FAIR ISAAC CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following: a business overview that provides a high-level summary of our strategies and initiatives, financial results and bookings trends that affect our business; a more detailed analysis of our results of operations; our liquidity and capital resources, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments; and a summary of our critical accounting policies and estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Our MD&A should be read in conjunction with Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ from those referred to herein due to a number of factors, including but not limited to risks described in Item 1A, Risk Factors , in this Annual Report on Form 10-K. BUSINESS OVERVIEW Strategies and Initiatives During fiscal 2020, we continued to advance our cloud-enabled, platform-based strategy in our Applications and Decision Management Software segments. The application of this strategy has led to an increase in our cloud bookings over the past several years. Our cloud bookings accounted for 41% of our total bookings in fiscal 2020, compared to 39% during fiscal 2019. We have invested, and intend to continue to invest, in product development to build out and deliver features, functionalities and performance enhancements using a SaaS-based approach on our platform. Our continued product innovation provides growth opportunities with customers that can benefit from the power, flexibility and modularity of these solutions. For our Scores segment, our industry leading business-to-business FICO ® Scores have achieved a multi-year expansion in the growing U.S. business-to-consumer market. We have launched numerous new FICO ® Score-based products, and continue to grow our business-to-consumer partnership with Experian, a leading global information services provider. This partnership provides consumers the FICO ® Score that lenders most commonly use in evaluating credit when determining applicant eligibility for new credit cards, car loans, mortgages or other lines of credit and can be accessed through Experian.com. The FICO ® Score Open Access program, which allows our participating clients to provide their customers with a free FICO ® Score along with content to help them understand the FICO ® Score their lender uses, has more than 240 million consumer accounts with access to their free FICO ® Scores. We continue to pursue additional partners to distribute FICO ® Scores with their product offerings sold directly to consumers. During fiscal 2020, we announced the launch of the FICO ® Resilience Index, a new analytic tool designed to complement FICO ® Score models by identifying those consumers who are most resilient to economic stress relative to other consumers within the same FICO ® Score bands. FICO ® Resilience Index would enable industry participants to more precisely assess credit risk and extend credit to more consumers throughout the economic cycle by managing the risk that emerges during periods of economic stress. We also continue to enhance stockholder value by returning cash to stockholders through our stock repurchase program. During fiscal 2020 , we repurchased approximately 0.7 million shares at a total repurchase price of $235.2 million . As of September 30, 2020 , we had $224.8 million remaining under our current stock repurchase program. As a strategic cost initiative in fiscal 2020, we committed to a course of action designed to reduce operating costs in lower value, less strategic areas of our business in order to facilitate incremental investment in higher value, more strategic areas while also reducing our facilities footprint in light of post-pandemic workforce patterns. As a result of this initiative, in the fourth quarter of fiscal 2020, we recorded a net charge of $41.9 million consisting of impairment losses of $33.2 million on our operating lease assets, property and equipment related to closing or consolidating office spaces, as well as a restructuring charge of $8.7 million related to our workforce reduction. We expect this course of action to result in an aggregate annual expense savings of approximately $36 million beginning in fiscal 2021. In addition, during fiscal 2020, we changed our practice of selling term software licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled. This transition will be substantially completed by the end of the first quarter of our fiscal 2021. This will shift the timing of our revenue recognition on these subscription sales, resulting in less revenue recognized upfront and more revenue recognized over the term of these subscriptions. We expect a decline in revenue recognized from term software licenses in fiscal 2021 as we transition to the new term license subscription model. This change will not negatively impact our cash flows. Overview of Financial Results 31 Table of Contents Total revenues for fiscal 2020 were $1.29 billion , an increase of 12% from $1.16 billion in fiscal 2019 . We continue to drive growth in our Scores segment. Scores revenue increased 25% to $528.5 million in fiscal 2020 from $421.2 million in fiscal 2019, and Scores operating income increased 26% to $454.3 million in fiscal 2020 from $361.4 million in fiscal 2019. For our Applications and Decision Management Software segments, our SaaS business continues to grow as we pursue our cloud-enabled, platform-based strategy. Revenue derived from our cloud-enabled SaaS business, which includes both subscription revenue and associated professional services revenue, increased 11% to $300.0 million during fiscal 2020, from $270.4 million during fiscal 2019. SaaS subscription revenue increased 11% to $236.0 million during fiscal 2020, from $213.1 million during fiscal 2019. We derive a significant portion of revenues internationally, and 32% and 34% of total consolidated revenues were derived from clients outside the U.S. during fiscal 2020 and 2019 , respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 86% and 87% of our revenues were derived from within this industry during fiscal 2020 and 2019 , respectively. In addition, a significant share of our revenues come from transactional or unit-based software license fees, transactional fees under credit scoring, data processing, data management and SaaS subscription services arrangements, and annual software maintenance fees. Arrangements with transactional or unit-based pricing accounted for 75% and 74% of our revenues during fiscal 2020 and 2019 , respectively. Operating income for fiscal 2020 was $296.0 million , an increase of 17% from $253.5 million in fiscal 2019 . Operating margin was 23% and 22% for fiscal 2020 and 2019, respectively. Net income increased 23% to $236.4 million in fiscal 2020 from $192.1 million in fiscal 2019 primarily due to an increase in operating income. Diluted earnings per share for fiscal 2020 was $7.90 , an increase of 25% from $6.34 in fiscal 2019 . COVID-19 Update In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, which has spread throughout the U.S. and the world. The COVID-19 pandemic has resulted in authorities implementing numerous measures to contain the virus, including quarantines, shelter-in-place orders, travel bans and restrictions, and business limitations and shutdowns. Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. Since March 2020, our employees have been instructed to work from home in each country where we operate to support their health and well-being as well as for our customers, partners and communities. We have also substantially reduced employee travel to only essential business needs. We cannot predict when or how we will begin to lift the actions put in place, but as of the date of this filing, we do not believe our work-from-home protocol has had a material adverse impact on our internal controls, financial reporting systems or our operations. Our operational flexibility and strong balance sheet allowed us to successfully manage through the initial impact of COVID-19 while protecting our cash flow and liquidity. However, certain areas of our business have been adversely impacted as a result of the pandemic’s global economic impact. For example, COVID-19 has been adversely affecting certain purchasing decisions by our customers in our Applications and Decision Management Software segments. For our Scores segment, we have seen a decline in auto and unsecured originations volumes, but an increase in mortgage volume through the 2 nd half of fiscal 2020 due to strong refinancing activities boosted by low interest rates. Additionally, we have granted and may continue to grant extended payment terms to a small number of customers as a result of COVID-19. We have not and do not plan to modify our customer agreements in a manner that would materially impact our financial condition or results of operations. Finally, contrary to our original expectations, a decrease in sales-related travel activity has not materially affected our ability to consummate sales. As a cost management initiative due to COVID-19, we accelerated reviews of our leased office spaces across our real estate portfolio to reshape and optimize our occupancy cost structures over the next several years. As a result, in the fourth quarter of fiscal 2020 we recorded impairment charges of $33.2 million on operating lease assets, property and equipment related to closing or consolidating office spaces to better align with anticipated needs. While we intend to continue to manage our costs by limiting the addition of new employees and third-party contracted services, and substantially reducing employee travel and other discretionary spending, to the extent the business disruption continues for an extended period, additional cost management actions will be considered and may become necessary. Further asset impairment charges, increases in allowance for doubtful accounts, or restructuring charges may be required, depending on the severity and duration of the pandemic. We have not incurred significant financial disruptions thus far from the COVID-19 outbreak, but due to numerous uncertainties, including the severity and duration of the pandemic, actions that may be taken by governmental authorities, the impact on the business of our clients, and other factors, we are unable to accurately predict the impact COVID-19 will have on our results of operations, financial condition, liquidity and cash flows. For more information, see Part I, Item 1A, Risk Factors , of this Annual Report on Form 10-K. 32 Table of Contents Bookings Management regards the volume of bookings achieved as an important indicator of future revenues, but they are not comparable to nor a substitute for an analysis of our revenues. Bookings represent contracts signed in the current reporting period that generate current and future revenue streams. While we disclose estimated revenue expected to be recognized in the future related to unsatisfied performance obligations in Note 16 to the accompanying consolidated financial statements, we believe bookings amount is still a meaningful measure of our business as it includes estimated revenues omitted from Note 16, such as usage-based royalties derived from our software licenses, among others. We estimate bookings as of the end of the period in which a contract is signed and initial booking estimates are not updated in future periods for changes between estimated and actual results. Our calculations have varying degrees of certainty depending on the revenue type and individual contract terms. They are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance, and estimates consider contract terms, knowledge of the marketplace and experience with our customers, among other factors. Actual revenue and the timing thereof could differ materially from our initial estimates. Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service-related that depend upon estimates such as volume of transactions, number of active accounts, or number of hours incurred. Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability for each revenue type, as defined in Revenue Recognition in the Critical Accounting Policies and Estimates. Transactional and Maintenance Bookings We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by the contractual rate. Transactional contracts generally span multiple years and require estimates of future transaction volumes or number of active accounts. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated. This variability is primarily caused by the economic trends in our customers’ industries; individual performance of our customers relative to their competitors; and regulatory and other factors that affect the business environment in which our customers operate. We calculate maintenance bookings directly from the terms stated in the contract. Professional Services Bookings We calculate professional services bookings as the estimated number of hours to complete a project multiplied by the rate per hour. We estimate the number of hours based on our understanding of the project scope, conversations with customer personnel and our experience in estimating professional services projects. Estimated bookings may differ from actual results primarily due to differences in the actual number of hours incurred. License Bookings Licenses that are sold on a perpetual or term basis when bookings generally equal the fixed amount (including guaranteed minimums) stated in the contract. Bookings Trend Analysis Bookings Bookings Yield (1) Number of Bookings over $1 Million Weighted- Average Term (2) (In millions) (months) Quarter ended September 30, 2020 $ 234.6 15 % 31 55 Quarter ended September 30, 2019 $ 160.4 15 % 34 34 Year ended September 30, 2020 $ 537.0 29 % 87 NM (a) Year ended September 30, 2019 $ 481.7 31 % 95 NM (a) (1) Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated. (2) Weighted-average term of bookings measures the average term over which bookings are expected to be recognized as revenue. (a) NM - Measure is not meaningful as our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results. 33 Table of Contents Transactional and maintenance bookings were 48% of total bookings for each of the years ended September 30, 2020 and 2019 . Professional services bookings were 33% and 39% of total bookings for the years ended September 30, 2020 and 2019 , respectively. License bookings were 19% and 13% of total bookings for the years ended September 30, 2020 and 2019 , respectively. RESULTS OF OPERATIONS We are organized into the following three reportable segments: Applications, Scores and Decision Management Software. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. Segment revenues, operating income, and related financial information, including disaggregation of revenue, for the years ended September 30, 2020, 2019 and 2018 are set forth in Note 15 to the accompanying consolidated financial statements. Revenues The following tables set forth certain summary information on a segment basis related to our revenues for fiscal 2020, 2019 and 2018 : Revenues Year Ended September 30, Period-to-Period Change Period-to-Period Percentage Change Segment 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 (In thousands) (In thousands) Applications $ 602,046 $ 605,034 $ 564,375 $ (2,988 ) $ 40,659 — % 7 % Scores 528,547 421,177 335,870 107,370 85,307 25 % 25 % Decision Management Software 163,969 133,872 99,901 30,097 33,971 22 % 34 % Total $ 1,294,562 $ 1,160,083 $ 1,000,146 134,479 159,937 12 % 16 % Percentage of Revenues Year Ended September 30, Segment 2020 2019 2018 Applications 46 % 52 % 56 % Scores 41 % 36 % 34 % Decision Management Software 13 % 12 % 10 % Total 100 % 100 % 100 % 34 Table of Contents Applications Year Ended September 30, Period-to-Period Change Period-to-Period Percentage Change 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 (In thousands) (In thousands) Transactional and maintenance $ 393,994 $ 395,398 $ 372,283 $ (1,404 ) $ 23,115 — % 6 % Professional services 136,677 137,258 142,736 (581 ) (5,478 ) — % (4 )% License 71,375 72,378 49,356 (1,003 ) 23,022 (1 )% 47 % Total $ 602,046 $ 605,034 $ 564,375 (2,988 ) 40,659 — % 7 % Applications segment revenues decreased $3.0 million in fiscal 2020 from 2019 primarily attributable to a $17.9 million decrease in our fraud solutions and a $3.1 million decrease in our customer communications services, partially offset by a $10.8 million increase in our compliance solutions and a $7.7 million increase in our originations solutions. The decrease in fraud solutions was primarily attributable to a decrease in license revenue, driven by a large multi-year license renewal recognized during fiscal 2019. The decrease in customer communication services was primarily attributable to a decrease in transactional revenue. The increase in compliance solutions was primarily attributable to an increase in professional services and license revenues. The increase in originations solutions was primarily due to an increase in SaaS subscription revenue classified as transactional and maintenance revenue and an increase in license revenue. Applications segment revenues increased $40.7 million in fiscal 2019 from 2018 primarily due to a $50.6 million increase in our fraud solutions and a $7.3 million increase in our customer communication services, partially offset by an $8.7 million decrease in our customer management solutions and a $7.6 million decrease in our originations solutions. The increase in fraud solutions was primarily attributable to an increase in license and transactional revenues. The increase in customer communication services was primarily attributable to an increase in transactional revenue. The decrease in customer management solutions was primarily attributable to a decrease in license and professional services revenues. The decrease in originations solutions was primarily attributable to a decrease in professional services revenues. Scores Year Ended September 30, Period-to-Period Change Period-to-Period Percentage Change 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 (In thousands) (In thousands) Transactional and maintenance $ 517,024 $ 415,288 $ 331,662 $ 101,736 $ 83,626 24 % 25 % Professional services 1,600 2,157 1,900 (557 ) 257 (26 )% 14 % License 9,923 3,732 2,308 6,191 1,424 166 % 62 % Total $ 528,547 $ 421,177 $ 335,870 107,370 85,307 25 % 25 % Scores segment revenues increased $107.4 million in fiscal 2020 from 2019 due to an increase of $79.8 million in our business-to-business scores revenue and $27.6 million in our business-to-consumer services revenue. The increase in business-to-business scores was primarily attributable to an increase in mortgage volumes, a higher unit price in auto and unsecured originations, a large royalty true-up as well as a large annual license deal recognized during fiscal 2020. The increase was partially offset by a decrease in unsecured originations volume. The increase in business-to-consumer services was attributable to an increase in both royalties derived from direct sales generated from the myFICO.com website and scores sold indirectly to consumers through credit reporting agencies. Scores segment revenues increased $85.3 million in fiscal 2019 from 2018 due to an increase of $77.4 million in our business-to-business scores revenue and $7.9 million in our business-to-consumer services revenue. The increase in business-to-business scores was primarily attributable to a higher unit price in mortgage and auto activities. The increase in business-to-consumer services was primarily attributable to an increase in royalties derived from scores sold indirectly to consumers through credit reporting agencies. 35 Table of Contents During fiscal 2020, 2019 and 2018 , revenues generated from our agreements with Experian accounted for 14%, 13% and 11%, respectively, of our total revenues, and revenues generated from our agreements with Equifax and TransUnion together accounted for 18%, 16% and 14%, respectively, of our total revenues. Revenues from these customers included amounts recorded in our other segments. Decision Management Software Year Ended September 30, Period-to-Period Change Period-to-Period Percentage Change 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 (In thousands) (In thousands) Transactional and maintenance $ 62,915 $ 50,262 $ 46,658 $ 12,653 $ 3,604 25 % 8 % Professional services 44,763 44,680 32,274 83 12,406 — % 38 % License 56,291 38,930 20,969 17,361 17,961 45 % 86 % Total $ 163,969 $ 133,872 $ 99,901 30,097 33,971 22 % 34 % Decision Management Software segment revenues increased $30.1 million in fiscal 2020 from 2019 primarily attributable to an increase in license revenue, as well as an increase in our SaaS subscription revenue classified as transactional and maintenance revenue. Decision Management Software segment revenues increased $34.0 million in fiscal 2019 from 2018 primarily attributable to an increase in license revenue, an increase in professional services revenue, as well as an increase in our SaaS subscription revenue classified as transactional and maintenance revenue. 36 Table of Contents Operating Expenses and Other Income, Net The following tables set forth certain summary information related to our consolidated statements of income and comprehensive income for fiscal 2020, 2019 and 2018 : Year Ended September 30, Period-to-Period Change Period-to-Period Percentage Change 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 (In thousands, except employees) (In thousands, except employees) Revenues $ 1,294,562 $ 1,160,083 $ 1,000,146 $ 134,479 $ 159,937 12 % 16 % Operating expenses: Cost of revenues 361,142 336,845 312,898 24,297 23,947 7 % 8 % Research and development 166,499 149,478 128,383 17,021 21,095 11 % 16 % Selling, general and administrative 420,930 414,086 376,912 6,844 37,174 2 % 10 % Amortization of intangible assets 4,993 6,126 6,594 (1,133 ) (468 ) (18 )% (7 )% Restructuring and impairment charges 45,029 — — 45,029 — — % — % Total operating expenses 998,593 906,535 824,787 92,058 81,748 10 % 10 % Operating income 295,969 253,548 175,359 42,421 78,189 17 % 45 % Interest expense, net (42,177 ) (39,752 ) (31,311 ) (2,425 ) (8,441 ) 6 % 27 % Other income, net 3,208 2,276 12,884 932 (10,608 ) 41 % (82 )% Income before income taxes 257,000 216,072 156,932 40,928 59,140 19 % 38 % Provision for income taxes 20,589 23,948 30,450 (3,359 ) (6,502 ) (14 )% (21 )% Net income $ 236,411 $ 192,124 $ 126,482 44,287 65,642 23 % 52 % Number of employees at fiscal year-end 4,003 4,009 3,668 (6 ) 341 — % 9 % Percentage of Revenues Year Ended September 30, 2020 2019 2018 Revenues 100 % 100 % 100 % Operating expenses: Cost of revenues 28 % 29 % 31 % Research and development 13 % 13 % 13 % Selling, general and administrative 33 % 35 % 37 % Amortization of intangible assets — % 1 % 1 % Restructuring and impairment charges 3 % — % — % Total operating expenses 77 % 78 % 82 % Operating income 23 % 22 % 18 % Interest expense, net (3 )% (3 )% (3 )% Other income, net — % — % 1 % Income before income taxes 20 % 19 % 16 % Provision for income taxes 2 % 2 % 3 % Net income 18 % 17 % 13 % 37 Table of Contents Cost of Revenues Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in delivering software products, operating SaaS infrastructure, and providing support, implementation and consulting services; allocated overhead, facilities and data center costs; software royalty fees; credit bureau data and processing services; third-party hosting fees related to our SaaS services; travel costs; and outside services. The fiscal 2020 over 2019 increase of $24.3 million in cost of revenues was primarily attributable to an $11.1 million increase in allocated facilities and infrastructure costs, a $10.3 million increase in personnel and labor costs and a $7.6 million increase in direct materials cost, partially offset by a $4.9 million decrease in travel costs. The increase in facilities and infrastructure costs was primarily attributable to increased resource requirements due to expansion in our cloud infrastructure operations. The increase in personnel and labor costs was primarily attributable to an increase in our average headcount. The increase in direct materials cost was primarily attributable to an increase in license and Scores revenues that incur third-party royalties and data costs, as well as an increase in telecommunication cost. The decrease in travel costs was primarily attributable to the COVID-19 pandemic. Cost of revenues as a percentage of revenues was 28% during fiscal 2020, materially consistent with that incurred during fiscal 2019. The fiscal 2019 over 2018 increase of $23.9 million in cost of revenues expenses was primarily attributable to a $13.9 million increase in personnel and labor costs and a $6.7 million increase in facilities and infrastructure costs. The increase in personnel and labor costs was primarily attributable to an increase in headcount. The increase in facilities and infrastructure costs was primarily attributable to increased resource requirements due to expansion in our cloud infrastructure operations. Cost of revenues as a percentage of revenues decreased to 29% during fiscal 2019 from 31% during fiscal 2018 primarily due to increased sales of our high-margin Scores and software products. Research and Development Research and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of Applications and Decision Management Software products. The fiscal 2020 over 2019 increase of $17.0 million in research and development expenses was primarily attributable to an increase in personnel and labor costs and an increase in allocated facilities and infrastructure costs, both driven by increased average headcount and our continued investments in new product development. Research and development expenses as a percentage of revenues was 13% during fiscal 2020, consistent with that incurred during fiscal 2019. The fiscal 2019 over 2018 increase of $21.1 million in research and development expenses was primarily attributable to a $15.6 million increase in personnel and labor costs as a result of increased headcount, and a $3.5 million increase in facilities and infrastructure cost. Research and development expenses as a percentage of revenues was 13% during fiscal 2019, consistent with that incurred during fiscal 2018. Selling, General and Administrative Selling, general and administrative expenses consist principally of employee salaries, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; business development expenses; and the cost of operating computer systems. The fiscal 2020 over 2019 increase of $6.8 million was primarily attributable to an increase in personnel and labor costs as a result of increased average headcount, higher share-based compensation and higher non-capitalizable commission cost. The increase was partially offset by a decrease in marketing and travel costs as a result of a decrease in travel activity due to COVID-19. Selling, general and administrative expenses as a percentage of revenues decreased to 33% during fiscal 2020 from 35% during fiscal 2019 primarily due to increased sales of our high-margin Scores and software products. The fiscal 2019 over 2018 increase of $37.2 million was primarily attributable to an increase in personnel and labor costs as a result of increased headcount, higher share-based compensation and higher non-capitalizable commission cost. Selling, general and administrative expenses as a percentage of revenues decreased to 35% during fiscal 2019 from 37% during fiscal 2018 primarily due to increased sales of our high-margin Scores and software products. Amortization of Intangible Assets Amortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions. Our finite-lived intangible assets consist primarily of completed technology and customer contracts and relationships, which are being amortized using the straight-line method over periods ranging from four to fifteen years. 38 Table of Contents Amortization expense was $5.0 million, $6.1 million and $6.6 million for fiscal 2020, 2019 and 2018, respectively. 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 abandonment 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. Interest Expense, Net Interest expense includes primarily interest on the senior notes issued in December 2019, May 2018, and July 2010, as well as interest and credit facility fees on the revolving line of credit. On our consolidated statements of income and comprehensive income, interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements. The fiscal 2020 over 2019 increase in net interest expense of $2.4 million was primarily attributable to a higher average outstanding debt balance during fiscal 2020. The fiscal 2019 over 2018 increase in net interest expense of $8.4 million was primarily attributable to a higher average outstanding debt balance during fiscal 2019, as well as a higher average interest rate on our 2018 Senior Notes compared to that on our revolving line of credit. Other Income, Net Other income, net consists primarily of realized investment gains/losses and unrealized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from re-measurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items. The fiscal 2020 over 2019 increase in other income, net of $0.9 million was primarily attributable to an increase in net unrealized gains on our supplemental retirement and savings plan, partially offset by an increase in foreign currency exchange losses. The fiscal 2019 over 2018 decrease in other income, net of $10.6 million was primarily attributable to a non-operating gain related to the divestiture of an investment during fiscal 2018. Provision for Income Taxes Our effective tax rates were 8.0% , 11.1% and 19.4% in fiscal 2020, 2019 and 2018 , respectively. The decrease in our income tax provision in fiscal 2020 compared to fiscal 2019 was due to the excess tax benefits related to stock-based compensation. 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 Cuts and Jobs Act of 2017 (the “Tax Act”). As of September 30, 2020, we had approximately $111.7 million of unremitted earnings of non-U.S. subsidiaries. The Company generates substantial cash flow in the U.S. and does not have a current need for the cash to be returned to the U.S. 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 our income tax provision. 39 Table of Contents Operating Income The following tables set forth certain summary information on a segment basis related to our operating income for fiscal 2020, 2019 and 2018 : Year Ended September 30, Period-to-Period Change Period-to-Period Percentage Change Segment 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 (In thousands) (In thousands) Applications $ 153,541 $ 161,162 $ 143,964 $ (7,621 ) $ 17,198 (5 )% 12 % Scores 454,310 361,356 272,418 92,954 88,938 26 % 33 % Decision Management Software (23,475 ) (35,116 ) (34,360 ) 11,641 (756 ) (33 )% 2 % Unallocated corporate expenses (144,704 ) (144,755 ) (125,255 ) 51 (19,500 ) — % 16 % Total segment operating income 439,672 342,647 256,767 97,025 85,880 28 % 33 % Unallocated share-based compensation (93,681 ) (82,973 ) (74,814 ) (10,708 ) (8,159 ) 13 % 11 % Unallocated amortization expense (4,993 ) (6,126 ) (6,594 ) 1,133 468 (18 )% (7 )% Unallocated restructuring and impairment charges (45,029 ) — — (45,029 ) — — % — % Operating income $ 295,969 $ 253,548 $ 175,359 42,421 78,189 17 % 45 % Applications Year Ended September 30, Percentage of Revenues 2020 2019 2018 2020 2019 2018 (In thousands) Segment revenues $ 602,046 $ 605,034 $ 564,375 100 % 100 % 100 % Segment operating expenses (448,505 ) (443,872 ) (420,411 ) (74 )% (73 )% (74 )% Segment operating income $ 153,541 $ 161,162 $ 143,964 26 % 27 % 26 % Scores Year Ended September 30, Percentage of Revenues 2020 2019 2018 2020 2019 2018 (In thousands) Segment revenues $ 528,547 $ 421,177 $ 335,870 100 % 100 % 100 % Segment operating expenses (74,237 ) (59,821 ) (63,452 ) (14 )% (14 )% (19 )% Segment operating income $ 454,310 $ 361,356 $ 272,418 86 % 86 % 81 % Decision Management Software Year Ended September 30, Percentage of Revenues 2020 2019 2018 2020 2019 2018 (In thousands) Segment revenues $ 163,969 $ 133,872 $ 99,901 100 % 100 % 100 % Segment operating expenses (187,444 ) (168,988 ) (134,261 ) (114 )% (126 )% (134 )% Segment operating loss $ (23,475 ) $ (35,116 ) $ (34,360 ) (14 )% (26 )% (34 )% 40 Table of Contents The fiscal 2020 over 2019 increase in operating income of $42.4 million was attributable to a $134.5 million increase in segment revenues and a $1.1 million decrease in amortization expense, partially offset by a $45.0 million increase in restructuring and impairment charges, a $37.5 million increase in segment operating expenses, and a $10.7 million increase in share-based compensation expense. At the segment level, the $97.0 million increase in segment operating income was the result of a $93.0 million increase in our Scores segment operating income and an $11.6 million decrease in our Decision Management Software segment operating loss, partially offset by a $7.6 million decrease in our Applications segment operating income. The $7.6 million decrease in Applications segment operating income was attributable to a $4.6 million increase in segment operating expenses and a $3.0 million decrease in segment revenue. Segment operating income as a percentage of segment revenue for Applications was 26%, materially consistent with fiscal 2019. The $93.0 million increase in Scores segment operating income was attributable to a $107.4 million increase in segment revenue, partially offset by a $14.4 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 86%, consistent with fiscal 2019. The $11.6 million decrease in Decision Management Software segment operating loss was attributable to a $30.1 million increase in segment revenue, partially offset by an $18.5 million increase in segment operating expenses. Segment operating margin for Decision Management Software improved to negative 14% from negative 26%, mainly due to an increase in sales of our higher-margin software products, partially offset by our continued investment in cloud infrastructure operations and new products. The fiscal 2019 over 2018 increase in operating income of $78.2 million was attributable to a $160.0 million increase in segment revenues and a $0.5 million decrease in amortization expense, partially offset by a $54.6 million increase in segment operating expenses, a $19.5 million increase in unallocated corporate expenses and an $8.2 million increase in share-based compensation expense. At the segment level, the $85.9 million increase in segment operating income was the result of an $88.9 million increase in our Scores segment operating income and a $17.2 million increase in our Applications segment operating income, partially offset by a $19.5 million increase in unallocated corporate expenses primarily driven by an increase in unallocated incentive cost and a $0.7 million increase in our Decision Management Software segment operating loss. The $17.2 million increase in Applications segment operating income was attributable to a $40.7 million increase in segment revenue, partially offset by a $23.5 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Applications increased to 27% from 26% mainly due to an increase in sales of our higher-margin software products. The $88.9 million increase in Scores segment operating income was attributable to an $85.3 million increase in segment revenue as well as a $3.6 million decrease in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores increased to 86% from 81% mainly due to an increase in sales of our higher-margin score products. The $0.7 million increase in Decision Management Software segment operating loss was attributable to a $34.7 million increase in segment operating expenses, partially offset by a $34.0 million increase in segment revenue. Segment operating margin for Decision Management Software improved to negative 26% from negative 34% mainly due to an increase in sales of our higher-margin software products, partially offset by our continued investment in cloud infrastructure operations and new products. 41 Table of Contents CAPITAL RESOURCES AND LIQUIDITY Outlook As of September 30, 2020 , we had $157.4 million in cash and cash equivalents, which included $118.0 million held by our foreign subsidiaries. Our cash position could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part I, Item 1A titled “Risk Factors” of this Annual Report on Form 10-K. However, based on our current business plan and revenue prospects, we believe our cash and cash equivalents balances, as well as available borrowings from our $400 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements. Under our current financing arrangements, we have no significant debt obligations maturing over the next twelve months. Our undistributed earnings outside the U.S. are deemed to be permanently reinvested in foreign jurisdictions. We currently do not foresee a need to repatriate cash and cash equivalents held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue for state income or foreign withholding taxes on the distributed foreign earnings, which we expect to be immaterial. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited. Summary of Cash Flows Year Ended September 30, 2020 2019 2018 (In thousands) Cash provided by (used in): Operating activities $ 364,916 $ 260,350 $ 223,052 Investing activities (24,583 ) (42,760 ) (14,119 ) Financing activities (289,424 ) (200,047 ) (218,627 ) Effect of exchange rate changes on cash 59 (1,140 ) (5,901 ) Increase (decrease) in cash and cash equivalents $ 50,968 $ 16,403 $ (15,595 ) Cash Flows from Operating Activities Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities totaled $364.9 million in fiscal 2020 compared to $260.4 million in fiscal 2019. The $104.5 million increase was attributable to a $44.3 million increase in net income, a $46.1 million increase in non-cash items, including a $28.0 million increase in impairment loss on operating lease assets as well as a $20.0 million increase in operating lease costs, and a $14.2 million increase that resulted from timing of receipts and payments in our ordinary course of business. Net cash provided by operating activities totaled $260.4 million in fiscal 2019 compared to $223.1 million in fiscal 2018. The $37.3 million increase was attributable to a $65.6 increase in net income as well as an $18.7 million increase in non-cash items, partially offset by a $47.0 million decrease that resulted from timing of receipts and payments in our ordinary course of business. Cash Flows from Investing Activities Net cash used in investing activities totaled $24.6 million in fiscal 2020 compared to $42.8 million in fiscal 2019. The $18.2 million decrease was primarily attributable to a $15.9 million decrease in net cash used for acquisitions and a $2.0 million decrease in net cash used for purchases of property and equipment. Net cash used in investing activities totaled $42.8 million in fiscal 2019 compared to $14.1 million in fiscal 2018. The $28.7 million increase was primarily attributable to a $20.0 million decrease in proceeds from the sale of cost method investment and a $15.9 million increase in net cash used for acquisitions, partially offset by a $7.3 million decrease in net cash used for purchases of property and equipment. 42 Table of Contents Cash Flows from Financing Activities Net cash used in financing activities totaled $289.4 million in fiscal 2020 compared to $200.0 million in fiscal 2019. The $89.4 million increase was primarily due to a $338.0 million increase in payments, net of proceeds, on our revolving line of credit and a $49.9 million increase in taxes paid related to net share settlement of equity awards, partially offset by a $293.0 million increase in proceeds, net of payments, from our senior notes. Net cash used in financing activities totaled $200.0 million in fiscal 2019 compared to $218.6 million in fiscal 2018. The $18.6 million decrease was primarily due to a $192.0 million decrease in payments, net of proceeds, on our revolving line of credit, a $113.7 million decrease in net cash used for repurchases of common stock and an $11.8 million increase in proceeds from issuance of treasury stock under employee stock plans, partially offset by a $297.0 million decrease in proceeds, net of payments, from our senior notes. Repurchases of Common Stock In July 2019, our Board of Directors approved a stock repurchase program following the completion of the previously authorized program. This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions. In July 2020, our Board of Directors approved a new stock repurchase program following the completion of the July 2019 program. This program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions. As of September 30, 2020 , we had $224.8 million remaining under this authorization. During fiscal 2020, 2019 and 2018 , we expended $235.2 million , $228.9 million and $336.9 million , respectively, under these and previously authorized stock repurchase programs. Revolving Line of Credit On May 8, 2018, we amended our credit agreement with a syndicate of banks, extending the maturity date of the unsecured revolving line of credit from December 30, 2019 to May 8, 2023, while reducing our borrowing capacity to $400 million with an option to increase it by another $100 million. Proceeds from the credit facility can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions and the repurchase of our common stock. Interest on amounts borrowed under the credit facility is based on (i) a base rate, which is the greater of (a) the prime rate, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0% to 0.875% and for LIBOR borrowings ranges from 1.000% to 1.875%, and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. 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 (as defined below) 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, 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. Senior Notes On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors, the outstanding aggregate principal amount of which was paid in full at maturity on July 14, 2020 (the “2010 Senior Notes”). 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. 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”). 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. As of September 30, 2020 , the carrying value of the Senior Notes was $750.0 million and we were in compliance with all financial covenants under these obligations, and do not believe we are at material risk of not meeting these covenants due to COVID-19. 43 Table of Contents Contractual Obligations The following table presents a summary of our contractual obligations at September 30, 2020 : Year Ending September 30, Thereafter Total 2021 2022 2023 2024 2025 (In thousands) Senior notes (1) $ — $ — $ — $ — $ — $ 750,000 $ 750,000 Revolving line of credit — — — — 95,000 — 95,000 Interest due on debt obligations (2) 35,000 35,000 35,000 35,000 35,000 63,000 238,000 Finance lease obligations 2,397 2,240 784 — — — 5,421 Operating lease obligations 26,047 21,925 17,109 14,384 9,004 17,131 105,600 Unrecognized tax benefits (3) — — — — — — 7,994 Total commitments $ 63,444 $ 59,165 $ 52,893 $ 49,384 $ 139,004 $ 830,131 $ 1,202,015 (1) Represents the unpaid principal amount of the Senior Notes. (2) Represents interest payments on the Senior Notes. (3) Represents unrecognized tax benefits related to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the section of the table showing payment by fiscal year. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, goodwill and other intangible assets resulting from business acquisitions, share-based compensation, income taxes and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements: 44 Table of Contents Revenue Recognition Contracts with Customers Our revenue is primarily derived from term-based or perpetual licensing of software and scoring products and solutions, and associated maintenance; SaaS subscription services; scoring and credit monitoring services for consumers; and professional services. For contracts with customers that contain various combinations of products and services, we evaluate 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. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. Revenue is recognized when control of the promised goods or services is transferred to our customers. 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 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 licenses 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 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. 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; or usage or transaction-based variable amount not subject to a minimum threshold. We determined the nature of our SaaS arrangements is to provide continuous access to our hosted application in the cloud, i.e., a stand-ready obligation that comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). We estimate the total variable consideration at contract inception—subject to any constraints that may apply—and update the estimates as new information becomes available and recognize the amount ratably over the SaaS service period, unless we determine it is appropriate to allocate the variable amount to each distinct service period and recognize revenue as each distinct service period is performed. We also derive transactional revenue from credit scoring and monitoring services that provide consumers access to their credit reports and enable them to monitor their credit. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. We determined the nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). Revenue from one-time or monthly subscription services is recognized during the period when service is performed. Revenue from annual subscription services is recognized ratably over the subscription period. Professional services include software or SaaS implementation, consulting, model development, training services and premium cloud support. They are sold either standalone, or together with other products or services and generally represent distinct performance obligations. The transaction price can be a fixed amount or on a time and materials basis. Revenue on fixed-price services is recognized using an input method based on labor hours expended which we believe provides a faithful depiction of the transfer of services. Revenue on services provided on a time and materials basis is recognized applying the “right-to-invoice” practical expedient as the amount to which we have a right to invoice the customer corresponds directly with the value of our performance to the customer. In addition, we sell premium cloud support on a subscription basis for a fixed amount, and revenue is recognized ratably over the contract term. 45 Table of Contents Significant Judgments Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct and should be accounted for separately may require significant judgment. Specifically, when implementation service is included in the original software or SaaS offerings, judgment is required to determine if the implementation service significantly modifies or customizes the software or SaaS service in such a way that the risks of providing it and the customization service are inseparable. In rare instances, contracts may include significant modification or customization of the software of SaaS service and will result in the combination of software or SaaS service and implementation service as one performance obligation. We determine the SSPs using data from our historical standalone sales, or, in instances where such information is not available (such as when we do not sell the product or service separately), we consider factors such as the stated contract prices, our overall pricing practices and objectives, go-to-market strategy, size and type of the transactions, and effects of the geographic area on pricing, among others. When the selling price of a product or service is highly variable, we may use the residual approach to determine the SSP of that product or service. 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. 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. In order to estimate the total hours of the project, we make assumptions about labor utilization, efficiency of processes, the customer’s specification and IT environment, among others. For certain complex projects, due to the risks and uncertainties inherent with the estimation process and factors relating to the assumptions, actual progress may differ due to the change in estimated total hours. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues are subject to revisions as the contract progresses to completion. Capitalized Commission Costs We capitalize incremental commission fees paid as a result of obtaining customer contracts. Capitalized commission costs are amortized on a straight-line basis over ten years — determined using a portfolio approach — based on the transfer of goods or services to which the assets relate, taking into consideration both the initial and future contracts as we do not typically pay a commission on a contract renewal. The amortization costs are included in selling, general, and administrative expenses of our consolidated statements of income and comprehensive income. We apply a practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are recorded within selling, general, and administrative expenses. Business Combinations Accounting for our acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income and comprehensive income. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and contingent consideration, where applicable. If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, we will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our consolidated results of operations and financial position. 46 Table of Contents Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i) future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and (iii) the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Historically, there have been no significant changes in our estimates or assumptions. To the extent a significant acquisition is made during a fiscal year, as appropriate we will expand the discussion to include specific assumptions and inputs used to determine the fair value of our acquired intangible assets. 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. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our consolidated statements of income and comprehensive income and could have a material impact on our consolidated results of operations and financial position. Historically, there have been no significant changes in our valuation allowances or uncertain tax positions as it relates to business combinations. We do not believe there is a reasonable likelihood there will be a material change in the future estimates. Goodwill, Acquisition Intangibles and Other Long-Lived Assets - Impairment Assessment 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 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. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we would bypass the two-step impairment test. Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and the overall financial performance of the reporting units. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting units to guideline publicly-traded companies. These methods require estimates of our future revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. Using assumptions that are different from those used in our estimates, but in each case reasonable, could produce significantly different results and materially affect the determination of fair value and/or goodwill impairment for each reporting unit. For example, if the economic environment impacts our forecasts beyond what we have anticipated, it could cause the fair value of a reporting unit to fall below its respective carrying value. 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. 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. 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. 47 Table of Contents 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. When impairment indicators are identified, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of our intangible assets or other long-lived assets could occur. We review the estimated remaining useful lives of our acquired intangible assets at each reporting period. A reduction in our estimate of remaining useful lives, if any, could result in increased annual amortization expense in future periods. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2020, 2019 and 2018 . As discussed above, while we believe that the assumptions and estimates utilized were appropriate based on the information available to management, different assumptions, judgments and estimates could materially affect our impairment assessments for our goodwill, acquired intangibles with finite lives and other long-lived assets. Historically, there have been no significant changes in our estimates or assumptions that would have had a material impact for our goodwill or intangible assets impairment assessment. We believe our projected operating results and cash flows would need to be significantly less favorable to have a material impact on our impairment assessment. However, based upon our historical experience with operations, we do not believe there is a reasonable likelihood of a significant change in our projections. Share-Based Compensation We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years). We use the Black-Scholes valuation model to determine the fair value of our stock options and a Monte Carlo valuation model to determine the fair value of our market share units. Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, expected dividend yield, employee turnover rates and employee stock option exercise behaviors. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions. See Note 13 to the accompanying consolidated financial statements for further discussion of our share-based employee benefit plans. Income Taxes We estimate our income taxes based on the various jurisdictions where we conduct business, which involves significant judgment in determining our income tax provision. 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. 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. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding income tax expense in our consolidated statements of income and comprehensive income. In assessing the need for the valuation allowance, we consider future taxable income in the jurisdictions we operate; our ability to carry back tax attributes to prior years; an analysis of our deferred tax assets and the periods over which they will be realizable; and ongoing prudent and feasible tax planning strategies. 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. We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the technical merits of the tax position indicate it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions and they are evaluated on a quarterly basis. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results. A description of our accounting policies associated with tax-related contingencies and valuation allowances assumed as part of a business combination is provided under “Business Combinations” above. 48 Table of Contents Contingencies and Litigation We are subject to various proceedings, lawsuits and claims relating to products and services, technology, labor, stockholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. If the potential loss is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. If the potential loss is considered less than probable or the amount cannot be reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies. Due to uncertainties related to these matters, accruals or disclosures are based on the best information available at the time. Significant judgment is required in both the assessment of likelihood and in the determination of a range of potential losses. Revisions in the estimates of the potential liabilities could have a material impact on our consolidated financial position or consolidated results of operations. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates. New Accounting Pronouncements Recently Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“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 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. Recent Accounting Pronouncements Not Yet Adopted In August 2018, the FASB issued ASU No. 2018-15, “ Intangibles—Goodwill and Other (Topic 350): Internal-Use Software. ” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. 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. 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. 2016-13, “ Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ” and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. 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. 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.