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Item 7. Management’s Discussion and Analysis

2023-11-08 compared with 2022-11-09 · 87 added, 177 removed, 380 unchanged (41% of the section changed)

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Actual results may differ from those referred to herein due to a number of factors, including but not limited to risks described in Item 1A, Risk Factors , in this Annual Report on Form 10-K.

Our MD&A focuses on discussion of year-over-year comparisons between fiscal 2023 and fiscal 2022.

Discussion of fiscal 2021 results and year-over-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

BUSINESS OVERVIEW

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We continued to promote adoption of our most predictive scores, FICO ® Score 10 and 10 T.

We also continued our rollout of the FICO ® Resilience Index, a complement to FICO Scores that identifies consumers who are more resilient to economic stress relative to other consumers within the same FICO Score bands.

Internationally, we launched FICO ® Score 10 in Canada, FICO ® Score 6 in South Africa, and FICO ® Score 4 and FICO ® Extended Score 4 in Mexico, further expanding our financial inclusion initiatives.

We also remained committed to expanding usage of the FICO ® Resilience Index, a complement to FICO Scores that identifies consumers who are more resilient to economic stress relative to other consumers within the same FICO Score bands.

We continued to develop scores that use alternative data to enhance conventional credit bureau data and generate scores for otherwise un-scorable consumers.

During fiscal 2022, we continued to advance our platform-first, cloud delivered strategy in our Software segment.

This led us to divert resources from less strategic areas of our business in order to facilitate incremental investment in higher value, more strategic areas.

During fiscal 2023, we continued to advance and drive growth through our platform-first, cloud delivered strategy in our Software segment.

This strategic focus has led us to exit non-strategic products and services in the past few years, allowing us to dedicate our resources to expanding the capabilities and market penetration of FICO ® Platform.

We also continued our transition from private data centers to external service providers to host our technology infrastructure.

We also continued to enhance stockholder value by returning cash to stockholders through our stock repurchase programs.

During fiscal 2022, we repurchased 2.7 million shares at a total repurchase price of $1.1 billion.

During fiscal 2023, we repurchased 0.6 million shares at a total repurchase price of $407.3 million.

Highlights from Fiscal 2023

• Total revenue was $1.5 billion during fiscal 2023, a 10% increase from fiscal 2022.

Our business divestiture in the prior year had a 3% negative impact on total revenue for fiscal 2022.

• Total revenue for our Scores segment was $706.6 million during fiscal 2022, an 8% increase from fiscal 2021.

• Annual Recurring Revenue for our Software segment as of September 30, 2022 was $569.3 million, a 9% increase from September 30, 2021, excluding divestitures.

• Dollar-Based Net Retention Rate for our Software segment during the fourth quarter of fiscal 2022 was 107%, excluding divestitures.

• Annual Recurring Revenue for our Software segment as of September 30, 2023 was $669.4 million, a 22% increase from September 30, 2022.

• Dollar-Based Net Retention Rate for our Software segment during the fourth quarter of fiscal 2023 was 120%.

• Operating income was $642.8 million during fiscal 2023, a 19% increase from fiscal 2022.

Operating income during fiscal 2021 included gains on product line asset sales and business divestiture of $100.1 million.

• Net income was $373.5 million during fiscal 2022, a 5% decrease from fiscal 2021.

Net income during fiscal 2021 included pre-tax gains on product line asset sales and business divestiture of $100.1 million.

• Net income was $429.4 million during fiscal 2023, a 15% increase from fiscal 2022.

• Diluted EPS was $16.93 during fiscal 2023, a 19% increase from fiscal 2022.

Diluted EPS during fiscal 2021 included pre-tax gains on product line asset sales and business divestiture of $100.1 million in the aggregate, or $2.71 per share after tax.

• Cash flow from operations was $509.5 million during fiscal 2022, compared with $423.8 million during fiscal 2021.

• Cash flow from operating activities was $468.9 million during fiscal 2023, compared with $509.5 million during fiscal 2022.

• Cash and cash equivalents were $136.8 million as of September 30, 2023, compared with $133.2 million as of September 30, 2022.

• Total debt balance was $1.9 billion as of September 30, 2022, compared with $1.3 billion as of September 30, 2021.

• Total share repurchases during fiscal 2022 were $1.1 billion, compared with $882.2 million during fiscal 2021.

• Total debt balance was $1.9 billion as of September 30, 2023 and September 30, 2022.

• Total share repurchases during fiscal 2023 were $407.3 million, compared with $1.1 billion during fiscal 2022.

Key performance metrics for Software segment

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$ 28.0 $ 29.2 $ 93.9 $ 84.5

(*) 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 amount for the year ended September 30, 2021 excludes these divested product lines and businesses.

(*) During fiscal 2023, we sold certain assets related to our Siron compliance business.

The amounts above exclude this product line for all periods presented.

Annual Recurring Revenue (“ARR”)

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Total 11 % 10 % 10 % 10 % 11 % 17 % 20 % 22 %

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

(**) 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.

(*) During fiscal 2023, we sold certain assets related to our Siron compliance business.

The amounts and percentages above exclude this product line at all dates presented.

(**) 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.

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Total 109 % 109 % 109 % 109 % 110 % 114 % 117 % 120 %

The percentages above exclude these divested product lines and businesses for all periods presented.

(*) During fiscal 2023, we sold certain assets related to our Siron compliance business.

The percentages above exclude this product line for all periods presented.

RESULTS OF OPERATIONS

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Total 100 % 100 % 100 %

Scores segment revenues increased $52.5 million in fiscal 2022 from 2021 due to an increase of $28.9 million in our business-to-business scores revenue and $23.6 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 credit originations volume, partially offset by a decrease in mortgage originations volume.

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 consumer reporting agencies and direct sales generated from the myFICO.com website.

Scores segment revenues increased $125.6 million in fiscal 2021 from 2020 due to an increase of $64.6 million in our business-to-business scores revenue and $61.0 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, as well as higher volumes.

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

Scores segment revenues increased $67.2 million in fiscal 2023 from 2022 due to an increase of $85.6 million in our business-to-business scores revenue, partially offset by a decrease of $18.4 million in our business-to-consumer revenue.

The increase in business-to-business scores revenue was primarily attributable to a higher unit price, partially offset by a decrease in mortgage originations volume.

The decrease in business-to-consumer revenue was primarily attributable to a decrease in direct sales generated from the myFICO.com website.

Year Ended September 30, Period-to-Period Change Period-to-Period

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Software segment revenues increased $69.1 million in fiscal 2023 from 2022 due to a $75.4 million increase in on-premises and SaaS software revenue, partially offset by a $6.3 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 in June 2021.

The decrease in services revenue was primarily attributable to the C&R business divestiture, as well as our strategic shift to emphasize software over services.

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

Software segment revenues decreased $103.6 million in fiscal 2021 from 2020 due to a $66.7 million decrease in on-premises and SaaS software revenue and a $36.9 million decrease in services revenue.

The decrease in on-premises and SaaS software revenue was attributable to a $68.6 million decrease in revenue recognized at a point in time, partially offset by a $1.9 million increase in revenue recognized over time.

The decrease in point-in-time recognition was primarily attributable to the shift in the timing of revenue recognition on our term license subscription sales as a result of changing our business practice of selling term licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled, as well as a decrease in the number and size of term license deals signed or renewed during fiscal 2021.

The increase in over-time recognition was primarily attributable to an increase in SaaS subscription revenue, partially offset by the divestiture of our C&R business in June 2021.

The decrease in services revenue was primarily due to our recent strategic shift to emphasize software over services, as well as the divestiture of our C&R business.

The total revenue impact from the divestiture was $21.7 million.

The increase in our on-premises and SaaS software revenue was primarily attributable to an increase in revenue recognized over the contract term largely driven by SaaS growth.

Operating Expenses and Other Income (Expense), Net

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Amortization of intangible assets 1,100 2,061 3,255 (961) (1,194) (47) % (37) %

Restructuring and impairment charges — 7,957 45,029 (7,957) (37,072) (100) % (82) %

Restructuring charges — — 7,957 — (7,957) — % (100) %

Gains on product line asset sales and business divestiture (1,941) — (100,139) (1,941) 100,139 — % (100) %

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Amortization of intangible assets — % — % — %

Restructuring and impairment charges — % 1 % 3 %

Restructuring charges — % — % 1 %

Gains on product line asset sales and business divestiture — % — % (7) %

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and outside services.

The fiscal 2022 from 2021 decrease of $30.3 million in cost of revenues was primarily attributable to a $24.0 million decrease in personnel and labor costs, and a $6.8 million decrease in facilities and infrastructure costs, partially offset by a $0.9 million increase in direct materials costs.

The decreases in personnel and labor costs, and facilities and infrastructure costs were both largely driven by a decrease in our headcount as a result of the divestiture of our C&R business in June 2021, the fourth quarter of fiscal 2021 reduction in workforce, as well as reduced resource requirements associated with our decreased services revenue.

The increase in direct materials was primarily attributable to an increase in telecommunication costs to support FICO ® Customer Communication Service revenue.

Cost of revenues as a percentage of revenues decreased to 22% during fiscal 2022 from 25% during fiscal 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 fiscal 2021 from 2020 decrease of $28.7 million in cost of revenues was primarily attributable to an $18.8 million decrease in personnel and labor costs, a $9.2 million decrease in facilities and infrastructure costs and a $3.7 million decrease in travel costs, partially offset by an increase in direct materials costs.

The decreases in personnel and labor costs, and in facilities and infrastructure costs were both largely driven by our strategic cost initiative implemented in September 2020, in which we reduced our workforce, consolidated office space and abandoned certain property and equipment;

as well as the divestiture of our C&R business in June 2021.

The decrease in travel costs was primarily attributable to the COVID-19 pandemic.

The increase in direct materials costs was primarily attributable to increased third-party data costs related to increased business-to-consumer Scores revenue.

Cost of revenues as a percentage of revenues decreased to 25% during fiscal 2021 from 28% during fiscal 2020, primarily due to increased sales of our higher-margin Scores products.

The fiscal 2023 over 2022 increase in cost of revenues of $8.9 million was primarily attributable to a $23.4 million increase in personnel and labor costs, partially offset by a $12.9 million decrease in infrastructure and facilities costs, and a $3.9 million decrease in direct materials costs.

The increase in personnel and labor costs was primarily attributable to increases in employee time allocated to cost of revenues, increased stock-based compensation expense, increased incentive expense and increased headcount.

The decrease in infrastructure and facilities costs was primarily attributable to a one-time reimbursement from a third-party data center provider for implementation costs previously incurred.

The decrease in direct materials costs was primarily attributable to a decrease in credit bureau data costs associated with decreased business-to-consumer scoring solutions revenue through the myFICO.com website.

Cost of revenues as a percentage of revenues decreased to 21% during fiscal 2023 from 22% during fiscal 2022, primarily due to increased sales of our higher margin Scores products and the one-time reimbursement from a third-party data center provider for implementation costs previously incurred.

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 fiscal 2022 over 2021 decrease of $24.5 million in research and development expenses was primarily attributable to a $20.1 million decrease in personnel and labor costs as a result of decreased headcount, and a $3.0 million decrease in third-party cloud computing costs.

Research and development expenses as a percentage of revenues decreased to 11% during fiscal 2022 from 13% during fiscal 2021.

The fiscal 2021 over 2020 increase of $4.7 million in research and development expenses was primarily attributable to an increase in personnel and labor costs, driven by increased average headcount and our continued investments in new product development.

Research and development expenses as a percentage of revenues was 13% during fiscal 2021, consistent with that during fiscal 2020.

The fiscal 2023 over 2022 increase in research and development expenses of $13.2 million was primarily attributable to a $10.7 million increase in personnel and labor costs as a result of increases in time allocated to research and development activities, and a $1.4 million increase in infrastructure and facilities costs primarily attributable to increased third-party data center hosting fees and SaaS costs.

Research and development expenses as a percentage of revenues remained consistent at 11% during fiscal 2023 and 2022.

Selling, General and Administrative

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and business development expenses.

The fiscal 2022 from 2021 decrease in selling, general and administrative expenses of $12.4 million was primarily attributable to a $27.6 million decrease in personnel and labor costs, partially offset by a $6.4 million increase in marketing costs, a $5.1 million increase in travel costs, a $3.4 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 fiscal 2022.

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

Selling, general and administrative expenses as a percentage of revenues decreased to 28% during fiscal 2022 from 30% during fiscal 2021.

The fiscal 2021 from 2020 decrease in selling, general and administrative expenses of $24.6 million was primarily attributable to a $7.4 million decrease in travel costs, a $6.8 million decrease in marketing costs, a $5.0 million decrease in outside services, and a $4.6 million decrease in facilities and infrastructure costs.

The decrease in travel costs was a result of a decrease in travel activity due to COVID-19.

The decrease in marketing costs was primarily driven by a company-wide marketing event during fiscal 2020.

The decrease in outside services was attributable to a decrease in legal and consulting fees associated with several company initiatives during fiscal 2020.

The decrease in facilities and infrastructure costs was largely driven by our strategic cost initiative implemented in September 2020, in which we consolidated office space and abandoned certain property and equipment.

The fiscal 2023 over 2022 increase in selling, general and administrative expenses of $16.7 million was primarily attributable to a $10.9 million increase in personnel and labor costs, a $5.2 million increase in marketing and business development costs, a $3.3 million increase in travel costs, and a $2.2 million increase in outside services expenses, partially offset by a $4.9 million decrease in infrastructure and facilities costs.

The increase in personnel and labor costs was primarily a result of increased fringe benefit costs related to our supplemental retirement and savings plan.

The increases in marketing, business development and travel costs were primarily attributable to increased costs for a company-wide marketing event held during both fiscal 2023 and 2022, with higher costs incurred for the fiscal 2023 event due to the increased scope of the event.

In addition, as COVID-19 related restrictions have been relaxed, we held more corporate events, increased advertising and promotional expenses and increased travel costs.

The increase in outside services expenses was primarily attributable to increased legal expenses.

The decrease in infrastructure and facilities costs was primarily attributable to a decrease in software royalty fees and maintenance allocated to selling, general and administrative expenses, and a favorable adjustment from the termination of an office lease related to our consolidation of office space.

Selling, general and administrative expenses as a percentage of revenues decreased to 26% during fiscal 2023 from 28% during fiscal 2022.

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Amortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions.

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 four to ten years.

Amortization expense was $2.1 million, $3.3 million and $5.0 million for fiscal 2022, 2021 and 2020, respectively.

Restructuring and Impairment Charges

There were no restructuring and impairment charges incurred during fiscal 2022.

During the fourth quarter of fiscal 2021, we incurred charges of $8.0 million in employee separation costs due to the elimination of 160 positions throughout the Company.

Cash payments for all the employee separation costs were fully paid before the end of our fiscal 2022.

There were no impairment charges incurred during fiscal 2021.

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

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

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

Cash payments for all the employee separation costs were fully paid before the end of our fiscal 2021.

Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are amortized using the straight-line method over periods ranging from five to ten years.

Amortization expense was $1.1 million and $2.1 million for fiscal 2023 and 2022, respectively.

Restructuring Charges

There were no restructuring charges incurred during fiscal 2023 and 2022.

Gains on Product Line Asset Sales and Business Divestiture

The $100.1 million gain on product line asset sales and business divestiture during fiscal 2021 was attributable to a $92.8 million gain on the sale of the C&R business in June 2021, 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.

The $1.9 million gain on product line asset sale during fiscal 2023 was attributable to the sale of certain assets related to our Siron compliance business in December 2022.

Interest Expense, Net

Interest expense includes interest on the senior notes issued in December 2021, December 2019, May 2018, and July 2010 (July 2010 senior notes were paid in full at maturity in July 2020), as well as interest and credit facility fees on the revolving line of credit and term loan.

Interest expense includes interest on the senior notes issued in December 2021, December 2019, and May 2018, as well as interest and credit agreement fees on the revolving line of credit and term loan.

On our consolidated statements of income and comprehensive income, interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.

The fiscal 2022 from 2021 increase in net interest expense of $28.9 million was primarily attributable to a higher average outstanding debt balance during fiscal 2022, as well as a higher average interest rate on our revolving line of credit and term loan during fiscal 2022.

The fiscal 2021 from 2020 decrease in net interest expense of $2.1 million was primarily attributable to a lower average outstanding debt balance during fiscal 2021.

The fiscal 2023 from 2022 increase in net interest expense of $26.6 million was primarily attributable to a higher average outstanding debt balance, as well as a higher average interest rate on our revolving line of credit and term loan during fiscal 2023.

Other Income (Expense), Net

Other income (expense), net consists primarily of unrealized investment gains/losses and realized 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 fiscal 2022 over 2021 change in other income (expense), net of $9.9 million, from $7.7 million in other income, net in fiscal 2021 to $2.1 million in other expense, net in fiscal 2022, was primarily attributable to net unrealized losses on investments classified as trading securities in our supplemental retirement and savings plan in the current year compared to gains in the prior year, partially offset by an increase in foreign currency exchange gains.

The fiscal 2021 over 2020 increase in other income, net of $4.5 million was primarily attributable to an increase in net unrealized gains on investments classified as trading securities in our supplemental retirement and savings plan, as well as a decrease in foreign currency exchange losses.

The fiscal 2023 over 2022 change in other income (expense), net of $8.5 million, from $2.1 million in other expense, net to $6.3 million in other income, net, was primarily attributable to net unrealized gains on investments classified as trading securities in our supplemental retirement and savings plan in the current year compared to losses in the prior year, partially offset by an increase in foreign currency exchange losses.

Provision for Income Taxes

Our effective tax rates were 22.4%, 20.7% and 17.1% in fiscal 2023, 2022 and 2021, respectively.

The increase in our income tax provision in fiscal 2022 compared to fiscal 2021 was due to a decrease in excess tax benefits related to share-based compensation.

The increase in our income tax provision in fiscal 2021 compared to fiscal 2020 was due to an increase in pretax book income, of which a large amount was due to the gain on divestiture of C&R business, as well as a decrease in excess tax benefits related to share-based compensation.

The increase in our effective tax rate in fiscal 2023 compared to fiscal 2022 was due to the increase in pretax income overall, in addition to a one-time increase related to the divestiture of a non-U.S.

Operating Income

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Unallocated amortization expense (1,100) (2,061) (3,255) 961 1,194 (47) % (37) %

Unallocated restructuring and impairment charges — (7,957) (45,029) 7,957 37,072 (100) % (82) %

Unallocated restructuring charges — — (7,957) — 7,957 — % (100) %

Gains on product line asset sales and business divestiture 1,941 — 100,139 1,941 (100,139) — % (100) %

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Segment operating income $ 241,191 $ 183,122 $ 107,101 33 % 27 % 16 %

The fiscal 2022 over 2021 increase in operating income of $36.9 million was primarily attributable to an $81.7 million decrease in segment operating expenses, a $60.7 million increase in segment revenues, and an $8.0 million decrease in restructuring and impairment charges.

This was partially offset by $100.1 million in gains on product line asset sales and business divestiture during fiscal 2021, an $11.6 million increase in corporate expenses, and a $2.9 million increase in share-based compensation expense.

At the segment level, the $130.8 million increase in segment operating income was the result of an $80.3 million increase in our Software segment operating income, and a $62.1 million increase in our Scores segment operating income, partially offset by an $11.6 million increase in corporate expenses.

The $62.1 million increase in our Scores segment operating income was attributable to a $52.5 million increase in segment revenue and a $9.6 million decrease in segment operating expenses.

Segment operating income as a percentage of segment revenue for Scores increased to 88% from 86%.

The $80.3 million increase in our Software segment operating income was attributable to a $72.1 million decrease in segment operating expenses and an $8.2 million increase in segment revenue.

Segment operating income as a percentage of segment revenue for Software increased to 28% from 16%, 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.

The fiscal 2021 over 2020 increase in operating income of $209.5 million was primarily attributable to a $100.1 million gain on product line asset sales and business divestiture during fiscal 2021, a $59.5 million decrease in segment operating expenses, a $37.1 million decrease in restructuring and impairment charges, a $22.0 million increase in segment revenues and a $7.8 million decrease in corporate expenses, partially offset by an $18.8 million increase in share-based compensation expense.

At the segment level, the $89.3 million increase in segment operating income was the result of a $106.4 million increase in our Scores segment operating income and a $7.8 million decrease in corporate expenses, partially offset by a $24.9 million decrease in our Software segment operating income.

The fiscal 2023 over 2022 increase in operating income of $100.4 million was primarily attributable to a $136.3 million increase in segment revenues, partially offset by a $16.5 million increase in segment operating expenses, a $13.8 million increase in corporate expenses, and an $8.5 million increase in share-based compensation cost.

At the segment level, the $106.0 million increase in segment operating income was the result of a $61.7 million increase in our Scores segment operating income and a $58.1 million increase in our Software segment operating income, partially offset by a $13.8 million increase in corporate expenses.

The $61.7 million increase in our Scores segment operating income was attributable to a $67.2 million increase in segment revenue, partially offset by a $5.5 million increase in segment operating expenses.

Segment operating income as a percentage of segment revenue for Scores was 88%, consistent with fiscal 2022.

The $24.9 million decrease in our Software segment operating income was attributable to a $103.6 million decrease in segment revenue, partially offset by a $78.7 million decrease in segment operating expenses.

Segment operating income as a percentage of segment revenue for Software was 16%, materially consistent with fiscal 2020.

The $58.1 million increase in our Software segment operating income was attributable to a $69.1 million increase in segment revenue, partially offset by a $11.0 million increase in segment operating expenses.

Segment operating income as a percentage of segment revenue for Software increased to 33% from 27%, primarily attributable to an increase in software revenue recognized over the contract term due to SaaS growth, a one-time reimbursement from a third-party data center provider for implementation costs previously incurred, and a decrease in sales of our lower-margin professional services.

CAPITAL RESOURCES AND LIQUIDITY

As of September 30, 2023, we had $136.8 million in cash and cash equivalents, which included $110.4 million held by our foreign subsidiaries.

We believe our cash and cash equivalents balances, including those held by our foreign subsidiaries, 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 for at least the next 12 months and thereafter for the foreseeable future, including the $15.0 million principal payments on our term loan due over the next twelve months.

Under our current financing arrangements, we have no other significant debt obligations maturing over the next twelve months.

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Net cash provided by operating activities totaled $468.9 million in fiscal 2023 compared to $509.5 million in fiscal 2022.

The $85.7 million increase was attributable to a $127.3 million increase in non-cash items, including a $100.1 million gain on product line asset sales and business divestiture in fiscal 2021, partially offset by a $23.1 million decrease that resulted from timing of receipts and payments in our ordinary course of business, and an $18.5 million decrease in net income.

Net cash provided by operating activities totaled $423.8 million in fiscal 2021 compared to $364.9 million in fiscal 2020.

The $58.9 million increase was primarily attributable to a $155.7 million increase in net income and a $28.6 million increase that resulted from timing of receipts and payments in our ordinary course of business, partially offset by a $125.4 million decrease in non-cash items, including a $100.1 million gain on product line asset sales and a business divestiture in fiscal 2021.

The $40.6 million decrease was attributable to a $68.9 million decrease in non-cash items and a $27.5 million decrease that resulted from timing of receipts and payments in our ordinary course of business, partially offset by a $55.8 million increase in net income.

Cash Flows from Investing Activities

Net cash used in investing activities totaled $5.7 million in fiscal 2022 compared to net cash provided of $137.9 million in fiscal 2021.

The $143.6 million change was primarily attributable to a $145.2 million decrease in cash proceeds from the product line asset sales and business divestiture, partially offset by a $1.5 million decrease in purchases of property and equipment.

Net cash provided by investing activities totaled $137.9 million in fiscal 2021 compared to net cash used of $24.6 million in fiscal 2020.

The $162.5 million change was primarily attributable to $147.4 million in cash proceeds from the product line asset sales and a business divestiture during fiscal 2021 and a $14.4 million decrease in purchases of property and equipment.

Net cash used in investing activities totaled $16.0 million in fiscal 2023 compared to $5.7 million in fiscal 2022.

The $10.3 million increase was primarily attributable to an $8.4 million decrease in cash proceeds from the product line asset sales, net of cash transferred and a $3.0 million decrease in proceeds from sale of marketable securities.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $455.0 million in fiscal 2023 compared to $547.2 million in fiscal 2022.

The $23.6 million increase was primarily attributable to a $372.3 million increase in payments, net of proceeds, on our revolving line of credit and term loan, a $230.0 million increase in repurchases of common stock, and a $7.3 million increase in payments on debt issuance costs, partially offset by a $550.0 million increase in proceeds from the issuance of senior notes and a $40.7 million decrease in taxes paid related to net share settlement of equity awards.

Net cash used in financing activities totaled $523.6 million in fiscal 2021 compared to $289.4 million in fiscal 2020.

The $234.2 million increase was primarily attributable to a $639.0 million increase in repurchases of common stock and a $350.0 million decrease in proceeds from issuance of senior notes, partially offset by a $419.0 million increase in proceeds from our revolving line of credit, a $254.0 million decrease in payments on our revolving line of credit, and an $85.0 million decrease in payments on senior notes.

The $92.2 million decrease was primarily attributable to a $698.7 million decrease in repurchases of common stock and an $8.8 million decrease in payments on debt issuance costs, partially offset by a $550.0 million decrease in proceeds from the issuance of senior notes, a $45.8 million decrease in proceeds, net of payments, on our revolving line of credit and term loan, and a $25.7 million increase in taxes paid related to net share settlement of equity awards.

Repurchases of Common Stock

In November 2021, our Board of Directors approved a stock repurchase program following the completion of the previously authorized program.

This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions.

In January 2022, our Board of Directors approved another stock repurchase program following the completion of the November 2021 program.

This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions.

As of September 30, 2022, we had $62.6 million remaining under our then-current stock repurchase program.

During fiscal 2022, 2021 and 2020, we expended $1.1 billion, $882.2 million and $235.2 million, respectively, under these and previously authorized stock repurchase programs.

In October 2022, our Board of Directors approved a new stock repurchase program replacing the January 2022 stock repurchase program.

The new 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.

In October 2022, our Board of Directors approved a stock repurchase program replacing our previously authorized 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.

As of September 30, 2023, we had $120.5 million remaining under our current stock repurchase program.

During fiscal 2023 and 2022, we expended $407.3 million and $1.1 billion, respectively, under our current and previously authorized stock repurchase programs.

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) an adjusted 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.

On October 20, 2021, we amended our credit agreement to provide for the issuance of a $300 million term loan.

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.

We have a $600 million unsecured revolving line of credit and a $300 million unsecured term loan with a syndicate of banks that mature on August 19, 2026.

Borrowings under the revolving line of credit and term loan 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.

The term loan requires principal payments in consecutive quarterly installments of $3.75 million on the last business day of each quarter.

As of September 30, 2022, we had $280.0 million in borrowings outstanding under the revolving credit facility at a weighted-average interest rate of 4.479% and $288.8 million in outstanding balance of the term loan at an interest rate of 4.283%, of which $538.8 million was classified as a long-term liability and recorded in long-term debt within the accompanying consolidated balance sheets.

We were in compliance with all financial covenants under this credit facility as of September 30, 2022.

In November 2022, we amended our credit agreement to replace the LIBOR reference rate with the Secured Overnight Financing Rate (“SOFR”) reference rate.

Interest rates on amounts borrowed under the revolving line of credit and term loan are based on (i) an adjusted base rate, which is the greatest of (a) the prime rate, (b) the Federal Funds rate plus 0.5%, and (c) one-month adjusted term SOFR rate plus 1%, plus, in each case, an applicable margin, or (ii) an adjusted term SOFR rate plus an applicable margin.

The applicable margin for base rate borrowings and for SOFR borrowings is determined based on our consolidated leverage ratio.

The applicable margin for base rate borrowings ranges from 0% to 0.75% per annum and for SOFR borrowings ranges from 1% to 1.75% per annum.

In addition, we must pay certain credit facility fees.

The revolving line of credit and term loan contain certain restrictive covenants including a maximum consolidated leverage ratio of 3.5 to 1.0, subject to a step up to 4.0 to 1.0 following certain permitted acquisitions and subject to certain conditions, and a minimum interest coverage ratio of 3.0 to 1.0.

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

As of September 30, 2023, we had $300.0 million in borrowings outstanding under the revolving line of credit at a weighted-average interest rate of 6.678%, of which $35.0 million was classified as a current liability and $265.0 million was classified as a long-term liability.

In addition, as of September 30, 2023, we had $273.8 million in outstanding balance under the term loan at an interest rate of 6.752%, of which $15.0 million was classified as a current liability and $258.8 million was classified as a long-term liability.

The current and long-term revolving line of credit and term loan liabilities were recorded in current maturities on debt and long-term debt, respectively, within the accompanying consolidated balance sheets.

We were in compliance with all financial covenants under this credit agreement as of September 30, 2023.

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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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 periodically evaluate our estimates including those relating to revenue recognition, goodwill resulting from business combinations and other long-lived assets — impairment assessment, 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.

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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.

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 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.

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

For fiscal 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 2020.

For fiscal 2021, we consolidated our operating segment structure from three to two by merging our Applications and Decision Management Software segments into the new Software segment.

We proceeded directly to 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 2022, 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 either 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 either of our reporting units for fiscal 2022.

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.

For fiscal 2022 and 2023, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment.

Consequently, we did not perform a step one quantitative analysis and determined goodwill was not impaired for either of our reporting units for fiscal 2022 and 2023.

Our 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 projected 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 2022, 2021 and 2020.

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.

Should different conditions prevail, material write downs of our other long-lived assets could occur.

We did not recognize any impairment charges on other long-lived assets in fiscal 2023 and 2022.

Historically, there have been no significant changes in our estimates or assumptions that would have had a material impact for our goodwill or other long-lived 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.

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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.

Contingencies and Litigation

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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, 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.

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.

For information about recent accounting pronouncements not yet adopted and the impact on our consolidated financial statements, refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 1, Nature of Business and Summary of Significant Accounting Policies, in our accompanying Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis