What changed in this filing

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Item 1. Financial Statements

2021-01-28 compared with 2020-07-29 · 215 added, 340 removed, 315 unchanged (64% of the section changed)

13 unchanged sentences

Operating lease right-of-use assets 56,030 57,656

Goodwill 817,777 812,364

Intangible assets, net 8,367 9,236

Deferred income taxes 15,003 14,629

Other assets 102,452 105,285

Total assets $ 1,576,863 $ 1,606,240

Liabilities and Stockholders’ Equity

16 unchanged sentences

Common stock ($ 0.01 par value;

200,000 shares authorized, 88,857 shares issued and 28,999 and 28,944 shares outstanding at June 30, 2020 and September 30, 2019, respectively)

200,000 shares authorized, 88,857 shares issued and 29,236 and 29,096 shares outstanding at December 31, 2020 and September 30, 2020, respectively)

Additional paid-in-capital 1,145,893 1,218,583

Treasury stock, at cost (59,858 and 59,913 shares at June 30, 2020 and September 30, 2019, respectively)

Treasury stock, at cost ( 59,621 and 59,761 shares at December 31, 2020 and September 30, 2020, respectively)

( 3,035,668 ) ( 2,997,856 )

Retained earnings 2,279,551 2,193,059

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Quarter Ended June 30,

Nine Months Ended June 30,

Quarter Ended December 31,

(In thousands, except per share data)

1 unchanged sentence

Professional services 41,425 44,025

License 18,839 34,105

Total revenues 312,414 298,504

4 unchanged sentences

Amortization of intangible assets 937 1,796

Restructuring and acquisition-related

Restructuring and impairment charges — 3,104

Gain on sale of product line assets ( 7,334 ) —

Total operating expenses 217,693 246,622

1 unchanged sentence

Interest expense, net ( 9,641 ) ( 9,768 )

Other income, net

Other income (expense), net 2,880 ( 219 )

Income before income taxes 87,960 41,895

Income tax provision

Other comprehensive gain (loss):

Income tax provision (benefit) 1,468 ( 13,026 )

Net income 86,492 54,921

Other comprehensive gain:

Foreign currency translation adjustments 17,048 14,092

1 unchanged sentence

Earnings per share:

Basic $ 2.97 $ 1.89

Diluted $ 2.90 $ 1.82

Shares used in computing earnings per share:

Basic 29,127 29,025

Diluted 29,789 30,169

See accompanying notes.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Paid-in-Capital

Treasury Stock

Retained Earnings

Accumulated Other

Comprehensive Loss

Stockholders’ Equity

(In thousands)

Balance at March 31, 2020

Share-based compensation

Issuance of treasury stock under employee stock plans

Repurchases of common stock

Foreign currency translation adjustments

Balance at June 30, 2020

Paid-in-Capital

Treasury Stock

Retained Earnings

Accumulated Other

Comprehensive Loss

Stockholders’ Equity

(In thousands)

Balance at March 31, 2019

Share-based compensation

Issuance of treasury stock under employee stock plans

Repurchases of common stock

Foreign currency translation adjustments

Balance at June 30, 2019

Paid-in-Capital

Treasury Stock

Retained Earnings

Accumulated Other

Comprehensive Loss

Common Stock Additional

Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other

Comprehensive Loss Total

Stockholders’ Equity

(In thousands)

(In thousands) Shares Par Value

Balance at September 30, 2020 29,096 $ 291 $ 1,218,583 $ ( 2,997,856 ) $ 2,193,059 $ ( 82,995 ) $ 331,082

2 unchanged sentences

Repurchases of common stock ( 101 ) ( 1 ) — ( 50,010 ) — — ( 50,011 )

Net income — — — — 86,492 — 86,492

Foreign currency translation adjustments — — — — — 17,048 17,048

Balance at June 30, 2020

Paid-in-Capital

Treasury Stock

Retained Earnings

Accumulated Other

Comprehensive Loss

Balance at December 31, 2020 29,236 $ 292 $ 1,145,893 $ ( 3,035,668 ) $ 2,279,551 $ ( 65,947 ) $ 324,121

Common Stock Additional

Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other

Comprehensive Loss Total

Stockholders’ Equity

(In thousands)

Balance at September 30, 2018 (As Adjusted)

(In thousands) Shares Par Value

Balance at September 30, 2019 28,944 $ 289 $ 1,225,365 $ ( 2,802,450 ) $ 1,956,648 $ ( 90,085 ) $ 289,767

Share-based compensation — — 23,145 — — — 23,145

1 unchanged sentence

Repurchases of common stock ( 168 ) ( 1 ) — ( 60,008 ) — — ( 60,009 )

Net income — — — — 54,921 — 54,921

Foreign currency translation adjustments — — — — — 14,092 14,092

Balance at June 30, 2019

Balance at December 31, 2019 29,186 $ 292 $ 1,148,190 $ ( 2,843,097 ) $ 2,011,569 $ ( 75,993 ) $ 240,961

See accompanying notes.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended June 30,

Quarter Ended December 31,

(In thousands)

Cash flows from operating activities:

Net income $ 86,492 $ 54,921

Adjustments to reconcile net income to net cash provided by operating activities:

2 unchanged sentences

Deferred income taxes ( 298 ) ( 1,016 )

Net (gain) loss on marketable securities

Net gain on marketable securities ( 1,768 ) ( 944 )

Non-cash operating lease costs 4,000 4,493

Provision for doubtful accounts, net 219 281

Net loss on sales of property and equipment

Net loss on sales and abandonment of property and equipment 62 48

Gain on sale of product line assets ( 7,334 ) —

Changes in operating assets and liabilities:

10 unchanged sentences

Purchases of marketable securities ( 1,741 ) ( 2,733 )

Distribution from other investments

Net cash used in investing activities

Proceeds from sale of product line assets 8,291 —

(Purchase of) distribution from equity investment ( 210 ) 55

Net cash provided by (used in) investing activities 3,862 ( 9,011 )

Cash flows from financing activities:

13 unchanged sentences

Supplemental disclosures of cash flow information:

Cash paid for income taxes, net of refunds

Cash paid for income taxes, net of refunds of $ 221 and $ 154 during the quarters ended December 31, 2020, and 2019, respectively

$ 3,186 $ 2,391

Cash paid for interest $ 17,858 $ 12,856

8 unchanged sentences

Incorporated under the laws of the State of Delaware, Fair Isaac Corporation (“FICO”) is a provider of analytic, software and data management products and services that enable businesses to automate, improve and connect decisions.

FICO provides a range of analytical solutions, credit scoring and credit account management products and services to banks, credit reporting agencies, credit card processing agencies, insurers, retailers, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.

In this Quarterly Report on Form 10-Q, Fair Isaac Corporation is referred to as “FICO,” “we,” “us,” “our,” or “the Company.”

5 unchanged sentences

The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.

As discussed in New Accounting Pronouncements below and Note 13, effective October 1, 2019, we adopted Accounting Standards Update (“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”) using the modified retrospective approach, under which financial results reported in prior periods were not restated.

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

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

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

2 unchanged sentences

We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes.

For example, we use estimates in determining the collectability of accounts receivable;

For example, we use estimates in determining the collectibility of accounts receivable;

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;

10 unchanged sentences

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Topic 842, which requires the recognition of operating lease assets and lease liabilities on the balance sheet.

Leases will be 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 13 for additional information regarding our accounting policy for leases and additional disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-15, Intangibles—Goodwill and Other (Topic 350):

1 unchanged sentence

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.

Early adoption is permitted.

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

We adopted ASU 2018-15 in the first quarter of our fiscal 2021 and the adoption did not have a significant impact on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No.

3 unchanged sentences

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.

Early adoption is permitted.

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.

We adopted Topic 326 in the first quarter of our fiscal 2021 and the adoption did not have a significant impact on our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

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

Fair Value Measurements

3 unchanged sentences

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 June 30, 2020 and September 30, 2019 .

We did not have any liabilities that are valued using inputs identified under a Level 1 hierarchy as of December 31, 2020 and September 30, 2020.

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

2 unchanged sentences

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 June 30, 2020 and September 30, 2019 .

We measure the fair value of the Senior Notes (as defined in Note 7) based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.

We did not have any assets that are valued using inputs identified under a Level 2 hierarchy as of December 31, 2020 and September 30, 2020.

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

• Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment.

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 June 30, 2020 and September 30, 2019 .

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

June 30, 2020

Active Markets for

We did not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of December 31, 2020 and September 30, 2020.

The following tables represent financial assets that we measured at fair value on a recurring basis at December 31, 2020 and September 30, 2020:

December 31, 2020 Active Markets for

Identical Instruments

Fair Value as of June 30, 2020

(Level 1) Fair Value as of December 31, 2020

(In thousands)

1 unchanged sentence

Marketable securities (2) 28,455 28,455

September 30, 2019

Active Markets for

Total $ 39,149 $ 39,149

September 30, 2020 Active Markets for

Identical Instruments

Fair Value as of September 30, 2019

(Level 1) Fair Value as of September 30, 2020

(In thousands)

1 unchanged sentence

Marketable securities (2) 25,513 25,513

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

Not included in these tables are cash deposits of $ 101.3 million and $ 77.5 million at June 30, 2020 and September 30, 2019 , respectively.

Total $ 60,788 $ 60,788

(1) Included in cash and cash equivalents on our condensed consolidated balance sheets at December 31, 2020 and September 30, 2020.

Not included in these tables are cash deposits of $ 134.0 million and $ 122.1 million at December 31, 2020 and September 30, 2020, respectively.

(2) Represents securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees.

Included in marketable securities on our condensed consolidated balance sheets at June 30, 2020 and September 30, 2019 .

For the fair value of our derivative instruments and senior notes, see Note 3 and Note 7, respectively.

There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the quarters and nine-month periods ended June 30, 2020 and 2019 .

Included in marketable securities on our condensed consolidated balance sheets at December 31, 2020 and September 30, 2020.

See Note 7 for the fair value of our senior notes.

There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the quarters ended December 31, 2020 and 2019.

Derivative Financial Instruments

7 unchanged sentences

The forward contracts are short-term in nature and typically have average maturities at inception of less than three months .

The following tables summarize our outstanding foreign currency forward contracts, by currency, at June 30, 2020 and September 30, 2019 :

June 30, 2020

Contract Amount

The following tables summarize our outstanding foreign currency forward contracts, by currency, at December 31, 2020 and September 30, 2020:

December 31, 2020

Contract Amount Fair Value

Currency USD USD

(In thousands)

Sell foreign currency:

Euro (EUR) EUR 18,900 $ 23,068 $ —

Buy foreign currency:

British pound (GBP)

Singapore dollar (SGD)

British pound (GBP) GBP 12,034 $ 16,400 $ —

Singapore dollar (SGD) SGD 6,725 $ 5,100 $ —

September 30, 2020

Contract Amount

Contract Amount Fair Value

Currency USD USD

(In thousands)

Sell foreign currency:

Euro (EUR) EUR 15,000 $ 17,656 $ —

Buy foreign currency:

British pound (GBP)

Singapore dollar (SGD)

The foreign currency forward contracts were entered into on June 30, 2020 and September 30, 2019 , respectively;

British pound (GBP) GBP 16,555 $ 21,300 $ —

Singapore dollar (SGD) SGD 7,815 $ 5,700 $ —

The foreign currency forward contracts were entered into on December 31, 2020 and September 30, 2020, respectively;

therefore, their fair value was $ 0 on each of these dates.

Losses on derivative financial instruments are recorded in our condensed consolidated statements of income and comprehensive income as a component of other income, net, and consisted of the following:

Quarter Ended June 30,

Nine Months Ended June 30,

Gains on derivative financial instruments are recorded in our condensed consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following:

Quarter Ended December 31,

(In thousands)

Losses on foreign currency forward contracts

Gains on foreign currency forward contracts $ 1,686 $ 1,145

Goodwill and Intangible Assets

1 unchanged sentence

Amortization expense consisted of the following:

Quarter Ended June 30,

Nine Months Ended June 30,

Quarter Ended December 31,

(In thousands)

1 unchanged sentence

Customer contracts and relationships 571 1,140

Trade names — 37

Non-compete agreements 44 44

Estimated future intangible asset amortization expense associated with intangible assets existing at June 30, 2020 was as follows:

Year Ending September 30,

(In thousands)

2020 (excluding the nine months ended June 30, 2020)

The following table summarizes changes to goodwill during the nine months ended June 30, 2020 , both in total and as allocated to our segments:

Decision Management Software

Total $ 937 $ 1,796

Estimated future intangible asset amortization expense associated with intangible assets existing at December 31, 2020 was as follows:

Year Ending September 30, (In thousands)

2021 (excluding the quarter ended December 31, 2020) $ 2,742

Total $ 8,367

The following table summarizes changes to goodwill during the quarter ended December 31, 2020, both in total and as allocated to our segments:

Applications Scores Decision Management Software Total

(In thousands)

1 unchanged sentence

Foreign currency translation adjustment 4,568 — 845 5,413

Balance at June 30, 2020

Balance at December 31, 2020 $ 601,372 $ 146,648 $ 69,757 $ 817,777

Composition of Certain Financial Statement Captions

The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at June 30, 2020 and September 30, 2019 :

The following table presents the composition of property and equipment, net and other assets at December 31, 2020 and September 30, 2020:

2020 September 30,

(In thousands)

Property and equipment, net:

Property and equipment $ 156,053 $ 161,119

accumulated depreciation and amortization ( 117,042 ) ( 114,700 )

Total $ 39,011 $ 46,419

Other assets:

Long-term receivables $ 50,566 $ 54,074

Prepaid commissions 40,159 38,579

Others 11,727 12,632

Total $ 102,452 $ 105,285

Revolving Line of Credit

5 unchanged sentences

The credit facility contains certain restrictive covenants including maintaining a maximum consolidated leverage ratio of 3.25 on an average trailing four-quarter basis, 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 in Note 7) in July 2020, upon which maintaining a minimum interest coverage ratio of 3.00 .

and a minimum interest coverage ratio of 3.00 .

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

As of June 30, 2020 , we had $ 103.0 million in borrowings outstanding at a weighted average interest rate of 1.313 % and 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 with maturities ranging from 6 to 10 years.

The outstanding 2010 Senior Notes’ weighted average interest rate is 5.6 % and the weighted average maturity is 10.0 years .

The 2010 Senior Notes required interest payments semi-annually and contained 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 June 30, 2020 .

In July 2020, we repaid $85 million in principal due at maturity of the remaining outstanding 2010 Senior Notes, and no 2010 Senior Notes remained outstanding following such repayment.

As of December 31, 2020, we had $ 131.0 million in borrowings outstanding at a weighted-average interest rate of 1.284 % and were in compliance with all financial covenants under this credit facility.

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”).

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

On December 6, 2019, we issued $ 350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” and with the 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 purchase agreements for the 2010 Senior Notes, as well as the indentures for the 2018 Senior Notes and the 2019 Senior Notes, contain certain covenants typical of unsecured obligations.

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

June 30, 2020

September 30, 2019

Face Value (*)

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

The following table presents the face values and fair values for the Senior Notes at December 31, 2020 and September 30, 2020:

December 31, 2020 September 30, 2020

Face Value (*) Fair Value Face Value (*) Fair Value

(In thousands)

1 unchanged sentence

The 2019 Senior Notes 350,000 364,000 350,000 358,750

The 2019 Senior Notes

(*) The carrying value of the Senior Notes was reduced by the net debt issuance costs of $ 11.0 million and $ 5.2 million at June 30, 2020 and September 30, 2019 , respectively.

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.

Restructuring Expenses

There were no restructuring expenses incurred during the quarter ended June 30, 2020.

During the nine-month period ended June 30, 2020, we incurred $ 3.1 million in employee separation costs due to the elimination of 69 positions throughout the Company.

We expect that cash payment for all the employee separation costs will be paid by the end of our fiscal 2020.

There were no restructuring expenses incurred during the quarter and nine-month period ended June 30, 2019.

The following table summarizes our restructuring accruals related to facility closures and employee separation.

The balances at June 30, 2020 and September 30, 2019 were classified as current liabilities and recorded in other accrued liabilities within the accompanying condensed consolidated balance sheets.

Adjustment (*)

September 30, 2019

June 30, 2020

(In thousands)

Facilities charges

Employee separation

(*) 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.

Total $ 750,000 $ 816,000 $ 750,000 $ 800,750

(*) The carrying value of the Senior Notes was the face value reduced by the net debt issuance costs of $ 10.2 million and $ 10.6 million at December 31, 2020 and September 30, 2020, respectively.

Effective Tax Rate

The effective income tax rate was 15.9 % and 17.8 % during the quarters ended June 30, 2020 and 2019 , respectively, and 1.8 % and 11.4 % during the nine months ended June 30, 2020 and 2019 , respectively.

The effective income tax rate was 1.7 % and ( 31.1 )% during the quarters ended December 31, 2020 and 2019, respectively.

The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year.

The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The effective tax rates for the nine months ended June 30, 2020 and 2019 were both impacted by the recording of excess tax benefits relating to stock awards.

Stock exercises during the nine months ended June 30, 2020 resulted in an additional increase in excess tax benefits.

The total unrecognized tax benefit for uncertain tax positions is estimated to be $ 6.8 million and $ 5.8 million at June 30, 2020 and September 30, 2019 , respectively.

The effective tax rates for the quarters ended December 31, 2020 and 2019 were both impacted by the recording of excess tax benefits relating to stock awards.

The impact is dependent upon grants of stock-based compensation and the future stock price in relation to the fair value of awards on the grant date.

The increase in stock price for awards that vested in December 2019 was significantly larger than the increase in stock price for the awards that vested in December 2020.

The total unrecognized tax benefit for uncertain tax positions was estimated to be $ 9.0 million and $ 8.0 million at December 31, 2020 and September 30, 2020, respectively.

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

We have accrued interest of $ 0.4 million and $ 0.3 million related to unrecognized tax benefits as of June 30, 2020 and September 30, 2019 , respectively.

We accrued interest of $ 0.5 million and $ 0.4 million related to unrecognized tax benefits as of December 31, 2020 and September 30, 2020, respectively.

Stock-Based Employee Benefit Plans

We maintain the 2012 Long-Term Incentive Plan (the “2012 Plan”) under which we grant equity awards, including stock options, stock appreciation rights, restricted stock awards, stock unit awards and other stock-based awards.

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.

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 generally vest annually over three years based on the achievement of specified criteria.

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 our common stock to eligible employees.

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

The purchase price of the stock is 85 % of the closing sales price of FICO common stock on the last trading day of each offering period.

Offering period means the approximately six-month long periods commencing (a) on the first trading day on or after September 1 and terminating on the last trading day in the following February, and (b) on the first trading day on or after March 1 and terminating on the last trading day in the following August.

Stock Options

The following table summarizes option activity during the quarter ended December 31, 2020:

Shares Weighted-average Exercise Price Weighted-average Remaining Contractual Term Aggregate Intrinsic Value

(In thousands) (In years) (In thousands)

Outstanding at September 30, 2020 246 $ 166.80

Granted 12 506.91

Outstanding at December 31, 2020 258 $ 182.79 3.75 $ 84,688

Exercisable at December 31, 2020 188 $ 140.06 3.05 $ 69,796

Vested or expected to vest at December 31, 2020 255 $ 180.76 3.72 $ 84,191

Restricted Stock Units

The following table summarizes restricted stock unit activity during the quarter ended December 31, 2020:

Shares Weighted-average Grant-date Fair Value

(In thousands)

Outstanding at September 30, 2020 721 $ 229.10

Granted 159 506.38

Released ( 273 ) 187.57

Forfeited ( 19 ) 241.04

Outstanding at December 31, 2020 588 $ 323.15

Performance Share Units

The following table summarizes performance share unit activity during the quarter ended December 31, 2020:

Shares Weighted-average Grant-date Fair Value

(In thousands)

Outstanding at September 30, 2020 127 $ 248.97

Granted 33 506.91

Released ( 68 ) 217.36

Outstanding at December 31, 2020 92 $ 366.08

Market Share Units

The following table summarizes market share unit activity during the quarter ended December 31, 2020:

Shares Weighted-average Grant-date Fair Value

(In thousands)

Outstanding at September 30, 2020 63 $ 311.91

Granted 67 471.16

Released ( 67 ) 257.15

Outstanding at December 31, 2020 63 $ 541.41

Employee Stock Purchase Plan

As the 2019 Purchase Plan has semi-annual offering periods with shares purchased on the last trading day in the months of February and August, no shares were purchased during the quarter ended December 31, 2020.

Earnings per Share

The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters and nine-month periods ended June 30, 2020 and 2019 :

Quarter Ended June 30,

Nine Months Ended June 30,

The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters ended December 31, 2020 and 2019:

Quarter Ended December 31,

(In thousands, except per share data)

Numerator for diluted and basic earnings per share:

Net income $ 86,492 $ 54,921

Denominator - share:

3 unchanged sentences

Earnings per share:

We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the exercise price of the options exceeds the average market price of our common stock as their inclusion would be antidilutive.

There were approximately 13,000 options excluded for the quarter ended June 30, 2020.

There were no options excluded for the quarter ended June 30, 2019.

There were approximately 14,000 and 5,000 options excluded for the nine months ended June 30, 2020 and 2019, respectively.

Basic $ 2.97 $ 1.89

Diluted $ 2.90 $ 1.82

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, software-as-a-service (“SaaS”) applications through the FICO ® Analytic Cloud or third-party public clouds, such as those provided by Amazon Web Services (“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.

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 and services are either distributed through major credit reporting agencies worldwide or sold to our 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.

Some of our 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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Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets, nor capital expenditures where depreciation amounts are allocated to the segments from their internal cost centers as described above.

The following tables summarize segment information for the quarters and nine-month periods ended June 30, 2020 and 2019 :

Quarter Ended June 30, 2020

Decision Management Software

(In thousands)

Segment revenues:

Transactional and maintenance

Professional services

Total segment revenues

Segment operating expense

Segment operating income (loss)

Unallocated share-based compensation expense

Unallocated amortization expense

Operating income

Unallocated interest expense, net

Unallocated other income, net

Income before income taxes

Depreciation expense

Quarter Ended June 30, 2019

Decision Management Software

(In thousands)

Segment revenues:

Transactional and maintenance

Professional services

Total segment revenues

Segment operating expense

Segment operating income (loss)

Unallocated share-based compensation expense

Unallocated amortization expense

Operating income

Unallocated interest expense, net

Unallocated other income, net

Income before income taxes

Depreciation expense

Nine Months Ended June 30, 2020

Decision Management Software

The following tables summarize segment information for the quarters ended December 31, 2020 and 2019:

Quarter Ended December 31, 2020

Applications Scores Decision Management Software Unallocated

Expenses Total

(In thousands)

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Professional services 30,605 117 10,703 — 41,425

License 7,025 5,944 5,870 — 18,839

Total segment revenues 135,361 144,651 32,402 — 312,414

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Unallocated amortization expense ( 937 )

Unallocated restructuring and acquisition-related

Unallocated gain on sale of product line assets 7,334

Operating income 94,721

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Depreciation expense $ 4,374 $ 194 $ 984 $ 33 $ 5,585

Nine Months Ended June 30, 2019

Decision Management Software

Quarter Ended December 31, 2019

Applications Scores Decision Management Software Unallocated

Expenses Total

(In thousands)

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Professional services 34,023 264 9,738 — 44,025

License 19,318 7,428 7,359 — 34,105

Total segment revenues 152,178 115,138 31,188 — 298,504

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Unallocated amortization expense ( 1,796 )

Unallocated restructuring and impairment charges ( 3,104 )

Operating income 51,882

Unallocated interest expense, net ( 9,768 )

Unallocated other income, net

Unallocated other expense, net ( 219 )

Income before income taxes $ 41,895

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Information about disaggregated revenue by product deployment methods was as follows:

Quarter Ended June 30, 2020

Reportable Segments

(Dollars in thousands)

Decision Management Software

Quarter Ended June 30, 2019

Reportable Segments

(Dollars in thousands)

Decision Management Software

Nine Months Ended June 30, 2020

Reportable Segments

Quarter Ended December 31, 2020

Reportable Segments On-Premises SaaS Scores Total Percentage

(Dollars in thousands)

Applications $ 71,220 $ 64,141 $ — $ 135,361 43 %

Scores — — 144,651 144,651 46 %

Decision Management Software 22,778 9,624 — 32,402 11 %

Nine Months Ended June 30, 2019

Reportable Segments

Total $ 93,998 $ 73,765 $ 144,651 $ 312,414 100 %

Quarter Ended December 31, 2019

Reportable Segments On-Premises SaaS Scores Total Percentage

(Dollars in thousands)

Applications $ 85,978 $ 66,200 $ — $ 152,178 51 %

Scores — — 115,138 115,138 39 %

Decision Management Software 23,679 7,509 — 31,188 10 %

Total $ 109,657 $ 73,709 $ 115,138 $ 298,504 100 %

Information about disaggregated revenue by primary geographical markets was as follows:

Quarter Ended June 30, 2020

Reportable Segments

North America

Latin America

Europe, Middle East and Africa

(In thousands)

Decision Management Software

Quarter Ended June 30, 2019

Reportable Segments

North America

Latin America

Europe, Middle East and Africa

(In thousands)

Decision Management Software

Nine Months Ended June 30, 2020

Reportable Segments

North America

Latin America

Europe, Middle East and Africa

Quarter Ended December 31, 2020

Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total

(In thousands)

Applications $ 79,337 $ 9,227 $ 35,257 $ 11,540 $ 135,361

Scores 140,410 303 1,713 2,225 144,651

Decision Management Software 16,547 2,913 8,578 4,364 32,402

Nine Months Ended June 30, 2019

Reportable Segments

North America

Latin America

Europe, Middle East and Africa

Total $ 236,294 $ 12,443 $ 45,548 $ 18,129 $ 312,414

Quarter Ended December 31, 2019

Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total

(In thousands)

Applications $ 85,466 $ 9,517 $ 39,784 $ 17,411 $ 152,178

Scores 110,197 284 1,538 3,119 115,138

Decision Management Software 15,587 4,333 7,265 4,003 31,188

Total $ 211,250 $ 14,134 $ 48,587 $ 24,533 $ 298,504

Contract Balances and Performance Obligations

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We record deferred revenue when the payment is made or due before we satisfy a performance obligation.

Receivables at June 30, 2020 and September 30, 2019 consisted of the following:

Receivables at December 31, 2020 and September 30, 2020 consisted of the following:

2020 September 30,

(In thousands)

Billed $ 187,071 $ 211,776

Unbilled 178,839 181,550

365,910 393,326

allowance for doubtful accounts ( 4,718 ) ( 5,072 )

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

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

Contract assets balance at December 31, 2020 and September 30, 2020 was immaterial.

Deferred revenue primarily relates to our maintenance and SaaS contracts billed annually in advance and generally recognized ratably over the term of the service period.

Significant changes in the deferred revenues balances during the nine months ended June 30, 2020 were as follows:

Nine Months Ended

June 30, 2020

Significant changes in the deferred revenues balances during the quarter ended December 31, 2020 were as follows:

Quarter Ended

December 31, 2020

(In thousands)

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Increases due to billings, excluding amounts recognized as revenue during the period 48,441

Deferred revenues at June 30, 2020

Deferred revenues at December 31, 2020 * $ 122,789

(*) Deferred revenues at September 30, 2020 included current portion of $ 115.2 million and long-term portion of $ 6.9 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets.

Deferred revenues at June 30, 2020 included current portion of $ 105.8 million and long-term portion of $ 5.9 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets.

Deferred revenues at December 31, 2020 included current portion of $ 115.8 million and long-term portion of $ 7.0 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days.

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• 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 $ 247.2 million as of June 30, 2020 , of which we expect to recognize approximately 54 % over the next 18 months and the remainder thereafter.

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 condensed 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 condensed 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.

The following table presents the lease balances within the condensed consolidated balance sheets:

Balance Sheet Location

June 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 $ 3.1 million .

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

Quarter Ended

June 30, 2020

Nine Months Ended June 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 lease term and weighted average discount rates related to our operating and finance leases:

June 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:

Nine Months Ended June 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 June 30, 2020 were as follows:

(In thousands)

Operating Leases

Finance Leases

Remainder of fiscal 2020

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.

The 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

Revenue allocated to remaining performance obligations was $ 337.7 million as of December 31, 2020, of which we expect to recognize approximately 50 % over the next 20 months and the remainder thereafter.

Contingencies

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For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.

Subsequent Events

In July 2020, our Board of Directors approved a new stock repurchase program following the completion of a similar program that was approved in July 2019.

The new 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.

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-Q

Item 1. Financial Statements