What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-04-27 · 108 added, 94 removed, 435 unchanged (32% of the section changed)

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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.

Highlights from the quarter and nine months ended June 30, 2022

• Total revenue was $349.0 million during the quarter ended June 30, 2022, a 3% increase from the quarter ended June 30, 2021, and $1.03 billion during the nine months ended June 30, 2022, a 5% increase from the nine months ended June 30, 2021.

Excluding our business divestiture in the prior year, revenue increased 7% from the quarter ended June 30, 2021, and 10% from the nine months ended June 30, 2021.

• Total revenue for our Scores segment was $179.4 million during the quarter ended June 30, 2022, a 4% increase from the quarter ended June 30, 2021, and $532.6 million during the nine months ended June 30, 2022, a 10% increase from the nine months ended June 30, 2021.

• Annual Recurring Revenue for our Software segment as of June 30, 2022 was $560.9 million, a 9% increase from June 30, 2021, excluding divestitures.

• Dollar-Based Net Retention Rate for our Software segment was 108% during the quarter ended June 30, 2022, excluding divestitures.

• Operating income was $140.6 million during the quarter ended June 30, 2022, a 28% decrease from the quarter ended June 30, 2021, and $408.3 million during the nine months ended June 30, 2022, a 5% increase from the nine months ended June 30, 2021.

Operating income during the quarter and nine months ended June 30, 2021 included gains on product line asset sales and a business divestiture of $92.8 million and $100.1 million, respectively.

• Net income was $93.5 million during the quarter ended June 30, 2022, a 38% decrease from the quarter ended June 30, 2021, and $282.8 million during the nine months ended June 30, 2022, an 8% decrease from the nine months ended June 30, 2021.

Net income during the quarter and nine months ended June 30, 2021 included pre-tax gains on product line asset sales and a business divestiture of $92.8 million and $100.1 million, respectively.

• Diluted EPS was $3.61 during the quarter ended June 30, 2022, a 30% decrease from the quarter ended June 30, 2021, and $10.63 during the nine months ended June 30, 2022, a 2% increase from the nine months ended June 30, 2021.

Diluted EPS during the quarter and nine months ended June 30, 2021 included pre-tax gains on product line asset sales and a business divestiture of $92.8 million and $100.1 million, or $2.52 and $2.68 after tax, respectively.

• Cash flows from operations were $364.6 million during the nine months ended June 30, 2022, compared with $332.1 million during the nine months ended June 30, 2021.

• Cash and cash equivalents were $155.1 million as of June 30, 2022, compared with $195.4 million as of September 30, 2021.

• Total debt balance was $1.96 billion as of June 30, 2022, compared with $1.26 billion as of September 30, 2021.

• Total share repurchases during the quarter ended June 30, 2022 were $282.4 million, compared with $286.0 million during the quarter ended June 30, 2021, and during the nine months ended June 30, 2022 were $1.04 billion, compared with $541.2 million during the nine months ended June 30, 2021.

Key performance metrics for Software segment

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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.

Differences between estimates and actual results occur due to variability in the estimated

This variability can be the result of the economic trends in our customers’ industries;

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The following table summarizes our ACV Bookings during the periods indicated:

Quarter Ended March 31, Six Months Ended March 31,

Quarter Ended June 30, Nine Months Ended June 30,

2022 2021 2022 2021

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(*) 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.

The amounts for the quarter and nine months ended June 30, 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.

Accounting Standards Codification Topic 606, Revenue from Contacts with Customers , 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.

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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:

The following table summarizes our ARR for on-premises and SaaS software at each of the dates presented:

September 30, 2020 December 31, 2020 March 31, 2021 June 30,

2021 September 30, 2021 December 31, 2021 March 31, 2022

2021 September 30, 2021 December 31, 2021 March 31, 2022 June 30,

(In millions)

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Non-platform (2) % (2) % (3) % 2 % 1 % 3 % 4 % 1 %

Total on-premises and SaaS software — % 1 % 2 % 1 % 6 % 7 % 10 % 11 %

Total 1 % 2 % 1 % 6 % 7 % 10 % 11 % 9 %

The amounts and percentages above excluded these divested product lines and businesses at all dates presented.

(**) 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.

(**) The FICO platform software is a set of interoperable capabilities which use software assets owned and/or governed by FICO for building solutions and services which conform to FICO architectural standards based on key elements of Cloud Native Computing design principles.

These standards encompass shared security context and access using FICO standard application programming interfaces.

Dollar-Based Net Retention Rate (“DBNRR”)

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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:

The following table summarizes our DBNRR for on-premises and SaaS software for each of the periods presented:

Quarter Ended

September 30, 2020 December 31, 2020 March 31, 2021 June 30,

2021 September 30, 2021 December 31, 2021 March 31, 2022

2021 September 30, 2021 December 31, 2021 March 31, 2022 June 30,

Platform 116 % 123 % 130 % 137 % 143 % 143 % 141 % 135 %

Non-platform 96 % 97 % 96 % 100 % 100 % 102 % 103 % 101 %

Total on-premises and SaaS software 98 % 99 % 100 % 100 % 105 % 106 % 109 % 110 %

Total 99 % 100 % 100 % 105 % 106 % 109 % 110 % 108 %

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RESULTS OF OPERATIONS

We are organized into the following two reportable segments:

We are organized into two reportable segments:

Scores and Software.

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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.

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

The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and nine-month periods ended June 30, 2022 and 2021:

Quarter Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-Period

Percentage Change

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Total $ 348,966 $ 338,184 100 % 100 % 10,782 3 %

Six Months Ended March 31, Percentage of Revenues Period-to-Period Change Period-to-Period

Nine Months Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-Period

Percentage Change

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Total $ 1,028,522 $ 981,959 100 % 100 % 46,563 5 %

Quarter Ended March 31, 2022 Compared to Quarter Ended March 31, 2021

Quarter Ended June 30, 2022 Compared to Quarter Ended June 30, 2021

Scores segment revenues increased $7.2 million due to an increase of $3.2 million in our business-to-business scores revenue and $4.0 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.

Quarter Ended March 31, Period-to-Period Change Period-to-Period

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 credit originations volume, partially offset by a decrease in mortgage originations volume during the quarter ended June 30, 2022.

The increase in business-to-consumer revenue was primarily attributable to an increase in royalties derived from scores and subscription services sold indirectly to consumers through credit reporting agencies.

Quarter Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

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Software segment revenues increased $3.6 million due to a $12.3 million increase in our on-premises and SaaS software revenue, partially offset by a $8.7 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.

Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 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 decrease in services revenue was primarily attributable to the C&R business divestiture in June 2021, as well as our strategic shift to emphasize software over services.

The total revenue impact from the divestiture was $13.2 million — a $6.0 million decrease from on-premises and SaaS software and a $7.2 million decrease from professional services.

Nine Months Ended June 30, 2022 Compared to Nine Months Ended June 30, 2021

Scores segment revenues increased $47.0 million due to an increase of $21.9 million in our business-to-business scores revenue and $25.1 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.

Six Months Ended March 31, Period-to-Period Change Period-to-Period

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 credit originations volume, partially offset by a decrease in mortgage originations volume during the nine months ended June 30, 2022.

The increase in business-to-consumer revenue was attributable to an increase in both royalties derived from scores and subscription services sold indirectly to consumers through credit reporting agencies and direct sales generated from the myFICO.com website.

Nine Months Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

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Software segment revenues decreased $0.4 million due to a $36.2 million decrease in services revenue, partially offset by a $35.7 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 decrease in services revenue was primarily attributable to the C&R business divestiture in June 2021, as well as our strategic shift to emphasize software over services.

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.

The total revenue impact from the divestiture was $45.3 million — a $22.3 million decrease from on-premises and SaaS software and a $23.0 million decrease from professional services.

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-

The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and nine-month periods ended June 30, 2022 and 2021:

Quarter Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-

Percentage Change

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Amortization of intangible assets 532 810 — % — % (278) (34) %

Gains on product line asset sales and business divestiture — (92,805) — % (27) % 92,805 (100) %

Total operating expenses 208,351 143,800 60 % 43 % 64,551 45 %

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Number of employees at quarter end 3,367 3,841 (474) (12) %

Six Months Ended March 31, Percentage of Revenues Period-to-Period Change Period-to-

Nine Months Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-

Percentage Change

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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.

The quarter-over-prior year quarter decrease in cost of revenues of $3.5 million was primarily attributable to a $1.9 million decrease in allocated facilities and infrastructure costs, and a $1.7 million decrease in personnel and labor costs.

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.

Cost of revenues as a percentage of revenues decreased to 23% during the quarter ended June 30, 2022 from 24% during the quarter ended June 30, 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 $40.4 million was primarily attributable to a $32.4 million decrease in personnel and labor costs and a $10.3 million decrease in allocated facilities and infrastructure costs, partially offset by a $3.0 million increase in direct materials.

The decrease in personnel and labor costs and allocated facilities and infrastructure costs 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.

The increase in direct materials was primarily attributable to an increase in telecommunication cost.

Cost of revenues as a percentage of revenues decreased to 21% during the nine months ended June 30, 2022 from 27% during the nine months ended June 30, 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 quarter-over-prior year quarter decrease in research and development expenses of $9.9 million was primarily attributable to an $8.9 million decrease in personnel and labor costs as a result of decreased headcount and a $0.8 million decrease in third-party cloud computing costs.

Research and development expenses as a percentage of revenues decreased to 10% during the quarter ended June 30, 2022 from 14% during the quarter ended June 30, 2021.

The year-to-date period over period decrease in research and development expenses of $18.8 million was primarily attributable to a $13.9 million decrease in personnel and labor costs as a result of decreased headcount and a $2.6 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.

Research and development expenses as a percentage of revenues decreased to 11% during the nine months ended June 30, 2022 from 13% during the nine months ended June 30, 2021.

Selling, General and Administrative

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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.

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.

The quarter-over-prior year quarter decrease in selling, general and administrative expenses of $14.5 million was primarily attributable to a $20.7 million decrease in personnel and labor costs, partially offset by a $4.4 million increase in marketing costs and a $2.1 million increase in travel costs.

The decrease in personnel and labor costs was primarily a result of decreased headcount, decreased fringe benefit costs related to our supplemental retirement and savings plan, lower non-capitalizable commission cost, and lower share-based compensation.

The increase in marketing and travel costs was primarily driven by a company-wide marketing event held during the third quarter of fiscal 2022.

In addition, travel costs increased as certain COVID-19 related restrictions have been reduced.

Selling, general and administrative expenses as a percentage of revenues decreased to 27% during the quarter ended June 30, 2022 from 32% during the quarter ended June 30, 2021.

The year-to-date period over period decrease in selling, general and administrative expenses of $11.2 million was primarily attributable to a $24.1 million decrease in personnel and labor costs, partially offset by a $4.1 million increase in marketing costs, a $3.3 million increase in travel costs, a $2.5 million increase in insurance costs, and a $0.8 million increase in third-party cloud computing costs.

The decrease in personnel and labor costs was primarily a result of decreased headcount, decreased fringe benefit costs related to our supplemental retirement and savings plan, and lower non-capitalizable commission cost, partially offset by higher share-based compensation.

The increase in marketing and travel costs was primarily driven by a company-wide marketing event held during the third quarter of fiscal 2022.

In addition, travel costs increased as certain COVID-19 related restrictions have been reduced.

Selling, general and administrative expenses as a percentage of revenues decreased to 28% during the nine months ended June 30, 2022 from 31% during the nine months ended June 30, 2021.

Amortization of Intangible Assets

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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.

Amortization expense was $0.5 million during the quarter ended June 30, 2022 compared to $0.8 million during the quarter ended June 30, 2021.

Amortization expense was $1.6 million during the nine months ended June 30, 2022 compared to $2.7 million during the nine months ended June 30, 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.

The $92.8 million g ain on product line asset sales and business divestiture during the quarter ended June 30, 2021 was attributable to the sale of the C&R business in June 2021.

The $100.1 million gain during the nine months ended June 30, 2021 also included a $7.3 million gain on 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

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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.

The quarter-over-prior year quarter increase in interest expense of $8.7 million was primarily attributable to a higher average outstanding debt balance during the quarter ended June 30, 2022.

The year-to-date period over period increase in interest expense of $18.5 million was primarily attributable to a higher average outstanding debt balance during the nine months ended June 30, 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.

Other income (expense), net consists primarily of realized investment gains/losses and unrealized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.

The quarter-over-prior year quarter change in other income (expense), net of $4.5 million was primarily attributable to net unrealized losses on investments classified as trading securities in our supplemental retirement and savings plan in the current year period compared to gains in the prior year period, partially offset by an increase in foreign currency exchange gains.

The year-to-date period over period change in other income (expense), net of $8.9 million was primarily attributable to net unrealized losses on investments classified as trading securities in our supplemental retirement and savings plan in the current year period compared to gains in the prior year period, partially offset by an increase in foreign currency exchange gains.

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 effective income tax rate was 22.7% and 19.5% during the quarters ended June 30, 2022 and 2021, respectively, and 21.0% and 16.7% during the nine months ended June 30, 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.

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 effective tax rates for the nine months ended June 30, 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.

The decrease in stock price for awards that vested in December 2021 has resulted in a decreased net excess tax benefit for the nine months ended June 30, 2022, as compared to the nine months ended June 30, 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

The following tables set forth certain summary information on a segment basis related to our operating income for the quarters and nine-month periods ended June 30, 2022 and 2021:

Quarter Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

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Unallocated amortization expense (532) (810) 278 (34) %

Unallocated gains on product line asset sales and business divestiture — 92,805 (92,805) — %

Operating income $ 140,615 $ 194,384 (53,769) (28) %

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Quarter Ended

March 31, Percentage of

June 30, Percentage of

Revenues Quarter Ended

March 31, Percentage of

June 30, Percentage of

2022 2021 2022 2021 2022 2021 2022 2021

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Segment operating income $ 160,148 $ 146,784 89 % 85 % $ 47,563 $ 20,186 28 % 12 %

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.

The quarter-over-prior year quarter $53.8 million decrease in operating income was primarily attributable to a $92.8 million gain on business divestiture during the quarter ended June 30, 2021 and a $4.2 million increase in corporate expenses, partially offset by a $30.0 million decrease in segment operating expenses, a $10.7 million increase in segment revenues, and a $2.2 million decrease in share-based compensation cost.

At the segment level, the quarter-over-prior year quarter $36.5 million increase in segment operating income was the result of a $27.4 million increase in our Software segment operating income and a $13.3 million increase in our Scores segment operating income, partially offset by a $4.2 million increase in corporate expenses.

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The quarter-over-prior year quarter $27.4 million increase in Software segment operating income was due to a $23.8 million decrease in segment operating expenses and a $3.6 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.

Six Months Ended March 31, Period-to-Period Change Period-to-Period

Segment operating income as a percentage of segment revenue for Software increased to 28% from 12%, primarily attributable to the divestiture of our lower-margin C&R business, an increase in higher-margin license revenue recognized at a point in time, and a decrease in sales of our lower-margin professional services.

Nine Months Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

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Scores Software

Six Months Ended

March 31, Percentage of

Revenues Six Months Ended

March 31, Percentage of

Nine Months Ended

June 30, Percentage of

Revenues Nine Months Ended

June 30, Percentage of

2022 2021 2022 2021 2022 2021 2022 2021

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Segment operating income $ 470,367 $ 416,351 88 % 86 % $ 135,356 $ 58,070 27 % 12 %

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.

The year-to-date period over period increase of $18.0 million in operating income was primarily attributable to an $84.7 million decrease in segment operating expenses and a $46.6 million increase in segment revenues, partially offset by $100.1 million in gains on product line asset sales and a business divestiture during the nine months ended June 30, 2021, a $12.0 million increase in corporate expenses, and a $2.3 million increase in share-based compensation cost.

At the segment level, the year-to-date period over period increase of $119.3 million in segment operating income was the result of a $77.3 million increase in our Software segment operating income and a $54.0 million increase in our Scores segment operating income, partially offset by a $12.0 million increase in corporate expenses.

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The year-to-date period over period $77.3 million increase in Software segment operating income was due to a $77.7 million decrease in segment operating expenses, partially offset by a $0.4 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.

Segment operating income as a percentage of segment revenue for Software increased to 27% from 12%, primarily attributable to the divestiture of our lower-margin C&R business, an increase in higher-margin license revenue recognized at a point in time, and a decrease in sales of our lower-margin professional services.

CAPITAL RESOURCES AND LIQUIDITY

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.

As of June 30, 2022, we had $155.1 million in cash and cash equivalents, which included $118.2 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.

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Summary of Cash Flows

Six Months Ended March 31, Period-to-Period Change

Nine Months Ended June 30, Period-to-Period Change

(In thousands)

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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.

Net cash provided by operating activities increased to $364.6 million during the nine months ended June 30, 2022 from $332.1 million during the nine months ended June 30, 2021.

The $32.6 million increase was attributable to a $124.3 million increase in non-cash items, including a $100.1 million gain on product line asset sales and business divestiture during the nine months ended June 30, 2021, partially offset by a $68.2 million decrease that resulted from timing of receipts and payments in our ordinary course of business and a $23.5 million decrease in net income.

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.

Net cash used in investing activities was $4.4 million for the nine months ended June 30, 2022 as compared to net cash provided of $137.6 million for the nine months ended June 30, 2021.

The $142.0 million change was primarily attributable to $146.4 million cash proceeds from the product line asset sales and business divestiture during the nine months ended June 30, 2021.

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.

Net cash used in financing activities decreased to $390.3 million for the nine months ended June 30, 2022 from $394.6 million for the nine months ended June 30, 2021.

The $4.3 million decrease was primarily attributable to a $550.0 million increase in proceeds from the issuance of senior notes and a $39.7 million decrease in taxes paid related to net share settlement of equity awards, partially offset by a $506.8 million increase in repurchases of common stock and a $66.5 million increase in payments, net of proceeds, on our revolving line of credit.

Repurchases of Common Stock

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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.

Pursuant to our previously-authorized stock repurchase programs and the January 2022 program, we repurchased approximately 735,000 shares and 2,558,000 shares of our common stock at a total repurchase price of $282.4 million and $1.04 billion during the quarter and nine months ended June 30, 2022, respectively.

As of June 30, 2022, we had $118.8 million remaining under the January 2022 program.

Revolving Line of Credit and Term Loan

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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.

As of June 30, 2022, we had $380.0 million in borrowings outstanding under the revolving credit facility at a weighted-average interest rate of 2.974%, and $292.5 million in outstanding balance of the term loan at an interest rate of 2.684%, of which $542.5 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 June 30, 2022.

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

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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.

As of June 30, 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 the COVID-19 pandemic.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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.

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, Revenue from Contacts with Customers , 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.

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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 2. Management’s Discussion and Analysis