Stock-Based Compensation

9 Months Ended

May 31, 2011

Stock-Based Compensation

Stock-Based Compensation

14. STOCK-BASED COMPENSATION

Accounting guidance requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including stock options, restricted stock and common shares acquired under employee stock purchases based on estimated fair values of the share awards that are scheduled to vest during the period. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based primarily on historical experience.

The following table summarizes stock-based compensation expense for the three and nine months ended May 31, 2011 and 2010 (in thousands):

	Three Months Ended May 31,						Nine Months Ended May 31,
	2011			2010			2011			2010
Stock-based compensation	$	4,975		$	4,142		$	15,352		$	10,239
Tax impact of stock-based compensation		(1,542	)		(1,389	)		(4,811	)		(3,442	)
Stock-based compensation, net of tax	$	3,433		$	2,753		$	10,541		$	6.797

As of May 31, 2011, $47.6 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 3.6 years. There was no stock-based compensation capitalized as of May 31, 2011 or August 31, 2010, respectively.

Employee Stock Option Fair Value Determinations

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

Fiscal 2011

• Q1 2011 – 84,811 non performance-based employee stock options and 809,239 performance-based employee stock options were granted at a weighted average exercise price of $88.40 and a weighted average estimated fair value of $24.42 per share.

• Q2 2011 – 65,224 performance-based employee stock options were granted at a weighted average exercise price of $99.78 and a weighted average estimated fair value of $29.07 per share.

• Q3 2011 – 6,408 non performance-based employee stock options were granted at a weighted average exercise price of $103.30 and a weighted average estimated fair value of $23.41 per share.

Fiscal 2010

• Q1 2010 – 32,476 non performance-based employee stock options and 900,665 performance-based employee stock options were granted at a weighted average exercise price of $66.46 and a weighted average estimated fair value of $19.99 per share.

• Q2 2010 – 297,483 non performance-based employee stock options were granted at a weighted average exercise price of $63.09 and a weighted average estimated fair value of $21.01 per share.

• Q3 2010 – there were no stock options granted during the third quarter of fiscal 2010.

The weighted average estimated fair value of employee stock options granted was determined using the binomial model with the following weighted average assumptions:

	Three Months Ended May 31, 2011	Nine Months Ended May 31,
		2011	2010
Term structure of risk-free interest rate	0.19% - 1.00%	0.18% - 1.88%	0.15% - 3.30%
Expected life	4.0 years	4.0 - 6.5 years	4.0 - 6.7 years
Term structure of volatility	23% - 35%	23% - 35%	27% - 36%
Dividend yield	1.07%	1.25%	1.58%
Weighted average estimated fair value	$23.41	$24.72	$20.24

The risk-free interest rate assumption for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on a combination of historical volatility of the Company's stock and implied volatilities of publicly traded options to buy FactSet common stock with contractual terms closest to the expected life of options granted to employees. The approach to utilize a mix of historical and implied volatility was based upon the availability of actively traded options on the Company's stock and the Company's assessment that a combination of implied volatility and historical volatility is best representative of future stock price trends. The Company uses historical data to estimate option exercises and employee termination within the valuation model. The dividend yield assumption is based on the Company's history and expectation of dividend payouts. The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the binomial model. The binomial model estimates employees exercise behavior is based on the option's remaining vested life and the extent to which the option is in-the-money. The binomial model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations of all past option grants made by the Company.

Non-Employee Director Stock Option Fair Value Determinations

On December 16, 2008, the Company's stockholders approved the 2008 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") that provides for the grant of share-based awards, including stock options, to non-employee directors of FactSet. The ratification of the Directors' Plan replaced the FactSet 1998 Non-Employee Directors' Stock Option Plan, which had expired on November 1, 2007, except with respect to outstanding options previously granted thereunder. A total of 250,000 shares of FactSet common stock have been reserved for issuance under the Directors' Plan. The expiration date of the Directors' Plan is December 1, 2018. The shares of common stock to be issued may be either authorized and unissued shares or shares held by the Company in its treasury.

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

Fiscal 2011

On January 14, 2011, 14,514 stock options were granted to the Company's non-employee Directors with a weighted average estimated fair value of $26.87 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate	2.13	%
Expected life	5.43 years
Expected volatility	31.1	%
Dividend yield	1.18	%

Fiscal 2010

On January 15, 2010, 18,510 stock options were granted to the Company's non-employee Directors with a weighted average estimated fair value of $21.06 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate	2.54	%
Expected life	5.43 years
Expected volatility	35.4	%
Dividend yield	1.42	%

The risk-free interest rate assumption for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility of the Company's stock. The Company uses historical data to estimate option exercises and non-employee director terminations within the valuation model. The dividend yield assumption is based on the Company's history and expectation of dividend payouts.

Restricted Stock Fair Value Determinations

Restricted stock granted to employees entitle the holder to shares of common stock as the award vests over time, but not to dividends declared on the underlying shares while the restricted stock is unvested. The grant date fair value of restricted stock awards are measured by reducing the grant date price of FactSet's share by the present value of the dividends expected to be paid on the underlying stock during the requisite service period, discounted at the appropriate risk-free interest rate. Restricted stock awards are amortized to expense over the vesting period.

Fiscal 2011

• 117,723 shares of restricted stock with a fair value of $84.38 were granted on November 8, 2010.

• 366 shares of restricted stock with a fair value of $95.24 were granted on January 27, 2011.

• 3,291 restricted stock units with a fair value of $83.49 were granted on November 8, 2010.

• 1,719 restricted stock units with a fair value of $94.50 were granted on January 27, 2011.

• 30,090 restricted stock units with a fair value of $99.75 were granted on April 14, 2011.

Fiscal 2010

• 161,794 shares of restricted stock with a fair value of $62.85 were granted on October 23, 2009.

• 90,030 restricted stock awards with a fair value of $59.42 were granted on February 9, 2010. Of the total number of restricted stock awards granted, 55,572 cliff vest 100% after three years. The remaining 34,458 restricted stock awards cliff vest 50% after four years and the other 50% after six years.

Employee Stock Purchase Plan Fair Value Determinations

Employees purchased 56,659 shares at a price of $75.58 during the first nine months of fiscal 2011. During the three months ended May 31, 2011, employees purchased 18,053 shares at a weighted average price of $87.02 as compared to 22,510 shares at a weighted average price of $57.46 in the same period a year ago.

The Company uses the Black-Scholes model to calculate the estimated fair value for the employee stock purchase plan. The weighted average estimated fair value of employee stock purchase plan grants during the three months ended May 31, 2011 and 2010 were $16.97 and $11.50 per share, respectively, with the following weighted average assumptions:

	Three Months Ended May 31,
	2011	2010
Risk-free interest rate	0.07%	0.17%
Expected life	3 months	3 months
Expected volatility	9.8%	12.6%
Dividend yield	0.9%	1.4%

The weighted average estimated fair value of employee stock purchase plan grants during the nine months ended May 31, 2011 and 2010 were $14.71 and $11.14 per share, respectively, with the following weighted average assumptions:

	Nine Months Ended May 31,
	2011	2010
Risk-free interest rate	0.12%	0.11%
Expected life	3 months	3 months
Expected volatility	9.7%	14.2%
Dividend yield	1.0%	1.3%

Accuracy of Fair Value Estimates

The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards. The Company's determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company's stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company's expected stock price volatility over the term of the awards, interest rates, option forfeiture rates and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable.