Note 16 - Stock-based Compensation

12 Months Ended

Aug. 31, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

16. STOCK-BASED COMPENSATION

The Company recognized total stock-based compensation expense of $32.4 million, $31.5 million and $34.2 million in fiscal 2019, 2018 and 2017, respectively. As of August 31, 2019, $80.4 million of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of 3.0 years. There was no stock-based compensation capitalized as of August 31, 2019 and 2018, respectively.

Employee Stock Option Fair Value Determinations

The Company utilizes the lattice-binomial option-pricing model (“binomial model”) to estimate the fair value of new employee stock option grants. The binomial model is affected by the Company’s stock price, as well as, assumptions regarding several variables, which 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, to determine the grant date stock option award fair value.

Q1 2019	454,598 non-performance-based employee stock options were granted at a weighted average exercise price of $221.93 and a weighted average estimated fair value of $56.77 per share.
Q2 2019	6,115 non-performance-based employee stock options were granted at a weighted average exercise price of $207.84 and a weighted average estimated fair value of $53.18 per share.
Q3 2019	2,320 non-performance-based employee stock options were granted at a weighted average exercise price of $267.02 and a weighted average estimated fair value of $68.33 per share.
Q4 2019	18,530 non-performance-based employee stock options were granted at a weighted average exercise price of $283.96 and a weighted average estimated fair value of $65.60 per share.
Q1 2018	553,942 non-performance-based employee stock options were granted at a weighted average exercise price of $189.98 and a weighted average estimated fair value of $48.27 per share.
Q2 2018	15,363 non-performance-based employee stock options were granted at a weighted average exercise price of $192.11 and a weighted average estimated fair value of $48.82 per share.
Q3 2018	There were no employee stock options granted during the three months ended May 31, 2018.
Q4 2018	5,848 non-performance-based employee stock options and 16,512 performance-based employee stock options were both granted at a weighted average exercise price of $200.20 with a weighted average estimated fair value of $50.87 per share.
Q1 2017	671,263 non performance-based employee stock options and 22,460 performance-based employee stock options were both granted at a weighted average exercise price of $152.51 with a weighted average estimated fair value of $39.60 per share.
Q2 2017	61,744 performance-based employee stock options were granted at a weighted average exercise price of $169.16 and a weighted average estimated fair value of $43.81 per share.
Q3 2017	11,604 non performance-based employee stock options were granted at a weighted average exercise price of $163.05 and a weighted average estimated fair value of $42.23 per share.
Q4 2017	29,650 non performance-based employee stock options and 206,417 performance-based employee stock options were granted at a weighted average exercise price of $165.75 and a weighted average estimated fair value of $42.93 per share.

The weighted average estimated fair value of employee stock options granted during fiscal 2019, 2018 and 2017 was determined using the binomial model with the following weighted average assumptions:

	2019				2018				2017
Term structure of risk-free interest rate		1.28%	—	3.14%		1.28%	—	2.41%		0.07%	—	2.09%
Expected life (years)		7.1	—	7.1		7.4	—	7.4		7.4	—	8.1
Term structure of volatility		18%	—	29%		19%	—	29%		21%	—	30%
Dividend yield			1.15%				1.32%				1.18%
Weighted average estimated fair value			$57.12				$48.39				$40.68
Weighted average exercise price			$224.35				$190.42				$156.77
Fair value as a percentage of exercise price			25.5%				25.4%				25.9%

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 based on the option’s remaining vested life and the extent to which the option is in-the-money. The binomial model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations of all past option grants made by the Company.

Non-Employee Director Stock Option Fair Value Determinations

The Non-Employee Directors' Stock Option and Award Plan, as Amended and Restated (the "Director Plan"), provides for the grant of share-based awards, including stock options, to non-employee directors of FactSet. As of August 31, 2019, shares available for future grant under the Director Plan was 263,956. The expiration date of the Director Plan is December 19, 2027.

The Company utilizes the Black-Scholes model to estimate the fair value of new non-employee Director stock option grants. The Black-Scholes model is affected by the Company’s stock price, as well as, assumptions regarding several variables, which 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, to determine the grant date stock-based payment award fair value.

Fiscal 2019

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

Risk-free interest rate	2.51	%
Expected life (years)	5.4
Expected volatility	20.5	%
Dividend yield	1.17	%

Fiscal 2018

On January 12, 2018, FactSet granted 18,963 stock options to the Company’s non-employee Directors. These options have a weighted average estimated fair value of $38.76 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate	2.34	%
Expected life (years)	5.4
Expected volatility	19.7	%
Dividend yield	1.16	%

Fiscal 2017

On January 13, 2017, FactSet granted 23,846 stock options to the Company’s non-employee Directors, including one-time new director grants of 2,104 for both Malcolm Frank and Sheila B. Jordan, who were elected to FactSet’s Board of Directors on December 20, 2016. All the options granted on January 13, 2017, have a weighted average estimated fair value of $35.65 per share, using the Black-Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate	1.95	%
Expected life (years)	5.4
Expected volatility	22.7	%
Dividend yield	1.24	%

Restricted Stock Fair Value Determinations

Restricted stock granted to employees entitles the holder to shares of common stock as the award vests over time, but not to dividends declared on the underlying shares, while the restricted stock is unvested. The grant date fair value of restricted stock awards is measured by reducing the grant date price of FactSet’s share by the present value of the dividends expected to be paid on the underlying stock during the requisite service period, discounted at the appropriate risk-free interest rate. The expense associated with restricted stock awards is amortized over the vesting period. During fiscal 2019, there were 73,047 restricted stock awards granted with a weighted average grant date fair value of $239.03 compared to 3,497 restricted stock awards granted with a weighted average grant date fair value of $189.28 in fiscal 2018.

Q1 2019	41,102 shares of restricted stock were granted at a weighted average estimated fair value of $212.66 per share.
Q2 2019	51 shares of restricted stock were granted at a weighted average estimated fair value of $210.67 per share.
Q3 2019	265 shares of restricted stock were granted at a weighted average estimated fair value of $255.95 per share.
Q4 2019	31,629 shares of restricted stock were granted at a weighted average estimated fair value of $273.19 per share.
Q1 2018	961 shares of restricted stock were granted at a weighted average estimated fair value of $182.17 per share.
Q2 2018	No restricted stock granted.
Q3 2018	No restricted stock granted.
Q4 2018	2,536 shares of restricted stock were granted at a weighted average estimated fair value of $191.97 per share.
Q1 2017	5,084 shares of restricted stock were granted at a weighted average estimated fair value of $151.63 per share.
Q2 2017	7,843 shares of restricted stock were granted at a weighted average estimated fair value of $161.31 per share.
Q3 2017	No restricted stock granted.
Q4 2017	49,473 shares of restricted stock were granted at a weighted average estimated fair value of $158.46 per share.

Employee Stock Purchase Plan Fair Value Determinations

During fiscal 2019, employees purchased 48,532 shares at a weighted average price of $205.64 compared to 64,230 shares at a weighted average price of $160.34 in fiscal 2018 and 75,372 shares at a weighted average price of $136.34 in fiscal 2017. Stock-based compensation expense recorded during fiscal 2019, 2018 and 2017 relating to the employee stock purchase plan was $2.0 million, $1.6 million and $2.1 million, respectively.

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 fiscal years 2019, 2018 and 2017, was $41.06, $31.83 and $28.16 per share, respectively, with the following weighted average assumptions:

	2019			2018			2017
Risk-free interest rate		2.33	%		1.55	%		0.69	%
Expected life (months)		3			3			3
Expected volatility		10.89	%		10.19	%		8.60	%
Dividend yield		1.12	%		1.27	%		1.25	%

Accuracy of Fair Value Estimates

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