ITEM 1A. RISK FACTORS
The following risks could materially and adversely affect our business, financial condition, results of operations, and cash flows and, as a result, the trading price of our common stock could decline. These risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Investors should also refer to the other information set forth in this Annual Report on Form 10-K, including Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements including the related Notes. Investors should carefully consider all risks, including those disclosed here, before making an investment decision.
Technology & Data Security Risks
Loss, corruption and misappropriation of data and information relating to clients and others
Many of our products, as well as our internal systems and processes, involve the collection, retrieval, processing, storage and transmission through a variety of media channels of our own, as well as supplier and customer, proprietary information and sensitive or confidential data. We rely on, and continuously invest in, a complex system of internal processes and controls, along with policies, procedures and training, designed to protect data that we receive in the ordinary course of business, including information from client portfolios and strategies. However, these measures do not guarantee security, and improper access to or release of confidential information may still occur through, for example, employee error or malfeasance, system error, other inadvertent release, failure to properly purge and protect data, or cyberattack. Additionally, the maintenance and enhancement of our systems may not be completely effective in preventing loss, unauthorized access or misappropriation. Data misappropriation, unauthorized access or data loss could instill a lack of confidence in our products and systems and damage our brand, reputation and business. Breaches of security measures could expose us, our clients or the individuals affected to a risk of loss or misuse of this information, potentially resulting in litigation and liability for us, as well as the loss of existing or potential clients and suppliers. Many jurisdictions in which we operate have laws and regulations relating to data privacy and protection of personal information, including the European Union General Data Protection Regulation, which became effective May 25, 2018, California's Consumer Privacy Act, which became effective January 1, 2020, and China's Personal Information Protection Law, which becomes effective November 1, 2021. These laws contain requirements regarding the handling of personal and sensitive data, including our use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. The law in this area continues to develop and the changing nature of privacy laws could impact our processing of personal and sensitive information related to our content, operations, employees, clients, and suppliers, and may expose us to claims of violations.
Successful prohibited data access and other cyber-attacks and the failure of cyber-security systems and procedures
In providing our digital-enabled services to clients, we rely on information technology infrastructure that is managed internally along with placing reliance on third-party service providers for critical functions. We and these third-party service providers are subject to the risks of system failures and security breaches, including cyber-attacks (including those sponsored by nation-states, terrorist organizations, or global corporations seeking to illicitly obtain technology or other intellectual property), such as phishing scams, hacking, viruses, denials of service attacks, tampering, intrusions, physical break-ins, ransomware and malware as well as employee errors or malfeasance. In some cases, these risks might be heightened when employees are working remotely. Our and our vendors' use of mobile and cloud technologies may increase our risk for such threats. Our protective systems and procedures and those of third parties to which we are connected, such as cloud computing providers, may not be effective against these threats. Our information technology systems must be constantly updated and patched to protect against known vulnerabilities and to optimize performance. While we have dedicated resources responsible for maintaining appropriate levels of cybersecurity and implemented systems and processes intended to help identify cyberattacks and protect and remediate our network infrastructure, we are aware that these attacks have become increasingly frequent, sophisticated, and difficult to
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detect and, as a result, we may not be able to anticipate, prevent or detect all such attacks. We also may be impacted by a cyberattack targeting one of our vendors or within our technology supply chain or infrastructure. Our contracts with service providers typically require them to implement and maintain adequate security controls, but we may not have the ability to effectively monitor these security measures. As a result, inadequacies of the third-party security technologies and practices may not be detected until after a security breach has occurred. These risks may be heightened in connection with employees working from remote work environments, as our dependency on certain service providers, such as video conferencing and web conferencing services, has significantly increased. In addition, to access our network, products and services, customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own security risk. We could suffer significant damage to our brand and reputation: if a cyber-attack or other security incident were to allow unauthorized access to, or modification of, clients’ or suppliers’ data, other external data, internal data or information technology systems; if the services provided to clients were disrupted; or if products or services were perceived as having security vulnerabilities. The costs we would incur to address and resolve these security incidents would increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and claims, loss of business and increased legal liability. Cyberattacks, security breaches or third-party reports of perceived security vulnerability to our systems, even if no breach has occurred, also could damage our brand and reputation, result in litigation, regulatory actions, loss of client confidence and increased legal liability. We also make acquisitions periodically. While significant effort is placed on addressing information technology security issues with respect to the acquired companies, we may inherit such risks when these acquisitions are integrated into our infrastructure.
A prolonged or recurring outage at our data centers and other business continuity disruptions at facilities could result in reduced service and the loss of clients
Our clients rely on us for the delivery of time-sensitive, up-to-date data and applications. Our business is dependent on our ability to process substantial volumes of data and transactions rapidly and efficiently on our computer-based networks, database storage facilities, and other network infrastructure, which are located across multiple facilities globally. If we experience significant growth of our customer base or increases in the number of products or services or in the speed at which we are required to provide products and services, it may strain our systems. Additionally, our systems and networks may become strained due to aging or end-of-life technology that we have not yet updated or replaced. Our computer operations, as well as our other business centers, and those of our suppliers and clients, are vulnerable to interruption by fire, natural disaster, power loss, telecommunications failures, terrorist attacks, acts of war, civil unrest, internet failures, computer viruses, security breaches, and other events beyond our reasonable control. In addition, in the remote work environments, the daily activities and productivity of our workforce is now more closely tied to key vendors, such as video conferencing services, consistently delivering their services without material disruption. Our ability to deliver information using the internet and to operate in a remote working environment may be impaired because of infrastructure failures, service outages at third-party internet providers, malicious attacks, or other factors. We maintain back-up facilities and certain other redundancies for each of our major data centers to minimize the risk that any such event will disrupt those operations. However, a loss of our services involving our significant facilities may materially disrupt our business and may induce our clients to seek alternative data suppliers. Any such losses or damages we incur could have a material adverse effect on our business. Although we seek to minimize these risks through security measures, controls, back-up data centers and emergency planning, there can be no assurance that such efforts will be successful or effective. Additionally, we may also face significant increases in our use of power and data storage and may experience a shortage of capacity and increased costs associated with such usage.
Transition to new technologies, applications and processes could expose us to unanticipated disruptions
The technology landscape is constantly evolving. To remain competitive, we must adapt and migrate to new technologies, applications and processes. Use of more advanced technologies and infrastructure is critical to the development of our products and services, the scaling of our business for future growth, and the accurate maintenance of our data and operations. The implementation of new technologies and infrastructure, such as migration to new cloud-based systems, is complex and can involve substantial expenditures as well as risks inherent in the conversion to any new system, including potential loss of information and disruption to operations. We may experience unanticipated interruption and delay in the performance and delivery of certain of our products and services. Certain of our technologies are also dependent upon third-party providers to maintain adequate systems to protect the security of our confidential information and data. Failure by our providers to maintain appropriate security could result in unauthorized access to our systems or a network disruption that could further lead to improper disclosure of confidential information or data, regulatory penalties and remedial costs. Any disruption to either the provider’s systems or the communication links between us and the provider could negatively affect our ability to operate our data systems and could impair our ability to provide services to our clients. If the services to our clients are disrupted, or if there is unauthorized access to the confidential information of our clients or our vendors, we could suffer significant damage to our brand and reputation and lose clients. We also may incur increased operating expenses to recover data, repair or remediate systems, equipment or facilities, and to protect ourselves from such disruptions. As we increase our reliance on third-party
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systems, our exposure to damages from services disruptions may increase, and we may incur additional costs to remedy damages caused by these disruptions.
Use of open source software could introduce security vulnerabilities, impose unanticipated restrictions on our ability to commercialize our products and services, and subject us to increased costs
We use open source code in our software development and incorporate it into our products and internal systems. The use of open source code may entail greater risks than the use of third-party commercial software. Open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality or security of the code. Some open source licenses provide that if we combine our proprietary applications with the open source software in a certain manner, we could be required to release the source code of our proprietary applications to the public. This would allow our competitors to create similar products with less development effort and time and ultimately put us at a competitive disadvantage. We have implemented procedures to control the use of source code so as to mitigate this risk; however, the terms of many open source licenses are also ambiguous and have not been interpreted by U.S. or other courts. Therefore, there is a risk that our internal procedures controlling the use of open source code could fail, or that the licenses could be construed in a manner that imposes unanticipated conditions or restrictions on us. If any of this were to occur, we could be required to seek alternative third-party licenses at increased costs or reduced scope, to re-engineer products or systems, or potentially to discontinue the licensing of certain products. Any remedial actions could divert resources away from our development efforts, be time intensive and have a significant cost.
Strategy & Market Demand Risks
Competition in our industry may cause price reductions or loss of market share
We continue to experience intense competition across all markets for our products, with competitors ranging in size from smaller, highly specialized, single-product businesses to multi-billion-dollar companies. While we believe the breadth and depth of our suite of products and applications offer benefits to our clients that are a competitive advantage, our competitors may offer price incentives to attract new business. Future competitive pricing pressures may result in decreased sales volumes and price reductions, resulting in lower revenue and ASV. Weak economic conditions may also result in clients seeking to utilize lower-cost information that is available from alternative sources. The impact of cost-cutting pressures across the industries we serve could lower demand for our products. Clients within the financial services industry that strive to reduce their operating costs may seek to reduce their spending on financial market data and related services, such as ours. If our clients consolidate their spending with fewer suppliers, by selecting suppliers with lower-cost offerings or by self-sourcing their needs for financial market data, our business could be negatively affected.
The continued shift from active to passive investing could negatively impact user count growth and revenue
The predominant investment strategy today is still active investing, which attempts to outperform the market. The main advantage of active management is the expectation that the investment managers will be able to outperform market indices. They make informed investment decisions based on their experiences, insights, knowledge and ability to identify opportunities that can translate into superior performance. The main advantage of passive investing is that it closely matches the performance of market indices. Passive investing requires little decision-making by investment managers and low operating costs which result in lower fees for the investor. A continued shift to passive investing, resulting in an increased outflow to passively managed index funds, could reduce demand for the services of active investment managers and consequently, the demand of our clients for our services.
A decline in equity and/or fixed income returns may impact the buying power of investment management clients
Approximately 83% of our ASV is derived from our investment management clients. The profitability and management fees of these clients are tied to assets under management. An equity market decline not only depresses the value of assets under management but also could cause a significant increase in redemption requests from our clients’ customers, further reducing their assets under management. Reduced client profits and management fees may cause our clients to cut costs. Moreover, extended declines in the equity and fixed income markets may reduce new fund or client creation. Each of these developments may result in lower demand from investment managers for our services and workstations, which could negatively affect our business.
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Uncertainty in the global economy and consolidation in the financial services industry may cause us to lose clients and users
Many of our clients are investment banks, asset managers, wealth advisors, and other financial services entities. Uncertainty in the global economy or a lack of confidence in the global financial system could negatively impact our clients, which could cause a corresponding negative impact on our business results. Mergers, consolidation or contraction of our clients in the financial services industry also could directly impact the number of clients and prospective clients and users of our products and services. If our clients merge with or are acquired by other entities that are not our clients, or that use fewer of our products and services, they may discontinue or reduce their use of our products and services. Thus, economic uncertainty, lack of confidence in the global financial system, and consolidation in this sector could adversely affect our business, financial results and future growth.
Volatility in the financial markets may delay the spending pattern of clients and reduce future ASV growth
The decision on the part of large institutional clients to purchase our services often requires management-level sponsorship and typically depends upon the size of the client, with larger clients having more complex and time-consuming purchasing processes. The process is also influenced by market volatility. These characteristics often lead us to engage in relatively lengthy sales efforts. Purchases (and incremental ASV) may therefore be delayed as uncertainties in the financial markets may cause clients to remain cautious about capital and data content expenditures, particularly in uncertain economic environments. The COVID-19 pandemic may increase this risk as it may curtail our client's spending and lead them to delay or defer purchasing decisions or product service implementations, or cause them to cancel or reduce their spending with us, which could negatively impact our revenues and future growth.
Failure to develop and market new products and enhancements that maintain our technological and competitive position and failure to anticipate and respond to changes in the marketplace for our products and customer demands
The market for our products is characterized by rapid technological change, including methods and speed of delivery, changes in client demands, development of new investment instruments and evolving industry standards. The direction of these trends can render our existing products less competitive, obsolete or unmarketable. As a result, our future success will continue to depend upon our ability to identify and develop new products and enhancements that address the future needs of our target markets and to respond to their changing standards and practices. We may not be successful in developing, introducing, marketing, licensing and implementing new products and enhancements on a timely and cost-effective basis or without impacting the stability and efficiency of existing products and customer systems. Further, any new products and enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in products and services that satisfy our clients' needs and generate revenues required to provide the desired results. Our failure or inability to anticipate and respond to changes in the marketplace, including competitor and supplier developments, may also adversely affect our business, operations and growth.
Errors or defects can exist at any point in a product's life cycle, but are more frequently found after the introduction of new products or enhancements to existing products. Despite internal testing and testing by clients, our products may contain errors. We may also experience delays while developing and introducing new products for various reasons, such as difficulties in licensing data inputs. Defects, errors, or delays in our products that are significant, or are perceived to be significant, could result in rejection or delay in market acceptance, damage to our reputation, loss of revenue, lower rate of license renewals or upgrades, diversion of development resources, product liability claims or regulatory actions, or increases in service and support costs.
We have provisions in our client contracts to limit our exposure to potential liability claims brought by clients based on the use of our products or services or our delay or failure to provide services. Contracts with customers also increasingly include service level requirements and audit rights to review our security. Many of our customers in the financial services sector are also subject to regulations and requirements to adopt risk management processes commensurate with the level of risk and complexity of their third-party relationships, and provide rigorous oversight of relationships that involve certain "critical activities," some of which may be deemed to be provided by us. Any failure on our part to comply with the specific provisions in customer contracts could result in the imposition of various penalties, which may include termination of contracts, service credits, suspension of payments, contractual penalties, adverse monetary judgments, and, in the case of government contracts, suspension from future government contracting. Even if the outcome of any claims brought against us were ultimately favorable, such a claim would require the time and attention of our management, personnel, as well as financial and other resources and potentially pose a significant disruption to our normal business operations.
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Failure to identify, integrate, or realize anticipated benefits of acquisitions and strains on resources as a result of growth
There can be no assurance that we will be able to identify suitable candidates for successful acquisition at acceptable prices. Additionally, there may be integration risks or other risks resulting from acquired businesses. Our ability to achieve the expected returns and synergies from past and future acquisitions and alliances depends in part upon our ability to integrate the offerings, technology, sales, administrative functions and personnel of these businesses effectively into our core business. We cannot guarantee that our acquired businesses will perform at the levels anticipated. In addition, past and future acquisitions may subject us to unanticipated risks or liabilities or disrupt operations.
Growth, such as the addition of new clients and acquisitions, puts demands on our resources, including our internal systems and infrastructure. These may require improvements or replacement to meet the additional demands of a larger organization. Further, the addition of new clients and the implementation of such improvements would require additional management time and resources. These needs may result in increased costs that could negatively impact results of operations. Failure to implement needed improvements, such as improved scalability, could result in a deterioration in the performance of our internal systems and negatively impact the performance of our business.
Failure to maintain reputation
We enjoy a positive reputation in the marketplace. Our ability to attract and retain clients and employees is affected by external perceptions of our brand and reputation. Reputational damage from negative perceptions or publicity could affect our ability to attract and retain clients and employees and our ability to maintain our pricing for our products. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity could have a material adverse effect on our business and financial results.
Operational Risks
Failure to enter into, renew or comply with contracts supplying new and existing data sets or products on competitive terms
We collect and aggregate third-party content from data suppliers, news sources, exchanges, brokers and contributors into our own dedicated online service, which clients access to perform their analyses. We combine the data from these sources into our own dedicated databases. Clients have access to the data and content found within our databases. These databases are important to our operations as they provide clients with key information. We have entered into third-party content agreements of varying lengths, which in some cases can be terminated on one year’s notice at predefined dates, and in other cases on shorter notice. Some of our content provider agreements are with competitors, who may attempt to make renewals difficult or expensive. We seek to maintain favorable contractual relationships with our data suppliers, including those that are also competitors. However, we cannot control the actions and policies of our data suppliers and we may have data suppliers who provide us with notice of termination, or exclude or restrict us from use of their content, or only license such content at prohibitive cost. Additionally, despite our efforts to comply with our third-party data supplier agreements, there can be no assurances that third-parties may not challenge our use of their content, which could result in increased licensing costs, loss of rights, and costly legal actions. Certain data sets that we rely on have a limited number of suppliers, although we make every effort to assure that, where reasonable, alternative sources are available. We are not dependent on any one third-party data supplier in order to meet the needs of our clients, with only two data suppliers representing more than 10% of our total data costs for the twelve months ended August 31, 2021. Our failure to be able to maintain these relationships, or the failure of our suppliers to deliver accurate data or in a timely manner, or the occurrence of a dispute with a vendor over use of their content, could increase our costs and reduce the type of content and products available to our clients, which could harm our reputation in the marketplace and adversely affect our business.
Increased accessibility to free or relatively inexpensive information sources may reduce demand for our products
Each year, an increasing amount of free or relatively inexpensive information becomes available, particularly through the internet, and this trend may continue. The availability of free or relatively inexpensive information may reduce demand for our products. While we believe our service offering is distinguished by such factors as customization, timeliness, accuracy, ease-of-use, completeness and other value-added factors, if users choose to obtain the information they need from public or other sources, our business, results of operations, and cash flows could be adversely affected.
Inability to hire and retain key qualified personnel
Our business is based on successfully attracting, motivating and retaining talented and diverse employees. Creating a diverse and inclusive environment that promotes empowerment and engagement is key to our ability to attract, retain, and develop talent. Competition for talent, especially engineering personnel, is strong. We need technical resources such as engineers to help
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develop new products and enhance existing services. We rely upon sales personnel to sell our products and services and maintain healthy business relationships. Our future success also is dependent on the continued service and performance of the members of our senior leadership team. All of these personnel possess business and technical capabilities that are difficult to replace. If we are unsuccessful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services may be adversely affected and could have a material, adverse effect on our business.
Operations outside the United States involve additional requirements and burdens that we may not be able to control or manage successfully
In fiscal 2021, approximately 40% of our revenue related to operations located outside the U.S. In addition, a significant number of our employees, approximately 78%, are located in offices outside the U.S. We expect our growth to continue outside the U.S., with non-U.S. revenues accounting for an increased portion of our total revenue in the future. Our non-U.S. operations involve risks that differ from or are in addition to those faced by our U.S. operations. These risks include difficulties in developing products, services and technology tailored to the needs of non-U.S. clients, including in emerging markets; different employment laws and rules; rising labor costs in lower-wage countries; difficulties in staffing and managing personnel that are located outside the U.S.; different regulatory, legal and compliance requirements, including in the areas of privacy and data protection, anti-bribery and anti-corruption, trade sanctions and currency controls, marketing and sales and other barriers to conducting business; social and cultural differences, such as language; diverse or less stable political, operating and economic environments and market fluctuations; civil disturbances or other catastrophic events that reduce business activity; limited recognition of our brand and intellectual property protection; differing accounting principles and standards; restrictions on or adverse tax consequences from entity management efforts; and changes in U.S. or foreign tax laws. If we are not able to adapt efficiently or manage the business effectively in markets outside the U.S., our business prospects and operating results could be materially and adversely affected.
The current COVID-19 pandemic and other global public health epidemics may adversely impact our business, our future results of operations and our overall financial performance
Our business could be materially and adversely affected by the risk, or the public perception of risk, related to a pandemic or widespread health crisis, such as the current COVID-19 pandemic. A significant outbreak, epidemic or pandemic of contagious diseases in the human population could result in a widespread health crisis adversely affecting the broader economies, financial markets and overall demand for our products. In addition, any preventative or protective actions that governments implement or that we take in respect of a global health crisis, such as travel restrictions, quarantines or site closures, may interfere with the ability of our employees, vendors, and data suppliers to perform their respective responsibilities and obligations relative to the conduct of our business, including our ability to gather content. Such results could have a material adverse effect on our operations, business, financial condition, results of operations, or cash flows.
Our operations have been affected by a range of external factors related to the COVID-19 pandemic that are not within our control. For example, many jurisdictions have imposed a wide range of restrictions on the physical movement of our employees and vendors to limit the spread of COVID-19. While to date the COVID-19 pandemic has not had a material negative impact on our financial condition, results of operations, or cash flows, due to the ongoing uncertainty related to the duration, magnitude and impact of the COVID-19 pandemic, its potential effects on our business remain uncertain. The COVID-19 pandemic may still have a substantial impact on our employees' or vendors' productivity, which could result in our operations, including our ability to gather content, suffering, and in turn our results of operations, cash flows, and overall financial performance may be impacted. Furthermore, if our employees incur substantial medical expenses due to COVID-19, our expenses may increase due to our self-funded employee medical insurance model. Our management is focused on mitigating the effects of COVID-19 on our business, which has required and will continue to require a substantial investment of their time and may delay their other efforts. The continued impact of COVID-19 may also increase the severity or likelihood of the other risks described in this Item, any of which could have a material effect on us.
We continue to closely monitor the impact of the COVID-19 pandemic and continually assess its potential effects on our business. In response to the COVID-19 pandemic, we implemented a business continuity plan with a dedicated incident management team to respond quickly and provide ongoing guidance. However, given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic cannot be reasonably estimated at this time. The extent to which our business, financial condition, results of operations, or cash flows are affected by COVID-19 will depend in part on future developments which cannot be accurately predicted and are uncertain, as there are no comparable recent events that provide guidance as to the potential effect of the spread of a global pandemic. The impact of the COVID-19 pandemic depends upon various uncertainties, including the ultimate geographic spread of the virus, the severity of the virus, the duration of the outbreak, and actions that may be taken by governmental authorities to contain the virus. This situation is changing continually, and additional effects may arise that we are not presently aware of or that we currently do not consider to be significant risks to our operations. If we are not able to respond to and manage the impact of such events effectively, our business and financial
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condition could be negatively impacted. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - COVID-19 Update for additional information.
Legal & Regulatory Risks
Legislative and regulatory changes in the environments in which we and our clients operate
As a business, we are subject to numerous laws and regulations in the U.S. and in the other countries in which we operate. These laws, rules, and regulations, and their interpretations, may change in the future or conflict, and compliance with these changes may increase our costs or cause us to make changes in or otherwise limit our business practices. In addition, the global nature and scope of our business operations make it more difficult to monitor areas that may be subject to regulatory and compliance risk. If we fail to comply with any applicable law, rule, or regulation, we could be subject to claims and fines and suffer reputational damage. Uncertainty caused by political change globally, and complex relationships across countries, including the U.S. and nations in Europe and Asia, heightens the risk of regulatory uncertainty.
Many of our clients operate within a highly regulated environment and must comply with governmental legislation and regulations. The U.S. regulators have increased their focus on the regulation of the financial services industry. Increased regulation of our clients may increase their expenses, causing them to seek to limit or reduce their costs from outside services such as ours. Additionally, if our clients are subjected to investigations or legal proceedings they may be adversely impacted, possibly leading to their liquidation, bankruptcy, receivership, reduction in assets under management, or diminished operations, which would adversely affect our revenue. Recent regulatory changes that we believe might materially impact us and our clients include:
MiFID
In the European Union, the new version of the Markets in Financial Instruments Directive (recast), also known as "MiFID II" became effective in January 2018. Prior to the effectiveness of the UK's withdrawal from the European Union on January 1, 2021, the UK laws and regulations implementing MiFID II were modified to transpose aspects of EU law and address deficiencies that would have otherwise been created as a result of the withdrawal. MiFID II built upon many of the initiatives introduced through MiFID and is intended to help improve the functioning of the European Union single market by achieving a greater consistency of regulatory standards. MiFID originally became effective in 2007. We believe that compliance with MiFID II requirements is time-consuming and costly for the investment managers who are subject to it and will cause clients to adapt their pricing models and business practices significantly. These increased costs may impact our clients’ spending and may cause some investment managers to lose business or withdraw from the market, which may adversely affect demand for our services. However, MiFID II may also present us with new business opportunities for new service offerings. We continue to monitor the impact of MiFID II on the investment process and trade lifecycle. We also continue to review the application of key MiFID II requirements and plan to work with our clients to navigate through them.
Brexit
On January 31, 2020, the United Kingdom formally left the European Union when the UK-EU Withdrawal Agreement became effective. Under the Withdrawal Agreement, a transition period began that ran until December 31, 2020. On January 1, 2021, the UK left the EU Single Market and Customs Union, as well as all EU policies and international agreements. As a result, the free movement of persons, goods, services and capital between the UK and the EU ended, and the EU and the UK formed two separate markets. On December 24, 2020, the EU reached a trade agreement with the UK (the "Trade Agreement") The Trade Agreement offers UK and EU companies preferential access to each other's markets, ensuring imported goods will be free of tariffs and quotas; however, economic relations between the UK and EU will now be on more restricted terms than existed previously. The Trade Agreement does not incorporate the full scope of the services sector, and businesses such as banking and finance face uncertainty. In March, 2021, the UK and EU have agreed on a framework for voluntary regulatory cooperation and dialogue on financial services issues between the two countries in a Memorandum of Understanding (the "MOU"), which is expected to be signed after formal steps are completed, although this has not yet occurred. At this time, we cannot predict the impact that the Trade Agreement, the MOU or any future agreements on services, particularly financial services, will have on our business and our clients. It is possible that new terms may adversely affect our operations and financial results. We continue to evaluate our own risks and uncertainty related to Brexit, and partner with our clients to help them navigate the fluctuating international markets. This uncertainty may have an impact on our clients’ expansion or spending plans, which may in turn negatively impact our revenue or growth.
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Adverse resolution of litigation or governmental investigations
We are party to lawsuits in the normal course of our business. Litigation and governmental investigations can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Unfavorable resolution of lawsuits could have a material adverse effect on our business, operating results or financial condition. For additional information regarding legal matters, see Item 3. Legal Proceedings, of this Annual Report on Form 10-K.
Third parties may claim we infringe upon their intellectual property rights or may infringe upon our intellectual property rights
We may receive notice from others claiming that we have infringed upon their intellectual property rights. Responding to these claims may require us to enter into royalty and licensing agreements on unfavorable terms, incur litigation costs, enter into settlements, stop selling or redesign affected products, or pay damages and satisfy indemnification commitments with our clients or suppliers under contractual provisions of various license arrangements. Additionally, third parties may copy, infringe or otherwise profit from the unauthorized use of our intellectual property rights, requiring us to litigate to protect our rights. Certain countries may not offer adequate protection of proprietary rights. If we are required to defend ourselves or assert our rights or take such actions mentioned, our operating margins may decline as a result. We have incurred, and expect to continue to incur, expenditures to acquire the use of technology and intellectual property rights as part of our strategy to manage this risk.
Additional cost due to tax assessments resulting from ongoing and future audits by tax authorities as well as changes in tax laws
In the ordinary course of business, we are subject to changes in tax laws as well as tax examinations by various governmental tax authorities. The global and diverse nature of our business means that there could be additional examinations by governmental tax authorities and the resolution of ongoing and other probable audits which could impose a future risk to the results of our business. In August 2019 and July 2021, we received Notices of Intent to Assess (the "Notices") additional sales/use taxes, interest and underpayment penalties from the Commonwealth of Massachusetts Department of Revenue relating to prior tax periods. Based upon a review of the Notices, we believe the Commonwealth may assess sales/use tax, interest and underpayment penalties on previously recorded sales transactions. We filed an appeal to the Notices and we intend to contest any such assessment, if assessed, and continue to cooperate with the Commonwealth’s inquiry. Further, on August 10, 2021, we received a letter (the “Letter”) from the Commonwealth relating to additional prior tax periods, requesting 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/use tax, interest and underpayment penalties on previously recorded sales transactions. Due to the uncertainty surrounding the assessment process, we are unable to reasonably estimate the ultimate outcome of these matters and, as such, have not recorded a liability as of August 31, 2021. We believe that we ultimately will prevail if we are presented with a formal assessment; however, if we do not prevail, the amount could have a material impact on our consolidated financial position, results of operations and cash flows.
Changes in tax laws or the terms of tax treaties in a jurisdiction where we are subject to tax could have an impact on our taxes payable.
Financial Market Risks
Exposure to fluctuations in currency exchange rates and the failure of hedging arrangements
Due to the global nature of our operations, we conduct business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, and Philippine Peso. To the extent our international activities increase in the future, our exposure to fluctuations in currency exchange rates may increase as well. To manage this exposure, we utilize derivative instruments (such as foreign currency forward contracts). By their nature, all derivative instruments involve elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. Credit risk is managed through the continuous monitoring of exposure to the counterparties associated with these instruments. Our primary objective in holding derivatives is to reduce the volatility of earnings with changes in foreign currency. Although we believe that our foreign exchange hedging policies are reasonable and prudent under the circumstances, our attempt to hedge against these risks may not be successful, which could cause an adverse impact on both our results of operations and cash flows.
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Business performance may not be sufficient to meet financial guidance or publicly disclosed long-term targets
We provide public, full-year financial guidance based upon assumptions regarding our expected financial performance, including our ability to grow revenue and organic ASV plus professional services, to meet our planned expenses and maintain a certain tax rate, and our ability to achieve our profitability targets. We can provide no assurances that we will be able to maintain the levels of growth and profitability that we have experienced in the past, or that our growth strategies will be successful. If we are unable to successfully execute on our strategies to achieve our growth objectives and retain our existing clients, or if we experience higher than expected operating costs or taxes, we risk not meeting our full-year financial guidance or may find it necessary to revise such guidance during the year.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located at 45 Glover Avenue in Norwalk, Connecticut. We lease our headquarters location, which is 173,164 square feet, and also lease the other locations listed in the table below. We have data content collection offices located in India, the Philippines and Latvia. Additionally, we have data centers that support our technological infrastructure located in New Jersey and Virginia.
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We believe the amount of leased space as of August 31, 2021 is adequate for our current needs and that additional space can be available to meet any future needs.
Segment Leased Location
Americas Austin, Texas
Boston, Massachusetts
Chicago, Illinois
Jackson, Wyoming
Lakewood, Colorado
Los Angeles, California
Minneapolis, Minnesota
New York, New York
Norwalk, Connecticut
Piscataway, New Jersey
Reston, Virginia
San Francisco, California
Toronto, Canada
Youngstown, Ohio
EMEA Amsterdam, the Netherlands
Avon, France
Cologne, Germany
Dubai, United Arab Emirates
Frankfurt, Germany
Johannesburg, South Africa
London, England
Luxembourg City, Luxembourg
Milan, Italy
Paris, France
Riga, Latvia
Sofia, Bulgaria
Zurich, Switzerland
Asia Pacific Chennai, India
Hong Kong, China
Hyderabad, India
Manila, the Philippines
Melbourne, Australia
Mumbai, India
Shanghai, China
Singapore
Sydney, Australia
Tokyo, Japan
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ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to legal proceedings, claims and litigation arising in the ordinary course of business, including intellectual property litigation. Based on currently available information, our management does not believe that the ultimate outcome of these unresolved matters against us, individually or in the aggregate, is likely to have a material adverse effect on our consolidated financial position, annual results of operations and cash flows. However, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Part II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)Market Information, Holders and Dividends
Market Information – Our common stock is listed on the NYSE and NASDAQ under the symbol FDS. The following table sets forth, for each fiscal period indicated, the high and low sales prices per share of our common stock as reported on the NYSE:
First Second Third Fourth
Holdersof Record – As of October 15, 2021, we had approximately 2,346 holders of record of our common stock. However, because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The closing price of our common stock on October 15, 2021, was $380.22 per share as reported on the NYSE.
Dividends - During fiscal years 2021 and 2020, our Board of Directors declared the following dividends on our common stock:
Future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us, and is subject to final determination by our Board of Directors.
(b) Recent Sales of Unregistered Securities
There were no sales of unregistered equity securities during fiscal 2021.
(c)Issuer Purchases of Equity Securities
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The following table provides a month-to-month summary of the share repurchase activity under our current share repurchase program during the three months ended August 31, 2021:
(in thousands, except per share data)
(1)Includes 265,526 shares purchased under the existing share repurchase program, as well as 5,463 shares repurchased from employees to cover their cost of taxes due upon the vesting or exercise of stock-based awards.
(2)Repurchasesmay be made from time to time in the open market and privately negotiated transactions, subject to market conditions.No minimum number of shares to be repurchased has been fixed. There is no timeframe to complete the share repurchase program and it is expected that share repurchases will be paid using existing and future cash generated by operations.
(3)On March 23, 2021, the Board of Directors of FactSet approved a $205.6 million increase to the existing share repurchase program. As of August 31, 2021, a total of $199.9 million remained available for future share repurchases under the program.
Securities Authorized for Issuance under Equity Compensation Plans – refer to Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Annual Report on Form 10-K.
StockPerformanceGraph
The annual changes for the five-year period shown in the graph below assume $100 had been invested in our common stock, the Standard & Poor’s 500 Index, the Dow Jones U.S. Financial Services Index, and the S&P 500 Financial Exchange and Data Index on August 31, 2016, or the origination date of each respective index.
The total cumulative dollar returns shown on the graph represent the value that such investments would have had on August 31, 2021. Stockholder returns over the indicated period are based on historical data and should not be considered indicative of future stockholder returns.
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The information contained in the above graph shall not be deemed to be soliciting material or filed or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specificallyincorporate it by reference into a document filed under the Securities Actof 1933 or the Securities Exchange Act of 1934.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 301 and Item 302 of Regulation S-K has been omitted as we have adopted the changes to Item 301 and Item 302 of Regulation S-K contained in SEC Release No. 33-10890.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. For a similar detailed discussion comparing fiscal 2020 and 2019, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report on Form 10-K for the year ended August 31, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause such differences include, but are not limited to, those identified below and those discussed in Item 1A. Risk Factors of this Annual Report on Form 10-K.
MD&A is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
•Executive Overview
•Annual Subscription Value ("ASV")
•Client and User Additions
•Employee Headcount
•Results of Operations
•Non-GAAP Financial Measures
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements
•Foreign Currency
•Critical Accounting Estimates
•New Accounting Pronouncements
Executive Overview
FactSet Research Systems Inc. and its wholly-owned subsidiaries (collectively, "we," "our," "us," the "Company" or "FactSet") is a global financial data and analytics company with open and flexible technology and a purpose to drive the investment community to see more, think bigger, and do their best work. Our strategy is to become the leading open content and financial analytics platform in the industry that delivers differentiated advantage for our clients’ success.
For over 40 years, the FactSet platform has delivered expansive data, sophisticated analytics, and flexible technology that global financial professionals need to power their critical investment workflows. Over 160,000 asset managers and owners, bankers, wealth managers, corporate firms, including private equity and venture capital firms, and others use our personalized solutions to identify opportunities, explore ideas, and gain a competitive advantage, in areas spanning 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 and industries to enable our clients to research investment ideas, as well as offering them the capabilities to analyze, monitor and manage their portfolios. We combine dedicated client service with open and flexible technology offerings, such as a configurable desktop and mobile platform, comprehensive data feeds, cloud-based digital solutions, and application programming interfaces ("APIs"). Our revenue is primarily derived from subscriptions to our products and services such as workstations, portfolio analytics, and market data.
We advance our industry by comprehensively understanding our clients’ workflows, solving their most complex challenges, and helping them achieve their goals. By providing them with the leading open content and analytics platform, an expansive universe of concorded data they can trust, next-generation workflow support designed to help them grow and see their next best action, and the industry’s most committed service specialists, FactSet puts our clients in a position to outperform.
We are focused on growing our business through three reportable segments ("segments"): the Americas, EMEA and Asia Pacific. Refer to Note 19, Segment Information, in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for further discussion. Within each of our segments, we primarily deliver insight and information through our three workflow solutions: Research & Advisory; Analytics & Trading; and Content & Technology ("CTS").
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Business Strategy
Client needs and market dynamics continue to evolve at an accelerated pace with an increasing demand for differentiated, personalized, and connected data, an ongoing shift to multi-asset class investing, and cost rationalization as the shift from active to passive investing continues. Clients are seeking new cloud-based solutions that enable self-service and automation, open and flexible systems, and increased efficiencies when integrating and managing data as part of their own broader digital transformations.
FactSet’s strategy focuses on building the leading open content and analytics platform that delivers differentiated advantages for our clients’ success – in keeping with our purpose of enabling the investment community to see more, think bigger and do their best work. We want to be the trusted partner of choice for clients, to anticipate their needs and provide them with the most innovative solutions to make them more efficient. This includes transforming the way our clients discover, decide, and act on an opportunity using our digital platform; purposefully increasing our pace and speed to market by streamlining how we work; and investing in our future workforce. To execute on our strategy, we plan on the following:
•Growing our digital platform: Scaling up our Content Refinery by providing the most comprehensive and connected inventory of industry, proprietary, and third-party data for the financial community, including granular data for key industry verticals, private companies, wealth, and environmental social and governance ("ESG"). Driving next-generation workflow solutions by creating personalized and integrated solutions to streamline workflows which includes solutions for asset managers, asset owners, sell side, wealth and corporate clients. Our goal is to deliver tangible efficiencies to our clients by connecting data and analytics with a cloud based eco-system, enabling them to manage work more effectively through an integrated investment lifecycle.
•Delivering execution excellence: Building a more agile and digital first-minded organization that increases the speed of our product creation and go-to-market strategy. To capitalize on market trends and give our clients innovative tools, we plan to release new products built on a cloud-based digital foundation as well as migrating our existing data and applications to the cloud. Additionally, we expect to rationalize our existing product portfolio to reinvest in higher return products.
•Driving a growth mindset: Recruiting, training and empowering a diverse and operationally efficient workforce to drive sustainable growth. To drive a more performance-based culture, we are investing in talent who can create leading technological solutions, efficiently execute our go-to-market strategy and achieve our growth targets.
At the center of our strategy is the relentless focus on our clients and their FactSet experience. We want to be a trusted partner and service provider, offering hyper-personalized digital products for clients to research ideas, uncover relevant insights, and leverage cognitive computing to help get the most out of their data and analytics. Additionally, we continually evaluate business opportunities such as acquisitions and partnerships to help us expand our capabilities and competitive differentiators across the investment portfolio lifecycle.
We are focused on growing our global business in three segments: the Americas, EMEA and Asia Pacific. We believe this geographical strategic alignment helps us better manage our resources, target our solutions and interact with our clients. We further execute on our growth strategy by offering data, products, and analytical applications within our three workflow solutions: Research & Advisory; Analytics & Trading; and CTS.
Fiscal 2021 Year in Review
Revenue for the fiscal year 2021 was $1.6 billion, an increase of 6.5% from the prior year. Revenue increased across our operating segments, primarily in the Americas, followed by EMEA and Asia Pacific, supported by increased revenue from each of our workflow solutions, mainly in Analytics & Trading, followed by CTS and Wealth. Revenue also grew due to the benefit from our annual price increase. The revenue growth of 6.5% was primarily attributed to organic revenue growth, which excludes the effects of acquisitions and dispositions completed in the last 12 months, changes in foreign currency rates in all periods presented and the deferred revenue fair value adjustments from purchase accounting (Refer to Results of Operations, Non-GAAP Financial Measures in this MD&A for further discussion on organic revenue).
Operating income increased 7.8% and diluted earnings per share ("EPS") increased 7.4% compared with the prior year. This increase in operating income and EPS was primarily driven by revenue growth of 6.5%, a decrease in non-compensatory employee related expenses, an impairment of an investment that occurred in fiscal 2020 and a decrease in professional fees. This increase was partially offset by higher spend in employee compensation, including stock-based compensation and
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increased computer-related expenses. Additionally, EPS benefited from a reduction in interest expense and diluted weighted average shares outstanding compared with the prior year period.
Our clients and users reached new highs of 6,453 and 160,932, respectively, in fiscal 2021. Over the last 12 months, we returned $382.6 million to stockholders in the form of share repurchases and dividends.
As of August 31, 2021, our employee count was 10,892, up 3.9% in the past 12 months, due primarily to an increase in net new employees of 6.6% in Asia Pacific and 0.7% in EMEA, partially offset by a decrease of 1.5% in the Americas. Of our total employees, as of August 31, 2021, 7,080 were located in Asia Pacific, 2,439 were located in the Americas and 1,373 were located in EMEA. Our centers of excellence, located in India, the Philippines, and Latvia, primarily focus on content collection that benefits all our segments.
We garnered multiple awards during fiscal 2021, with honors spanning multiple workflows, including research, risk, performance, trading, and wealth management. Our expanding suite of datasets stood out, most notably in the ESG and alternative categories, for its depth and innovation in delivery mechanisms. We were recognized by over thirty industry awards and rankings reports, including winning three categories in WatersTechnology’s 2021 Inside Market Data & Inside Reference Data awards: best alternative data provider, best ESG data provider, and best overall data or service provider for 2021.
Client Service / Customer Success
Our client service teams are a critical component of our comprehensive value proposition, and include a versatile group of financial data and modeling experts, with extensive knowledge of financial markets and FactSet solutions. Our client service teams take a consultative approach to understand our clients’ challenges and objectives to strategically leverage our workflow solutions and deliver support of the highest standard. Our clients have continuous access to our support desk, trained to respond to both project and technical support questions. A client-centric approach is foundational to our ongoing achievements, therefore client satisfaction is critical to how we measure our success. According to our global client satisfaction survey, greater than 94% of respondents were satisfied or very satisfied with our support. We believe that these strong relationships help ensure continued high rates of retention and account expansion.
COVID-19 Update
A novel strain of coronavirus, now known as COVID-19 ("COVID-19"), was first reported in December 2019, and it has since extensively impacted the global health and economic environment, with the World Health Organization characterizing COVID-19 as a pandemic on March 11, 2020. In response to the COVID-19 pandemic, we implemented a business continuity plan with a dedicated incident management team to respond quickly and provide ongoing guidance so that we could continue offering our clients uninterrupted products, services and support while also protecting our employees. We believe these actions have been successful and that the pandemic, and our responses, have not significantly affected the financial results for our 2021 fiscal year.
At the outset of the pandemic, we required the vast majority of our employees at our offices across the globe (including our corporate headquarters) to work remotely and implemented global travel restrictions for our employees. Since that time, we have begun to re-open many of our offices globally, utilizing a three-phased approach to provide flexibility for employees wishing to work from our offices with a focus on social distancing and safety while acting consistently with applicable local regulations. We anticipate that the ability to open offices will vary significantly from region to region based on a number of factors, including the availability of COVID-19 vaccines and the spread of COVID-19 variants. We have worked with local organizations to procure vaccines for our employees and encouraged them to get vaccinated. Our offices will not re-open fully until local authorities permit us to do so and our own criteria and conditions to ensure employee health and safety are satisfied.
As of August 31, 2021, there have been minimal interruptions in our ability to provide our products, services and support to our clients. Working remotely has had relatively little impact on the productivity of our employees, including our ability to gather content. We continue to work closely with our clients to provide consistent access to our products and services and have remained flexible to achieve client priorities.
Based on our success in working in a remote environment during the COVID-19 pandemic, we expect to implement a new work standard under which employees in many of our locations, where permitted by local laws and regulations, and where the role permits, will have the opportunity to choose between different work arrangements. These include working either in a hybrid arrangement, where an employee can split time between working from the office and working from a pre-approved remote location, or a fully remote arrangement, where an employee can work entirely from a pre-approved remote location.
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Our revenue, earnings, and ASV are relatively stable and predictable as a result of our subscription-based business model. To date, the COVID-19 pandemic has not had a material negative impact on our revenue, earnings or ASV. We incurred additional expenses at the start of the COVID-19 pandemic, particularly relating to equipment to enable our employees to support our clients while working remotely, which were not material to our fiscal 2021 results. As we have continued to work in remote and hybrid environments, reductions in discretionary spending, particularly travel and entertainment, have more than offset any related increased expenses. Given our transition to our new work standard, we anticipate that many of these expense reductions will continue going forward, as we incur less travel and entertainment spending than we did pre-pandemic and seek to reduce our spending on office space that is no longer necessary in our new work environment.
Refer to Item 1A. Risk Factors of this Annual Report on Form 10-K for further discussion of the potential impact of the COVID-19 pandemic on our business.
Annual Subscription Value ("ASV")
As of August 31, 2021, organic annual subscription value ("organic ASV") plus Professional Services totaled $1.7 billion, an increase of 7.2% over August 31, 2020. Organic ASV increased across all our geographic segments with the majority of the increase related to the Americas, followed by EMEA and Asia Pacific.
We believe ASV reflects our ability to grow recurring revenue and generate positive cash flow and is the key indicator of the successful execution of our business strategy.
–"ASV" at any point in time represents our forward-looking revenue for the next 12 months from all subscription services currently being supplied to client, excluding revenues from Professional Services.
–"Organic ASV" at any point in time equals our ASV excluding ASV from acquisitions and dispositions completed within the last 12 months and the effects of foreign currency movements on the current year period.
–"Professional Services" are revenues derived from project-based consulting and implementation.
–"Organic ASV plus Professional Services" at any point in time equals the sum of Organic ASV and Professional Services.
Organic ASV plus Professional Service
The following table presents the calculation the calculation of Organic ASV plus Professional Services as of August 31, 2021. With proper notice provided as contractually required, our clients can add to, delete portions of, or terminate service, subject to certain limitations.
(in millions) As of August 31, 2021
As reported ASV plus Professional Services(1) $ 1,688.3
Currency impact(2) 1.6
Acquisition ASV(3) (11.4)
Organic ASV plus Professional Services $ 1,678.5
Organic ASV plus Professional Services growth rate 7.2 %
(1)Includes $24.1 million in Professional Services fees as of August 31, 2021.
(2)The impact from foreign currency movements.
(3)Acquired ASV from acquisitions completed within the last 12 months.
As of August 31, 2021, Organic ASV plus Professional Services was $1.7 billion, an increase of 7.2% compared with August 31, 2020. The increase in year-over-year Organic ASV was largely attributed to existing clients, followed by new client sales and existing client price increases, partially offset by existing client cancellations.
Organic ASV increased across all our geographic segments with the majority of the increase related to the Americas, followed by EMEA and Asia Pacific. This increase was driven by additional sales in our workflow solutions, primarily in Research, followed by Analytics & Trading and CTS. Sales increased in Research mainly due to higher demand for our workstations. Sales increased in Analytics & Trading mainly from our portfolio analytics, portfolio reporting, performance and reporting, front office, and risk and quantitative solutions. CTS sales increased primarily due to core and premium content sets, specifically related to company financial data and data management solutions.
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Segment ASV
As of August 31, 2021, ASV from the Americas was $1,039.4 million, an increase from $956.6 million as of August 31, 2020. Americas organic ASV increased to $1029.2 million as of August 31, 2021, a 7.4% increase compared with August 31, 2020.
As of August 31, 2021, ASV from EMEA was $450.0 million, an increase from $426.0 million as of August 31, 2020. EMEA organic ASV increased to $451.3 million as of August 31, 2021, a 5.6% increase compared with August 31, 2020.
As of August 31, 2021, Asia Pacific ASV was $174.7 million, an increase from $156.5 million as of August 31, 2020. Asia Pacific organic ASV increased to $174.6 million as of August 31, 2021, a 12.3% increase compared with August 31, 2020.
The increase in organic ASV across all our geographic segments was largely attributed to increased sales to existing clients, followed by new client sales and existing client price increases, partially offset by existing client cancellations. The increased organic ASV in the Americas was primarily driven by increased sales for Research, followed by higher sales of Analytics & Trading and CTS. The EMEA organic ASV increase was mainly driven by higher sales of CTS followed by Analytics & Trading. The Asia Pacific organic ASV increase was primarily due to increased sales of Research, Analytics & Trading, and CTS.
Buy-side and Sell-side Organic ASV Growth
Buy-side and sell-side Organic ASV growth rates at August 31, 2021, compared with August 31, 2020, were 6.5% and 12.0%, respectively. Buy-side clients account for approximately 83% of our Organic ASV, consistent with the prior year period, and primarily include asset managers, asset owners, wealth managers, hedge funds and corporate firms. The remainder of our Organic ASV is derived from sell-side firms and primarily include broker-dealers, banking and advisory, private equity and venture capital firms.
Client and User Additions
As of and for theYear Ended August 31,
(1)The client count includes clients with ASV of $10,000 and above.
(2)In the second quarter of fiscal 2021, we revised our user count methodology to include users across all our products, including workstations, StreetAccount and other workflow solutions. The prior year user count was adjusted to reflect this change for comparison purposes.
Our client count includes clients with ASV of $10,000 and above. Our total client count was 6,453 as of August 31, 2021, a net increase of 9.8%, or 578 clients in the last 12 months, mainly due to an increase in corporate and wealth management clients and third-party data providers. The client count increase was mainly driven by demand for our integrated content and workflow solutions, which are further enhanced by our continued investment in product innovation. As part of our long-term growth strategy, we continue to focus on expanding and cultivating relationships with our existing client base through sales of workstations, applications, services and content.
As of August 31, 2021, there were 160,932 professionals using FactSet, representing a net increase of 14.0%, or 19,796 users, in the last 12 months, primarily driven by an increase in wealth advisory professionals from our wealth management clients, as well as an increase in sell-side users from our banking clients. The increase in users was mainly due to a new wealth management client, improvement in our client retention and increased new hiring at our banking clients.
Annual ASV retention was greater than 95% of ASV for the period ended August 31, 2021 and August 31, 2020. When expressed as a percentage of clients, annual retention was approximately 91.0% for the period ended August 31, 2021, an improvement from approximately 90% for the period ended August 31, 2020.
Employee Headcount
As of August 31, 2021, our employee headcount was 10,892, up 3.9% in the past 12 months, due primarily to an increase in net new employees of 6.6% in Asia Pacific and 0.7% in EMEA, partially offset by a decrease of 1.5% in the Americas. Of our total
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employee headcount at August 31, 2021, 7,080 were located in Asia Pacific, 2,439 were located in the Americas and 1,373 were located in EMEA.
Results of Operations
For an understanding of the significant factors that influenced our performance during fiscal 2021 and 2020, the following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8. of this Annual Report on Form 10-K.
The following table summarizes the results of operations for the periods described:
Years ended August 31,
(in thousands, except per share data) 2021 2020 $ Change % Change
Diluted earnings per common share $ 10.36 $ 9.65 $ 0.71 7.4 %
Diluted weighted average common shares 38,570 38,646
Revenue
Revenue increased 6.5% to $1.6 billion in fiscal 2021, compared with $1.5 billion from the same period in the prior year. The increase in revenue was largely attributed to increased sales to existing clients, followed by new client sales and existing client price increases, partially offset by existing client cancellations. Revenue increased across all our segments, primarily from the Americas, followed by EMEA and Asia Pacific, driven by increased revenue in all our workflow solutions, mainly in Analytics & Trading, CTS, and Research, compared with the prior year. Organic revenue increased to $1.6 billion for the fiscal year ended 2021, a 6.3% increase over the prior year period. (Refer to Item 7. Results of Operations, Non-GAAP Financial Measures in the MD&A of this Annual Report on Form 10-K for further discussion on organic revenue).
The revenue growth of 6.5% was composed of organic revenue growth of 6.3%, a 30 basis point increase from foreign currency exchange rate fluctuations, partially offset by a 10 basis point decrease from deferred revenue fair value adjustments from purchase accounting and acquisition-related revenue.
Revenue by Segment
Years ended August 31,
(in thousands) 2021 2020 $ Change % Change
% of revenue 9.8 % 9.6 %
Americas revenue increased 6.8% to $1,008.0 million in fiscal 2021, compared with $943.6 million from the same period in the prior year. The increase in revenue was largely attributed to increased sales to existing clients, followed by new client sales and existing client price increases, partially offset by existing client cancellations. This revenue growth was mainly due to increased sales in all of our workflow solutions, primarily in Analytics & Trading and CTS. The revenue growth of 6.8% was due to
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organic revenue growth of 6.3% and a 50 basis point increase in acquisition-related revenue and deferred revenue fair value adjustments from purchase accounting.
EMEA revenue increased 5.2% to $427.7 million in fiscal 2021, compared with $406.5 million from the same period in the prior year. The increase in revenue was largely attributed to increased sales to existing clients, followed by new client sales and existing client price increases, partially offset by existing client cancellations. This revenue growth was mainly due to increased sales in all of our workflow solutions, primarily in CTS and Analytics & Trading. The revenue growth of 5.2% was driven by organic revenue growth of 3.7%, a 110 basis point increase from foreign currency exchange rate fluctuations and a 40 basis point increase from deferred revenue fair value adjustments from purchase accounting.
Asia Pacific revenue increased 8.2% to $155.7 million in fiscal 2021, compared with $144.0 million from the same period in the prior year. The increase in revenue was largely attributed to increased sales to existing clients, followed by new client sales and existing client price increases, partially offset by existing client cancellations. The revenue growth was mainly due to increased sales in all of our workflow solutions, primarily in Analytics & Trading. The revenue growth of 8.2% was due mainly to organic revenue growth of 8.0% and a 20 basis point increase from foreign currency exchange rate fluctuations.
Revenue by Workflow Solution
Revenue increased 6.5% for fiscal 2021, compared with the same period in the prior, primarily driven by Analytics & Trading and CTS. The increase in Analytics & Trading was mainly driven by increased sales in our portfolio reporting, portfolio analytics, risk and quantitative solutions and performance and reporting. CTS sales increased primarily due to core and premium content sets, specifically related to company financial data and data management solutions.
Operating Expenses
(in thousands) Years ended August 31,
Cost of Services
Cost of services increased 13.1% to $786.4 million in fiscal 2021 compared with $695.4 from the same period in the prior year. Cost of services, expressed as a percentage of revenue, was 49.4% during fiscal 2021, an increase of 290 basis points over the prior year period. This increase was primarily due to an increase in employee compensation costs, including stock-based compensation, and computer-related expenses.
Employee compensation costs increased 150 basis points mainly due to higher annual base salaries and a net increase in employee headcount of 408 employees, with the majority of the compensation from new employee headcount included in cost of services, an increase in year-over-year variable compensation, and an increase in stock based compensation expense. Computer-related expenses increased by 150 basis points, primarily due to increased technology investments related to our migration to cloud-based hosting services, licensed software arrangements, and a 30 basis point increase in the amortization of intangibles, due to a higher investment in capitalized software that has been placed into service. This increase was partially offset by increased capitalization of compensation costs related to development of our internal-use software projects, as well as a shift in headcount to lower cost locations.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses decreased 7.8% to $331.0 million during fiscal 2021, compared with $359.0 million from the same period in the prior year. SG&A expenses, expressed as a percentage of revenue, were 20.8% in fiscal 2021, a decrease of 320 basis points over the prior year period. This decrease was primarily due to a decrease in non-
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compensatory employee related expenses, an impairment on an investment in a company in fiscal 2020, and a decrease in professional fees, partially offset by increased compensations costs.
Non-compensatory employee-related expenses, inclusive of travel, entertainment and office expenses, decreased 150 basis points, mainly due to restrictions and impacts related to the COVID-19 pandemic, as most employees continued to work from home. The prior year investment impairment resulted in a 110 basis point decrease in the current year. Professional fees decreased 50 basis points, primarily due to the completion of certain projects to support our technology plan and business transformation activities and lower tax consulting and accounting fees, compared with the prior year period. The decrease was partially offset by an increase in employee compensation costs of 70 basis points, primarily driven by higher annual base salaries and a net increase in employee headcount, as well as higher variable compensation expense.
Operating Income and Operating Margin
Operating income increased 7.8% to $474.0 million in fiscal 2021 compared with $439.7 million in the prior year. Operating income increased primarily due to revenue growth, inclusive of our annual price increase, a reduction in non-compensatory employee related expenses, a prior year investment impairment, decreased professional fees and occupancy costs, partially offset by an increase in employee compensation costs, including stock-based compensation, and computer-related expenses. Operating income was negatively impacted by movements in foreign currency exchange rates on a year-over-year basis. Our operating margin increased in fiscal 2021 to 29.8%, compared with 29.4% for fiscal 2020. Operating margin increased primarily due to a decrease in non-compensatory employee related expenses, a prior year investment impairment, decreased professional fees and occupancy costs, partially offset by higher employee compensation costs and computer-related expenses.
Operating Income by Segment
Our internal financial reporting structure is based on three reportable segments, the Americas, EMEA and Asia Pacific. Refer to Note 19, Segment Information, for further discussion regarding our segments.
Years ended August 31,
(in thousands) 2021 2020 $ Change % Change
Americas
Americas operating income increased 19.9% to $218.2 million during fiscal 2021, compared with $182.0 million from the prior year. The increase was primarily due to revenue growth of 6.8%, inclusive of our annual price increase, a reduction in non-compensatory employee related expenses, a prior year investment impairment and lower professional fees, partially offset by an increase in employee compensation expense and computer-related expenses.
Non-compensatory employee related expenses, inclusive of travel, entertainment and office expenses, decreased mainly due to restrictions and impacts related to the COVID-19 pandemic. Professional fees decreased, primarily due to the completion of certain projects to support our technology plan and business transformation activities, as well as lower tax consulting fees, compared with the prior year period. The expense decreases were partially offset by higher employee compensation expense, mainly due to increased annual base salaries, an increase in year-over-year variable compensation, partially offset by higher capitalization of compensation costs related to development of our internal-use software projects, and increases in computer-related expenses, due to increased technology investments, including costs from cloud-based hosting and licensed software arrangements. Additionally, amortization of intangible assets increased, primarily due to a higher investment in capitalized software that has been placed into service.
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EMEA
EMEA operating income decreased 3.4% to $159.7 million during fiscal 2021, compared with $165.3 million from the prior year. The decrease in EMEA operating income was primarily due to an increase in employee compensation costs, bad debt expense, and amortization of intangibles, partially offset by revenue growth of 5.2%, inclusive of our annual price increase and a reduction in non-compensatory employee related expenses. Operating income was negatively impacted by movements in foreign currency exchange rates on a year-over-year basis. Employee compensation increased primarily due to a net increase in employee headcount over the past 12 months, increased annual base salaries, higher variable compensation and higher vacation expense. Non-compensatory employee related expenses, inclusive of travel, entertainment and office expenses, decreased, mainly due to restrictions and impacts related to the COVID-19 pandemic, partially offset by investment in technology to allow employees to work from home.
Asia Pacific
Asia Pacific operating income increased 4.2% to $96.2 million during fiscal 2021, compared with $92.3 million from the prior year. The increase in Asia Pacific operating income was mainly due to revenue growth of 8.2%, inclusive of our annual price increase, and a reduction in non-compensatory employee related expenses, partially offset by an increase in employee compensation costs. Operating income was favorably impacted by movements in foreign currency exchange rates on a year-over-year basis. Non-compensatory employee related expenses, inclusive of travel, entertainment and office expenses, decreased, mainly due to restrictions and impacts related to the COVID-19 pandemic, partially offset by investments in technology to allow employees to work from home. Employee compensation increased mainly due to a 6.6% increase in our Asia Pacific workforce in the last 12 months and increased annual base salaries.
Income Taxes, Net Income and Diluted Earnings per Share
Years ended August 31,
(in thousands) 2021 2020 $ Change % Change
Diluted earnings per common share $ 10.36 $ 9.65 $ 0.71 7.4 %
Income Taxes
The fiscal 2021 provision for income taxes was $68.0 million, compared with $54.2 million in fiscal 2020, an increase of 25.5%. The increase was primarily due to net changes in jurisdictional pre-tax book income in fiscal 2021, compared with the prior year. Additionally, the increase was driven by a $4.4 million lower windfall tax benefit from stock-based compensation for fiscal 2021, compared with fiscal 2020, changes in tax rates in certain jurisdictions, and a lower benefit from finalizing prior year tax returns of $1.2 million. The increase was partially offset by the impact of the true-up of certain foreign deferred tax balances, and higher research and development tax credits.
Net Income and Diluted Earnings per Share
Net income increased 7.1% to $399.6 million during fiscal 2021 compared with $372.9 million in fiscal 2020. Diluted earnings per share increased 7.4% to $10.36 in fiscal 2021 compared with $9.65 in fiscal 2020. Net income and diluted EPS increased primarily due to increased operating income and a reduction in interest expense, partially offset by an increase in the provision for income taxes. Interest expense decreased as a result of a decrease in LIBOR compared with the prior year, which reduced the interest rate under our 2019 Revolving Credit Facility. Refer to Note 13, Debt of the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for more information on LIBOR and the 2019 Revolving Credit Facility.
Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with generally accepted accounting principles in the United States ("GAAP"), we use non-GAAP financial measures including organic revenue, adjusted operating margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are show in the tables below. These non-GAAP financial measures should not be considered in isolation from, as a substitute for, or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect
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all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently that we do, limiting the usefulness of those measures for comparative purposes.
Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to gauge progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.
The table below provides an unaudited reconciliation of revenue to adjusted revenue and organic revenue.
Twelve Months EndedAugust 31,
(In thousands) 2021 2020 $ Change % Change
(1)The amortization effect of the purchase accounting adjustment on the fair value of acquired deferred revenue.
(2)Revenues from acquisitions completed within the last 12 months.
(3)The impact from foreign currency movements over the past 12 months.
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The table below provides an unaudited reconciliation of operating income, operating margin, net income and diluted EPS to adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted EPS.
Twelve Months Ended
(In thousands, except per share data) 2021 2020 Change
Deferred revenue fair value adjustment 539 4,192
Impairment of Investment — 16,500
Restructuring / severance 5,028 51
Adjusted operating margin(2) 32.5 % 33.6 %
Deferred revenue fair value adjustment 456 3,385
Impairment of Investment — 16,500
Restructuring / severance 4,253 41
Diluted earnings per common share $ 10.36 $ 9.65 7.4 %
Deferred revenue fair value adjustment 0.01 0.10
Intangible asset amortization 0.51 0.46
Impairment of Investment — 0.42
Restructuring / severance 0.11 —
Adjusted diluted earnings per common share(4) $ 11.20 $ 10.87 3.0 %
Weighted average common shares (Diluted) 38,570 38,646
(1)Costs primarily related to professional fees associated with the ongoing multi-year investment plan.
(2)Adjusted operating margin is calculated as adjusted operating income divided by adjusted revenue as shown in the organic revenue table above.
(3)Income tax items for the year ended August 31, 2021 reflects tax expenses primarily related to a reduction in the estimated foreign pre-tax book income as well as an increase in estimated U.S. pre-tax book income. This was partially offset by a benefit from the finalization of the prior year tax return. Income tax items for the year ended August 31, 2020 includes income tax expenses primarily due to finalization of the prior year tax return.
(4)For purposes of calculating adjusted net income and adjusted diluted earnings per share, deferred revenue fair value adjustments and intangible asset amortization were taxed at the annual effective tax rates of 17.8% for fiscal 2021 and 17.7% for fiscal 2020.
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Liquidity and Capital Resources
Our primary sources of liquidity have been our cash flows generated from our operations, existing cash and cash equivalents and, when needed, our credit capacity under our existing credit facility. We use these sources of liquidity to, among other things, service our existing and future debt obligations, fund our working capital requirements, capital expenditures, investments, acquisitions, dividend payments and repurchases of our common stock. Based on past performance and current expectations, we believe our liquidity, along with other financing alternatives, will provide us the necessary capital to fund these transactions and achieve our planned growth for the next 12 months and the foreseeable future.
Sources of Liquidity
Long-Term Debt
On March 29, 2019, we entered into a credit agreement with PNC Bank, National Association ("PNC") (the "2019 Credit Agreement"), which provides for a $750.0 million revolving credit facility (the "2019 Revolving Credit Facility"). We may request borrowings under the 2019 Revolving Credit Facility until its maturity date of March 29, 2024. The 2019 Credit Agreement also allows us, subject to certain requirements, to arrange for additional borrowings with PNC for an aggregate amount up to $500.0 million, provided that any such request for additional borrowings must be in a minimum amount of $25.0 million.
As of August 31, 2021, we have borrowed $575.0 million of the available $750.0 million provided by the 2019 Revolving Credit Facility, resulting in $175.0 million available to be withdrawn. We are required to pay a commitment fee using a pricing grid which was 0.10% as of August 31, 2021. This fee is based on the daily amount by which the available balance in the 2019 Revolving Credit Facility exceeds the borrowed amount. All outstanding loan amounts are reported as Long-term debt within the Consolidated Balance Sheets at August 31, 2021 and August 31, 2020. The principal balance is payable in full on the maturity date.
Borrowings under the loan bear interest on the outstanding principal amount at a rate equal to LIBOR plus a spread using a debt leverage pricing grid, which was 0.875% as of August 31, 2021. The variable rate of interest on the 2019 Revolving Credit Facility can expose us to interest rate volatility due to changes in LIBOR. To mitigate this exposure, on March 5, 2020, we entered into an interest rate swap agreement with a notional amount of $287.5 million to hedge the variable interest rate obligation on a portion of our outstanding balance under the 2019 Revolving Credit Facility. Under the terms of the interest rate swap agreement, we will pay interest at a fixed rate of 0.7995% and receive variable interest payments based on the same one-month LIBOR utilized to calculate the interest expense from the 2019 Revolving Credit Facility. The interest rate swap agreement matures on March 29, 2024. There is currently a global transition, known as reference rate reform, away from referencing the LIBOR, and other interbank offered rates, and toward new reference rates. As a result of the reference rate reform initiative, these interbank offered rates, including LIBOR are expected to be discontinued. Refer to Note 3, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for more information on our evaluation of reference rate reform on our Consolidated Financial Statements.
Including the effects of the interest rate swap agreement, the weighted average interest rate on amounts outstanding under our 2019 Revolving Credit Facility was 1.38% and 2.20% for the twelve months ended August 31, 2021 and August 31, 2020, respectively. Interest on the outstanding balance under the 2019 Revolving Credit Facility is payable quarterly, in arrears, and on the maturity date.
The 2019 Credit Agreement contains covenants and requirements restricting certain of our activities, which are usual and customary for this type of loan. In addition, the 2019 Credit Agreement requires that we maintain a consolidated net leverage ratio, as measured by total net funded debt/EBITDA (as defined in the 2019 Credit Agreement) below a specified level as of the end of each fiscal quarter. We were in compliance with all the covenants and requirements within the 2019 Credit Agreement as of August 31, 2021.
Letters of Credit
From time to time, we are required to obtain letters of credit in the ordinary course of business. Approximately $2.8 million of standby letters of credit have been issued in connection with our leased office spaces as of August 31, 2021. These standby letters of credit utilize the same covenants included in the 2019 Credit Agreement. Refer to Note 13, Debt of the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for more information on these covenants.
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Uses of Liquidity
Returning Value to Shareholders
For the year ended August 31, 2021, we returned $382.6 million to stockholders in the form of share repurchases and dividends.
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. In fiscal 2021, we repurchased 0.8 million shares for $264.7 million under our existing share repurchase program compared with 0.7 million shares for $199.6 million in fiscal 2020. A total of $199.9 million remains authorized for future share repurchases as of August 31, 2021. There is no defined number of shares to be repurchased over a specified timeframe through the life of the share repurchase program. It is expected that share repurchases will be paid using existing and future cash generated by operations.
Capital Expenditures
For the year ended August 31, 2021, capital expenditures were $61.3 million, compared with $77.6 million during the same period a year ago, a decrease of $16.3 million. Capital expenditures decreased as the cost related to the build-out of our office space in the Philippines during the year ended August 31, 2021 was less than the cost related to the build-out of our new corporate headquarters in Norwalk, Connecticut and office space in India during the prior year period. This decrease was partially offset by higher expenditures related to the development of capitalized internal-use software during the year ended August 31, 2021 compared with the prior year.
Dividends
On August 9, 2021, our Board of Directors approved a regular quarterly dividend of $0.82 which was paid on September 16, 2021. During fiscal 2021, the quarterly dividend increased $0.05 per share or 6.5%, which marked the 22nd consecutive year we have increased dividends, highlighting our continued commitment to returning value to stockholders. Over the last 12 months, we have paid 117.9 million in cash dividends. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us and is subject to final determination by our Board of Directors.
Acquisitions
During fiscal 2021, we completed acquisitions of businesses, with the most significant cash flows related to the acquisition of Truvalue Labs, Inc. ("TVL") on November 2, 2020. We acquired all of the outstanding shares of TVL for a purchase price of $41.9 million, subject to working capital and other adjustments. TVL is a leading provider of 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. Refer to Note 7, Acquisition, in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-Kfor further discussion of the TVL acquisition.
Contractual Obligations
Purchase obligations represent committed payments due in future periods to our various data vendors and for other goods and services. These purchase commitments are agreements that are enforceable and legally binding on us, and they specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. As of August 31, 2021 and 2020, we had total purchase commitments with suppliers of $191.9 million and $226.0 million, respectively. We also have contractual obligations related to our lease liabilities and outstanding debt. Refer to Note 12, Leases and Note 13, Debt for information regarding lease commitments and outstanding debt obligations, respectively.
Our purchase obligations consist of two primary arrangements, data content and hosting services. Data content is an integral component of the value we provide to our clients. Hosting services support our technology investments related to our migration to cloud-based hosting services, the majority of which rely on third-party hosting providers. Of the $191.9 million in purchase commitments, $84.0 million relates to hosting services and $78.7 million relates to data content. Additional commitments relate primarily to third-party software providers.
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Summary of Cash Flows
The table below, for the periods indicated, provides selected cash flow information:
Years ended August 31,
(in thousands) 2021 2020 $ Change % Change
Cash and cash equivalents aggregated to $681.9 million as of August 31, 2021, compared with $585.6 million as of August 31, 2020. Our cash and cash equivalents increased $96.3 million during the twelve months ended August 31, 2021, primarily due to inflows of $555.2 million from net cash provided by operating activities and $64.2 million in proceeds from the exercise of employee stock options, partially offset by cash outflows of $264.7 million in share repurchases, $117.9 million in dividend payments, $58.1 million for the acquisition of businesses and $61.3 million of capital expenditures.
Our cash and cash equivalents are held in numerous locations throughout the world, with $266.9 million within the Americas, $369.3 million within EMEA (predominantly within the UK, Germany, and France) and the remaining $45.8 million within Asia Pacific (predominantly within the Philippines and India) as of August 31, 2021. We intend to reinvest substantially all of our accumulated undistributed foreign earnings, except in instances where repatriation would result in minimal additional tax. As a result of the U.S. Tax Cuts and Jobs Act ("TCJA"), we believe that the income tax impact if such earnings were repatriated would be minimal.
Operating
For fiscal 2021, net cash provided by operating activities was $555.2 million compared with $505.8 million for fiscal 2020, an increase of $49.4 million. This increase was primarily driven by higher net income and the timing of tax payments in certain jurisdictions, partially offset by certain working capital changes, inclusive of increases in variable compensation accruals.
Investing
For fiscal 2021, net cash used in investing activities was $136.0 million, representing a $62.4 million increase from the prior year. This increase was mainly due to the acquisition of businesses, primarily related to the acquisition of TVL for approximately $41.9 million in cash, net of cash acquired, and a $16.3 million decrease in capital expenditures.
Financing
For fiscal 2021, net cash used by financing activities was $322.7 million, representing a $104.6 million increase in cash outflows compared with the prior year. Financing activities were impacted by a $65.1 million increase in share repurchases, a $31.3 million decrease in proceeds from employee stock plans, and an increase of $7.5 million in dividend payments.
Free Cash Flow
We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities less purchases of property, equipment, leasehold improvements and capitalized internal use software. We present free cash flow solely as a supplemental disclosure to provide useful information to investors about the amount of cash generated by the business after necessary capital expenditures. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures. The following table reconciles our net cash provided by operating activities to free cash flow:
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Years ended August 31,
Net cash provided by operating activities $ 555,226 $ 505,840
(1)Capital expenditures are included in net cash used in investing activities during each fiscal period reported and include property, equipment, leasehold improvements and internal-use software.
For fiscal 2021, we generated free cash flow of $493.9 million compared with $428.2 million in fiscal 2020, an increase of $65.7 million. This increase reflects an increase of $49.4 million in cash provided by operating activities and decreases in capital expenditures of $16.3 million.
Off-Balance Sheet Arrangements
At August 31, 2021 and 2020, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing other debt arrangements, or other contractually limited purposes.
Foreign Currency
Foreign Currency Exposure
Certain wholly-owned subsidiaries, primarily within the EMEA and Asia Pacific segments, where approximately 78% of our employees are located, are exposed to volatility in currency exchange rates through translation of the foreign subsidiaries' net assets or liabilities from their respective functional currencies into U.S. dollars, using an end of period exchange rate. The net translation gains and losses are recorded in accumulated other comprehensive loss as a component of stockholders’ equity.
During fiscal 2021, foreign currency movements decreased operating income by $5.4 million, compared with a $5.0 million increaseto operating income in the prior year. To mitigate the foreign currency exposure, we entered into a series of forward contracts to hedge a portion of our British Pound Sterling, Euro, Indian Rupee, and Philippine Peso exposures ranging from 25% to 75% over their respective hedged periods as of August 31, 2021. The current foreign currency forward contracts are set to mature at various points between the first quarter of fiscal 2022 through the fourth quarter of fiscal 2022.
As of August 31, 2021, the gross notional value of foreign currency forward contracts to purchase Philippine Pesos and Indian Rupees with U.S. dollars was ₱1.4 billion and Rs2.6 billion, respectively. The gross notional value of foreign currency forward contracts to purchase U.S. dollars with Euros and British Pound Sterling was €33.8 million and £37.7 million, respectively.
A loss on foreign currency forward contracts of $5.0 million was recorded into operating income during fiscal 2021, compared with a loss of $1.6 million in fiscal 2020.
Critical Accounting Estimates
We prepare the Consolidated Financial Statements in conformity with GAAP, which requires us to make certain estimates and apply judgements that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable at the time the Consolidated Financial Statements are prepared and, as such, they may ultimately differ materially from actual results.
We describe our significant accounting policies in Note 3, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. The critical accounting estimates and judgments that we believe to have the most significant impacts to our Consolidated Financial Statements are described below.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our tax provision is an estimate based on our understanding of laws in Federal, state and foreign tax jurisdictions. These laws can be complicated and are difficult to apply to
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any business. The tax laws also require us to allocate our taxable income to many jurisdictions based on subjective allocation methodologies and information collection processes. Our effective tax rates differ from the statutory rate primarily due to the impact of state taxes, foreign operations, research and development ("R&D") and other tax credits, tax audit settlements, incentive-stock options and the foreign derived intangible income ("FDII") deduction. Our annual effective tax rate was 14.5%, 12.7% and 16.4% in fiscal 2021, 2020 and 2019, respectively.
Our provision for income taxes is subject to volatility and could be adversely impacted by numerous factors such as changes in tax laws, regulations, or accounting principles, including accounting for uncertain tax positions or interpretations of them. Significant judgment is required to determine recognition and measurement. Further, as a result of certain ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely affect our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse impact on our operating results and financial condition.
To account for unrecognized tax benefits, we first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. The determination of liabilities related to unrecognized tax benefits, including associated interest and penalties, requires significant estimates. There can be no assurance that we will accurately predict the outcomes of these audits, however, we have no reason to believe that such audits will result in the payment of additional taxes and/or penalties that would have a material adverse effect on our results of operations or financial position, beyond current estimates. For this reason and due to ongoing audits by multiple tax authorities, we regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. We do not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months.
We classify the liability for unrecognized tax benefits as Taxes Payable (non-current) and to the extent that we anticipate payment of cash within one year, the benefit will be classified as Taxes Payable (current). Additionally, we accrue interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. This interest is classified as income tax expense in the financial statements. As of August 31, 2021, we had gross unrecognized tax benefits totaling $14.9 million, including $1.3 million of accrued interest, recorded as Taxes Payable (non-current) within the Consolidated Balance Sheets. Refer to Note 11, Income Taxes in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for further information.
Performance-based Equity Awards
Performance-based equity awards require management to make assumptions regarding the likelihood of achieving performance targets. The number of performance-based awards that vest will be predicated on achieving performance levels during the measurement period subsequent to the date of grant. Dependent on the financial performance levels attained, a percentage of the performance-based awards will vest to the grantees. However, there is no current guarantee that such awards will vest in whole or in part. Refer to Note 17, Stock-Based Compensation in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for further information.
Goodwill and Intangible Assets
Goodwill is assigned to one or more reporting units on the date of acquisition. Our reporting units are the same as our reportable segments. Goodwill is not amortized as it is estimated to have an indefinite life. We review our goodwill for impairment annually during the fourth quarter of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of any one of our reporting units below its respective carrying amount.
We may elect to perform a qualitative analysis for the reporting units to determine whether it is more likely than not the fair value of the reporting unit is greater than its carrying value. In performing a qualitative assessment, we consider such factors as macro-economic conditions, industry and market conditions in which we operate, including the competitive environment and significant changes in demand for our services. We also consider the share price both in absolute terms and in relation to peer companies. If the qualitative analysis indicates that it is more likely than not the fair value of a reporting unit is less than its
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carrying amount or if we elect not to perform a qualitative analysis, a quantitative analysis is performed to determine whether a goodwill impairment exists.
The quantitative goodwill impairment analysis is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount using an income approach, along with other relevant market information, derived from a discounted cash flow model to estimate the fair value of our reporting units. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any, would be recognized. The loss recognized would not exceed total amount of goodwill allocated to that reporting unit.
We completed our annual goodwill impairment test during the fourth quarter of fiscal 2021. We determined, after performing a qualitative review of each reporting unit, that it is more likely than not that the fair value of each reporting unit substantially exceeds their respective carrying amounts. Accordingly, there was no indication of impairment and a quantitative goodwill impairment test was not performed.
Our identifiable intangible assets consist of acquired content databases, client relationships, software technology, and trade names resulting from acquisitions, which have been fully integrated into our operations, as well as internal-use software. We amortize intangible assets over their estimated useful lives, which are evaluated quarterly to determine whether events and circumstances warrant a revision to the remaining period of amortization. The weighted average useful life of our identifiable intangible assets at August 31, 2021 was 9.1 years. If the estimate of the remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. There were no material adjustments to the useful lives of intangible assets subject to amortization during any of the periods presented. These intangible assets had no assigned residual values as of August 31, 2021 and 2020.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for intangible assets that management expects to hold, and use is based on the amount the carrying value exceeds the fair value of the asset, which may be based on estimated future cash flows (discounted). No indicators of impairment of intangible assets has been identified during any of the periods presented. Our ongoing consideration of recoverability could result in impairment charges in the future, which could adversely affect our results of operations. The carrying value of intangible assets as of August 31, 2021 and 2020 was $135.0 million and $121.1 million, respectively. Refer to Note 9, Goodwill and Note 10, Intangible Assets in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for further details.
Long-lived Assets
Long-lived assets, comprised of property, equipment and leasehold improvements and lease right-of-use ("ROU") assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. In evaluating long-lived assets for recoverability, we use our best estimate of future cash flows (undiscounted and excluding interest charges). If the estimated future cash flows are less than the carrying value of the asset, an impairment loss is recognized to the extent that such asset's carrying value exceeds its fair value, based on the most appropriate valuation technique, including discounted cash flows.
In determining indicators for impairment, we take various factors into account, including, but not limited to, a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in the usage or operating performance. A significant amount of judgment is involved in determining if an indicator of impairment has occurred and in calculating the inputs to the impairment calculation such as estimates related to future cash flows and asset fair values, forecasting asset useful lives and selecting the discount rate that reflects the risk inherent in future cash flows. If actual results are not consistent with our estimates and assumptions included in our impairment assessment, we may be exposed to losses that could be material.
There have been no long-lived asset impairment charges and no change to our impairment assessment methodology for each of the last three years. The carrying value of long-lived assets was $131.4 million as of August 31, 2021 and $133.1 million as of August 31, 2020. Refer to Note 8, Property, Equipment and Leasehold Improvements in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for further information.
Contingencies
We are subject to various legal proceedings, claims and litigation that have arisen in the ordinary course of business, which involve inherent uncertainties including, but not limited to, employment matters, and commercial and intellectual property litigation. Assessing the probability of loss for such contingencies and determining how to accrue the appropriate liabilities
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requires judgment. If actual results differ from our assessments, our financial position, results of operations, or cash flows would be affected.
Business Combinations
We account for business combinations using the purchase method of accounting. The acquisition purchase price is allocated to the underlying identified, tangible and intangible assets and liabilities assumed, based on their respective estimated fair values on the acquisition date. The excess of the purchase consideration over the fair values of the identified assets and liabilities is recorded as goodwill and assigned to one or more reporting units. The amounts and useful lives assigned to acquisition-related tangible and intangible assets impact the amount and timing of future amortization expense. Determining the fair value of assets acquired and liabilities assumed and the expected useful life, requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. Acquisition-related expenses and restructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.
New Accounting Pronouncements
Refer to Note 3, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for a full description of recent accounting pronouncements, including the expected dates of adoption, which we include here by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
In the normal course of business, we are exposed to foreign currency exchange risk as we conduct business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, and Philippine Peso. Changes in the exchange rates for such currencies into U.S. dollars can affect our revenues, earnings, and the carrying values of our assets and liabilities in our consolidated balance sheet, either positively or negatively.
To manage the exposures related to the effects of foreign exchange rate fluctuations, we utilize derivative instruments (foreign currency forward contracts). The changes in fair value for these foreign currency forward contracts are initially reported as a component of Accumulated other comprehensive loss ("AOCL") and subsequently reclassified into operating expenses when the hedged exposure affects earnings.
A sensitivity analysis was performed based on the estimated fair value of all foreign currency forward contracts outstanding at August 31, 2021. If the U.S. dollar had been 10% weaker, the fair value of outstanding foreign currency forward contracts would have increased by $15.3 million, which would have had an immaterial impact on our Consolidated Balance Sheet. Such a change in fair value of our financial instruments would be substantially offset by changes in our expense base. If we had no hedges in place as of August 31, 2021, a hypothetical 10% weaker U.S. dollar against all foreign currencies from the quoted foreign currency exchange rates at August 31, 2021, with operating results held constant in local currencies, would result in a decrease in operating income of $38.2 million over the next 12 months. A hypothetical 10% weaker U.S. dollar against all foreign currencies at August 31, 2021 would have increased the fair value of total assets by $71.4 million and equity by $46.7 million.
Refer to Note 6, Derivative Instruments in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for more information on our foreign currency exposures and our foreign currency forward contracts.
Interest Rate Risk
Cash and Cash Equivalents and Investments
The fair market value of our cash and cash equivalents and investments at August 31, 2021 was $717.8 million. Our cash and cash equivalents consist of demand deposits and money market funds with original maturities of three months or less and are reported at fair value. We are exposed to interest rate risk through fluctuations of interest rates on our investments. As we have a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low. Refer to Note 3, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for more information on our cash and cash equivalents.
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Debt
As of August 31, 2021, we had long term debt outstanding under the 2019 Revolving Credit Facility with a principal balance of $575.0 million. The debt bears interest on the outstanding principle at a rate equal to LIBOR plus a spread, using a debt leverage pricing grid. The variable rate of interest on our long-term debt can expose us to interest rate volatility due to changes in LIBOR. To mitigate this exposure, on March 5, 2020, we entered into an interest rate swap agreement with a notional amount of $287.5 million to hedge the variable interest rate obligation, effectively converting the floating interest rate to fixed for the hedged portion. Thus, we are only exposed to base interest rate risk on floating rate borrowings in excess of any amounts that are not hedged, or $287.5 million of our outstanding principal balance. Assuming all terms of our outstanding long-term debt remained the same, a hypothetical 25 basis point change (up or down) in the one-month LIBOR would result in a $0.7 million change to our annual interest expense for the portion of the long-term debt not hedged by the interest rate swap agreement. Refer to Note 13, Debt in the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for additional information regarding our outstanding debt obligations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Management’s Statement of Responsibility for Financial Statements 50
Management’s Report on Internal Control over Financial Reporting 50
Reports of Independent Registered Public Accounting Firm 51
Consolidated Financial Statements:
Notes to the Consolidated Financial Statements 59
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts 94
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Management’s Statement of Responsibility for Financial Statements
FactSet’s Consolidated Financial Statements are prepared by management, which is responsible for their fairness, integrity and objectivity. The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s estimates and judgments. All financial information in this Report on Form 10-K has been presented on a basis consistent with the information included in the accompanying financial statements.
FactSet’s policies and practices reflect corporate governance initiatives that are compliant with the listing requirements of the New York Stock Exchange, the NASDAQ Stock Market and the corporate governance requirements of the Sarbanes-Oxley Act of 2002. Management, with oversight by our Board of Directors, has established and maintains a strong ethical climate so that our affairs are conducted to the highest standards of personal and corporate conduct.
FactSet maintains accounting systems, including internal accounting controls, designed to provide reasonable assurance of the reliability of financial records and the protection of assets. The concept of reasonable assurance is based on recognition that the cost of a system should not exceed the related benefits. The effectiveness of those systems depends primarily upon the careful selection of financial and other managers, clear delegation of authority and assignment of accountability, inculcation of high business ethics and conflict-of-interest standards, policies and procedures for coordinating the management of corporate resources, and the leadership and commitment of top management. In compliance with the Sarbanes-Oxley Act of 2002, FactSet assessed its internal control over financial reporting as of August 31, 2021 and issued a report (see below).
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for FactSet. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of FactSet; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of FactSet are being made only in accordance with authorizations of management and directors of FactSet; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management (with the participation of the Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of FactSet’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that FactSet’s internal control over financial reporting was effective as of August 31, 2021. Ernst & Young LLP, an independent registered public accounting firm, has audited the effectiveness of FactSet’s internal control over financial reporting and has issued a report on FactSet’s internal control over financial reporting, which is included in their report on the subsequent page.
/s/ F. PHILIP SNOW /s/ LINDA S. HUBER
F. Philip Snow Linda S. Huber
Chief Executive Officer Executive Vice President, Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of FactSet Research Systems Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FactSet Research Systems Inc. (the Company) as of August 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended August 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 8 (collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company at August 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 22, 2021 expressed an unqualified opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2016-02
As discussed in Note 3, Summary of Significant Accounting Policies, to the Consolidated Financial Statements, the Company changed its method of accounting for leases in 2020 due to the adoption of ASU No. 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the Consolidated Financial Statements, taken as a whole, and we are not, by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Measurement of income tax provision
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Stamford, CT
October 22, 2021
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of FactSet Research Systems Inc.
Opinion on Internal Control over Financial Reporting
We have audited FactSet Research System Inc.’s (the Company) internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2021 Consolidated Financial Statements of the Company and our report dated October 22, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Stamford, CT
October 22, 2021
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FactSet Research Systems Inc.
Consolidated Statements of Income
(in thousands, except per share data) For the years ended August 31,
Operating expenses
Other income (expense)
Basic earnings per common share $ 10.56 $ 9.83 $ 9.25
Diluted earnings per common share $ 10.36 $ 9.65 $ 9.08
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FactSet Research Systems Inc.
Consolidated Statements of Comprehensive Income
(in thousands) For the years ended August 31,
Other comprehensive income, net of tax:
Net unrealized (loss) gain on cash flow hedges* (504) 674 504
*For the fiscal years ended August 31, 2021, 2020 and 2019, the net unrealized (loss) gain on cash flow hedges disclosed above were net of a tax benefit of $162 thousand, tax expense of $251 thousand, and a tax expense of $387 thousand, respectively.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FactSet Research Systems Inc.
Consolidated Balance Sheets
(in thousands, except share data) August 31,
ASSETS
Prepaid expenses and other current assets 50,625 43,675
Property, equipment and leasehold improvements, net 131,377 133,102
Deferred taxes 2,250 —
LIABILITIES
Accounts payable and accrued expenses $ 85,777 $ 82,094
Deferred revenue, non-current 8,394 9,319
Commitments and contingencies (see Note 14)
STOCKHOLDERS’ EQUITY
Accumulated other comprehensive loss (38,962) (39,293)
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FactSet Research Systems Inc.
Consolidated Statements of Cash Flows
(in thousands) Years ended August 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of lease right-of-use assets 42,846 43,185 —
Impairment Charge — 16,500 —
Changes in assets and liabilities, net of effects of acquisitions
CASH FLOWS FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt — — (575,000)
Supplemental Disclosure of Cash Flow Information
Supplemental Disclosure of Non-Cash Transactions
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FactSet Research Systems Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Shares Par Value Shares Amount
Cumulative effect of adoption of accounting standards* 1,302 716 2,018
Other comprehensive income 331 331
*Includes the cumulative effect of adoption of accounting standards primarily due to both the adoption of the new revenue recognition standard (ASC 606) resulting in a cumulative increase to retained earnings related to certain fulfillment costs and the accounting standard update related to the U.S. Tax Cuts and Jobs Act ("TCJA") providing for the reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Notes to the Consolidated Financial Statements
Page
Note 1 Description of Business 59
Note 2 Basis of Presentation 60
Note 3 Summary of Significant Accounting Policies 60
Note 4 Revenue Recognition 66
Note 5 Fair Value Measures 67
Note 6 Derivative Instruments 69
Note 7 Acquisition 71
Note 8 Property, Equipment and Leasehold Improvements 71
Note 9 Goodwill 72
Note 10 Intangible Assets 72
Note 11 Income Taxes 73
Note 14 Commitments and Contingencies 78
Note 15 Stockholders' Equity 80
Note 16 Earnings Per Share 81
Note 17 Stock Based Compensation 82
Note 18 Employee Benefit Plans 86