What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-11-12 compared with 2019-11-08 · 302 added, 273 removed, 941 unchanged (38% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

To the stockholders and the Board of Directors of

Fair Isaac Corporation

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We also have audited the Company’s internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of operations and cash flows for each of the three years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America .

Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in fiscal year 2019 due to the adoption of the new revenue standard.

The Company adopted the new revenue standard using the full retrospective approach.

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in fiscal year 2020 due to adoption of the new lease standard (Topic 842).

The Company adopted the new lease standard using the modified retrospective approach.

Basis for Opinions

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain

to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations;

internal control over financial reporting may not prevent or detect misstatements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenues - Refer to Notes 1, 15 and 16 to the financial statements

Revenues -Refer to Note 1 to the financial statement

Critical Audit Matter Description

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software-as-a service (SaaS) subscription services;

scoring and credit monitoring services for consumers;

scoring and credit monitoring services for customers;

and professional services.

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer.

For contracts with customers that contain various combinations of products and services, the Company evaluates whether the products or services are distinct.

Distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation.

The Company's contracts with customers often includes promises to transfer multiple products and services to a customer.

For contracts with customers that contain various combinations of products and services, the Company evaluates weather the product or service are distinct.

Distinct product or services will be accounted for as separate performance obligations, while non distinct products or services are combined with others to form a single performance obligation.

For transactional revenue, the transaction price for contracts with customers typically includes a fixed consideration in the form of a guaranteed minimum that allows up to a certain level of usage and a variable consideration in the form of usage or transaction-based fees in excess of the minimum threshold;

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-Obtained other contracts with the same customer that were entered into at or near the same time and evaluated management’s conclusion of whether two or more contracts for multiple products and services promised to a customer should be combined and accounted for as a single contract for revenue recognition.

Confirmed the terms of the contract directly with the customer, including whether there are side agreements and terms not formally included in the contract that may impact the identification of performance obligations and revenue recognition.

-Confirmed the terms of the contract directly with the customer, including whether there are side agreements and terms not formally included in the contract that may impact the identification of performance obligations and revenue recognition and performed alternative procedures in the event of nonreplies.

-Evaluated internal certification letters provided by the Company’s sales personnel to identify the existence of side agreements that may impact the identification of performance obligations and revenue recognition.

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Property and equipment, net

Operating lease right-of-use assets

Intangible assets, net

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Long-term debt

Operating lease liabilities

Other liabilities

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Amortization of intangible assets

Restructuring and acquisition-related

Restructuring and impairment charges

Total operating expenses

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Interest expense, net

Other income (expense), net

Other income, net

Income before income taxes

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(In thousands)

Balance at September 30, 2016 (As Adjusted)

Balance at September 30, 2017

Share-based compensation

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Repurchases of common stock

Dividends paid

Foreign currency translation adjustments

Balance at September 30, 2017 (As Adjusted)

Balance at September 30, 2018

Share-based compensation

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Foreign currency translation adjustments

Balance at September 30, 2018 (As Adjusted)

Balance at September 30, 2019

Share-based compensation

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Deferred income taxes

Non-cash operating lease costs

Impairment loss on operating lease assets

Provision of doubtful accounts

Net gain (loss) on marketable securities

Gain on sale of cost-method investment

Net loss on sales of property and equipment

Gain on sale of equity investments

Net loss on sales and abandonment of property and equipment

Changes in operating assets and liabilities:

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Purchases of marketable securities

Proceeds from sale of cost-method investment

Purchase of cost-method investment

Proceeds from sale of equity investments

Distribution from equity investments

Cash paid for acquisitions, net of cash acquired

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Payments on debt issuance costs

Payments on capital leases

Payments on finance leases

Proceeds from issuance of treasury stock under employee stock plans

Taxes paid related to net share settlement of equity awards

Dividends paid

Repurchases of common stock

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Supplemental disclosures of non-cash investing and financing activities:

Capital lease obligation incurred

Unsettled repurchases of common stock

Finance lease obligation incurred

Purchase of property and equipment included in accounts payable

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Effective October 1, 2019, we adopted ASU No.

2014-09, “ Revenue from Contracts with Customers (Topic 606) ” (“ASU 2014-09”) using the full retrospective method.

In connection with this adoption, the results and related disclosures for the comparative fiscal 2018 and 2017 presented in this Form 10-K were adjusted to be presented as if ASU 2014‑09 had been in effect during such fiscal years.

See “New Accounting Pronouncements” and “Revenue Recognition” below.

All amounts and disclosures set forth in this Form 10-K reflect these changes.

2016-02, “ Leases (Topic 842) ” and subsequent amendments to the initial guidance:

ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, “Topic 842”) using the modified retrospective approach, under which financial results reported in prior periods were not restated.

As a result, the consolidated balance sheet as of September 30, 2020 is not comparable with that as of September 30, 2019.

See our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 filed with the SEC on November 8, 2019 for lease policies that were in effect in prior periods before adoption of Topic 842.

The consolidated financial statements include the accounts of FICO and its subsidiaries.

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the appropriate levels of various accruals;

variable considerations included in the transaction price for our customer contracts;

labor hours in connection with fixed-fee service contracts;

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Actual results may differ from our estimates.

As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment.

These estimates and assumptions may change in future periods and will be recognized in the consolidated financial statements as new events occur and additional information becomes known.

To the extent our actual results differ materially from those estimates and assumptions, our future financial statements could be affected.

For more information, see Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

Cash and Cash Equivalents

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The fair value of our senior notes is disclosed in Note 9.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

We categorize our investments in debt and equity instruments as trading, available-for-sale or held-to-maturity at the time of purchase.

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Investments with remaining maturities over one year are classified as long-term investments.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

We have certain other investments for which there is no readily determinable fair value.

These investments are recorded at cost, less impairment (if any) plus or minus adjustments for observable price changes.

The carrying value of these investments was $ 1.6 million and $ 1.7 million at September 30, 2019 and 2018, respectively, and they are reported in other assets on our balance sheets.

At September 30, 2019, we reviewed the carrying value of these investments and concluded that they were not impaired and as of that date, we are unable to exercise significant influence over the investees.

The carrying value of these investments was $ 1.1 million and $ 1.6 million at September 30, 2020 and 2019, respectively, and they are reported in other assets on our consolidated balance sheets.

At September 30, 2020 , we reviewed the carrying value of these investments and concluded that they were not impaired and as of that date, we were unable to exercise significant influence over the investees.

Concentration of Risk

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Depreciation and amortization on property and equipment totaled $ 23.5 million , $ 24.2 million and $ 22.6 million during fiscal 2020, 2019 and 2018 , respectively.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Internal-Use Software

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Costs we incur to maintain and support our existing products after the general release of the product are expensed in the period they are incurred and included in research and development costs in our consolidated statements of income and comprehensive income.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Goodwill, Acquisition Intangibles and Other Long-Lived Assets

Goodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations.

We assess goodwill for impairment for each of our reporting units on an annual basis during the fourth quarter using a July 1 measurement date unless circumstances require a more frequent measurement.

We assess goodwill for impairment for each of our reporting units on an annual basis during our fourth fiscal quarter using a July 1 measurement date unless circumstances require a more frequent measurement.

We have determined that our reporting units are the same as our reportable segments.

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Alternatively, we may bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing step one of the goodwill impairment test.

For each of fiscal 2019 and 2018, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment.

After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not that the fair value of any of our reporting units was less their carrying amounts, and did not perform a step one quantitative analysis.

For fiscal 2017, we elected to proceed directly to the step one quantitative analysis for all of our reporting units, and determined goodwill was not impaired for any of our reporting units as there was a substantial excess of fair value over carrying value for each of our reporting units.

Consequently, we did not recognize any goodwill impairment charges in fiscal 2019, 2018 or 2017.

For fiscal 2017, we elected to proceed directly to the step one quantitative analysis for all of our reporting units.

There was a substantial excess of fair value over carrying value for each of our reporting units and we determined goodwill was not impaired for any of our reporting units for fiscal 2017.

For fiscal 2018, 2019 and 2020, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment.

Consequently, we did not perform a step one quantitative analysis and determined goodwill was not impaired for any of our reporting units for fiscal 2018, 2019 and 2020.

We amortize our finite-lived intangible assets which result from our acquisitions over the following estimated useful lives:

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Non-compete agreements

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Our intangible assets that have finite useful lives and other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable.

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Our revenue is primarily derived from term-based or perpetual licensing of software and scoring products and solutions, and associated maintenance;

SaaS subscription services;

software-as-a-service (“SaaS”) subscription services;

scoring and credit monitoring services for consumers;

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Revenue is recognized when control of the promised goods or services is transferred to our customers.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

License revenue is derived from contracts in which we grant our direct customers or distributors the right to deploy or resell our software and scoring products and solutions on-premises.

Our software offerings often include a perpetual or term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately.

The transaction price is either in the form of a fixed consideration with separate stated prices for license and maintenance, or a sales or usage-based royalty — sometimes subject to a guaranteed minimum — for the license and maintenance bundle.

When the amount is in the form of a fixed consideration, including the guaranteed minimum in sales or usage-based royalty, license revenue from distinct on-premises license is recognized at the point in time when the software or scoring solution is made available to the customer or distributor.

The transaction price is either in the form of a fixed consideration with separately stated prices for license and maintenance, a single subscription with license and maintenance bundled, or a usage-based royalty — sometimes subject to a guaranteed minimum — for the license and maintenance bundle.

When the amount is in the form of a fixed consideration, including the guaranteed minimum in usage-based royalty, license revenue from distinct on-premises license is recognized at the point in time when the software or scoring solution is made available to the customer or distributor.

Any royalties not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as transactional revenue when the subsequent sales or usage occurs.

Revenue allocated to maintenance is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits.

In addition to sales or usage-based royalty on our software and scoring products, transactional revenue is also derived from SaaS contracts in which we provide customers with access to and standard support for our software application either in the FICO ® Analytic Cloud or AWS, our primary cloud infrastructure provider, on a subscription basis.

In addition to usage-based royalty on our software and scoring products, transactional revenue is also derived from SaaS contracts in which we provide customers with access to and standard support for our software application either in the FICO ® Analytic Cloud or Amazon Web Services (“AWS”), our primary cloud infrastructure provider, on a subscription basis.

The transaction price typically includes a fixed consideration in the form of a guaranteed minimum that allows up to a certain level of usage and a variable consideration in the form of usage or transaction-based fees in excess of the minimum threshold;

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Revenue from annual subscription services is recognized ratably over the subscription period.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Professional services include software or SaaS implementation, consulting, model development, training services and premium cloud support.

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Significant judgment may be required to determine the SSP for each distinct performance obligation when it involves the consideration of many market conditions and entity-specific factors discussed above.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Significant judgment may be required to determine the timing of satisfaction of a performance obligation in certain professional services contracts with a fixed consideration, in which we measure progress using an input method based on labor hours expended.

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See Note 15 for our discussion on disaggregation of revenues, and Note 16 for contract balances and performance obligations.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Business Combinations

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Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date.

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We estimate our current tax liability using currently enacted tax rates and laws and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes.

These differences result in deferred tax assets and liabilities recorded on our balance sheet using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled.

These differences result in deferred tax assets and liabilities recorded on our consolidated balance sheets using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled.

We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not more likely than not, we establish a valuation allowance.

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An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we record the increase.

On December 22, 2017, the Tax Act was enacted by the U.S.

The Tax Act makes broad and complex changes to the U.S.

tax code that affect our fiscal year ended September 30, 2019, including but not limited to:

(1) creating the base erosion anti-abuse tax measure that taxes certain payments between a U.S.

corporation and its foreign subsidiaries;

(2) creating a new provision designed to tax global intangible low-tax income of foreign subsidiaries;

and (3) a foreign derived intangible income.

We have estimated the impact of these changes in our income tax provision for 2019.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

We recognize and measure benefits for uncertain tax positions using a two-step approach.

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It includes net income, foreign currency translation adjustments and unrealized gains and losses on our investments in marketable securities, net of tax.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Foreign Currency and Derivative Financial Instruments

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At the end of the reporting period, foreign-currency-denominated assets and liabilities are remeasured into the functional currencies of the reporting entities at current market rates.

The change in value from this remeasurement is reported as a foreign exchange gain or loss for that period in other income (expense), net in the accompanying consolidated statements of income and comprehensive income.

The change in value from this remeasurement is reported as a foreign exchange gain or loss for that period in other income, net in the accompanying consolidated statements of income and comprehensive income.

We recorded transactional foreign exchange losses of $ 1.0 million , $ 0.0 million and $ 0.4 million during fiscal 2020, 2019 and 2018 , respectively.

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Advertising and Promotion Costs

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Advertising and promotion costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of income and comprehensive income.

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Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09.

The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from the contracts with customers.

The guidance permits two methods of adoption:

full retrospective method or modified retrospective method.

We adopted ASU 2014-09 in the first quarter of our fiscal 2019 using the full retrospective method which required us to adjust each prior reporting period presented.

This adoption primarily affected timing of revenue recognition of license revenue on term licenses and transactional revenue on guaranteed minimum fees related to our on-premises software products.

Under the new standard, we recognize revenue when control of the license is transferred to the customer, rather than at the date payments become due and payable when there are extended payment terms, or ratably over the term of the contract as required under the previous standard.

In addition, revenue attributable to a software license renewal is recognized at the beginning of the applicable renewal period rather than at the signing of the renewal agreement as required under the previous standard.

Additionally, under the new standard, when we enter into noncancellable contracts that provide unconditional rights to payment from our customers for services we have not yet completed or services we will provide in the near future, we present receivables—our unconditional rights to payments—and deferred revenues on a gross basis, rather than on a net basis.

Finally, under the new standard we capitalize and amortize contract acquisition costs such as commissions paid for SaaS cloud services contracts in excess of one year.

Following the adoption of ASU 2014-09, the revenue recognition for our other sales arrangements remained materially consistent with our historical practice.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Upon adoption of ASU 2014-09, we applied the standard’s practical expedients that permit the omission of prior-period information about our performance obligations.

Adoption of the standard impacted our previously reported results as follows:

Consolidated Balance Sheets

September 30, 2018

As Previously Reported

(In thousands)

Accounts receivable, net

Deferred income taxes

Other accrued liabilities

Deferred revenue

Stockholders’ equity

Consolidated Statements of Income and Comprehensive Income

Year Ended September 30, 2018

Year Ended September 30, 2017

As Previously Reported

(In thousands, except per share amounts)

Cost of revenues

Selling, general and administrative

Provision for income taxes

Comprehensive income

Basic earnings per share

Diluted earnings per share

Consolidated Statement of Cash Flows

Year Ended September 30, 2018

Year Ended September 30, 2017

As Previously Reported

(In thousands)

Cash flows from operating activities:

Deferred income taxes

Changes in operating assets and liabilities

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

In February 2016, the FASB issued Topic 842, which requires the recognition of operating lease assets and lease liabilities on the balance sheet.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

Under the new standard, disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

In the first quarter of fiscal 2020, we adopted Topic 842 using the “Comparatives Under 840 Option” approach to transition.

In accordance with the standard, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Topic 842 provided a package of practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing leases.

We elected to apply the package of practical expedients, and did not elect the hindsight practical expedient in determining the lease term for existing leases as of October 1, 2019.

Adoption of Topic 842 did not result in the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The most significant impact of adoption was the recognition of operating lease assets and operating lease liabilities of $ 89.8 million and $ 98.9 million , respectively, while our accounting for existing capital leases (now referred to as finance leases) remained substantially unchanged.

We expect the impact of adoption to be immaterial to our consolidated statements of income and comprehensive income and consolidated statements of cash flows on an ongoing basis.

As part of our adoption, we also modified our control procedures and processes, none of which materially affected our internal control over financial reporting.

See Note 17 for additional information regarding our accounting policy for leases and additional disclosures.

Recent Accounting Pronouncements Not Yet Adopted

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The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means that it will be effective for our fiscal year beginning October 1, 2020.

Early adoption is permitted.

We are currently evaluating the impact of our pending adoption of ASU 2018-15 on our consolidated financial statements.

We do not believe that adoption of ASU 2018-15 will have a significant impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No.

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Topic 326 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means it will be effective for our fiscal year beginning October 1, 2020.

Early adoption is permitted.

We are currently evaluating the impact of our pending adoption of Topic 326 on our consolidated financial statements.

In February 2016, the FASB issued ASU No.

2016-02, “ Leases (Topic 842) ” and subsequent amendments to the initial guidance:

ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, “Topic 842”).

Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets.

Topic 842 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, which means it will be effective for our fiscal year beginning October 1, 2019.

Early adoption is permitted.

We are currently evaluating the impact of our pending adoption of Topic 842 on our consolidated financial statements.

We expect that most of our operating leases will be recognized as right-of-use assets and corresponding lease liabilities on our consolidated balance sheets, which will increase our total assets and total liabilities upon adoption.

Subject to the completion of our assessment, we expect the adoption of the standard will result in recognition of right-of-use assets of approximately $ 90 million and lease liability of approximately $ 99 million in our consolidated balance sheets.

We do not believe that adoption of Topic 326 will have a significant impact on our consolidated financial statements.

We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.

Business Combinations

On August 9, 2019, we acquired 100 % of the equity of EZMCOM for $ 18.6 million in cash.

EZMCOM is a provider of digital security and authentication products that helps organizations protect users, data and applications from credential theft, account takeover and breaches.

We expect that this acquisition will help provide our clients, including the world’s largest financial services institutions, with a seamless approach to authentication and customer onboarding across digital channels, mobile devices, servers and workstations.

We recorded, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values, which included $ 2.7 million of cash and $ 6.0 million of intangible assets primarily consisting of completed technology.

The intangible assets are being amortized using the straight-line method over a weighted average useful life of 4.73 years .

There were no acquisitions incurred during fiscal 2020.

In fiscal 2019, we acquired 100 % of the equity of eZmCom, Inc.

for $ 18.6 million in cash.

We recorded $ 6.0 million of intangible assets which are being amortized using the straight-line method over a weighted-average useful life of 4.73 years .

We allocated $ 11.2 million of goodwill to our Applications segment that is deductible for tax purposes.

EZMCOM has been included in our operating results since the acquisition date.

The pro forma impact of this acquisition was not deemed material to our results of operations.

There were no acquisitions incurred during fiscal 2018 and 2017.

There were no acquisitions incurred during fiscal 2018.

FAIR ISAAC CORPORATION

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Marketable securities

The assets included in marketable securities represent long-term marketable equity securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees.

The assets included in marketable securities represent long-term marketable equity securities held under a supplemental retirement and savings plan for certain officers and senior management employees, which are distributed upon termination or retirement of the employees.

These investments are treated as trading securities and recorded at fair value.

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Our Level 1 assets are comprised of money market funds and certain marketable securities.

We do not have any liabilities that are valued using inputs identified under a Level 1 hierarchy as of September 30, 2019 and 2018 .

We did not have any liabilities that are valued using inputs identified under a Level 1 hierarchy as of September 30, 2020 and 2019 .

Level 2 — uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data.

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and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data.

We do not have any assets that are valued using inputs identified under a Level 2 hierarchy as of September 30, 2019 and 2018 .

We did not have any assets that are valued using inputs identified under a Level 2 hierarchy as of September 30, 2020 and 2019 .

We measure the fair value of the Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.

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Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation.

We do not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of September 30, 2019 and 2018 .

We did not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of September 30, 2020 and 2019 .

The following table represents financial assets that we measured at fair value on a recurring basis at September 30, 2020 and 2019 :

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Marketable securities (2)

Included in cash and cash equivalents on our balance sheet at September 30, 2019 and 2018 .

Included in cash and cash equivalents on our consolidated balance sheets at September 30, 2020 and 2019 .

Not included in this table are cash deposits of $ 122.1 million and $ 77.5 million at September 30, 2020 and 2019 , respectively.

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For the fair value of our derivative instruments and senior notes, see Note 5 and Note 9, respectively.

There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the year ended September 30, 2019 , 2018 or 2017 .

There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the years ended September 30, 2020 , 2019 or 2018 .

Derivative Financial Instruments

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We routinely enter into contracts to offset exposures denominated in the British pound, Euro and Singapore dollar.

Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income (expense), net.

The forward contracts are not designated as hedges and are marked to market through other income (expense), net.

The forward contracts are not designated as hedges and are marked to market through other income, net.

Fair value changes in the forward contracts help mitigate the changes in the value of the remeasured receivable and cash balances attributable to changes in foreign exchange rates.

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therefore, their fair value was $ 0 at September 30, 2020 and 2019 .

Gains (losses) on derivative financial instruments are recorded in our consolidated statements of income and comprehensive income as a component of other income (expense), net.

Losses on derivative financial instruments are recorded in our consolidated statements of income and comprehensive income as a component of other income, net.

These amounts are shown below for the years ended September 30, 2020, 2019 and 2018 :

1 unchanged sentence

(In thousands)

Gain (loss) on foreign currency forward contracts

Loss on foreign currency forward contracts

Goodwill and Intangible Assets

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Balance at September 30, 2018

Addition from acquisitions

Foreign currency translation adjustment

Balance at September 30, 2019

Addition from acquisitions

Foreign currency translation adjustment

Balance at September 30, 2020

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Composition of Certain Financial Statement Captions

The following table presents the composition of property and equipment at September 30, 2019 and 2018 :

The following table presents the composition of property and equipment, net and other assets at September 30, 2020 and 2019 :

September 30,

6 unchanged sentences

accumulated depreciation and amortization

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Other assets:

Long-term receivables

Prepaid commissions

As a strategic cost initiative in fiscal 2020 we committed to a course of action to adjust our facilities footprint in light of post-pandemic workforce patterns.

As a result of this initiative, we recorded a net impairment loss of $ 5.2 million on abandonment of property and equipment.

See Note 11 for additional information regarding our restructuring and impairment charges.

Revolving Line of Credit

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The credit facility contains certain restrictive covenants including maintaining a maximum consolidated leverage ratio of 3.25 , subject to a step up to 3.75 following certain permitted acquisitions;

and a minimum fixed charge ratio of 2.50 through the maturity of our 2010 Senior Notes in July 2020, upon which maintaining a minimum interest coverage ratio of 3.00 .

The credit agreement also contains other covenants typical of unsecured facilities.

and a minimum fixed charge ratio of 2.50 through the maturity of our 2010 Senior Notes in July 2020, following which maintaining a minimum interest coverage ratio of 3.00 is required.

The credit agreement also contains other covenants typical of unsecured facilities.

As of September 30, 2019 , we had $ 345.0 million in borrowings outstanding at a weighted average interest rate of 3.423 % , of which $ 212.0 million was classified as a long-term liability and recorded in long-term debt within the accompanying consolidated balance sheets.

We were in compliance with all financial covenants under this credit facility as of September 30, 2019 .

As of September 30, 2020 , we had $ 95.0 million in borrowings outstanding at a weighted-average interest rate of 1.285 % and we were in compliance with all financial covenants under this credit facility.

On July 14, 2010, we issued $ 245 million of senior notes in a private placement to a group of institutional investors (the “2010 Senior Notes”).

The 2010 Senior Notes were issued in four series as follows:

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Interest Rate

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July 14, 2020

The 2010 Senior Notes require us to pay the entire unpaid principal balances of each note series on its maturity date.

The 2010 Senior Notes also require interest payments semi-annually and contain certain restrictive covenants, including the maintenance of a maximum consolidated net debt to consolidated EBITDA ratio of 3.00 and a minimum fixed charge coverage ratio of 2.50 .

We were in compliance with all financial covenants under the 2010 Senior Notes as of September 30, 2019 .

On May 8, 2018, we issued $ 400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”, and with the 2010 Senior Notes, the “Senior Notes”).

On July 14, 2020, the aggregate principal amount of Series H of 2010 Senior Notes was repaid at maturity.

At September 30, 2020, the 2010 Senior Notes were no longer outstanding.

On May 8, 2018, we issued $ 400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”).

The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25 % per annum and will mature on May 15, 2026 .

The purchase agreements for the 2010 Senior Notes and the indenture for the 2018 Senior Notes contain certain covenants typical of unsecured obligations.

On December 6, 2019, we issued $ 350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” along with the 2010 Senior Notes and 2018 Senior Notes, the “Senior Notes”).

We used the net proceeds to repay a large portion of the outstanding balance on our revolving credit facility.

The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00 % per annum and will mature on June 15, 2028 .

The indentures for the 2018 Senior Notes and the 2019 Senior Notes contain certain covenants typical of unsecured obligations.

The following table presents the carrying amounts and fair values for the Senior Notes at September 30, 2020 and 2019 :

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September 30, 2019

Face Value (*)

(In thousands)

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The 2018 Senior Notes

(1) Amounts exclusive of net debt issuance cost of $ 5.2 million and $ 6.1 million at September 30, 2019 and 2018 , respectively.

The 2019 Senior Notes

(*) The carrying value of the Senior Notes was reduced by the net debt issuance costs of $ 10.6 million and $ 5.2 million at September 30, 2020 and 2019 , respectively.

Future principal payments for the Senior Notes are as follows (in thousands):

Year Ending September 30,

FAIR ISAAC CORPORATION

1 unchanged sentence

Years Ended September 30, 2020, 2019 and 2018

Future principal payments for the Senior Notes are as follows (in thousands):

Year Ending September 30,

Employee Benefit Plans

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Total expenses under our employee incentive plans were $ 60.6 million , $ 57.5 million and $ 48.4 million during fiscal 2020, 2019 and 2018 , respectively.

Restructuring Expenses

There was no restructuring expense incurred during fiscal 2019 and 2018.

During fiscal 2017, we incurred net charges totaling $ 4.5 million consisting of $ 1.7 million in facilities charges associated with vacating excess leased space in San Rafael, California and $ 2.8 million in employee separation costs due to the elimination of 79 positions throughout the Company.

Cash payments for all the facilities charges will be paid by the end of fiscal 2020.

Cash payments for all the employee separation costs were paid before the end of the second quarter of fiscal 2018.

The following tables summarize our restructuring accruals associated with the above actions.

Restructuring and Impairment Charges

During fiscal 2020, we incurred net charges totaling $ 45.0 million consisting of $ 28.0 million in impairment loss on operating lease assets, $ 5.2 million in impairment loss on disposals of property and equipment and $ 11.8 million in restructuring charges.

The impairment losses were associated with closing certain non-core offices and reducing office space in other locations to better align with anticipated needs in light of post-pandemic workforce patterns.

The restructuring charges related to employee separation costs as a result of eliminating 209 positions throughout the Company.

Cash payments for all the employee separation costs will be paid by the end of our fiscal 2021.

There were no restructuring and impairment charges incurred during fiscal 2019 and 2018.

The following tables summarize our restructuring accruals associated with the employee separation actions.

The current portion and non-current portion were recorded in other accrued liabilities and other liabilities, respectively, within the accompanying consolidated balance sheets.

Accrual at September 30, 2018

Accrual Adjustments

Accrual at September 30, 2019

1 unchanged sentence

Facilities charges

Employee separation

current portion

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Accrual at September 30, 2019

Accrual Adjustments (*)

Accrual at September 30, 2020

1 unchanged sentence

Facilities charges

Employee separation

current portion

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S.

The Tax Act makes broad and complex changes to the U.S.

tax code that affect our fiscal year ended September 30, 2019, including but not limited to:

(1) creating the base erosion anti-abuse tax measure that taxes certain payments between a U.S.

corporation and its foreign subsidiaries;

(2) creating a new provision designed to tax global intangible low-tax income (“GILTI”) of foreign subsidiaries;

and (3) a foreign derived intangible income.

We have estimated the impact of these changes in our income tax provision for 2019.

The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.

The FASB Staff Q&A, Topic 740, No.

5, “ Accounting for Global Intangible Low-Taxed Income ”, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.

We have elected to account for any potential GILTI tax in the period in which it is incurred.

(*) Upon adoption of Topic 842, accrued lease exit obligations of $ 1.4 million , which were associated with vacating excess leased space in fiscal 2017, were reclassified to operating lease liabilities.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

The provision for income taxes was as follows during fiscal 2020, 2019 and 2018 :

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Foreign withholding tax and related foreign tax credits are included in current tax expense above.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Deferred tax assets and liabilities at September 30, 2020 and 2019 were as follows:

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Compensation benefits

Less valuation allowance

Operating lease liabilities

valuation allowance

Total deferred tax assets

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Property and equipment

Operating lease right-of-use assets

Other liabilities

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Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowance at September 30, 2020.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

As of September 30, 2020 , we had available U.S.

federal, state and foreign net operating loss (“NOL”) carryforwards of approximately $ 7.6 million , $ 0.1 million , and $ 31.3 million , respectively.

NOLs were acquired in connection with our acquisitions of Braun in fiscal 2005, Adeptra in fiscal 2012 and Infoglide in fiscal 2013.

federal NOLs were acquired in connection with our acquisitions of Adeptra in fiscal 2012 and Infoglide in fiscal 2013.

federal NOL carryforward will expire at various dates beginning in fiscal 2024, if not utilized.

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Utilization of the U.S.

federal and state NOL are subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions.

federal and state NOLs are subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions.

In fiscal 2020 we generated approximately $ 4.7 million of excess federal research credits which are expected to be utilized fully in future tax years.

2 unchanged sentences

however, based on enacted law and expected future cash taxes, we have recorded a valuation allowance of $ 16.6 million .

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

A reconciliation of the provision for income taxes, with the amount computed by applying the U.S.

federal statutory income tax rate ( 21 % in fiscal 2019, 24.5 % in fiscal 2018, and 35 % in fiscal 2017) to income before provision for income taxes for fiscal 2019, 2018 and 2017 is shown below:

federal statutory income tax rate ( 21 % in each of fiscal 2020 and fiscal 2019, and 24.5 % in fiscal 2018) to income before provision for income taxes for fiscal 2020, 2019 and 2018 is shown below:

Year Ended September 30,

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Foreign tax rate differential

Intercompany interest

Research credits

2 unchanged sentences

Valuation allowance

Foreign tax credit

Foreign tax credit and foreign withholding tax

Excess tax benefits relating to stock-based compensation

Tax effect of the Tax Act

GILTI, FDII and BEAT

Recorded income tax provision

The decrease in our income tax provision in fiscal 2019 compared to fiscal 2018 is due to the decrease in the overall federal tax rate from the blended 24.5 % in fiscal 2018 to 21% in fiscal 2019 and the recording of several one-time items in fiscal 2018 related to the enactment of the Tax Act.

The increase in our income tax provision in fiscal 2018 compared to fiscal 2017 was primarily due to recording the impact related to the enactment of the Tax Act in fiscal 2018.

This includes re-measurement to our deferred for the tax rate changes, the one-time deemed repatriation transition tax, and the loss of deductibility of performance-based compensation for certain employees.

As of September 30, 2019, we have approximately $ 95.6 million of unremitted earnings of non-U.S.

The decrease in our income tax provision in fiscal 2020 compared to fiscal 2019 was due to an increase in the excess tax benefits related to stock-based compensation in fiscal 2020.

The decrease in our income tax provision in fiscal 2019 compared to fiscal 2018 was due to the decrease in the overall federal tax rate from the blended 24.5 % in fiscal 2018 to 21 % in fiscal 2019 and the recording of several one-time items in fiscal 2018 related to the enactment of the Tax Act.

As of September 30, 2020, we had approximately $ 111.7 million of unremitted earnings of non-U.S.

subsidiaries.

2 unchanged sentences

from the foreign entities.

In the event these earnings are later remitted to the U.S., any estimated withholding tax on remittance of those earnings is expected to be immaterial to the income tax provision.

In the event these earnings are later remitted to the U.S., any estimated withholding tax and state income tax due upon remittance of those earnings is expected to be immaterial to the income tax provision.

Unrecognized Tax Benefit for Uncertain Tax Positions

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federal, state, local, or foreign income tax examinations for fiscal years prior to 2015.

We are currently under audit by South Carolina and New York State for fiscal years 2016, 2017 and 2018.

We do not anticipate any adjustments related to those audits that will result in a material change to our consolidated financial statements.

FAIR ISAAC CORPORATION

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Decreases for settlements and payments

Decreases due to statue expiration

Decreases due to statute expiration

Gross unrecognized tax benefits at end of year

We had $ 8.0 million of total unrecognized tax benefits as of September 30, 2020 , including $ 7.8 million of tax benefits that, if recognized, would impact the effective tax rate.

Although the timing and outcome of audit settlements are uncertain, it is unlikely there will be a reduction of the uncertain tax benefits in the next twelve months.

We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income and comprehensive income.

Although the timing and outcome of audit settlements are uncertain, it is unlikely there will be a significant reduction of the uncertain tax benefits in the next twelve months.

We recognize interest expense and penalties related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income and comprehensive income.

We recognize interest earned related to income tax matters as interest income in our consolidated statements of income and comprehensive income.

As of September 30, 2019 , we have accrued interest of $ 0.3 million related to the unrecognized tax benefits.

As of September 30, 2020 , we had accrued interest of $ 0.4 million related to the unrecognized tax benefits.

Stock-Based Employee Benefit Plans

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All employees, consultants and advisors of FICO or any subsidiary, as well as all non-employee directors are eligible to receive awards under the 2012 Plan.

We also have awards currently outstanding under the 1992 Long-Term Incentive Plan, which was adopted in February 1992 and expired in February 2012.

Stock option awards have a maximum term of seven years .

In general, stock option awards and restricted stock unit awards not subject to market or performance conditions vest annually over four years .

Restricted stock unit awards subject to market or performance conditions vest annually over three years based on the achievement of specified criteria.

Restricted stock unit awards subject to market or performance conditions generally vest annually over three years based on the achievement of specified criteria.

At September 30, 2020 , there were 4,998,722 shares available for issuance under the 2012 Plan.

Description of Employee Stock Purchase Plan

On February 28, 2019 our shareholders approved the adoption of the 2019 Employee Stock Purchase Plan (the “2019 Purchase Plan”).

The 2019 Purchase Plan authorizes the issuance of up to 1,000,000 shares of common stock to eligible employees.

We maintain the 2019 Employee Stock Purchase Plan (the “2019 Purchase Plan”) under which we are authorized to issue up to 1,000,000 shares of common stock to eligible employees.

Employees may have up to 15 % of their eligible pay withheld through payroll deductions to purchase FICO common stock during semi-annual offering periods.

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We expect to recognize that cost over a weighted-average period of 2.33 years.

In fiscal 2020 we received $ 25.4 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $ 30.2 million .

FAIR ISAAC CORPORATION

1 unchanged sentence

Years Ended September 30, 2020, 2019 and 2018

In fiscal 2019 we received $ 22.8 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $ 23.3 million .

Stock-Based Activity

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Weighted-average expected dividend yield

Expected dividend yield (range)

Expected Volatility.

3 unchanged sentences

We estimate the expected term based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.

In fiscal 2017 the dividend yield assumption was based on historical dividend payments, which were discontinued in May 2017.

We have not declared or paid any cash dividends on our common stock since May 2017, and we do not presently plan to pay cash dividends on our common stock in the foreseeable future.

Consequently, we used an expected dividend yield of zero in the years presented.

Risk-Free Interest Rate.

5 unchanged sentences

(In thousands)

Outstanding at October 1, 2018

Outstanding at September 30, 2019

Outstanding at September 30, 2020

Exercisable at September 30, 2020

Vested and expected to vest at September 30, 2020

The weighted-average fair value of options granted were $ 99.30 , $ 59.63 and $ 56.61 during fiscal 2020, 2019 and 2018 , respectively.

The aggregate intrinsic value of options outstanding at September 30, 2020 was calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 0.2 million outstanding options, which had exercise prices lower than the $ 425.38 market price of our common stock at September 30, 2020 .

The total intrinsic value of options exercised was $ 132.6 million , $ 99.1 million and $ 41.4 million during fiscal 2020, 2019 and 2018 , respectively, determined as of the date of exercise.

FAIR ISAAC CORPORATION

1 unchanged sentence

Years Ended September 30, 2020, 2019 and 2018

The weighted average fair value of options granted were $ 59.63 , $ 56.61 and $ 43.80 during fiscal 2019, 2018 and 2017 , respectively.

The aggregate intrinsic value of options outstanding at September 30, 2019 was calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 0.6 million outstanding shares, which had exercise prices lower than the $ 303.52 market price of our common stock at September 30, 2019 .

The total intrinsic value of options exercised was $ 99.1 million , $ 41.4 million and $ 27.0 million during fiscal 2019, 2018 and 2017 , respectively, determined as of the date of exercise.

Restricted Stock Units

4 unchanged sentences

(In thousands)

Outstanding at October 1, 2018

Outstanding at September 30, 2019

Outstanding at September 30, 2020

The weighted-average fair value of the RSUs granted were $ 356.66 , $ 206.29 and $ 161.85 during fiscal 2020, 2019 and 2018 , respectively.

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Performance share units (“PSUs”) are granted to our senior officers and earned based on pre-established performance goals approved by the Leadership Development and Compensation Committee of our Board of Directors for any given performance period.

The range of payout is zero to 200 % of the number of granted PSUs, based on the outcome of the performance conditions.

The range of payout is zero to 200 % of the number of target PSUs, based on the outcome of the performance conditions.

We estimate the fair value of the PSUs using the closing market price of our common stock on the date of grant, adjusted for the expected dividend yield if applicable, based on the performance condition that is probable of achievement.

4 unchanged sentences

(In thousands)

Outstanding at October 1, 2018

Outstanding at September 30, 2019

Outstanding at September 30, 2020

The weighted-average fair value of the PSUs granted were $ 354.18 , $ 185.05 and $ 157.17 during fiscal 2020, 2019 and 2018 , respectively.

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The correlation between FICO and the Russell 3000 Index was determined based on historical daily stock price movements for the three years preceding the grant date.

The dividend yield was determined using the historical dividend payout and a trailing twelve -month closing stock price on the grant date for fiscal 2017, and in May 2017 we discontinued dividend payments.

Because we have not declared or paid any cash dividends on our common stock since May 2017, and we do not presently plan to pay cash dividends on our common stock in the foreseeable future, we used an expected dividend yield of zero.

The risk-free rate was determined based on U.S.

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(In thousands)

Outstanding at October 1, 2018

Outstanding at September 30, 2019

Outstanding at September 30, 2020

The weighted-average fair value of the MSUs granted were $ 249.13 , $ 169.46 and $ 151.78 during fiscal 2020, 2019 and 2018 , respectively.

2 unchanged sentences

The compensation expense on the employee stock purchase plan arises from the 15 % discount offered to participants.

As our first semi-annual offering period started on September 1, 2019, no shares have been purchased as of September 30, 2019.

During fiscal 2020, a total of 50,298 shares of our common stock with a weighted-average purchase price of $ 334.21 per share was issued under the 2019 Purchase Plan.

As our first semi-annual offering period started on September 1, 2019, there were no shares purchased during fiscal 2019.

FAIR ISAAC CORPORATION

11 unchanged sentences

Earnings per share:

The computation of diluted EPS excludes options to purchase approximately 4,000 , 5,000 , and 8,000 shares of common stock for fiscal 2019, 2018 and 2017 , respectively, because the exercise prices of the options exceeded the average market price of our common stock in these fiscal years and their inclusion would be antidilutive.

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

Segment Information

1 unchanged sentence

Applications.

This segment includes pre-configured decision management applications designed for a specific type of business problem or process — such as marketing, account origination, customer management, fraud, collections and insurance claims management — as well as associated professional services.

These applications are available to our customers as on-premises software, and many are available as hosted, SaaS applications through the FICO ® Analytic Cloud or third-party public clouds, such as those provided by AWS.

This segment includes our business-to-business scoring solutions, our myFICO ® solutions for consumers and associated professional services.

This segment includes pre-configured decision management applications designed for a specific type of business problem or process — such as marketing, account origination, customer management, fraud, financial crimes compliance, collections and insurance claims management — as well as associated professional services.

These applications are available to our customers as on-premises software, and many are available as hosted, SaaS applications through the FICO ® Analytic Cloud or AWS.

This segment includes our business-to-business scoring solutions and services, our business-to-consumer scoring solutions and services including myFICO ® solutions for consumers, and associated professional services.

Our scoring solutions give our clients access to analytics that can be easily integrated into their transaction streams and decision-making processes.

Our scoring solutions are distributed through major credit reporting agencies, as well as services through which we provide our scores to clients directly.

Our scoring solutions are distributed through major credit reporting agencies worldwide, as well as services through which we provide our scores to clients directly.

Decision Management Software.

This segment is composed of analytic and decision management software tools that clients can use to create their own custom decision management applications, our FICO ® Decision Management Suite, as well as associated professional services.

These tools are available to our customers as on-premises software or through the FICO ® Analytic Cloud or third-party public clouds, such as those provided by AWS.

Decision management software is currently delivered as part of the FICO ® Decision Management Platform and is increasingly being adopted to connect decisioning solutions or previously disconnected use cases.

These tools are available to our customers as on-premises software, through the FICO ® Analytic Cloud or AWS.

Our Chief Executive Officer evaluates segment financial performance based on segment revenues and segment operating income.

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Unallocated amortization expense

Unallocated restructuring and impairment charges

Operating income

3 unchanged sentences

Depreciation expense

Year Ended September 30, 2018 (As Adjusted)

Year Ended September 30, 2019

Decision Management Software

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Years Ended September 30, 2020, 2019 and 2018

Year Ended September 30, 2017 (As Adjusted)

Year Ended September 30, 2018

Decision Management Software

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Unallocated amortization expense

Unallocated restructuring and acquisition-related expenses

Operating income

Unallocated interest expense, net

Unallocated other expense, net

Unallocated other income, net

Income before income taxes

5 unchanged sentences

Decision Management Software

Year Ended September 30, 2018 (As Adjusted)

Year Ended September 30, 2019

Reportable Segments

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Years Ended September 30, 2020, 2019 and 2018

Year Ended September 30, 2017 (As Adjusted)

Year Ended September 30, 2018

Reportable Segments

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Decision Management Software

Year Ended September 30, 2018 (As Adjusted)

Year Ended September 30, 2019

Reportable Segments

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Decision Management Software

Year Ended September 30, 2017 (As Adjusted)

Year Ended September 30, 2018

Reportable Segments

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Decision Management Software

Within our Applications segment our fraud solutions accounted for 18 % , 17 % and 19 % of total revenues in each of fiscal 2019, 2018 and 2017 , respectively, our customer communication services accounted for 9 % , 10 % and 10 % of total revenues in each of these periods, respectively;

and our customer management solutions accounted for 6 % , 8 % and 8 % of total revenues in each of these periods, respectively.

Within our Applications segment our fraud solutions accounted for 15 % , 18 % and 17 % of total revenues in each of fiscal 2020, 2019 and 2018 , respectively, and our customer communication services accounted for 8 % , 9 % and 10 % of total revenues in each of these periods, respectively.

FAIR ISAAC CORPORATION

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Net receivables

(*) Included short-term receivables of $ 297.4 million and long-term receivables of $ 34.4 million that were recorded in accounts receivable, net and other assets, respectively, within the accompanying consolidated balance sheets at September 30, 2019.

Long-term receivables were not material at September 30, 2018.

long-term receivables *

Short-term receivables *

(*) Short-term receivables and long-term receivables were recorded in accounts receivable, net and other assets, respectively, within the accompanying consolidated balance sheets.

FAIR ISAAC CORPORATION

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(In thousands)

Balance, beginning of year

Allowance for doubtful accounts, beginning balance

write-offs (net of recoveries)

Balance, end of year

Allowance for doubtful accounts, ending balance

Contract assets balance at September 30, 2020 and 2019 was immaterial.

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Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:

Year Ending September 30,

Performance Obligations

Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and amounts that will be invoiced and recognized as revenue in future periods.

This does not include:

Revenue that will be recognized in future periods from usage-based royalty from license sales;

SaaS transactional revenue from variable considerations that will be recognized in the distinct service period during which it is earned;

Revenue from variable considerations that will be recognized in accordance with the “right-to-invoice” practical expedient, such as fees from our professional services billed based on a time and materials basis.

Revenue allocated to remaining performance obligations was $ 298.0 million as of September 30, 2020, of which we expect to recognize approximately 50 % over the next 18 months and the remainder thereafter.

Revenue allocated to remaining performance obligations was $ 238.4 million as of September 30, 2019.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

We lease office space and data centers under operating lease arrangements, which constitute the majority of our lease obligations.

We also enter into finance lease agreements from time to time for certain computer equipment.

For any lease with a lease term in excess of 12 months, the related lease assets and liabilities are recognized on our consolidated balance sheets as either operating or finance leases at the commencement of an agreement where it is determined that a lease exists.

We have lease agreements that contain both lease and non-lease components, and we have elected to combine these components together and account for them as a single lease component for all classes of assets.

Leases with a lease term of 12 months or less are not recorded on our consolidated balance sheets.

Furthermore, we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease.

These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date.

We use a collateralized incremental borrowing rate based on the information available at the commencement date, including the lease term, in determining the present value of future payments.

In calculating the incremental borrowing rates, we consider recent ratings from credit agencies and current lease demographic information.

Our operating leases also typically require payment of real estate taxes, common area maintenance, insurance and other operating costs as well as payments that are adjusted based on a consumer price index.

These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations.

In instances where they are fixed, they are included due to our election to combine lease and non-lease components.

Operating lease assets also include prepaid lease payments and initial direct costs, and are reduced by lease incentives.

Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.

Fixed payments may contain predetermined fixed rent escalations.

We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

As a strategic cost initiative in fiscal 2020 we committed to a course of action to adjust our facilities footprint in light of post-pandemic workforce patterns, including closing certain non-core offices and reducing office space in other locations to better align with anticipated needs.

As a result of this initiative, we recorded a net impairment of $ 28.0 million on operating lease right-of-use assets.

Prior to the adoption of ASC 842, these adjustments were described as restructuring expenses - facilities charges.

See Note 11 for additional information regarding our restructuring and impairment charges.

The following table presents the lease balances within the accompanying consolidated balance sheet as of September 30, 2020:

Balance Sheet Location

September 30, 2020

(In thousands)

Operating leases

Operating lease right-of-use assets

Finance leases (*)

Property and equipment, net

Total lease assets

Operating leases

Other accrued liabilities

Finance leases

Other accrued liabilities

Operating leases

Operating lease liabilities

Finance leases

Other liabilities

Total lease liabilities

(*) Finance leases are recorded net of accumulated depreciation of $ 1.5 million .

FAIR ISAAC CORPORATION

1 unchanged sentence

Years Ended September 30, 2020, 2019 and 2018

We apply the optional exemption that permits the omission of information about remaining performance obligations that have original expected durations of one year or less.

We also applied the transition practical expedient that permits the omission of prior-period information about our performance obligations.

We occupy the majority of our facilities under non-cancelable operating leases with lease terms in excess of one year.

Such facility leases generally provide for annual increases based upon the Consumer Price Index or fixed increments.

Rent expense under operating leases, including month-to-month leases, totaled $ 21.6 million , $ 19.8 million and $ 18.6 million during fiscal 2019, 2018 and 2017 , respectively.

We have also entered into capital lease commitments for certain computer equipment.

Property acquired through capital leases and the associated depreciation of these assets is included in property and equipment on our consolidated balance sheets.

The current portion and long-term portion of our capital lease obligations is reported in other accrued liabilities and other liabilities, respectively within the accompanying consolidated balance sheets.

In the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.

Minimum future commitments under our non-cancelable leases and other obligations were as follows at September 30, 2019 :

Future Minimum Lease Commitments

Other Commitments

Year Ending September 30,

Capital Leases

The components of our operating and finance lease expenses were as follows:

September 30, 2020

(In thousands)

Operating lease cost

Finance lease cost:

Depreciation of lease assets

Interest on lease liabilities

Short-term lease cost

Variable lease cost

Total lease cost

The following table presents weighted-average remaining lease term and weighted-average discount rates related to our operating and finance leases:

September 30, 2020

Operating Leases

Finance Leases

Weighted-average remaining lease term (in months)

Weighted-average discount rate

Supplemental cash flow information related to our operating and finance leases was as follows:

September 30, 2020

(In thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflow for operating leases

Operating cash outflow for finance leases

Financing cash outflow for finance leases

Lease assets obtained in exchange for new lease liabilities:

Operating leases

Finance leases

Future lease payments under our non-cancellable leases as of September 30, 2020 were as follows:

(In thousands)

Operating Leases

Finance Leases

Total future undiscounted lease payments

Less imputed interest

Total reported lease liability

In accordance with the prior guidance—ASC 840, Leases—our leases were previously designated as either capital or operating.

Previously designated capital leases are now considered finance leases under the new guidance, Topic 842.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

designation of operating leases remains substantially unchanged under the new guidance.

The future minimum lease payments by fiscal year as determined prior to the adoption of Topic 842 under our previously designated capital and operating leases as disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, were as follows:

(In thousands)

Operating Leases

Capital Leases

Total minimum lease payments

Less amount representing interest

Present value of minimum lease payments

In the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.

We are also a party to a management agreement with 23 of our executives providing for certain payments and other benefits in the event of a qualified change in control of FICO, coupled with a termination of the officer during the following year.

7 unchanged sentences

In addition, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Indemnification and warranty provisions contained within our customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in our industry.

6 unchanged sentences

The maximum potential amount of future payments that we could be required to make under the indemnification provisions in our customer license and service agreements, and officer and director agreements is unlimited.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2020, 2019 and 2018

Supplementary Financial Data (Unaudited)

14 unchanged sentences

Cost of revenues excludes amortization expense of $ 0.3 million , $ 0.4 million , $ 0.5 million , $ 0.6 million , $ 0.5 million , $ 0.5 million , $ 0.5 million and $ 0.5 million for the quarters ended September 30, 2020 , June 30, 2020 , March 31, 2020 , December 31, 2019 , September 30, 2019 , June 30, 2019 , March 31, 2019 and December 31, 2018 , respectively.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2019, 2018 and 2017

Earnings per share is computed independently for each of the quarters presented.

Therefore, the sum of the quarterly per share amounts may not equal the totals for the respective years.

Subsequent Events

In October 2020, we entered into a purchase agreement with Rackspace US, Inc.

(“Rackspace”) pursuant to which Rackspace will provide to us primary cloud infrastructure services as a reseller of AWS.

The initial term is a five-year period for which we have a minimum purchase obligation of $ 120 million over the first 3 years with the ability to roll up to $ 12 million into a fourth year if we spend less than the minimum commitment.

The purpose of this agreement is to replace services that were previously provided directly through AWS.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data