FACTSET RESEARCH SYSTEMS INC 10-K

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 Part II, Item 8. Financial Statements and Supplementary Data , of this Annual Report on Form 10-K, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission. For a similar detailed discussion comparing fiscal 2022 and 2021, refer to Part II, 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, 2022. 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 Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K. Our 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 digital platform and enterprise solutions provider with open and flexible products that drive the investment community to see more, think bigger and do its best work. Our platform delivers expansive data, sophisticated analytics and flexible technology used by global financial professionals to power their critical investment workflows. As of August 31, 2023, we had nearly 8,000 clients comprised of almost 190,000 investment professionals, including asset managers, bankers, wealth managers, asset owners, partners, hedge funds, corporate users and private equity & venture capital professionals. Our revenues are primarily derived from subscriptions to our multi-asset class data and solutions powered by our content refinery. Our products and services include workstations, portfolio analytics and enterprise solutions. We drive our business based on our detailed understanding of our clients’ workflows, which helps us to solve their most complex challenges. We provide financial data and market intelligence on securities, companies, industries and people to enable our clients to research investment ideas, as well as to analyze, monitor and manage their portfolios. Our on- and off-platform solutions span the investment life cycle of investment research, portfolio construction and analysis, trade execution, performance measurement, risk management and reporting. We provide open and flexible technology offerings, including a configurable desktop and mobile platform, comprehensive data feeds, cloud-based digital solutions and APIs. Our CGS business supports security master files relied on by the investment industry for critical front, middle and back-office functions. Our platform and solutions are supported by our dedicated client service teams. We operate our business through three segments: the Americas, EMEA and Asia Pacific. Refer to Note 18, 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. For each of our segments, we execute our strategy through three workflow solutions: Research & Advisory; Analytics & Trading; and CTS. CGS operates as part of CTS. Refer to Part I, Item 1. Business - Business Strategy , of this Annual Report on Form 10-K for further discussion on our business strategy. 30 Ta ble of C onte nts Fiscal 2023 in Review Revenues for fiscal 2023 were $2.1 billion, an increase of 13.1% from the prior year. Revenues increased in all our segments, primarily in the Americas, and, to a lesser extent, EMEA and Asia Pacific. This increase in revenues was supported by higher sales in each of our workflow solutions, primarily in CTS (driven by inorganic revenues from CGS), followed by Analytics & Trading and Research & Advisory. Organic revenues contributed to 8.2% of our growth during fiscal 2023, compared with the prior year. Refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Non-GAAP Financial Measures, of this Annual Report on Form 10-K for a reconciliation between revenues and organic revenues. As of August 31, 2023, organic annual subscription value ("Organic ASV") plus Professional Services totaled $2.2 billion, an increase of 7.1% over the prior year. Organic ASV increased in all our segments, with the majority of the increase related to the Americas and, to a lesser extent, EMEA and Asia Pacific. This increase was driven by additional sales in our workflow solutions, primarily in Analytics & Trading, followed by CTS and Research & Advisory. Refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Annual Subscription Value, of this Annual Report on Form 10-K for the definitions of Organic ASV and Organic ASV plus Professional Services. Operating income for fiscal 2023 was $629.2 million, an increase of 32.3% compared with the prior year. Operating margin increased in fiscal 2023 to 30.2%, compared with 25.8% for fiscal 2022. Operating margin increased primarily due to growth in revenues and, when expressed as a percentage of revenues, a decrease in asset impairment charges, employee compensation costs, professional fees, data costs and occupancy costs, partially offset by higher royalty fees and amortization of intangible assets. Net income for fiscal 2023 was $468.2 million, an increase of 18.0% from the prior year. Diluted earnings per common share ("Diluted EPS") increased 17.5% compared with the prior year. This increase in net income and Diluted EPS was primarily due to higher operating income, partially offset by an increase in the provision for income taxes and an increase in interest expense as a result of higher outstanding debt compared to the prior year. Our clients and users reached new highs of 7,921 and 189,972, respectively, in fiscal 2023. We returned $315.3 million to stockholders in the form of share repurchases and dividends paid during fiscal 2023. As of August 31, 2023, our employee count was 12,237, up 9.2% compared to the prior year, due to an increase in net new employees of 12.4% in Asia Pacific, 3.6% in the Americas and 1.9% in EMEA. We garnered multiple awards in fiscal 2023, with honors noted for research, risk, performance, trading and wealth management. FactSet was honored by more than thirty industry awards and rankings reports, including winning “Trading Tech’s Best Cloud-Based Market Data Delivery Solution.” CUSIP Global Services Acquisition On March 1, 2022, we completed our acquisition of CGS for a cash price of $1.932 billion, inclusive of working capital adjustments. We acquired CGS to expand our critical role in the global capital markets. Revenues from CGS are recognized based on geographic business activities in accordance with how our operating segments are currently aligned. During fiscal 2023, CGS functioned as part of the CTS workflow solution. The purchase price for the CGS acquisition was financed from the net proceeds of the issuance of the Senior Notes and borrowings under the 2022 Credit Facilities. Refer to Note 6, Acquisitions and Note 12, Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for more information on these defined terms as well as our acquisition of CGS, the Senior Notes and the 2022 Credit Facilities, respectively. 31 Ta ble of C onte nts Annual Subscription Value ("ASV") We believe ASV reflects our ability to grow recurring revenues and generate positive cash flow and serves as a key indicator of the successful execution of our business strategy. – "ASV" at any point in time represents our forward-looking revenues for the next 12 months from all subscription services currently being supplied to clients, 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. – "Professional Services" are revenues derived from project-based consulting and implementation, annualized over the past 12 months. – "Organic ASV plus Professional Services" at any point in time equals the sum of Organic ASV and Professional Services. Prior year ASV now reflects additional CGS revenues not previously included. Organic ASV plus Professional Services The following table presents the calculation of Organic ASV plus Professional Services as of August 31, 2023. With proper notice provided as contractually required, our clients can add to, delete portions of, or terminate service, subject to certain limitations. (dollar amounts in millions) As of August 31, 2023 As reported ASV plus Professional Services (1) $ 2,174.6 Currency impact (2) 0.5 Organic ASV plus Professional Services $ 2,175.1 Organic ASV plus Professional Services annual growth rate 7.1 % (1) Includes $22.7 million in Professional Services as of August 31, 2023. (2) The impact from foreign currency movements. As of August 31, 2023, Organic ASV plus Professional Services was $2.2 billion, an increase of 7.1% compared with August 31, 2022. The increase in Organic ASV was primarily driven by higher sales to existing clients and, to a lesser extent, price increases to existing clients and sales to new clients, partially offset by existing client cancellations. Organic ASV increased in all our 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 Analytics & Trading, followed by CTS and Research & Advisory. Sales increased in Analytics & Trading mainly from our performance & reporting products, portfolio analytics solutions and portfolio & benchmark services. CTS sales increased mainly from CGS and, to a lesser extent, data management solutions, company data and real time data. Sales increased in Research & Advisory mainly due to higher demand for our workstations. Segment ASV As of August 31, 2023, ASV from the Americas represented 64% of total ASV and was $1,376.9 million, an increase from $1,286.7 million as of August 31, 2022. Americas Organic ASV was $1,376.9 million as of August 31, 2023, a 7.0% increase from the prior year. The Organic ASV increase in the Americas was primarily driven by increased sales from Analytics & Trading, followed by CTS and Research & Advisory. As of August 31, 2023, ASV from EMEA represented 26% of total ASV and was $559.6 million, an increase from $516.1 million as of August 31, 2022. EMEA Organic ASV was $558.8 million as of August 31, 2023, a 7.7% increase from the prior year. The EMEA Organic ASV increase was mainly driven by higher sales from Analytics & Trading and CTS. As of August 31, 2023, ASV from Asia Pacific represented 10% of total ASV and was $215.4 million, an increase from $200.5 million as of August 31, 2022. Asia Pacific Organic ASV was $216.7 million as of August 31, 2023, an 8.1% increase from the prior year. The Asia Pacific Organic ASV increase was primarily due to higher sales from Research & Advisory and Analytics & Trading. 32 Ta ble of C onte nts Buy-side and Sell-side Organic ASV Growth The buy-side and sell-side Organic ASV annual growth rates as of August 31, 2023 were 6.9% and 9.3%, respectively. Buy-side clients account for approximately 82% of our Organic ASV, compared to 83% in the prior year, and primarily include asset managers, wealth managers, asset owners, partners, hedge funds and corporate firms. The remainder of our Organic ASV is derived from sell-side firms and primarily include broker-dealers, banking & advisory and private equity & venture capital firms. Client and User Additions The table below presents our total clients and users: As of August 31, 2023 2022 Change Clients (1) 7,921 7,538 5.1 % Users 189,972 179,982 5.6 % (1) The client count includes clients with ASV of $10,000 and above. Our total client count was 7,921 as of August 31, 2023, a net increase of 5.1%, or 383 clients compared to the prior year, mainly due to an increase in corporate clients, wealth management clients and partners. We believe this increase is primarily due to our on- and off- platform workflow solutions, connected content and client-focused services. As of August 31, 2023, there were 189,972 professionals using FactSet, representing a net increase of 5.6%, or 9,990 users, compared to the prior year, primarily driven by an increase from our wealth management firms and sell-side users from our banking clients. Annual ASV retention was greater than 95% for the year ended August 31, 2023 and August 31, 2022. When expressed as a percentage of clients, annual retention was approximately 91% for the year ended August 31, 2023, compared with approximately 92% for the year ended August 31, 2022. Employee Headcount As of August 31, 2023, our employee headcount was 12,237, an increase of 9.2% compared with 11,203 employees as of August 31, 2022. This headcount increase was primarily due to our continued investment in our COEs by expanding our talent pool primarily in India and the Philippines. Our COEs accounted for approximately 67% of our employees. Our net headcount growth by segment as of August 31, 2023 compared with August 31, 2022 was 12.4% in Asia Pacific, 3.6% in the Americas and 1.9% in EMEA. As of August 31, 2023, the number of employees located in Asia Pacific was 8,322, in the Americas was 2,487 and in EMEA was 1,428. 33 Ta ble of C onte nts Results of Operations For an understanding of the significant factors that influenced our performance during fiscal 2023 and 2022, the following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part II, Item 8. of this Annual Report on Form 10-K. The following table summarizes our results of operations: Years ended August 31, (dollar amounts in thousands, except per share data) 2023 2022 $ Change % Change Revenues $ 2,085,508 $ 1,843,892 $ 241,616 13.1 % Cost of services 973,225 871,106 102,119 11.7 % Selling, general and administrative 457,130 433,032 24,098 5.6 % Asset impairments 25,946 64,272 (38,326) (59.6) % Operating income $ 629,207 $ 475,482 $ 153,725 32.3 % Net income $ 468,173 $ 396,917 $ 71,256 18.0 % Diluted weighted average common shares 38,898 38,736 Diluted EPS $ 12.04 $ 10.25 $ 1.79 17.5 % Revenues Revenues in fiscal 2023 were $2.1 billion, an increase of 13.1% compared to the prior year. This increase was primarily driven by higher sales to existing clients and, to a lesser extent, price increases to existing clients and sales to new clients, partially offset by existing client cancellations. Revenues increased in all our segments, primarily from the Americas, followed by EMEA and Asia Pacific. The increased revenues were supported by higher sales in all three of our workflow solutions, primarily in CTS (driven by inorganic revenues from CGS), and, to a lesser extent, by Analytics & Trading and Research & Advisory. Organic revenues increased to $1,995.0 million for fiscal 2023, an 8.2% increase over the prior year. Refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Non-GAAP Financial Measures, of this Annual Report on Form 10-K for further discussion on organic revenues. The 13.1% growth in revenues was reflective of organic revenues growth of 8.2% and a 5.2% increase primarily related to acquisition-related revenues, partially offset by a 0.3% decrease from foreign currency exchange rate fluctuations. Revenues by Segment The following table summarizes our revenues by segment: Years ended August 31, (dollar amounts in thousands) 2023 2022 $ Change % Change Americas $ 1,335,484 $ 1,173,946 $ 161,538 13.8 % % of revenues 64.0 % 63.7 % EMEA $ 539,843 $ 484,279 $ 55,564 11.5 % % of revenues 25.9 % 26.3 % Asia Pacific $ 210,181 $ 185,667 $ 24,514 13.2 % % of revenues 10.1 % 10.0 % Consolidated Revenues $ 2,085,508 $ 1,843,892 $ 241,616 13.1 % Americas revenues increased 13.8% to $1,335.5 million in fiscal 2023, compared with $1,173.9 million in fiscal 2022. This increase was mainly due to higher sales in all our workflow solutions, primarily in CTS (driven by inorganic revenue from CGS). The 13.8% growth in revenues was reflective of a 7.7% increase in organic revenue and a 6.1% increase primarily due to the impact of acquisition-related revenues. 34 Ta ble of C onte nts EMEA revenues increased 11.5% to $539.8 million in fiscal 2023, compared with $484.3 million in fiscal 2022. This increase was mainly due to higher sales in all our workflow solutions, primarily in CTS (driven by inorganic revenues from CGS). The 11.5% growth in revenues was reflective of an 8.0% increase in organic revenue and a 3.9% increase primarily due to the impact of acquisition-related revenues, partially offset by a 0.4% decrease due to effects of foreign currency exchange rate fluctuations. Asia Pacific revenues increased 13.2% to $210.2 million in fiscal 2023, compared with $185.7 million in fiscal 2022. This increase was mainly due to higher sales in all our workflow solutions, primarily in CTS (driven by inorganic revenues from CGS), followed by Research & Advisory and Analytics & Trading. The 13.2% growth in revenues was reflective of an 11.8% increase in organic revenue and a 3.3% increase primarily due to the impact of acquisition-related revenues, partially offset by a 1.9% decrease due to effects of foreign currency exchange rate fluctuations. Revenues by Workflow Solution The growth in revenues of 13.1% for fiscal 2023, compared with fiscal 2022, was due to higher revenues from each of our segments supported by increased revenues from our workflow solutions, primarily from CTS and, to a lesser extent, Analytics & Trading and Research & Advisory. The increased CTS revenues were driven mainly by CGS related data licensing and issuance revenues. The increased revenues from Analytics & Trading were primarily due to higher demand for our performance & reporting products, portfolio analytics solutions and portfolio & benchmark services. The increased Research & Advisory revenues was driven mainly by higher demand for our workstations. Operating Expenses Principal Operating Expenses Cost of services is mainly comprised of employee compensation costs and also includes expenses related to data costs, computer-related expenses, amortization of identifiable intangible assets, royalty fees, client-related communication costs and computer depreciation. Selling, general and administrative (" SG&A") consists primarily of employee compensation costs and also includes expenses related to occupancy costs, professional fees, depreciation of furniture and fixtures, amortization of leasehold improvements, travel and entertainment expenses, marketing costs, other employee-related expenses, internal communication costs and bad debt expense. Employee compensation costs are a major component of both our Cost of services and SG&A. These expenses primarily include costs related to salaries, incentive compensation and sales commissions, stock-based compensation, benefits, employment taxes, and any applicable restructuring costs. We assign employee compensation costs between Cost of services and SG&A based on the roles and activities associated with each employee. We categorize employees within the content collection, consulting, product development, software and systems engineering groups as Cost of services personnel. Employees included in our sales department and those that serve in various other support departments, including marketing, finance, legal, human resources and administrative services, are classified as SG&A. Asset impairments consist primarily of expenses recognized when the carrying amount of an asset exceeds its fair value. The following table summarizes the components of our total operating expenses and operating margin: (dollar amounts in thousands) Years ended August 31, 2023 2022 $ Change % Change Cost of services $ 973,225 $ 871,106 $ 102,119 11.7 % SG&A 457,130 433,032 24,098 5.6 % Asset impairments 25,946 64,272 $ (38,326) (59.6) % Total operating expenses $ 1,456,301 $ 1,368,410 $ 87,891 6.4 % Operating income $ 629,207 $ 475,482 $ 153,725 32.3 % Operating margin 30.2 % 25.8 % 17.0 % 35 Ta ble of C onte nts Cost of S ervices Cost of services increased 11.7% to $973.2 million in fiscal 2023, compared with $871.1 million in fiscal 2022, primarily due to an increase in employee compensation costs, amortization of intangible assets, computer-related expenses and royalty fees related to our CGS acquisition. Cost of services, when expressed as a percentage of revenues, was 46.7% for fiscal 2023, a decrease of 60 basis points compared with fiscal 2022. This decrease was primarily due to lower employee compensation costs and data costs, partially offset by higher royalty fees, amortization of intangible assets and computer-related expenses. When expressed as a percentage of revenues: • Employee compensation costs decreased 180 basis points primarily due to growth of our revenues outpacing the increase in employee compensation costs. This decrease was also driven by higher capitalization of compensation costs related to the development of internal-use software, partially offset by higher annual base salaries and restructuring costs to drive organization realignment. The increase in annual base salaries was primarily driven by annual merit increases and a net headcount increase in Cost of services of 959 employees, primarily located in our COEs. • Data costs decreased 80 basis points mainly due to the release of certain accruals in the first quarter of fiscal 2023 related to the successful resolution of exchange audits that were recorded during the prior year and revenue growth outpacing the increased cost of content. • Royalty fees increased Cost of services 80 basis points due to contracts acquired in connection with the acquisition of CGS. Due to the timing of the CGS acquisition, fiscal 2023 included a full year of royalty fees, compared with a partial year during fiscal 2022. • Amortization of intangible assets increased 80 basis points, mainly due to acquired intangible assets, primarily from the CGS acquisition. Due to the timing of the CGS acquisition, fiscal 2023 included a full year of CGS intangible amortization, compared with a partial year during fiscal 2022. • Computer-related expenses increased 50 basis points, primarily due to higher spend related to licensed software arrangements and our cloud-based hosting services. Selling, General and Administrative SG&A expenses increased 5.6% to $457.1 million during fiscal 2023, compared with $433.0 million in fiscal 2022, primarily due to higher employee compensation costs and, to a lesser extent, an increase in travel and entertainment expenses, partially offset by a decrease in professional fees and occupancy costs. SG&A expenses, when expressed as a percentage of revenues, were 21.9% for fiscal 2023, a decrease of 160 basis points over fiscal 2022. This decrease was primarily due to lower professional fees and occupancy costs, partially offset by an increase in travel and entertainment expenses. When expressed as a percentage of revenues: • Professional fees decreased 100 basis points primarily due to CGS acquisition costs incurred during the prior year. • Occupancy costs decreased by 60 basis points mainly driven by impairment charges recognized during fiscal 2022 related to vacating leased office space, which reduces occupancy costs recorded over their respective remaining lease terms. • Travel and entertainment expenses increased by 30 basis points as we resumed essential business travel and incurred other employee-related expenses associated with return to office activities during the current year. Asset Impairments Asset impairments were $25.9 million and $64.3 million during fiscal 2023 and 2022, respectively. The asset impairments were mainly driven by an $18.0 million and $62.2 million charge during fiscal 2023 and 2022, respectively, related to our lease right-of-use ("ROU") assets and property, equipment and leasehold improvements ("PPE") associated with vacating certain leased office space to resize our real estate footprint for the hybrid work environment. As there were no expected future cash flows associated with lease ROU assets for locations we will not sublease nor PPE associated with the related vacated leased office space, we determined these assets had no remaining fair value and were fully impaired. For locations we intended to sublease, we recognized an impairment when the estimated fair value of the lease ROU asset was less than its carrying value. The remaining asset impairments for fiscal 2023 and 2022 were $7.9 million related to Developed technology and Trade names and $2.1 million related to Developed technology, respectively. 36 Ta ble of C onte nts Operating Income and Operating Margin Operating income increased 32.3% to $629.2 million in fiscal 2023, compared with $475.5 million in the prior year. This increase was primarily due to a 13.1% growth in revenues, and, to a lesser extent, a decrease in asset impairment charges and professional fees, partially offset by higher employee compensation costs, amortization of intangible assets, computer-related expenses and royalty fees. Foreign currency exchange rate fluctuations, net of hedge activity, increased operating income by $25.7 million during fiscal 2023, compared with a decrease of $3.1 million in fiscal 2022. Operating margin increased in fiscal 2023 to 30.2%, compared with 25.8% in the prior year. This increase was primarily due to growth in revenues and, when expressed as a percentage of revenues, a decrease in asset impairment charges, employee compensation costs, professional fees, data costs and occupancy costs, partially offset by higher royalty fees and amortization of intangible assets. Operating Income by Segment We operate our business through three segments: the Americas, EMEA and Asia Pacific. Refer to Note 18, 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 regarding our segments. The following table summarizes our operating income by segment: Years ended August 31, (dollar amounts in thousands) 2023 2022 $ Change % Change Americas $ 239,438 $ 159,140 $ 80,298 50.5 % EMEA 243,028 196,231 46,797 23.8 % Asia Pacific 146,741 120,111 26,630 22.2 % Total Operating Income $ 629,207 $ 475,482 $ 153,725 32.3 % Americas Americas operating income increased 50.5% to $239.4 million during fiscal 2023, compared with $159.1 million from the prior year. This increase was primarily due to a 13.8% growth in revenues and, to a lesser extent, a decrease in asset impairment charges and professional fees, partially offset by higher employee compensation costs, amortization of intangible assets, computer-related expenses and royalty fees. • Asset impairment charges decreased primarily due to lower lease ROU asset and PPE impairment charges associated with vacating certain leased office space during fiscal 2023, compared with fiscal 2022. • Professional fees decreased primarily due to costs incurred during the prior year related to the acquisition of CGS. • Employee compensation costs increased primarily due to an increase in annual base salaries and, to a lesser extent, higher stock-based compensation expense, payroll taxes and restructuring costs, partially offset by a decrease in variable compensation. The increase in annual base salaries was primarily driven by annual merit increases and a net headcount increase of 87 employees. • Amortization of intangible assets increased mainly due to acquired intangible assets, primarily from the CGS acquisition. Due to the timing of the CGS acquisition, fiscal 2023 included a full year of CGS intangible asset amortization, compared with a partial year during fiscal 2022. • Computer-related expenses increased primarily due to higher spend related to licensed software arrangements and our cloud-based hosting services. • Royalty fees increased due to contracts acquired in connection with the acquisition of CGS. Due to the timing of the CGS acquisition, fiscal 2023 included a full year of royalty fees, compared with a partial year during fiscal 2022. EMEA EMEA operating income increased 23.8% to $243.0 million during fiscal 2023, compared with $196.2 million from the prior year. This increase was primarily due to an 11.5% growth in revenues and, to a lesser extent, a decrease in data costs and amortization of intangible assets. These increases in operating income were partially offset by higher employee compensation costs and, to a lesser extent, asset impairment charges. • Data costs decreased due to the release of certain accruals during the first quarter of fiscal 2023 which related to the successful resolution of exchange audits that were recorded during the prior year. 37 Ta ble of C onte nts • Amortization of intangible assets decreased as certain acquired intangible assets were fully amortized during the third quarter of fiscal 2022. • Employee compensation costs increased primarily due to higher annual base salaries, restructuring costs and, to a lesser extent, higher variable compensation. The increase in annual base salaries was primarily driven by annual merit increases and a net headcount increase of 26 employees. • Asset impairment charges increased primarily due to higher lease ROU asset impairment charges associated with vacating certain leased office space during fiscal 2023, compared with fiscal 2022. Asia Pacific Asia Pacific operating income increased 22.2% to $146.8 million during fiscal 2023, compared with $120.1 million from the prior year. The increase was mainly due to a 13.2% growth in revenues, partially offset by an increase in employee compensation costs and, to a lesser extent, travel expenses. Employee compensation costs increased mainly due to an increase in annual base salaries driven by annual merit increases and a net headcount increase of 921 employees primarily in our COEs. Travel expenses increased due to other employee-related expenses associated with return to office activities in the current year. Income Taxes Years ended August 31, (dollar amounts in thousands) 2023 2022 $ Change % Change Income before income taxes $ 583,954 $ 443,594 $ 140,360 31.6 % Provision for income taxes $ 115,781 $ 46,677 $ 69,104 148.0 % Effective tax rate 19.8 % 10.5 % 88.4 % We are subject to taxation in the United States and various foreign jurisdictions in which we conduct our business. Our effective tax rate is based on recurring factors and non-recurring events, including the taxation of foreign income. Our effective tax rate will vary based on, among other things, changes in levels of foreign income, as well as other non-recurring events. Our effective tax rate is lower than the applicable U.S. corporate income tax rate for fiscal 2023 driven mainly by research and development ("R&D") tax credits, a tax benefit from the exercise of stock options and a foreign derived intangible income ("FDII") deduction, partially offset by a one-time out-of-period adjustment related to a review and analysis of certain tax positions, as well as our net state taxes. Our effective tax rate for fiscal 2023 was 19.8% compared to 10.5% in fiscal 2022. The increase was primarily driven by an out-of-period adjustment related to a review and analysis of certain tax positions, resulting in a one-time net charge of $22.1 million. The adjustment related to the accounting of tax balance sheet accounts. All local, federal and foreign taxes payable have been paid in a timely manner, subject to normal audits of open years. The increase was also driven by a lower impact from tax attributes on the effective tax rate as a result of an increase in income before income taxes, higher net state taxes, an increase in the UK's enacted tax rates and a reduction in the exercise of stock options. Net Income and Diluted EPS Years ended August 31, (dollar amounts in thousands, except per share data) 2023 2022 $ Change % Change Net income $ 468,173 $ 396,917 $ 71,256 18.0 % Diluted weighted average common shares 38,898 38,736 162 0.4 % Diluted EPS $ 12.04 $ 10.25 $ 1.79 17.5 % Net income increased 18.0% and Diluted EPS increased 17.5% for fiscal 2023, compared with fiscal 2022. The increase in net income and Diluted EPS was primarily due to higher operating income, partially offset by an increase in the provision for income taxes and an increase in interest expense as a result of higher outstanding debt compared to the prior year. 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 revenues, adjusted operating income, adjusted operating margin, adjusted net income, EBITDA, adjusted EBITDA and adjusted Diluted EPS. The reconciliations from our 38 Ta ble of C onte nts financial measures calculated and presented in accordance with GAAP to these non-GAAP financial measures are shown 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 all the items associated with the operations of our business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than 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. Adjusted revenues exclude the impact of the fair value of deferred revenues acquired in a business combination. Organic revenues further excludes both acquisition-related revenues recognized in the current year in which the comparable prior year period predated the acquisition(s) and foreign currency movements in all years presented. The table below provides an unaudited reconciliation of revenues to adjusted revenues and organic revenues: Years ended August 31, (dollar amounts in thousands) 2023 2022 $ Change % Change Revenues $ 2,085,508 $ 1,843,892 $ 241,616 13.1 % Deferred revenues fair value adjustment (1) — 25 (25) Adjusted revenues 2,085,508 1,843,917 241,591 13.1 % Acquired revenues (2) (95,953) — (95,953) Currency impact (3) 5,398 — 5,398 Organic revenues $ 1,994,953 $ 1,843,917 $ 151,036 8.2 % (1) Reflects the amortization effect of any purchase accounting adjustments related to the fair value of acquired deferred revenues for acquisitions prior to fiscal 2022. Acquisitions thereafter do not include this adjustment in accordance with ASU No. 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805) . (2) Removes acquisition-related revenues recognized during fiscal 2023 in which the comparable prior year period predated the acquisition(s). (3) The impact from foreign currency movements during the fiscal year. 39 Ta ble of C onte nts 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, EBITDA, adjusted EBITDA and adjusted Diluted EPS. Adjusted operating income and margin, adjusted net income, and adjusted Diluted EPS exclude the impact of the fair value of deferred revenues acquired in a business combination, intangible asset amortization and non-recurring items. EBITDA excludes interest expense, provision for income taxes and depreciation and amortization, while Adjusted EBITDA further excludes non-recurring non-cash expenses. Years ended August 31, (dollar amounts in thousands, except per share data) 2023 2022 % Change Operating income $ 629,207 $ 475,482 32.3 % Deferred revenues fair value adjustment — 25 Intangible asset amortization 71,503 49,122 Asset impairments (1) 20,327 62,205 Restructuring / severance 19,879 9,975 Business acquisition / integration costs (2) 7,033 20,608 Contingent liability 6,239 3,610 Transformation costs (3) — 3,368 Adjusted operating income $ 754,188 $ 624,395 20.8 % Operating margin 30.2 % 25.8 % Adjusted operating margin (4) 36.2 % 33.9 % Net income $ 468,173 $ 396,917 18.0 % Deferred revenues fair value adjustment — 22 Intangible asset amortization 59,422 43,266 Asset impairments (1) 16,893 54,789 Restructuring / severance 16,520 8,786 Business acquisition / integration costs (2) 5,845 18,151 Contingent liability 5,185 3,180 Transformation costs (3) — 2,967 Income tax items (2,316) (7,799) Adjusted net income (5) $ 569,722 $ 520,279 9.5 % Net income $ 468,173 $ 396,917 Interest expense 66,319 35,697 Income taxes 115,781 46,677 Depreciation and amortization expense 105,384 86,683 EBITDA $ 755,657 $ 565,974 33.5 % Non-recurring non-cash expenses 20,963 62,205 Adjusted EBITDA $ 776,620 $ 628,179 23.6 % Diluted EPS $ 12.04 $ 10.25 17.5 % Deferred revenues fair value adjustment — 0.00 Intangible asset amortization 1.53 1.11 Asset impairments (1) 0.43 1.41 Restructuring / severance 0.43 0.23 Business acquisition / integration costs (2) 0.15 0.47 Contingent liability 0.13 0.08 Transformation costs (3) — 0.08 Income tax items (0.06) (0.20) Adjusted Diluted EPS (5) $ 14.65 $ 13.43 9.1 % Weighted average common shares (Diluted) 38,898 38,736 40 Ta ble of C onte nts (1) We reclassified Real estate charges to Asset impairments in the Non-GAAP Financial Measures to conform to current year's presentation. Asset impairments primarily related to impairment charges of lease ROU assets and PPE associated with vacating certain leased office space. (2) Related to acquisition and integration costs of the CGS acquisition. (3) Primarily related to professional fees associated with our multi-year investment plan. (4) Adjusted operating margin is calculated as Adjusted operating income divided by Adjusted revenues as shown in the revenues reconciliation table above. (5) For purposes of calculating Adjusted net income and Adjusted Diluted EPS, all adjustments for fiscal 2023 and 2022 were taxed at an adjusted tax rate of 16.9% and 11.9%, respectively. Liquidity and Capital Resources Our cash flows provided by operating activities, existing cash and cash equivalents, supplemented with our long-term debt borrowings, have been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations. Generally, some or all of our remaining available cash flows have been used to, among other things, service our existing and future debt obligations, satisfy our working capital requirements and fund various activities, including our capital expenditures, acquisitions, investments, dividend payments and repurchases of our common stock. Based on past performance and current expectations, we believe our sources of liquidity, including the available capacity under our existing revolving credit facility and 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. We are exposed to credit risk for cash and cash equivalents held in financial institutions in the event of a default, to the extent that such amounts are in excess of applicable insurance limits; however, we do not believe our concentration of cash and cash equivalents presents a significant credit risk as the counterparties to the instruments consist of multiple high-quality, credit-worthy financial institutions. Sources of Liquidity Long-Term Debt & Swap Agreements 2022 Credit Agreement On March 1, 2022, we entered into a credit agreement (the "2022 Credit Agreement") and borrowed an aggregate principal amount of $1.0 billion under its senior unsecured term loan credit facility (the "2022 Term Facility") and $250.0 million of the available $500.0 million under its senior unsecured revolving credit facility (the "2022 Revolving Facility" and, together with the 2022 Term Facility, the “2022 Credit Facilities”). The 2022 Term Facility matures on March 1, 2025, and the 2022 Revolving Facility matures on March 1, 2027. The 2022 Revolving Facility allows for the availability of up to $100.0 million in the form of letters of credit and up to $50.0 million in the form of swingline loans. We may seek additional commitments under the 2022 Revolving Facility from lenders or other financial institutions up to an aggregate principal amount of $750.0 million. We pay a commitment fee on the daily unused amount of the 2022 Revolving Facility using a pricing grid based on our senior unsecured non-credit enhanced long-term debt rating and our total leverage ratio. The commitment fee remained consistent at 0.125% from the borrowing date through August 31, 2023. During fiscal 2022, we incurred approximately $9.5 million in debt issuance costs related to the 2022 Credit Facilities. We used these borrowings, along with the net proceeds from the issuance of the Senior Notes (as defined below) and cash on hand, to finance the consideration for the CGS acquisition, to repay borrowings under the 2019 Credit Agreement (as defined below) and to pay related transaction fees, costs and expenses. We may voluntarily prepay loans under the 2022 Credit Facilities at any time without premium or penalty. During fiscal 2023, we repaid $375.0 million under the 2022 Term Facility, inclusive of voluntary prepayments of $325.0 million. Since loan inception on March 1, 2022, we have repaid $625.0 million under the 2022 Term Facility, inclusive of voluntary prepayments of $562.5 million. As of August 31, 2023, the outstanding borrowings under the 2022 Credit Facilities bore interest at a rate equal to the applicable one-month Term Secured Overnight Financing Rate ("SOFR") rate plus a 1.1% spread (comprised of a 1.0% interest rate margin based on a debt leverage pricing grid plus a 0.1% credit spread adjustment). The spread remained consistent from the borrowing date through August 31, 2023. Interest on the 2022 Credit Facilities is currently payable on the last business day of each month, in arrears. The 2022 Credit Agreement contains usual and customary event of default provisions for facilities of this type, which are subject to usual and customary grace periods and materiality thresholds. If an event of default occurs under the 2022 Credit Agreement, the lenders may, among other things, terminate their commitments and declare all outstanding borrowings immediately due and payable. 41 Ta ble of C onte nts The 2022 Credit Agreement contains usual and customary affirmative and negative covenants for facilities of this type, including a financial covenant requiring maintenance of a total leverage ratio of no greater than 3.75 to 1.00 as of August 31, 2023. We were in compliance with all covenants and requirements of the 2022 Credit Agreement as of August 31, 2023. Refer to Note 12, Debt 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 of the 2022 Credit Agreement. 2022 Swap Agreement On March 1, 2022, we entered into an interest rate swap agreement (the "2022 Swap Agreement") to hedge a portion of our outstanding floating SOFR rate debt with a fixed interest rate of 1.162%. Effective December 30, 2022, we apportioned the then-outstanding notional amount of the 2022 Swap Agreement between two counterparties. Refer to Note 5, Derivative Instruments in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K, for defined terms and more information on the 2022 Swap Agreement. Senior Notes On March 1, 2022 we completed a public offering of $500.0 million aggregate principal amount of 2.900% Senior Notes due March 1, 2027 (the “2027 Notes”) and $500.0 million aggregate principal amount of 3.450% Senior Notes due March 1, 2032 (the “2032 Notes” and, together with the 2027 Notes, the “Senior Notes”). The Senior Notes were issued pursuant to an indenture, dated as of March 1, 2022, by and between us and U.S. Bank Trust Company, National Association, as trustee (the "Trustee"), as supplemented by the supplemental indenture, dated as of March 1, 2022, between us and the Trustee (the "Supplemental Indenture"). Interest on the Senior Notes is payable semiannually in arrears on March 1 and September 1 of each year, with the first payment made on September 1, 2022. The Senior Notes were issued at an aggregate discount of $2.8 million and we incurred approximately $9.1 million in debt issuance costs. We may redeem the Senior Notes, in whole or in part, at any time at specified redemption prices, plus any accrued and unpaid interest. Upon the occurrence of a change of control triggering event (as defined in the Supplemental Indenture), we must offer to repurchase the Senior Notes at 101% of their principal amount, plus any accrued and unpaid interest. 2019 Credit Agreement On March 29, 2019, we entered into a credit agreement with PNC Bank, National Association (the "2019 Credit Agreement") and borrowed $575.0 million of the available $750.0 million provided by the revolving credit facility thereunder (the "2019 Revolving Credit Facility"). Borrowings under the 2019 Revolving Credit Facility bore interest on the outstanding principal amount at a rate equal to the daily London Interbank Offer Rate ("LIBOR") plus a spread using a debt leverage pricing grid. Interest on the amounts outstanding under the 2019 Revolving Credit Facility was payable quarterly, in arrears, and on the maturity date. As of March 1, 2022, we repaid in full and terminated the 2019 Credit Agreement. Refer to Note 12, Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for more information on the termination. Uses of Liquidity Returning Value to Stockholders During fiscal 2023 and 2022, respectively, we returned $315.3 million and $144.6 million to our stockholders in the form of share repurchases and dividends. Dividends During fiscal 2023 and 2022, we paid dividends of $138.6 million and $125.9 million, respectively. During fiscal 2023, our dividends increased 10%, which marked the 24th consecutive year we have increased dividends, highlighting our continued 42 Ta ble of C onte nts commitment to returning value to our stockholders. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us and are subject to final determination by our Board of Directors. Share Repurchase Program We may repurchase shares of our common stock under our share repurchase program from time-to-time in the open market and via privately negotiated transactions, subject to market conditions. We suspended our share repurchase program beginning in the second quarter of fiscal 2022, with the exception of potential minor repurchases to offset dilution from grants of equity awards or repurchases to satisfy withholding tax obligations due upon the vesting of stock-based awards. We suspended our share repurchase program to prioritize the repayment of debt under the 2022 Credit Facilities. We resumed our share repurchase program in the third quarter of fiscal 2023. For fiscal 2023 and 2022, we repurchased 430,350 shares for $176.7 million and 46,200 shares for $18.6 million, respectively. There is no defined number of shares to be repurchased over a specified timeframe through the life of our share repurchase program. As of August 31, 2023, we had $4.5 million authorized under our share repurchase program for future share repurchases, which was not available for use after August 31, 2023. On June 20, 2023, our Board of Directors authorized up to $300 million for share repurchases on or after September 1, 2023. Capital Expenditures For the year ended August 31, 2023, capital expenditures increased by 18.8% to $60.8 million, compared with $51.2 million in fiscal 2022. This increase was primarily due to higher expenditures related to the development of capitalized internal-use software and investments in network-related equipment mainly at our data centers. Acquisitions We completed acquisitions of several businesses during fiscal 2021 through fiscal 2023, with the most significant cash flows related to the acquisitions of CGS, Cobalt Software, Inc. ("Cobalt") and Truvalue Labs, Inc. ("TVL"). CUSIP Global Services On March 1, 2022, we completed the acquisition of CGS for a cash purchase price of $1.932 billion, inclusive of working capital adjustments. CGS manages a database of 60 different data elements uniquely identifying more than 50 million global financial instruments. It is the foundation for security master files relied on by critical front, middle and back-office functions. CGS, operating on behalf of the ABA, is the exclusive issuer of CUSIP and CINS identifiers globally and also acts as the official numbering agency for ISIN identifiers in the United States and as a substitute number agency for more than 30 other countries. We acquired CGS to expand our critical role in the global capital markets. Cobalt Software, Inc. On October 12, 2021, we acquired all of the outstanding shares of Cobalt for a purchase price of $50.0 million, net of cash acquired and inclusive of working capital adjustments. Cobalt is a leading portfolio monitoring platform for the private capital industry. We acquired Cobalt to scale our data and workflow solutions through targeted investments as part of our multi-year investment plan and to expand our private markets offering. Truvalue Labs, Inc. On November 2, 2020, we acquired all of the outstanding shares of TVL for a purchase price of $41.9 million, net of cash acquired. TVL is a leading provider of sustainability 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 sustainability behavior. We acquired TVL to further enhance our commitment to providing industry leading access to sustainability data across our platforms. Refer to Note 6, Acquisitions , 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 of the CGS, Cobalt and TVL acquisitions. Contractual Obligations Purchase obligations represent our legally-binding agreements to purchase fixed or minimum quantities at determinable prices. As of August 31, 2023 and 2022, we had total purchase obligations with suppliers of $362.2 million and $373.9 million, respectively. Our total purchase obligations as of August 31, 2023 and 2022 primarily related to hosting services, acquisition of 43 Ta ble of C onte nts data and, to a lesser extent, third-party software providers. Hosting services support our hybrid cloud strategy, the majority of which rely on third-party hosting providers. Data is an integral component of the value we provide to our clients, and our commitments to third-party software providers mainly include internal-use software licenses. We also have contractual obligations related to our lease liabilities and outstanding debt. Refer to Note 11, Leases and Note 12, Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for information regarding lease commitments and outstanding debt obligations, respectively. Summary of Cash Flows As of August 31, 2023, Cash and cash equivalents were $425.4 million, compared with $503.3 million as of August 31, 2022. Our cash and cash equivalents are held in numerous locations throughout the world, with $165.4 million in the Americas, $148.4 million in EMEA (predominantly in the UK) and the remaining $111.6 million in Asia Pacific (predominantly in India and the Philippines) as of August 31, 2023. As of August 31, 2023 , we had approximately $204.0 million of undistributed foreign earnings. We permanently reinvest all foreign undistributed earnings, except in jurisdictions where earnings can be repatriated substantially free of tax. It is not practicable to determine the deferred tax liability that would be payable if these earnings were repatriated to the U.S. The table below provides selected cash flow information: Years ended August 31, (dollar amounts in thousands) 2023 2022 $ Change % Change Net cash provided by operating activities $ 645,573 $ 538,277 $ 107,296 19.9 % Net cash provided by (used in) investing activities (95,393) (2,033,675) 1,938,282 (95.3) % Net cash provided by (used in) financing activities (632,024) 1,339,234 (1,971,258) (147.2) % Effect of exchange rate changes on cash and cash equivalents 4,015 (22,428) 26,443 (117.9) % Net increase (decrease) in cash and cash equivalents $ (77,829) $ (178,592) $ 100,763 (56.4) % Operating For fiscal 2023, net cash provided by operating activities was $645.6 million, which included net income of $468.2 million, non-cash charges of $194.6 million and a net cash outflow of $17.2 million to support working capital requirements. The non-cash charges were primarily driven by $105.4 million of depreciation and amortization, $62.0 million of stock-based compensation expense and $32.3 million from amortization of lease ROU assets, partially offset by $31.1 million in deferred income taxes. The net cash outflow in working capital was primarily due to an increase in accounts receivable driven by sales and the timing of client payments and cash outflows for lease payments, partially offset by an increase in net taxes payable due to an out-of-period adjustment related to an ongoing review and analysis of certain tax positions and timing of tax payments in certain jurisdictions. For fiscal 2022, net cash provided by operating activities was $538.3 million, which included net income of $396.9 million, non-cash charges of $241.3 million and net cash outflow of $99.9 million to support working capital requirements. The non-cash charges were primarily driven by $86.7 million of depreciation and amortization, $64.3 million in asset impairment charges, $56.0 million of stock-based compensation expense and $43.0 million from amortization of lease ROU assets. The net cash outflow in working capital was primarily driven by cash outflows for lease payments and an increase in accounts receivable driven by sales and the timing of client payments. Investing For fiscal 2023, net cash used in investing activities was $95.4 million, mainly driven by capital expenditures of $60.8 million, primarily due to capitalization of compensation costs related to development of capitalized internal-use software and, to a lesser extent, investments in network-related equipment mainly at our data centers and laptops. Cash used in investing activities was also driven by the acquisition of a business for $23.6 million. For fiscal 2022, net cash used in investing activities was $2,033.7 million, mainly driven by the cash purchase of CGS for $1.932 billion, inclusive of working capital adjustments, and the cash purchase of Cobalt for $50.0 million, net of cash acquired and inclusive of working capital adjustments. 44 Ta ble of C onte nts Financing For fiscal 2023, net cash used in financing activities was $632.0 million, consisting mainly of $375.0 million related to the partial repayment of the 2022 Term Facility, $176.7 million of share repurchases and $138.6 million of dividend payments, partially offset by $72.0 million in proceeds from employee stock plans. For fiscal 2022, net cash provided by financing activities was $1,339.2 million, consisting mainly of $2,238.4 million proceeds received from the 2022 Credit Facilities and Senior Notes and $86.0 million of proceeds from employee stock plans, partially offset by $825.0 million related to the full repayment and termination of the 2019 Credit Agreement and, to a lesser extent, the partial repayment of the 2022 Term Loan Facility, $125.9 million of dividend payments and $18.6 million of share repurchases. Free Cash Flow We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities, less purchases of PPE and capitalized internal use software. We believe free cash flow is a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after capital expenditures, can be used for strategic opportunities, including returning value to stockholders, investing in our business, making strategic acquisitions, and strengthening the balance sheet. Free cash flow should be considered in addition to, rather than as a substitute for, consolidated net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity. The following table reconciles our net cash provided by operating activities to free cash flow: Years ended August 31, (dollar amounts in thousands) 2023 2022 Change Net cash provided by operating activities $ 645,573 $ 538,277 $ 107,296 Less: purchases of property, equipment, leasehold improvements and capitalized internal-use software (60,786) (51,156) (9,630) Free cash flow $ 584,787 $ 487,121 $ 97,666 During fiscal 2023, we generated free cash flow of $584.8 million, an increase of $97.7 million compared with fiscal 2022. This change reflects a $107.3 million increase in cash provided by operating activities, mainly due to lower working capital requirements and higher net income, partially offset by an increase in purchases of PPE and capitalized internal-use software, primarily driven by higher capitalized costs related to internal-use software and investments in network-related equipment at our data centers. Off-Balance Sheet Arrangements As of August 31, 2023 and August 31, 2022, we had no off-balance sheet financing other than letters of credit incurred in the ordinary course of business. Refer to Note 12, Debt and Note 13, Commitments and Contingencies in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for more information on our letters of credit. As of August 31, 2023 and August 31, 2022, we also had no 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 Exposure As we operate globally, we are exposed to the risk that our financial condition, results of operations and cash flows could be impacted by changes in foreign currency exchange rates. As of August 31, 2023, we maintained a series of foreign currency forward contracts to hedge a portion of our primary currency exposures of the Indian Rupee, Euro, British Pound Sterling and Philippine Peso. To mitigate our currency exposure, we entered into these contracts to hedge between 25% to 75% of our 45 Ta ble of C onte nts projected primary currency operating expenses over their respective hedge periods which range from the first quarter of fiscal 2024 through the fourth quarter of fiscal 2024. The following table summarizes the gross notional value of our foreign currency forward contracts to purchase the respective local currency with U.S. dollars: August 31, 2023 August 31, 2022 (in thousands) Local Currency Amount Notional Contract Amount (USD) Local Currency Amount Notional Contract Amount (USD) British Pound Sterling £ 45,000 $ 56,098 £ 44,200 $ 55,567 Euro € 39,000 42,646 € 37,500 40,679 Indian Rupee Rs 3,363,150 40,300 Rs 2,667,928 33,600 Philippine Peso ₱ 1,888,541 33,600 ₱ 1,462,060 27,000 Total $ 172,644 $ 156,846 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 2, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K. We disclose the development and selection of our 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 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 rate differs 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, the tax benefit from stock option exercises and the foreign derived intangible income ("FDII") tax deduction. Our provision for income taxes is subject to volatility and could be adversely impacted by numerous factors such as changes in earnings or tax laws, regulations, or accounting principles, including accounting for uncertain tax positions or interpretations of them. Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. 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. Our failure to meet these employment and capital investment actions and 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. Significant judgement is required in determining our uncertain tax positions. We follow a two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not (defined as a likelihood of more than 50%) that a tax position will be sustained based on its technical merits as of the reporting date. The second step, for those positions that meet the recognition criteria, is to measure and recognize the largest amount of benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority. As the determination of liabilities related to uncertain tax positions and associated interest and penalties requires significant estimates and assumptions, there can be no assurance that we will accurately predict 46 Ta ble of C onte nts the outcomes of these audits. 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 accrue interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The Provision for income taxes on our Consolidated Statements of Income includes the impact of changes to reserves and any related interest. 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. Refer to Note 10, Income Taxes in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for further information. Stock-based Compensation We measure compensation expense for all stock-based awards using a lattice-binomial option-pricing model ("binomial model") or the Black-Scholes model to estimate the grant-date fair value. Both models involve certain estimates and subjective assumptions regarding our stock price volatility, the expected life of the award, the term selected for the risk-free rate and the expected dividend yield. The binomial model also incorporates market conditions, vesting restrictions and exercise patterns. Our performance share units ("PSUs") require management to make assumptions regarding the probability of achieving specified performance levels established at the time of grant, which are reviewed on a quarterly basis. The ultimate number of common shares that may be earned from a PSU is determined pursuant to a payout range based on the achievement of specified performance levels. We estimate expected forfeitures of equity awards at the date of grant and recognize compensation expense only for those awards expected to vest. The forfeiture assumption is revised if actual forfeitures differ from those estimates. The assumptions we use to calculate and account for stock-based compensation awards represent management's best estimates, which involve inherent uncertainties. As a result, if we revise our assumptions and estimates, our stock-based compensation expense could differ from amounts recorded. Refer to Note 16, Stock-Based Compensation in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for further information. Goodwill and Intangible Assets Goodwill 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 test 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 (a likelihood of more than 50%) that the fair value of the reporting unit is less 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 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 carrying amount of a reporting unit with its fair value. To perform this analysis, we apply the income approach which utilizes discounted cash flows, along with other relevant market information. Significant judgment is involved in determining the assumptions used in estimating future cash flows. These assumptions include, but are not limited to, the following estimates: expected sales, working capital needs to support each reporting unit, capital expenditures and related depreciation and amortization, operating expenses, expected tax rates and the weighted average cost of capital for each reporting unit. Our cost of capital is based on assumptions about interest rates, as well as a risk-adjusted rate of return required by our equity investors. Changes in these estimates can impact the present value of expected cash flows used in determining fair value of a reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the goodwill is considered impaired and written down to the reporting unit’s fair value. The impairment loss for the reporting unit cannot exceed the carrying amount of the goodwill allocated to that reporting unit. 47 Ta ble of C onte nts Intangible Assets We amortize our identifiable intangible assets over their estimated useful lives, which are evaluated annually to determine whether events and circumstances warrant a revision to the remaining period of amortization. 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. Determining the useful life of intangible assets requires judgement and an understanding of our planned use of the asset, among other factors. Intangible assets are tested for impairment qualitatively on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset group is not recoverable. If indicators of impairment are present, amortizable intangible assets are tested for impairment by comparing the carrying value to undiscounted cash flows and, if impaired, written down to fair value based on discounted cash flows. Significant judgment is involved in determining the assumptions used in estimating future cash flows. Refer to Note 8, Goodwill and Note 9, Intangible Assets in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for further details. 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. Long-lived Assets We review our PPE to determine if any indicators of impairment are present on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If indicators of impairment are present, the asset group is tested for impairment by comparing the carrying value to undiscounted cash flows and, if impaired, written down to fair value based on discounted cash flows. 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. Indicators we consider include, but are not limited to, a significant decline in our expected future cash flows, a change in an expected useful life, unanticipated competition, slower growth rates, ongoing maintenance and improvements of the assets, or changes in the usage or operating performance. Inputs to an impairment calculation include 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. Refer to Note 7, Property, Equipment and Leasehold Improvements in the Notes to the Consolidated Financial Statements included in Part II, 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. Assessing the probability of loss for such contingencies and determining how to accrue the appropriate liabilities requires judgment. If actual results differ from our assessments, our financial position, results of operations, or cash flows would be affected. Refer to Note 13, Commitments and Contingencies in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K, for more information on contingent matters. New Accounting Pronouncements Refer to Note 2, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K for a full description of recent accounting pronouncements, including the expected dates of adoption. 48 Ta ble of C onte nts