023 | 40,638 | ||||
| 2024 | 37,710 | ||||
| 2025 | 35,638 | ||||
| 2026 | 34,449 | ||||
| Thereafter | 150,925 | ||||
| Total | $ | 309,646 | |||
| Less: Imputed interest | 51,842 | ||||
| Present value | $ | 257,804 |
The components of lease cost related to our operating leases were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| May 31, | May 31, | ||||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost1 | $ | 9.8 | $ | 10.7 | $ | 30.5 | $ | 32.2 | |||||||||
| Variable lease cost2 | $ | 3.2 | $ | 2.6 | $ | 8.9 | $ | 10.3 |
*1.*Operating lease costs include 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 include variable non-lease costs and leases that qualified for the short-term lease exception. Our variable non-lease costs include 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:
| May 31, 2022 | August 31, 2021 | |||||||
| Weighted average remaining lease term (in years) | 8.7 | 9.4 | ||||||
| Weighted average discount rate (IBR) | 4.3 | % | 4.3 | % |
The following table summarizes supplemental cash flow information related to our operating leases:
| Nine Months Ended | ||||||||
| May 31, | ||||||||
| (in millions) | 2022 | 2021 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 32.9 | $ | 30.9 | ||||
| Lease ROU assets obtained in exchange for lease liabilities | $ | 9.3 | $ | 5.5 | ||||
| Reductions to ROU assets resulting from reductions to lease liabilities1 | $ | (11.7) | $ | — |
*1.*Primarily related to lease term reassessments based on contractual options to early terminate, resulting in a reduction to the lease liability and the corresponding Lease ROU asset.
During the three and nine months ended May 31, 2022, we incurred an impairment charge of $24.2 million and $31.5 million, respectively, related to our lease ROU assets associated with vacating certain leased office space. Refer to Note 5, Fair Value Measures for more information on the lease ROU assets impairment methodology.
12. DEBT
We elected not to carry our Long-term debt at fair value. The carrying value of our debt is net of related unamortized discount and debt issuance costs. Our total debt obligations as of May 31, 2022 and August 31, 2021 consisted of the following:
| (in thousands) | Issuance Date | Maturity Date | May 31, 2022 | August 31, 2021 | ||||||||||
| 2019 Credit Agreement | ||||||||||||||
| 2019 Revolving Credit Facility | 3/29/2019 | 3/29/2024 | $ | — | $ | 575,000 | ||||||||
| 2022 Credit Agreement | ||||||||||||||
| 2022 Term Facility | 3/1/2022 | 3/1/2025 | 875,000 | — | ||||||||||
| 2022 Revolving Facility | 3/1/2022 | 3/1/2027 | 250,000 | — | ||||||||||
| Senior Notes | ||||||||||||||
| 2027 Notes | 3/1/2022 | 3/1/2027 | 500,000 | — | ||||||||||
| 2032 Notes | 3/1/2022 | 3/1/2032 | 500,000 | — | ||||||||||
| Total unamortized discounts and debt issuance costs | (19,858) | (465) | ||||||||||||
| Total Long-term debt | $ | 2,105,142 | $ | 574,535 |
As of May 31, 2022, annual maturities on our total debt obligations, based on contract maturity, were as follows:
| (in thousands) | Maturities | ||||
| Fiscal Years Ended August 31, | |||||
| 2022 (remaining three months) | $ | — | |||
| 2023 | — | ||||
| 2024 | — | ||||
| 2025 | 875,000 | ||||
| 2026 | — | ||||
| Thereafter | 1,250,000 | ||||
| Total | $ | 2,125,000 |
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"), which provided a $750.0 million revolving credit facility (the "2019 Revolving Credit Facility"). We borrowed $575.0 million of the available $750.0 million provided by the 2019 Revolving Credit Facility. We were required to pay a commitment fee using a pricing grid based on the daily amount by which the available balance in the 2019 Revolving Credit Facility exceeded the borrowed amount. All outstanding loan amounts were reported as Long-term debt within the Consolidated Balance Sheets.
Borrowings under the 2019 Revolving Credit Facility bore interest on the outstanding principal amount at a rate equal to the daily LIBOR plus a spread using a debt leverage pricing grid. Interest on the amounts outstanding under the 2019 Revolving Credit Facility was 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 were amortized into Interest expense, net in the Consolidated Statements of Income ratably over the term of the 2019 Credit Agreement.
The 2019 Credit Agreement contained covenants and requirements restricting certain of our activities, which were usual and customary for this type of loan. In addition, the 2019 Credit Agreement required 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 through the termination date of the 2019 Credit Agreement.
On March 1, 2022, we terminated the 2019 Credit Agreement and amortized the remaining related $0.4 million of capitalized debt issuance costs into Interest expense, net in the Consolidated Statements of Income.
2022 Credit Agreement
On March 1, 2022, we entered into a credit agreement (the "2022 Credit Agreement") which provides for a senior unsecured term loan credit facility in an aggregate principal amount of $1.0 billion (the “2022 Term Facility”) and a senior unsecured revolving credit facility in an aggregate principal amount of $500.0 million (the “2022 Revolving Facility” and, together with the 2022 Term Facility, the “2022 Credit Facilities”). The 2022 Term Facility matures on March 1, 2025, and the 2022 Revolving Facility matures on March 1, 2027. The 2022 Revolving Facility allows for the availability of up to $100.0 million in the form of letters of credit and up to $50.0 million in the form of swingline loans. We may seek additional commitments under the 2022 Revolving Facility from lenders or other financial institutions up to an aggregate principal amount of $750.0 million.
On March 1, 2022, we borrowed $1.0 billion under the 2022 Term Facility and $250.0 million of the available $500.0 million under the 2022 Revolving Facility. We are required to pay a commitment fee on the daily unused amount of the 2022 Revolving Facility using a pricing grid which was 0.125% as of May 31, 2022 and can fluctuate between 0.10% per annum and 0.25% per annum.
We used these borrowings, along with the net proceeds from the issuance of the Senior Notes (as defined below) and cash on hand, to finance the consideration for the CGS acquisition, to repay borrowings under the 2019 Credit Agreement and to pay related transaction fees, costs and expenses.
During the third quarter of 2022, we incurred approximately $9.5 million in debt issuance costs related to the 2022 Credit Facilities. We defer costs we incur to issue debt, which are presented in the Consolidated Balance Sheets as a direct deduction from the carrying amount of the related debt liability, and we amortize these costs to Interest expense, net in the Consolidated Statements of Income over the contractual term on a straight-line basis, which approximates the effective interest method.
Loans under the 2022 Term Facility are subject to scheduled amortization payments on the last day of each fiscal quarter, commencing with August 31, 2022 and ending on the last such day to occur prior to the maturity date. Each amortization payment is equal to 1.25% of the original principal amount of the 2022 Term Facility. Any remaining outstanding principal will be repaid in full on March 1, 2025, the maturity date of the 2022 Term Facility. The 2022 Credit Facilities are not otherwise subject to any mandatory prepayments. We may voluntarily prepay loans under the 2022 Credit Facilities at any time without premium or penalty. Prepayments of the 2022 Term Facility shall be applied to reduce the subsequent scheduled amortization payments in direct order of maturity. During the third quarter of fiscal 2022, we repaid $125.0 million under the 2022 Term Facility.
The 2022 Credit Agreement provides that loans denominated in U.S. dollars, at our option, will bear interest at either (i) one-month Term SOFR (with a 10 basis points credit spread adjustment and subject to a “zero” floor), (ii) Daily Simple SOFR (with a 10 basis points credit spread adjustment and subject to a “zero” floor) or (iii) an alternate base rate. Under the 2022 Credit Agreement, loans denominated in Pounds Sterling will bear interest at Daily Simple Sterling Overnight Index Average ("SONIA") (subject to a “zero” floor) and loans denominated in Euros will bear interest at Euro Interbank Offered Rate ("EURIBOR") (subject to a “zero” floor), in each case, plus an applicable interest rate margin. The interest rate margin will be based upon our senior unsecured non-credit enhanced long-term debt rating and our total leverage ratio.
The outstanding borrowings under the 2022 Credit Facilities through the third quarter of fiscal 2022 bore interest at a rate equal to the applicable Term SOFR rate plus a spread using a debt leverage pricing grid, currently at 1.1%. Interest on the 2022 Credit Facilities is currently payable on the last business day of each month, in arrears.
The 2022 Credit Agreement contains usual and customary event of default provisions for facilities of this type, which are subject to usual and customary grace periods and materiality thresholds. If an event of default occurs under the 2022 Credit Agreement, the lenders may, among other things, terminate their commitments and declare all outstanding borrowings immediately due and payable.
The 2022 Credit Agreement contains usual and customary affirmative and negative covenants for facilities of this type, including limitations on indebtedness of non-guarantor subsidiaries, liens, sale and leaseback transactions, mergers and certain other fundamental changes and change in nature of business. The 2022 Credit Agreement contains a financial covenant requiring maintenance of a total leverage ratio, permitting netting up to $350.0 million of unrestricted cash and cash equivalents, no greater than (a) 4.00 to 1.00 as of the last day of each fiscal quarter beginning with the fiscal quarter ending on May 31, 2022, (b) 3.75 to 1.00 as of the last day of each fiscal quarter beginning with the fiscal quarter ending on August 31, 2023 and (c) 3.50 to 1.00 as of the last day of each fiscal quarter beginning with the fiscal quarter ending on August 31, 2024, but if we consummate a material acquisition where the aggregate consideration payable is $200.0 million or more, we may, on no more than two occasions, increase the maximum total leverage ratio then applicable under the financial covenant by 0.50 to 1.00 with respect to the fiscal quarter in which such material acquisition is consummated and the subsequent four consecutive fiscal quarters.
The 2022 Credit Agreement provides that, in the event that we no longer have a senior unsecured non-credit enhanced long-term debt rating or a corporate rating from at least two of the rating agencies where such rating is Baa3, BBB- or BBB-, respectively, or higher, (i) our wholly-owned domestic subsidiaries will be required to guarantee the 2022 Credit Facilities, subject to customary exceptions, (ii) we will be subject to limitations on additional indebtedness, investments, dispositions, restricted payments and burdensome agreements, and (iii) we will be required to maintain an interest coverage ratio of no less than 3.00 to 1.00 for any period of four consecutive fiscal quarters.
Senior Notes
On March 1, 2022 we completed a public offering of $500.0 million aggregate principal amount of 2.900% Senior Notes due March 1, 2027 (the “2027 Notes”) and $500.0 million aggregate principal amount of 3.450% Senior Notes due March 1, 2032 (the “2032 Notes” and, together with the 2027 Notes, the “Senior Notes”). The Senior Notes were issued pursuant to an indenture, dated as of March 1, 2022, by and between us and U.S. Bank Trust Company, National Association, as trustee (the "Trustee"), as supplemented by the supplemental indenture, dated as of March 1, 2022, between us and the Trustee (the "Supplemental Indenture").
The Senior Notes were issued at an aggregate discount of $2.8 million, and during the third quarter of 2022 we incurred approximately $9.1 million in debt issuance costs related to the Senior Notes. We deferred the debt discounts and costs we incurred to issue debt, which are presented in the Consolidated Balance Sheets as a net direct deduction from the carrying amount of the related debt liability, and we amortize these costs to Interest expense, net in the Consolidated Statements of Income over the contractual term leveraging the effective interest method.
The 2027 Notes and the 2032 Notes will mature on March 1, 2027 and March 1, 2032, respectively. Interest on the Senior Notes is payable semiannually in arrears on March 1 and September 1 of each year, beginning September 1, 2022. The Senior Notes are unsecured unsubordinated obligations and will be effectively subordinated to any of our existing and future secured obligations to the extent of the value of the assets securing such obligations.
We may redeem the Senior Notes, in whole or in part, at any time at specified redemption prices, plus accrued and unpaid interest, if any. Upon the occurrence of a change of control triggering event (as defined in the Supplemental Indenture), we must offer to repurchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest, if any.
Swap Agreements
On March 5, 2020, we entered into the 2020 Swap Agreement to hedge a portion of our then outstanding floating LIBOR rate debt with a fixed interest rate of 0.7995%. On March 1, 2022, we terminated the 2020 Swap Agreement and concurrently entered into the 2022 Swap Agreement to hedge a portion of our outstanding floating SOFR rate debt with a fixed interest rate of 1.162%. Refer to Note 6, Derivative Instruments for further discussion of the 2020 Swap Agreement and 2022 Swap Agreement.
Interest Expense
On March 1, 2022, the 2019 Revolving Credit Facility and 2020 Swap Agreement were both terminated and concurrently replaced with the 2022 Credit Facilities, Senior Notes and 2022 Swap Agreement.
For the three months ended May 31, 2022 and May 31, 2021, we recorded interest expense on our outstanding debt, including the related amortization of debt issuance costs and debt discounts, net of the effects of the related interest rate swap agreements, of $15.8 million and $2.0 million, respectively in Interest expense, net in the Consolidated Statements of Income. For the nine months ended May 31, 2022 and May 31, 2021, we recorded interest expense on our outstanding debt, including the related amortization of debt issuance costs and debt discounts, net of the effects of the interest rate swap agreement, of $19.6 million and $6.0 million, respectively in Interest expense, net in the Consolidated Statements of Income.
Including the related amortization of debt issuance costs and debt discounts, net of the effects of the related interest rate swap agreement, the year-to-date weighted average interest rate on amounts outstanding under our outstanding debt was 1.75% and 1.38% as of May 31, 2022 and August 31, 2021, respectively. Refer to Note 6, Derivative Instruments for further discussion of the 2020 Swap Agreement and 2022 Swap Agreement.
13. 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 our legally-binding agreements to purchase fixed or minimum quantities at determinable prices. Our purchase obligations consist of two primary arrangements, data content and hosting services. As of August 31, 2021, we had total purchase commitments with suppliers of $191.9 million. During the second quarter of fiscal 2022, we entered into a software subscription agreement with total purchase commitments of approximately $10 million with a contract term of three years. During the third quarter of fiscal 2022, we entered into a cloud hosting contract with total purchase commitments of approximately $275.0 million with a contract term of six years. This cloud hosting contract replaced a previous contract which was included in the total purchase commitments as of August 31, 2021, with a minimum purchase commitment of $125.0 million.
We also have contractual obligations related to our lease liabilities and outstanding debt. Refer to Note 11, Leases and Note 12, Debt for further information.
Letters of Credit
From time to time, we are required to obtain letters of credit in the ordinary course of business. As of May 31, 2022, we had approximately $0.5 million of standby letters of credit outstanding. Refer to Note 12, Debt for more information on these covenants. No liabilities related to these arrangements are reflected in the Company's balance sheets.
Contingencies
Income Taxes
Uncertain income tax positions are accounted for in accordance with applicable accounting guidance, refer to Note 10, 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 as of May 31, 2022, 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 May 31, 2022. 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 presents 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 on a quarterly basis. These losses have historically been within expectations. No single client represented more than 3% of our total revenues in any period presented. As of May 31, 2022, the receivable reserve was $3.4 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 proprietary 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 each representing more than 10% of our total data costs for the nine months ended May 31, 2022.
14. STOCKHOLDERS’ EQUITY
Shares of common stock outstanding were as follows:
| Nine Months Ended | ||||||||
| May 31, | ||||||||
| (in thousands) | 2022 | 2021 | ||||||
| Balance, beginning of period | 37,615 | 38,030 | ||||||
| Common stock issued for employee stock plans | 409 | 280 | ||||||
| Repurchase of common stock from employees(1) | (7) | (7) | ||||||
| Repurchase of common stock under the share repurchase program(2) | (46) | (532) | ||||||
| Balance, end of period | 37,971 | 37,771 |
*(1)*For the nine months ended May 31, 2022 and May 31, 2021, we repurchased 7,432 and 7,469 shares from employees, or $3.3 million and $2.4 million of common stock, respectively, primarily to satisfy withholding tax obligations due upon the vesting of stock-based awards.
*(2)*Refer to Share Repurchase Program below for more information on the year over year change.
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.
Beginning in the second quarter of fiscal 2022, we suspended our share repurchase program through at least the second half of fiscal 2023, with the exception of potential minor repurchases to offset dilution from grants of equity awards or repurchases to satisfy withholding tax obligations due upon the vesting of stock-based awards. The suspension of our share repurchase
program allows us to prioritize the repayment of debt under the 2022 Credit Facilities. Refer to Note 12, Debt for more information on the 2022 Credit Facilities.
As such, for the three months ended May 31, 2022, we did not make any repurchases under our existing share repurchase program, compared to 178,100 shares repurchased for $57.6 million for the three months ended May 31, 2021. During the nine months ended May 31, 2022, we repurchased 46,200 shares for $18.6 million under our existing share repurchase program compared with 531,859 shares for $172.2 million in the same period a year ago.
As of May 31, 2022, a total of $181.3 million remained authorized for future share repurchases under this program. There is no defined number of shares to be repurchased over a specified timeframe through the life of the share repurchase program.
Restricted Stock
Restricted stock awards entitle the holders to receive shares of common stock as the awards vest over time. For the nine months ended May 31, 2022, 18,384 shares of previously granted restricted stock vested and were included in common stock outstanding as of May 31, 2022 (recorded net of 7,172 shares repurchased from employees at a cost of $3.1 million to cover their cost of taxes upon vesting of the restricted stock). During the nine months ended May 31, 2021, 18,995 shares of previously granted restricted stock vested and were included in common stock outstanding as of May 31, 2021 (recorded net of 7,151 shares repurchased from employees at a cost of $2.3 million to cover their cost of taxes upon vesting of the restricted stock).
Dividends
Our Board of Directors declared dividends in the nine months ended May 31, 2022 and May 31, 2021 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 | ||||||||
| Second Quarter | $ | 0.82 | February 28, 2022 | $ | 31,065 | March 17, 2022 | ||||||||
| Third Quarter | $ | 0.89 | May 31, 2022 | $ | 33,795 | June 16, 2022 | ||||||||
| Fiscal 2021 | ||||||||||||||
| First Quarter | $ | 0.77 | November 30, 2020 | $ | 29,266 | December 17, 2020 | ||||||||
| Second Quarter | $ | 0.77 | February 26, 2021 | $ | 29,141 | March 18, 2021 | ||||||||
| Third Quarter | $ | 0.82 | May 31, 2021 | $ | 30,972 | June 17, 2021 |
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) | May 31, 2022 | August 31, 2021 | |||||||||
| Accumulated unrealized gains (losses) on cash flow hedges | $ | 3,524 | $ | (2,095) | |||||||
| Accumulated foreign currency translation adjustment losses | (80,658) | (36,867) | |||||||||
| Total AOCL | $ | (77,134) | $ | (38,962) |
15. 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 | Nine Months Ended | |||||||||||||
| May 31, | May 31, | |||||||||||||
| (in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Numerator | ||||||||||||||
| Net income used for calculating basic and diluted income per share | $ | 74,910 | $ | 100,679 | $ | 292,495 | $ | 298,528 | ||||||
| Denominator | ||||||||||||||
| Weighted average common shares used in the calculation of basic income per share | 37,934 | 37,806 | 37,716 | 37,910 | ||||||||||
| Common stock equivalents associated with stock-based compensation plan | 786 | 682 | 891 | 692 | ||||||||||
| Shares used in the calculation of diluted income per share | 38,720 | 38,488 | 38,607 | 38,602 | ||||||||||
| Basic income per share | $ | 1.97 | $ | 2.66 | $ | 7.76 | $ | 7.87 | ||||||
| Diluted income per share | $ | 1.93 | $ | 2.62 | $ | 7.58 | $ | 7.73 |
Dilutive potential common shares consist of stock options and unvested performance-based awards. There were 291,716 stock options excluded from the calculation of diluted EPS for the three and nine months ended May 31, 2022 as they were out-of-the-money and their inclusion would have been anti-dilutive. There were 8,810 stock options excluded from the calculation of diluted EPS for the three and nine months ended May 31, 2021 as they were out-of-the-money and their inclusion would have been anti-dilutive.
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 and nine months ended May 31, 2022, there were 95,359 performance-based awards excluded from the calculation of diluted EPS. For the three and nine months ended May 31, 2021, there were 71,275 performance-based awards excluded from the calculation of diluted EPS.
16. STOCK-BASED COMPENSATION
We recognized total stock-based compensation expense of $14.7 million and $11.0 million during the three months ended May 31, 2022 and May 31, 2021, respectively. During the nine months ended May 31, 2022 and May 31, 2021, we recognized total stock-based compensation expense of $40.6 million and $33.4 million, respectively. As of May 31, 2022, $121.1 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 3.1 years. There was no stock-based compensation capitalized as of May 31, 2022 and May 31, 2021.
Employee Stock Option Awards
During the nine months ended May 31, 2022, we granted 302,952 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 $434.64 to existing employees of FactSet, using the lattice-binomial option-pricing model. The majority of the stock options granted during the nine months ended May 31, 2022 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 May 31, 2022, we had 4.7 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 May 31, 2022, we had 227,348 shares available for future grant under the Director Plan.
On January 18, 2022, we granted 6,329 stock options under the Director Plan to our non-employee directors, using the Black-Scholes option-pricing model with the following assumptions:
| January 18, 2022 Grant Details | ||||||||
| Risk-free interest rate | 1.53 | % | ||||||
| Expected life (years) | 5.7 | |||||||
| Expected volatility | 26.3 | % | ||||||
| Dividend yield | 0.72 | % | ||||||
| Estimated fair value | $109.11 | |||||||
| Exercise price | $428.71 | |||||||
| Fair value as a percentage of exercise price | 25.5 | % | ||||||
Employee Restricted Stock Units
During the nine months ended May 31, 2022, we granted 71,933 non-performance based restricted stock units ("RSUs") and 30,704 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 nine months ended May 31, 2022 had a weighted average grant date fair value of $418.16.
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 majority of the Restricted Stock Awards granted during the nine months ended May 31, 2022 were 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. Substantially all the other RSUs granted during the nine months ended May 31, 2022 vest one-third annually on the anniversary date of grant and are fully vested after three years.
Non-Employee Director Restricted Stock Units
The Director Plan provides for the grant of share-based awards, including RSUs, to non-employee directors of FactSet. On January 18, 2022, we granted 1,629 RSUs to our directors that vest 100% on the first anniversary of the grant date. The RSUs granted under the Director Plan during the nine months ended May 31, 2022 had a weighted average grant date fair value of $425.49.
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. Shares purchased through the ESPP cannot be sold or otherwise transferred for 18 months after purchase. 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 May 31, 2022, employees purchased 9,904 shares through the ESPP at a weighted average price of $328.85 compared with 10,621 shares at a weighted average price of $267.02 for the three months ended May 31, 2021. During the nine months ended May 31, 2022, employees purchased 27,321 shares through the ESPP at a weighted average price of $336.22 compared with 29,418 shares at a weighted average price of $271.94 for the nine months ended May 31, 2021. Stock-based compensation expense related to the ESPP was $0.6 million for the three months ended May 31, 2022 and $0.5 million for the three months ended May 31, 2021. Stock-based compensation expense related to the ESPP was $1.7 million for the nine months ended May 31, 2022 and $1.5 million for the nine months ended May 31, 2021. As of May 31, 2022 the ESPP had 111,635 shares reserved for future issuance.
17. 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 revenue 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 revenue reflects 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 May 31, 2022 and May 31, 2021:
| (in thousands) | Americas | EMEA | Asia Pacific | Total | ||||||||||
| For the three months ended May 31, 2022 | ||||||||||||||
| Revenues | $ | 309,740 | $ | 128,326 | $ | 50,685 | $ | 488,751 | ||||||
| Operating income(1) | $ | 11,212 | $ | 53,228 | $ | 32,814 | $ | 97,254 | ||||||
| Capital expenditures | $ | 12,362 | $ | 466 | $ | 2,576 | $ | 15,404 | ||||||
| (in thousands) | Americas | EMEA | Asia Pacific | Total | ||||||||||
| For the three months ended May 31, 2021 | ||||||||||||||
| Revenues | $ | 253,786 | $ | 106,833 | $ | 38,939 | $ | 399,558 | ||||||
| Operating income | $ | 51,800 | $ | 41,468 | $ | 24,434 | $ | 117,702 | ||||||
| Capital expenditures | $ | 8,636 | $ | 757 | $ | 9,263 | $ | 18,656 | ||||||
| (in thousands) | ||||||||||||||
| For the nine months ended May 31, 2022 | Americas | EMEA | Asia Pacific | Total | ||||||||||
| Revenues | $ | 850,312 | $ | 357,920 | $ | 136,363 | $ | 1,344,595 | ||||||
| Operating income(1) | $ | 115,613 | $ | 139,826 | $ | 87,824 | $ | 343,263 | ||||||
| Capital expenditures | $ | 29,911 | $ | 828 | $ | 5,211 | $ | 35,950 | ||||||
| (in thousands) | ||||||||||||||
| For the nine months ended May 31, 2021 | Americas | EMEA | Asia Pacific | Total | ||||||||||
| Revenues | $ | 746,112 | $ | 318,103 | $ | 115,336 | $ | 1,179,551 | ||||||
| Operating income | $ | 161,789 | $ | 122,392 | $ | 70,684 | $ | 354,865 | ||||||
| Capital expenditures | $ | 26,415 | $ | 1,390 | $ | 19,609 | $ | 47,414 |
*(1)*Includes an impairment charge related to our lease ROU assets and PPE associated with vacating certain leased office space. For the three months ended May 31, 2022, the impairment charge was $44.4 million in the Americas, $4.1 million in EMEA and $0.3 million in Asia Pacific. For the nine months ended May 31, 2022, the impairment charge was $57.7 million in the Americas, $4.2 million in EMEA and $0.3 million in Asia Pacific.
The following table reflects the total assets for our segments:
| Segment Assets (in thousands) | May 31, 2022 | August 31, 2021 | |||||||||
| Americas | $ | 3,246,871 | $ | 1,144,693 | |||||||
| EMEA | 580,070 | 842,652 | |||||||||
| Asia Pacific | 241,623 | 237,595 | |||||||||
| Total assets | $ | 4,068,564 | $ | 2,224,940 |
Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS