FAIR ISAAC CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Statements contained in this report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). In addition, certain statements in our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the PSLRA. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, expenses, earnings or loss per share, the payment or nonpayment of dividends, share repurchases, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, research and development, and the sufficiency of capital resources; (iii) statements of assumptions underlying such statements, including those related to economic conditions; (iv) statements regarding results of business combinations or strategic divestitures; (v) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; and (vi) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” “outlook,” “plan,” “estimated,” “will,” variations of these terms and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Part II, Item 1A “ Risk Factors ” of this Quarterly Report on Form 10-Q. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. OVERVIEW We were founded in 1956 on the premise that data, used intelligently, can improve business decisions. Today, FICO’s software and the widely used FICO ® Score operationalize analytics, enabling thousands of businesses in nearly 120 countries to uncover new opportunities, make timely decisions that matter, and execute them at scale. Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, automotive companies, public agencies, and organizations in other industries. We also serve consumers through online services that enable people to access and understand their FICO Scores — the standard measure in the U.S. of consumer credit risk — empowering them to increase financial literacy and manage their financial health. Our business consists of two operating segments: Scores and Software. Our Scores segment includes our business-to-business (“B2B”) scoring solutions and services which give our clients access to predictive credit and other scores that can be easily integrated into their transaction workflows and decision-making processes. This segment also includes our business-to-consumer (“B2C”) scoring solutions, including our myFICO.com subscription offerings. Our Software segment includes pre-configured analytic and decision management solutions designed for a specific type of business need or process — such as account origination, customer management, customer engagement, fraud detection, financial crimes compliance, and marketing — as well as associated professional services. This segment also includes FICO ® Platform, a modular software offering designed to support advanced analytic and decision use cases, as well as stand-alone analytic and decisioning software that can be configured by our customers to address a wide variety of business use cases. Our offerings are available to our customers as software-as-a-service (“SaaS”) or as on-premises software. 18 Table of Contents Due to the COVID-19 pandemic, we continue to conduct business with substantial modifications to employee travel and work locations. We expect these modifications to remain in place throughout calendar year 2022, along with substantially modified interactions with customers and suppliers, among other adjustments. We have maintained a “Remote Work Policy” providing our employees with valued flexibility. While we have not experienced material disruptions to our operations from the COVID-19 pandemic, we are unable to predict the full impact that the COVID-19 pandemic will have on our operations and future financial performance, including demand for our offerings, impact to our customers and partners, actions that may be taken by governmental authorities, and other factors identified in “Risk Factors” in Part II, Item 1A of this Report. Highlights from the quarter and six months ended March 31, 2022 • Total revenue was $357.2 million during the quarter ended March 31, 2022, an 8% increase from the quarter ended March 31, 2021, and $679.6 million during the six months ended March 31, 2022, a 6% increase from the six months ended March 31, 2021. • Total revenue for our Scores segment was $183.7 million during the quarter ended March 31, 2022, a 9% increase from the quarter ended March 31, 2021, and $353.2 million during the six months ended March 31, 2022, a 13% increase from the six months ended March 31, 2021. • Annual Recurring Revenue for our Software segment as of March 31, 2022 was $550.3 million, a 11% increase from March 31, 2021, excluding divestitures. • Dollar-Based Net Retention Rate for our Software segment was 110% during the quarter ended March 31, 2022, excluding divestitures. • Operating income was $152.1 million during the quarter ended March 31, 2022, a 50% increase from the quarter ended March 31, 2021, and $267.6 million during the six months ended March 31, 2022, a 37% increase from the six months ended March 31, 2021. • Net income was $104.4 million during the quarter ended March 31, 2022, a 52% increase from the quarter ended March 31, 2021, and $189.3 million during the six months ended March 31, 2022, a 22% increase from the six months ended March 31, 2021. • EPS was $3.95 during the quarter ended March 31, 2022, a 70% increase from the quarter ended March 31, 2021, and $7.02 during the six months ended March 31, 2022, a 34% increase from the six months ended March 31, 2021. • Cash flows from operations were $247.5 million during the six months ended March 31, 2022, compared with $231.5 million during the six months ended March 31, 2021. • Cash and cash equivalents were $174.2 million as of March 31, 2022, compared with $195.4 million as of September 30, 2021. • Total debt balance was $1.79 billion as of March 31, 2022, compared with $1.26 billion as of September 30, 2021. • Total share repurchases during the quarter ended March 31, 2022 were $264.0 million, compared with $205.2 million during the quarter ended March 31, 2021, and during the six months ended March 31, 2022 were $757.6 million, compared with $255.2 million during the six months ended March 31, 2021. Key performance metrics for Software segment Annual Contract Value Bookings (“ACV Bookings”) Management regards ACV Bookings as an important indicator of future revenues, but they are not comparable to, nor are they a substitute for, an analysis of our revenues and other GAAP measures. We define ACV Bookings as the average annualized value of software contracts signed in the current reporting period that generate current and future on-premises and SaaS software revenue. We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other revenues that are non-recurring in nature. For renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACV Bookings. ACV Bookings is calculated by dividing the total expected contract value by the contract term in years. The expected contract value equals the fixed amount — including guaranteed minimums — stated in the contract, plus estimates of future usage-based fees. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimates and actual results occur due to variability in the estimated usage. This variability can be the result of 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. 19 Table of Contents We disclose estimated revenue expected to be recognized in the future related to remaining performance obligations in Note 8 to the accompanying condensed consolidated financial statements. However, we believe ACV Bookings is a more meaningful measure of our business as it includes estimated revenues and future billings excluded from Note 8, such as usage-based fees and guaranteed minimums derived from our on-premises software licenses, among others. The following table summarizes our ACV Bookings during the periods indicated: Quarter Ended March 31, Six Months Ended March 31, 2022 2021 2022 2021 (In millions) Total on-premises and SaaS software * $ 20.6 $ 13.3 $ 37.2 $ 25.4 (*) During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our Collections and Recovery (“C&R”) business. The amounts for the quarter and six months ended March 31, 2021 excluded these divested product lines and businesses. Annual Recurring Revenue (“ARR”) Accounting Standards Codification 606 requires us to recognize a significant portion of revenue from our on-premises software subscriptions at the point in time when the software is first made available to the customer, or at the beginning of the subscription term, despite the fact that our contracts typically call for billing these amounts ratably over the life of the subscription. The remaining portion of our on-premises software subscription revenue including maintenance and usage-based fees are recognized over the life of the contract. This point-in-time recognition of a portion of our on-premises software subscription revenue creates significant variability in the revenue recognized period to period based on the timing of the subscription start date and the subscription term. Furthermore, this point-in-time revenue recognition can create a significant difference between the timing of our revenue recognition and the actual customer billing under the contract. We use ARR to measure the underlying performance of our subscription-based contracts and mitigate the impact of this variability. ARR is defined as the annualized revenue run-rate of on-premises and SaaS software agreements within a quarterly reporting period, and as such, is different from the timing and amount of revenue recognized. All components of our software licensing and subscription arrangements that are not expected to recur (primarily perpetual licenses) are excluded. We calculate ARR as the quarterly recurring revenue run-rate multiplied by four. The following table summarizes our ARR at each of the dates presented: June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 March 31, 2022 ARR (*) (In millions) Platform (**) $ 43.8 $ 47.7 $ 55.1 $ 60.2 $ 67.7 $ 75.2 $ 92.2 $ 96.7 Non-platform 438.5 443.6 439.9 437.1 445.9 448.8 454.4 453.6 Total $ 482.3 $ 491.3 $ 495.0 $ 497.3 $ 513.6 $ 524.0 $ 546.6 $ 550.3 Percentage Platform 9 % 10 % 11 % 12 % 13 % 14 % 17 % 18 % Non-platform 91 % 90 % 89 % 88 % 87 % 86 % 83 % 82 % Total 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % YoY Change Platform 44 % 45 % 38 % 47 % 54 % 58 % 67 % 60 % Non-platform (3) % (2) % (2) % (3) % 2 % 1 % 3 % 4 % Total on-premises and SaaS software — % 1 % 2 % 1 % 6 % 7 % 10 % 11 % (*) During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our C&R business. The amounts and percentages above excluded these divested product lines and businesses at all dates presented. 20 Table of Contents (**) The FICO platform software is a set of interoperable services which use software assets owned and/or governed by FICO for building solutions and which conform to FICO architectural standards based on key elements of Cloud Native Computing design principles. These standards encompass shared security context and pre-integration using FICO standard application programming interfaces for all services. Dollar-Based Net Retention Rate (“DBNRR”) We consider DBNRR to be an important measure of our success in retaining and growing revenue from our existing customers. To calculate DBNRR for any period, we compare the ARR at the end of the prior comparable quarter (“base ARR”) to the ARR from that same cohort of customers at the end of the current quarter (“retained ARR”); we then divide the retained ARR by the base ARR to arrive at the DBNRR. Our calculation includes the positive impact among this cohort of customers of selling additional products, price increases and increases in usage-based fees, and the negative impact of customer attrition, price decreases, and decreases in usage-based fees during the period. However, the calculation does not include the positive impact from sales to any new customers acquired during the period. Our DBNRR may increase or decrease from period to period as a result of various factors, including the timing of new sales and customer renewal rates. The following table summarizes our DBNRR for each of the periods presented: Quarter Ended June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 March 31, 2022 DBNRR (*) Platform 108 % 116 % 123 % 130 % 137 % 143 % 143 % 141 % Non-platform 95 % 96 % 97 % 96 % 100 % 100 % 102 % 103 % Total on-premises and SaaS software 98 % 99 % 100 % 100 % 105 % 106 % 109 % 110 % (*) During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our C&R business. The percentages above excluded these divested product lines and businesses for all periods presented. RESULTS OF OPERATIONS We are organized into the following two reportable segments: Scores and 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 are set forth in Note 8 and Note 11 to the accompanying condensed consolidated financial statements. 21 Table of Contents Revenues The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and six-month periods ended March 31, 2022 and 2021: Quarter Ended March 31, Percentage of Revenues Period-to-Period Change Period-to-Period Percentage Change Segment 2022 2021 2022 2021 (In thousands) (In thousands) Scores $ 183,742 $ 168,719 51 % 51 % $ 15,023 9 % Software 173,453 162,642 49 % 49 % 10,811 7 % Total $ 357,195 $ 331,361 100 % 100 % 25,834 8 % Six Months Ended March 31, Percentage of Revenues Period-to-Period Change Period-to-Period Percentage Change Segment 2022 2021 2022 2021 (In thousands) (In thousands) Scores $ 353,229 $ 313,370 52 % 49 % $ 39,859 13 % Software 326,327 330,405 48 % 51 % (4,078) (1) % Total $ 679,556 $ 643,775 100 % 100 % 35,781 6 % Quarter Ended March 31, 2022 Compared to Quarter Ended March 31, 2021 Scores Scores segment revenues increased $15.0 million due to an increase of $5.9 million in our business-to-business scores revenue and $9.1 million in our business-to-consumer revenue. The increase in business-to-business scores revenue was primarily attributable to a higher unit price across several business-to-business offerings and an increase in unsecured originations volume, partially offset by a decrease in mortgage originations volume during the quarter ended March 31, 2022. The increase in business-to-consumer revenue was attributable to an increase in both royalties derived from scores sold indirectly to consumers through credit reporting agencies and direct sales generated from the myFICO.com website. Software Quarter Ended March 31, Period-to-Period Change Period-to-Period Percentage Change 2022 2021 (In thousands) (In thousands) On-premises and SaaS software $ 149,088 $ 125,551 $ 23,537 19 % Professional services 24,365 37,091 (12,726) (34) % Total $ 173,453 $ 162,642 10,811 7 % Software segment revenues increased $10.8 million due to a $23.5 million increase in our on-premises and SaaS software revenue, partially offset by a $12.7 million decrease in services revenue. The increase in our on-premises and SaaS software revenue was primarily attributable to an increase in point-in-time recognition due to a large license deal, as well as an increase in over-time recognition due to SaaS growth, partially offset by the C&R business divestiture. The decrease in services revenue was primarily attributable to our strategic shift to emphasize software over services, as well as the C&R business divestiture. The total impact to current quarter revenue from the divestiture was $15.9 million — an $8.1 million decrease from on-premises and SaaS software and a $7.8 million decrease from professional services. 22 Table of Contents Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021 Scores Scores segment revenues increased $39.9 million due to an increase of $18.8 million in our business-to-business scores revenue and $21.1 million in our business-to-consumer revenue. The increase in business-to-business scores revenue was primarily attributable to a higher unit price across several business-to-business offerings, partially offset by a decrease in mortgage originations volume during the six months ended March 31, 2022. The increase in business-to-consumer revenue was attributable to an increase in both royalties derived from scores sold indirectly to consumers through credit reporting agencies and direct sales generated from the myFICO.com website. Software Six Months Ended March 31, Period-to-Period Change Period-to-Period Percentage Change 2022 2021 (In thousands) (In thousands) On-premises and SaaS software $ 275,426 $ 252,006 $ 23,420 9 % Professional services 50,901 78,399 (27,498) (35) % Total $ 326,327 $ 330,405 (4,078) (1) % Software segment revenues decreased $4.1 million due to a $27.5 million decrease in services revenue, partially offset by a $23.4 million increase in our on-premises and SaaS software revenue. The decrease in services revenue was primarily attributable to our strategic shift to emphasize software over services, as well as the divestiture of our C&R business in June 2021. The increase in our on-premises and SaaS software revenue was primarily attributable to an increase in our platform software revenue, partially offset by the C&R business divestiture. The total impact to current year-to-date revenue from the divestiture was $32.2 million — a $16.4 million decrease from on-premises and SaaS software and a $15.8 million decrease from professional services. 23 Table of Contents Operating Expenses and Other Income / Expenses The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and six-month periods ended March 31, 2022 and 2021: Quarter Ended March 31, Percentage of Revenues Period-to-Period Change Period-to- Period Percentage Change 2022 2021 2022 2021 (In thousands, except employees) (In thousands, except employees) Revenues $ 357,195 $ 331,361 100 % 100 % $ 25,834 8 % Operating expenses: Cost of revenues 71,794 88,333 20 % 27 % (16,539) (19) % Research and development 36,387 43,612 10 % 13 % (7,225) (17) % Selling, general and administrative 96,414 97,272 27 % 29 % (858) (1) % Amortization of intangible assets 543 945 — % — % (402) (43) % Total operating expenses 205,138 230,162 57 % 69 % (25,024) (11) % Operating income 152,057 101,199 43 % 31 % 50,858 50 % Interest expense, net (17,211) (9,943) (5) % (3) % (7,268) 73 % Other income (expense), net (2,361) 568 (1) % — % (2,929) (516) % Income before income taxes 132,485 91,824 37 % 28 % 40,661 44 % Provision for income taxes 28,102 23,150 8 % 7 % 4,952 21 % Net income $ 104,383 $ 68,674 29 % 21 % 35,709 52 % Number of employees at quarter end 3,460 3,953 (493) (12) % Six Months Ended March 31, Percentage of Revenues Period-to-Period Change Period-to- Period Percentage Change 2022 2021 2022 2021 (In thousands) (In thousands) Revenues $ 679,556 $ 643,775 100 % 100 % $ 35,781 6 % Operating expenses: Cost of revenues 140,997 177,861 21 % 28 % (36,864) (21) % Research and development 75,367 84,263 11 % 13 % (8,896) (11) % Selling, general and administrative 194,462 191,183 29 % 30 % 3,279 2 % Amortization of intangible assets 1,087 1,882 — % — % (795) (42) % Gains on product line asset sales and business divestiture — (7,334) — % (1) % 7,334 (100) % Total operating expenses 411,913 447,855 61 % 70 % (35,942) (8) % Operating income 267,643 195,920 39 % 30 % 71,723 37 % Interest expense, net (29,406) (19,584) (4) % (3) % (9,822) 50 % Other income (expense), net (932) 3,448 — % 1 % (4,380) (127) % Income before income taxes 237,305 179,784 35 % 28 % 57,521 32 % Provision for income taxes 47,963 24,618 7 % 4 % 23,345 95 % Net income $ 189,342 $ 155,166 28 % 24 % 34,176 22 % 24 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 quarter-over-prior year quarter decrease in cost of revenues of $16.5 million was primarily attributable to a $14.1 million decrease in personnel and labor costs and a $2.6 million decrease in allocated facilities and infrastructure costs. Both were largely driven by a decrease in our headcount as a result of the divestiture of our C&R business in June 2021, as well as reduced resource requirements associated with decreased services revenue. Cost of revenues as a percentage of revenues decreased to 20% during the quarter ended March 31, 2022 from 27% during the quarter ended March 31, 2021, primarily due to an increase in license revenue recognized at a point in time, increased sales of our higher-margin Scores products and decreased sales of lower-margin professional services. The year-to-date period over period decrease in cost of revenues of $36.9 million was primarily attributable to a $30.7 million decrease in personnel and labor costs and a $7.1 million decrease in allocated facilities and infrastructure costs. Both were largely driven by a decrease in our headcount as a result of the divestiture of our C&R business in June 2021, as well as reduced resource requirements associated with decreased services revenue. Cost of revenues as a percentage of revenues decreased to 21% during the six months ended March 31, 2022 from 28% during the six months ended March 31, 2021, primarily due to an increase in license revenue recognized at a point in time, increased sales of our higher-margin Scores products and decreased sales of lower-margin professional services. 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 Software products. The quarter-over-prior year quarter decrease in research and development expenses of $7.2 million was primarily attributable to a $5.0 million decrease in personnel and labor costs as a result of decreased headcount and a $0.9 million decrease in third-party cloud computing costs. Research and development expenses as a percentage of revenues decreased to 10% during the quarter ended March 31, 2022 from 13% during the quarter ended March 31, 2021. The year-to-date period over period decrease in research and development expenses of $8.9 million was primarily attributable to a $4.7 million decrease in personnel and labor costs as a result of decreased headcount and a $1.8 million decrease in third-party cloud computing costs. Research and development expenses as a percentage of revenues decreased to 11% during the six months ended March 31, 2022 from 13% during the six months ended March 31, 2021. Selling, General and Administrative Selling, general and administrative expenses consist principally of employee salaries, incentives, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; and business development expenses. The quarter-over-prior year quarter decrease in selling, general and administrative expenses of $0.9 million was primarily attributable to a $3.0 million decrease in personnel and labor costs as a result of decreased headcount, partially offset by $0.9 million increase in insurance costs, and a $0.7 million increase in travel costs. Selling, general and administrative expenses as a percentage of revenues decreased to 27% during the quarter ended March 31, 2022 from 29% during the quarter ended March 31, 2021. 25 Table of Contents The year-to-date period over period increase in selling, general and administrative expenses of $3.3 million was primarily attributable to a $1.6 million increase in insurance costs, a $1.4 million increase in facilities and infrastructure costs, a $1.2 million increase in travel activity, and a $0.7 million increase in third-party cloud computing costs, partially offset by a $3.4 million decrease in personnel and labor costs as a result of decreased headcount. Selling, general and administrative expenses as a percentage of revenues decreased to 29% during the six months ended March 31, 2022 from 30% during the six months ended March 31, 2021. Amortization of Intangible Assets Amortization of intangible assets consists of amortization expense related to intangible assets recorded in connection with acquisitions accounted for by the acquisition method of accounting. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method over periods ranging from five to ten years. Amortization expense was $0.5 million during the quarter ended March 31, 2022 compared to $0.9 million during the quarter ended March 31, 2021. Amortization expense was $1.1 million during the six months ended March 31, 2022 compared to $1.9 million during the six months ended March 31, 2021. The decrease was primarily attributable to certain assets associated with the divestiture of our C&R business in June 2021. Gains on Product Line Asset Sales and Business Divestiture The $7.3 million g ain on product line asset sales and business divestiture during the six months ended March 31, 2021 was attributable to the sale of all assets related to our cyber risk score operations in October 2020 and the sale of certain assets related to our Software operations to an affiliated joint venture in China in December 2020. Interest Expense, Net Interest expense includes interest on the senior notes issued in December 2021, December 2019 and May 2018, as well as interest and credit facility fees on the revolving line of credit and term loan. Our condensed consolidated statements of income and comprehensive income include interest expense netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements. The quarter-over-prior year quarter increase in interest expense of $7.3 million was primarily attributable to a higher average outstanding debt balance during the quarter ended March 31, 2022. The year-to-date period over period increase in interest expense of $9.8 million was primarily attributable to a higher average outstanding debt balance during the six months ended March 31, 2022. Other Income (Expense), Net Other income (expense), net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances 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 quarter-over-prior year quarter change in other income (expense), net of $2.9 million was primarily attributable to a decrease in net unrealized gains on our supplemental retirement and savings plan. The year-to-date period over period change in other income (expense), net of $4.4 million was primarily attributable to a decrease in net unrealized gains on our supplemental retirement and savings plan. Provision for Income Taxes The effective income tax rate was 21.2% and 25.2% during the quarters ended March 31, 2022 and 2021, respectively, and 20.2% and 13.7% during the six months ended March 31, 2022 and 2021, 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. 26 Table of Contents The effective tax rates for the six months ended March 31, 2022 and 2021 were both favorably impacted by the recording of excess tax benefits relating to stock awards. The impact is dependent upon grants of share-based compensation and the future stock price in relation to the fair value of awards on the grant date. The decrease in stock price for awards that vested in December 2021 has resulted in a decreased net excess tax benefit for the six months ended March 31, 2022, as compared to the six months ended March 31, 2021. Operating Income The following tables set forth certain summary information on a segment basis related to our operating income for the quarters and six-month periods ended March 31, 2022 and 2021: Quarter Ended March 31, Period-to-Period Change Period-to-Period Percentage Change Segment 2022 2021 (In thousands) (In thousands) Scores $ 162,716 $ 146,542 $ 16,174 11 % Software 53,500 17,200 36,300 211 % Unallocated corporate expenses (35,680) (33,392) (2,288) 7 % Total segment operating income 180,536 130,350 50,186 39 % Unallocated share-based compensation (27,936) (28,206) 270 (1) % Unallocated amortization expense (543) (945) 402 (43) % Operating income $ 152,057 $ 101,199 50,858 50 % Scores Software Quarter Ended March 31, Percentage of Revenues Quarter Ended March 31, Percentage of Revenues 2022 2021 2022 2021 2022 2021 2022 2021 (In thousands) (In thousands) Segment revenues $ 183,742 $ 168,719 100 % 100 % $ 173,453 $ 162,642 100 % 100 % Segment operating expense (21,026) (22,177) (11) % (13) % (119,953) (145,442) (69) % (89) % Segment operating income $ 162,716 $ 146,542 89 % 87 % $ 53,500 $ 17,200 31 % 11 % The quarter-over-prior year quarter $50.9 million increase in operating income was primarily attributable to a $26.6 million decrease in segment operating expenses and a $25.8 million increase in segment revenues, partially offset by a $2.3 million increase in corporate expenses. At the segment level, the quarter-over-prior year quarter $50.2 million increase in segment operating income was the result of a $36.3 million increase in our Software segment operating income and a $16.2 million increase in our Scores segment operating income, partially offset by a $2.3 million increase in corporate expenses. The quarter-over-prior year quarter $16.2 million increase in Scores segment operating income was due to a $15.0 million increase in segment revenue and a $1.2 million decrease in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores increased to 89% from 87%. The quarter-over-prior year quarter $36.3 million increase in Software segment operating income was due to a $25.5 million decrease in segment operating expenses and a $10.8 million increase in segment revenue. Segment operating income as a percentage of segment revenue for Software increased to 31% from 11%, primarily attributable to the divestiture of our lower-margin C&R business, an increase in license revenue recognized at a point in time, and a decrease in sales of our lower-margin professional services. 27 Table of Contents Six Months Ended March 31, Period-to-Period Change Period-to-Period Percentage Change Segment 2022 2021 (In thousands) (In thousands) Scores $ 310,219 $ 269,567 $ 40,652 15 % Software 87,793 37,884 49,909 132 % Unallocated corporate expenses (71,468) (63,645) (7,823) 12 % Total segment operating income 326,544 243,806 82,738 34 % Unallocated share-based compensation (57,814) (53,338) (4,476) 8 % Unallocated amortization expense (1,087) (1,882) 795 (42) % Unallocated gains on product line asset sales and business divestiture — 7,334 (7,334) (100) % Operating income $ 267,643 $ 195,920 71,723 37 % Scores Software Six Months Ended March 31, Percentage of Revenues Six Months Ended March 31, Percentage of Revenues 2022 2021 2022 2021 2022 2021 2022 2021 (In thousands) (In thousands) Segment revenues $ 353,229 $ 313,370 100 % 100 % $ 326,327 $ 330,405 100 % 100 % Segment operating expense (43,010) (43,803) (12) % (14) % (238,534) (292,521) (73) % (89) % Segment operating income $ 310,219 $ 269,567 88 % 86 % $ 87,793 $ 37,884 27 % 11 % The year-to-date period over period increase of $71.7 million in operating income was primarily attributable to a $54.8 million decrease in segment operating expenses and a $35.8 million increase in segment revenues, partially offset by a $7.8 million increase in corporate expenses, a $7.3 million decrease in gain on sale of product line assets, and a $4.5 million increase in share-based compensation cost. At the segment level, the year-to-date period over period increase of $82.7 million in segment operating income was the result of a $49.9 million increase in our Software segment operating income and a $40.6 million increase in our Scores segment operating income, partially offset by a $7.8 million increase in corporate expenses. The year-to-date period over period $40.6 million increase in Scores segment operating income was attributable to a $39.9 million increase in segment revenue and a $0.8 million decrease in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores increased to 88% from 86%. The year-to-date period over period $49.9 million increase in Software segment operating income was due to a $54.0 million decrease in segment operating expenses, partially offset by a $4.1 million decrease in segment revenue. Segment operating income as a percentage of segment revenue for Software increased to 27% from 11%, primarily attributable to the divestiture of our lower-margin C&R business, an increase in license revenue recognized at a point in time, and a decrease in sales of our lower-margin professional services. 28 Table of Contents CAPITAL RESOURCES AND LIQUIDITY Outlook As of March 31, 2022, we had $174.2 million in cash and cash equivalents, which included $114.2 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 II, Item 1A titled “Risk Factors” of this Quarterly Report on Form 10-Q. 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 $600 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements as well as the $15.0 million principal payments on our term loan over the next twelve months. Under our current financing arrangements, we have no other 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 Six Months Ended March 31, Period-to-Period Change 2022 2021 (In thousands) Cash provided by (used in): Operating activities $ 247,484 $ 231,470 $ 16,014 Investing activities (3,664) 1,746 (5,410) Financing activities (263,162) (196,795) (66,367) Effect of exchange rate changes on cash (1,793) 4,021 (5,814) Increase (decrease) in cash and cash equivalents $ (21,135) $ 40,442 (61,577) 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 increased to $247.5 million during the six months ended March 31, 2022 from $231.5 million during the six months ended March 31, 2021. The $16.0 million increase was primarily attributable to a $34.2 million increase in net income and an $18.5 million increase in non-cash items, partially offset by a $36.7 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 was $3.7 million for the six months ended March 31, 2022 as compared to net cash provided of $1.7 million for the six months ended March 31, 2021. The $5.4 million change was primarily attributable to a $6.0 million decrease in cash proceeds from the product line asset sales and business divestiture. Cash Flows from Financing Activities Net cash used in financing activities increased to $263.2 million for the six months ended March 31, 2022 from $196.8 million for the six months ended March 31, 2021. The $66.4 million increase was primarily attributable to a $510.5 million increase in repurchases of common stock and a $136.8 million increase in payments, net of proceeds, on our revolving line of credit, partially offset by a $550.0 million increase in proceeds from the issuance of senior notes and a $38.8 million decrease in taxes paid related to net share settlement of equity awards. 29 Table of Contents Repurchases of Common Stock In January 2022, our Board of Directors approved a new stock repurchase program following the completion of our previous program. This program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. Pursuant to our previously-authorized stock repurchase programs and the January 2022 program, we repurchased approximately 579,875 shares and 1,823,494 shares of our common stock at a total repurchase price of $264.0 million and $757.6 million during the quarter and six months ended March 31, 2022, respectively. As of March 31, 2022, we had $400.2 million remaining under the January 2022 program. Revolving Line of Credit and Term Loan We have a $600 million unsecured revolving line of credit with a syndicate of banks that expires on August 19, 2026. Borrowings under 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 greatest 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 0.750% and for LIBOR borrowings ranges from 1.000% to 1.750%, 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 a maximum consolidated leverage ratio of 3.50, subject to a step up to 4.00 following certain permitted acquisitions; and a minimum interest coverage ratio of 3.00. The credit agreement also contains other covenants typical of unsecured facilities. In addition, we have a term loan in an initial principal amount of $300 million. The term loan is subject to the same pricing and covenants as the revolving line of credit and matures at the expiration of the facility on August 19, 2026. The term loan requires principal payments in consecutive quarterly installments of $3.75 million on the last business day of each quarter. As of March 31, 2022, we had $215.0 million in borrowings outstanding under the revolving credit facility at a weighted-average interest rate of 1.932%, and $296.3 million in outstanding balance of the term loan at an interest rate of 1.955%, of which $381.3 million was classified as a long-term liability and recorded in long-term debt within the accompanying condensed consolidated balance sheets. We were in compliance with all financial covenants under this credit facility as of March 31, 2022. 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”). The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028. On December 17, 2021, we issued $550 million of additional senior notes of the same class as the 2019 Senior Notes in a private offering to qualified institutional investors (the “2021 Senior Notes,” and collectively with the 2018 Senior Notes and the 2019 Senior Notes, the “Senior Notes”). The 2021 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028, the same date as the 2019 Senior Notes. The indentures for the Senior Notes contain certain covenants typical of unsecured obligations. As of March 31, 2022, the carrying value of the Senior Notes was $1.30 billion 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. 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. 30 Table of Contents We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition Contracts with Customers Our revenue is primarily derived from on-premises software and SaaS subscriptions, professional services, and scoring 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. Our on-premises software is primarily sold on a subscription basis, which includes a 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 a fixed fee, or a usage-based fee — sometimes subject to a guaranteed minimum. When the amount is fixed, including the guaranteed minimum in a usage-based fee, license revenue is recognized at the point in time when the software is made available to the customer. Maintenance revenue is recognized ratably over the contract period as customers simultaneously consume and receive benefits. Any usage-based fees not subject to a guaranteed minimum or earned in excess of the minimum amount are recognized when the subsequent usage occurs. We occasionally sell software arrangements consisting of on-premises perpetual licenses and maintenance. License revenue is recognized at a point in time when the software is made available to the customer and maintenance revenue is recognized ratably over the contract term. Our SaaS products provide customers with access to and standard support for our software on a subscription basis, delivered through our own infrastructure or third-party cloud services. The SaaS transaction contracts typically include a guaranteed minimum fee per period that allows up to a certain level of usage and a consumption-based variable fee in excess of the minimum threshold; or a consumption-based variable fee not subject to a minimum threshold. The nature of our SaaS arrangements is to provide continuous access to our hosted solutions 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. Our professional services include software implementation, consulting, model development and training. Professional services 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 a variable amount based upon the time and materials expended. 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 by 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. Our scoring services include both business-to-business and business-to-consumer offerings. Our business-to-business scoring services typically include a license that grants consumer reporting agencies the right to use our scoring solutions in exchange for a usage-based royalty. Revenue is generally recognized when the usage occurs. Business-to-consumer offerings provide consumers with access to their FICO ® Scores and credit reports, as well as other value-add services. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. 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. 31 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 over 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. 32 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. During the fourth quarter of fiscal 2021, we reevaluated our operating segments to better align with how our CODM evaluates performance and allocates resources, which resulted in a change from three operating segments — Applications, Decision Management Software and Scores — to two operating segments, Software and Scores. As part of this reevaluation, we determined our operating segments continue to represent our reporting units. 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 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. Alternatively, we may bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing step one of the goodwill impairment test. We performed a step one quantitative impairment test on the Software and Scores reporting units before and immediately following the change in reporting units. There was a substantial excess of fair value over carrying value for the reporting units and we determined goodwill was not impaired for any of our reporting units before or after the change for fiscal 2021. For fiscal 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 2019 and 2020. 33 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 2021, 2020, and 2019. 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 share-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. 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 consolidated balance sheets using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled. We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not more likely than not, we establish a valuation allowance. 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. 34 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 Recent Accounting Pronouncements Not Yet Adopted In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, “ Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ” (“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities from acquired contracts using the revenue recognition guidance under Accounting Standards Codification Topic 606 in order to align the recognition of a contract liability with the definition of a performance obligation. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which means that it will be effective for our fiscal year beginning October 1, 2023. Early adoption is permitted. We do not believe that adoption of ASU 2021-08 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.