e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |
For the transition period from to
Commission File Number 1-11689
Fair Isaac Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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94-1499887 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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901 Marquette Avenue, Suite 3200
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55402-3232 |
Minneapolis, Minnesota
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(Zip Code) |
(Address of principal executive offices) |
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Registrants telephone number, including area code:
612-758-5200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
The number of shares of common stock outstanding on July 31, 2009 was 48,855,019 (excluding
40,001,764 shares held by the Company as treasury stock).
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
(Unaudited)
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June 30, |
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September 30, |
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2009 |
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2008 |
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Assets |
Current assets: |
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Cash and cash equivalents |
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$ |
240,346 |
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$ |
129,678 |
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Marketable securities available for sale, current portion |
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75,743 |
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57,049 |
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Accounts receivable, net |
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98,604 |
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141,571 |
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Prepaid expenses and other current assets |
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25,477 |
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23,404 |
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Total current assets |
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440,170 |
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351,702 |
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Marketable securities available for sale, less current portion |
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55,467 |
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72,101 |
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Other investments |
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11,074 |
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12,374 |
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Property and equipment, net |
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38,269 |
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46,360 |
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Goodwill |
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671,061 |
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686,082 |
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Intangible assets, net |
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41,734 |
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52,468 |
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Deferred income taxes |
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45,050 |
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45,786 |
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Other assets |
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10,100 |
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8,380 |
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$ |
1,312,925 |
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$ |
1,275,253 |
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Liabilities and Stockholders Equity |
Current liabilities: |
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Accounts payable |
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$ |
10,698 |
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$ |
11,172 |
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Accrued compensation and employee benefits |
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28,485 |
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29,551 |
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Other accrued liabilities |
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40,526 |
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43,665 |
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Deferred revenue |
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40,166 |
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38,243 |
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Total current liabilities |
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119,875 |
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122,631 |
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Revolving line of credit |
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295,000 |
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295,000 |
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Senior notes |
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275,000 |
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275,000 |
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Other liabilities |
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18,802 |
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20,681 |
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Total liabilities |
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708,677 |
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713,312 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock ($0.01 par value; 1,000 shares authorized; none issued and outstanding) |
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Common stock ($0.01 par value; 200,000 shares authorized; 88,857 shares issued and
48,855 and 48,473 shares outstanding at June 30, 2009 and September 30, 2008,
respectively) |
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489 |
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485 |
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Paid-in-capital |
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1,107,984 |
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1,110,165 |
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Treasury stock, at cost (40,002 and 40,384 shares at June 30, 2009 and September 30,
2008, respectively) |
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(1,361,411 |
) |
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(1,374,455 |
) |
Retained earnings |
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870,180 |
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825,109 |
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Accumulated other comprehensive income (loss) |
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(12,994 |
) |
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637 |
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Total stockholders equity |
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604,248 |
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561,941 |
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$ |
1,312,925 |
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$ |
1,275,253 |
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See accompanying notes to condensed consolidated financial statements.
1
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Quarter Ended |
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Nine Months Ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues |
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$ |
156,018 |
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$ |
183,315 |
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$ |
478,813 |
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$ |
566,655 |
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Operating expenses: |
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Cost of revenues (1) |
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48,160 |
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68,709 |
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160,655 |
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208,627 |
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Research and development |
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18,364 |
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18,779 |
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55,409 |
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58,910 |
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Selling, general and administrative (1) |
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50,290 |
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59,734 |
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157,519 |
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187,858 |
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Amortization of intangible assets (1) |
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3,219 |
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3,797 |
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9,622 |
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10,481 |
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Restructuring |
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(237 |
) |
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2,176 |
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8,711 |
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7,855 |
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Loss on sale of product line assets |
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2,993 |
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2,993 |
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Total operating expenses |
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122,789 |
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153,195 |
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394,909 |
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473,731 |
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Operating income |
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33,229 |
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30,120 |
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83,904 |
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92,924 |
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Interest income |
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936 |
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1,707 |
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3,836 |
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5,942 |
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Interest expense |
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(6,086 |
) |
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(5,203 |
) |
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(19,771 |
) |
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(13,461 |
) |
Other income, net |
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503 |
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1,478 |
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1,651 |
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2,095 |
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Income from continuing operations before income taxes |
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28,582 |
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28,102 |
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69,620 |
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87,500 |
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Provision for income taxes |
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10,443 |
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9,304 |
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21,263 |
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30,092 |
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Income from continuing operations |
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18,139 |
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18,798 |
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48,357 |
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57,408 |
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Income (loss) from discontinued operations |
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7,703 |
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(363 |
) |
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2,766 |
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Net income |
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$ |
18,139 |
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$ |
26,501 |
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$ |
47,994 |
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$ |
60,174 |
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Basic earnings per share: |
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Continuing operations |
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$ |
0.37 |
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$ |
0.39 |
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$ |
0.99 |
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$ |
1.17 |
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Discontinued operations |
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0.16 |
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0.06 |
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Total |
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$ |
0.37 |
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$ |
0.55 |
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$ |
0.99 |
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$ |
1.23 |
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Diluted earnings (loss) per share: |
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Continuing operations |
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$ |
0.37 |
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$ |
0.38 |
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$ |
0.99 |
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$ |
1.16 |
|
Discontinued operations |
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0.16 |
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(0.01 |
) |
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0.05 |
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Total |
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$ |
0.37 |
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$ |
0.54 |
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$ |
0.98 |
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$ |
1.21 |
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Shares used in computing earnings (loss) per share: |
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Basic |
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48,835 |
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48,521 |
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48,707 |
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|
49,111 |
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Diluted |
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48,986 |
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48,727 |
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48,777 |
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49,633 |
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(1) |
|
Cost of revenues and selling, general and administrative expenses exclude the
amortization of intangible assets. See Note 2 to the accompanying condensed
consolidated financial statements. |
See accompanying notes to condensed consolidated financial statements.
2
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
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Accumulated |
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Common Stock |
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Other |
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Total |
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Par |
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Paid-In- |
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Treasury |
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Retained |
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Comprehensive |
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Stockholders |
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Comprehensive |
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Shares |
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Value |
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Capital |
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Stock |
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Earnings |
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Income (Loss) |
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Equity |
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Income (Loss) |
|
Balance at September 30, 2008 |
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|
48,473 |
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|
$ |
485 |
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$ |
1,110,165 |
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|
$ |
(1,374,455 |
) |
|
$ |
825,109 |
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|
$ |
637 |
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$ |
561,941 |
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Share-based compensation |
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|
15,342 |
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15,342 |
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Exercise of stock options |
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82 |
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1 |
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(1,887 |
) |
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2,779 |
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|
893 |
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Tax effect from share-based payment
arrangements |
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(7,297 |
) |
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(7,297 |
) |
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Issuance of ESPP shares from treasury |
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|
195 |
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2 |
|
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(3,841 |
) |
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|
6,628 |
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2,789 |
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Forfeitures of restricted stock |
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(2 |
) |
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|
64 |
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(64 |
) |
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Issuance of stock to employees from treasury |
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|
107 |
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|
1 |
|
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|
(4,562 |
) |
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|
3,701 |
|
|
|
|
|
|
|
|
|
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|
(860 |
) |
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|
Dividends paid |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
(2,923 |
) |
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|
|
|
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|
(2,923 |
) |
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|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,994 |
|
|
|
|
|
|
|
47,994 |
|
|
$ |
47,994 |
|
Unrealized gains on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456 |
|
|
|
456 |
|
|
|
456 |
|
Cumulative translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,087 |
) |
|
|
(14,087 |
) |
|
|
(14,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
48,855 |
|
|
$ |
489 |
|
|
$ |
1,107,984 |
|
|
$ |
(1,361,411 |
) |
|
$ |
870,180 |
|
|
$ |
(12.994 |
) |
|
$ |
604,248 |
|
|
$ |
34,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
See accompanying notes to condensed consolidated financial statements.
3
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
47,994 |
|
|
$ |
60,174 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
29,052 |
|
|
|
29,753 |
|
Share-based compensation |
|
|
15,342 |
|
|
|
21,713 |
|
Deferred income taxes |
|
|
3,660 |
|
|
|
948 |
|
Tax effect from share-based payment arrangements |
|
|
(7,297 |
) |
|
|
(1,874 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
(121 |
) |
|
|
(1,301 |
) |
Gain on repurchase of senior convertible notes |
|
|
|
|
|
|
(896 |
) |
Net amortization of premium on marketable securities |
|
|
601 |
|
|
|
370 |
|
Provision for doubtful accounts |
|
|
499 |
|
|
|
2,867 |
|
Loss on sale of product line assets |
|
|
2,993 |
|
|
|
|
|
Loss on sale of discontinued operations |
|
|
|
|
|
|
6,952 |
|
Net loss (gain) on sales of property and equipment |
|
|
103 |
|
|
|
(37 |
) |
Changes in operating assets and liabilities, net of acquisition and disposition effects: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
35,251 |
|
|
|
13,576 |
|
Prepaid expenses and other assets |
|
|
925 |
|
|
|
2,353 |
|
Accounts payable |
|
|
(864 |
) |
|
|
(3,159 |
) |
Accrued compensation and employee benefits |
|
|
(624 |
) |
|
|
(12,120 |
) |
Other liabilities |
|
|
(10,390 |
) |
|
|
(3,827 |
) |
Deferred revenue |
|
|
7,222 |
|
|
|
(1,649 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
124,346 |
|
|
|
113,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(11,283 |
) |
|
|
(17,613 |
) |
Cash proceeds from sales of property and equipment |
|
|
|
|
|
|
1,552 |
|
Cash paid for acquisition, net of cash acquired |
|
|
|
|
|
|
(33,336 |
) |
Cash proceeds from sale of business unit |
|
|
|
|
|
|
14,200 |
|
Cash proceeds from sale of product line assets |
|
|
1,000 |
|
|
|
|
|
Purchases of marketable securities |
|
|
(110,723 |
) |
|
|
(153,483 |
) |
Proceeds from sales of marketable securities |
|
|
|
|
|
|
2,008 |
|
Proceeds from maturities of marketable securities |
|
|
107,495 |
|
|
|
160,085 |
|
Distribution from cost-method investees |
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,211 |
) |
|
|
(26,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayments made on revolving line of credit |
|
|
|
|
|
|
(132,000 |
) |
Repurchases of senior convertible notes |
|
|
|
|
|
|
(122,808 |
) |
Proceeds from issuance of senior notes |
|
|
|
|
|
|
275,000 |
|
Debt issuance costs |
|
|
|
|
|
|
(1,477 |
) |
Proceeds from issuances of common stock under employee stock option and purchase plans |
|
|
2,822 |
|
|
|
19,592 |
|
Dividends paid |
|
|
(2,923 |
) |
|
|
(2,928 |
) |
Repurchases of common stock |
|
|
|
|
|
|
(116,642 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
121 |
|
|
|
1,301 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
20 |
|
|
|
(79,962 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(1,487 |
) |
|
|
298 |
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
110,668 |
|
|
|
7,592 |
|
Cash and cash equivalents, beginning of period |
|
|
129,678 |
|
|
|
95,284 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
240,346 |
|
|
$ |
102,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes, net |
|
$ |
20,910 |
|
|
$ |
13,971 |
|
Cash paid for interest |
|
$ |
24,861 |
|
|
$ |
10,513 |
|
See accompanying notes to condensed consolidated financial statements.
4
FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business
Fair Isaac Corporation
Incorporated under the laws of the State of Delaware, Fair Isaac Corporation is a provider of
analytic, software and data management products and services that enable businesses to automate,
improve and connect decisions. Fair Isaac Corporation (doing business under the name FICO)
provides a range of analytical solutions, credit scoring and credit account management products and
services to banks, credit reporting agencies, credit card processing agencies, insurers, retailers,
healthcare organizations and government agencies.
In these consolidated financial statements, Fair Isaac Corporation is referred to as we,
us, our, FICO, Fair Isaac, and the Company.
Principles of Consolidation and Basis of Presentation
We have prepared the accompanying unaudited interim condensed consolidated financial
statements in accordance with the instructions to Form 10-Q and the standards of accounting
measurement set forth in Accounting Principles Board (APB) Opinion No. 28 and any amendments
thereto adopted by the Financial Accounting Standards Board (FASB). Consequently, we have not
necessarily included in this Form 10-Q all information and footnotes required for audited financial
statements. In our opinion, the accompanying unaudited interim condensed consolidated financial
statements in this Form 10-Q reflect all adjustments (consisting only of normal recurring
adjustments, except as otherwise indicated) necessary for a fair presentation of our financial
position and results of operations. These unaudited condensed consolidated financial statements and
notes thereto should be read in conjunction with our audited consolidated financial statements and
notes thereto presented in our Annual Report on Form 10-K for the year ended September 30, 2008.
The interim financial information contained in this report is not necessarily indicative of the
results to be expected for any other interim period or for the entire fiscal year.
The condensed consolidated financial statements include the accounts of FICO and its
subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. These estimates and assumptions include,
but are not limited to, assessing the following: the recoverability of accounts receivable,
goodwill and other intangible assets, software development costs and deferred tax assets; estimated
losses associated with contingencies and litigation; the ability to estimate hours in connection
with fixed-fee service contracts, the ability to estimate transactional-based revenues for which
actual transaction volumes have not yet been received, the determination of whether fees are fixed
or determinable and collection is probable or reasonably assured; and the development of
assumptions for use in the Black-Scholes model that estimates the fair value of our share-based
awards and assessing forfeiture rates of share-based awards.
Adoption of Recent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 165, Subsequent Events (SFAS 165), which establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. The Company adopted SFAS 165
in the third quarter of fiscal 2009. We have evaluated subsequent events through the time of
filing these financial statements on August 6, 2009.
In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1 and APB 28-1,
Interim Disclosures About Fair Value of Financial Instruments (FSP No. 107-1 and APB 28-1).
FSP No. FAS 107-1 and APB 28-1 requires fair value disclosures of financial instruments on a
quarterly basis, as well as new disclosures regarding the methodology and significant assumptions
underlying the fair value measures and any changes to the methodology and assumptions during the
reporting period. The additional disclosures required by this standard are included in Note 12.
The adoption of FSP No. 107-1 and APB 28-1 did not affect our consolidated financial statements.
5
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP No. 157-4). FSP No. FAS 157-4 amends SFAS 157 to provide
additional guidance on estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased in relation to normal market activity for the asset or
liability. The adoption of FSP No. FAS 157-4 did not affect our consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments (FSP No. FAS 115-2 and FAS 124-2). FSP No. FAS 115-2 and
FAS 124-2 provides new criteria for determining whether an impairment of a debt security is
temporary and recorded in other comprehensive income in the equity section of the balance sheet or
other-than-temporary and recorded as a loss on the statement of operations. The adoption of FSP
No. FAS 115-2 and FAS 124-2 did not affect our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB statement No. 133 (SFAS 161). SFAS 161 expands the
disclosure requirements about an entitys derivative instruments and hedging activities. We
adopted SFAS 161 as of January 1, 2009 on a prospective basis. Since SFAS 161 requires only
additional disclosures of our derivative and hedging activities, the adoption of SFAS 161 did not
affect our consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 provides enhanced guidance for using fair value to
measure assets and liabilities. The standard also responds to investors requests for expanded
information about the extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value and the effect of fair value measurements on earnings. SFAS
157 applies whenever other standards require or permit assets or liabilities to be measured at fair
value. This standard does not expand the use of fair value in any new circumstances. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued
FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, which defers the
effective date of SFAS 157 for one year for non-financial assets and liabilities, except for items
that are recognized or disclosed at fair value in an entitys financial statements on a recurring
basis (at least annually). In October 2008, the FASB issued FSP No. 1573, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the
application of SFAS 157 in a market that is not active. As described in Note 8, we have adopted
Statement 157 and the related FASB staff positions. Consistent with the provisions of FSP 1572,
we elected to defer the adoption of SFAS 157 for nonfinancial assets and liabilities measured at
fair value on a nonrecurring basis until October 1, 2009. We are currently evaluating the impact
of the full adoption of SFAS 157 on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 provides companies with an option to report selected
financial assets and liabilities at fair value. The standards objective is to reduce both
complexity in accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. The standard requires companies to provide
additional information that will help investors and other users of financial statements to more
easily understand the effect of a companys choice to use fair value on its earnings. It also
requires companies to display the fair value of those assets and liabilities for which a company
has chosen to use fair value on the face of the balance sheet. The new standard does not eliminate
disclosure requirements included in other accounting standards, including requirements for
disclosures about fair value measurements included in SFAS 157 and SFAS 107, Disclosures about Fair
Value of Financial Instruments. On October 1, 2008 we adopted SFAS 159 but did not elect the fair
value option for any additional financial assets or liabilities that we held at that date.
2. Amortization of Intangible Assets
Amortization expense associated with our intangible assets, which has been reflected as a
separate operating expense caption within the accompanying condensed consolidated statements of
income, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost of revenues |
|
$ |
1,704 |
|
|
$ |
2,043 |
|
|
$ |
5,090 |
|
|
$ |
5,464 |
|
Selling, general and administrative |
|
|
1,515 |
|
|
|
1,754 |
|
|
|
4,532 |
|
|
|
5,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,219 |
|
|
$ |
3,797 |
|
|
$ |
9,622 |
|
|
$ |
10,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Cost of revenues reflects our amortization of completed technology, and selling, general and
administrative expenses reflect our amortization of other intangible assets. Intangible assets were
$41.7 million and $52.5 million, net of accumulated amortization of $110.1 million and $101.7
million, as of June 30, 2009 and September 30, 2008, respectively.
3. Restructuring and Acquisition-Related Expenses
The following table summarizes our restructuring and acquisition-related accruals associated
with acquisitions and certain facility closures. The current portion and non-current portion is
recorded in other accrued current liabilities and other long-term liabilities, respectively, within
the accompanying condensed consolidated balance sheets. These balances are expected to be paid by
fiscal 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
|
September 30, |
|
|
Expense |
|
|
Cash |
|
|
Expense |
|
|
June 30, |
|
|
|
2008 |
|
|
Additions |
|
|
Payments |
|
|
Reversal |
|
|
2009 |
|
|
|
(In thousands) |
|
Facilities charges |
|
$ |
9,688 |
|
|
$ |
3,877 |
|
|
$ |
(3,467 |
) |
|
$ |
(650 |
) |
|
$ |
9,448 |
|
Employee separation |
|
|
930 |
|
|
|
5,860 |
|
|
|
(6,348 |
) |
|
|
(376 |
) |
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,618 |
|
|
$ |
9,737 |
|
|
$ |
(9,815 |
) |
|
$ |
(1,026 |
) |
|
|
9,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion |
|
|
(4,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current |
|
$ |
6,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the quarter ended December 31, 2008, in connection with our reengineering program, we
incurred net charges totaling $8.1 million. The charges included $5.9 million for severance costs
associated with the reduction of 255 positions throughout the Company. Cash payments for
substantially all the severance costs were paid during the quarter ended March 31, 2009. We also
recognized charges of $2.6 million associated with vacating excess leased space located in Georgia
and California. The charge represents future cash lease payments, net of estimated sublease income,
which will be paid out over the next nine years. In addition, we reversed $0.4 million of accrued
expenses as a result of a favorable lease termination agreement that we entered into for office
space that was vacated in the prior year. During the quarter ended March 31, 2009, we recognized a
$1.2 million charge due to unfavorable sublease arrangements we entered into for office space
previously vacated. The charge was offset by a $0.4 million reduction in other restructuring
liabilities. During the quarter ended June 30, 2009 we reversed $0.2 million of accrued expenses
as a result of a favorable lease termination agreement.
4. Sale of Product Line Assets
In June 2009, we signed definitive agreements to sell the assets associated with our
LiquidCredit® for Telecom (LCT) and RoamEx® product lines, which were acquired through our
acquisition of HNC Software Inc. in 2002. LCT and RoamEx solutions were included in our Strategy
Machine segment. The LCT sale, which closed on July 3, 2009 for $3.5 million, includes a $0.5
million receivable for post-closing working capital adjustments. In addition, we have an earnout
agreement that allows for payment of up to $3.0 million if the acquired business achieves certain
earnings before interest, tax, depreciation and amortization goals. The primary assets sold
include accounts receivable and goodwill. Included in the results of operations for the quarter
was the estimated $1.5 million pre-tax loss, and a $2.1 million after-tax loss on the sale as the
goodwill associated with the LCT solution product line was not deductible for income tax purposes.
Revenues attributable to the LCT solutions product line were $2.5 million and $3.3 million for the
quarters ended June 30, 2009 and 2008, respectively and $8.5 million and $9.3 million for the nine
months ended June 30, 2009 and 2008, respectively. The RoamEx sale, which closed on June 30, 2009
for $2.7 million, includes a $1.4 million escrow balance and a $0.3 million receivable for
post-closing working capital adjustments. The primary assets sold include accounts receivable and
goodwill. We recognized a $1.5 million pre-tax loss, and a $1.8 million after-tax loss on the sale
as the goodwill associated with the RoamEx product line was not deductible for income tax purposes.
Revenues attributable to the RoamEx product line were $2.3 million and $2.5 million for the
quarters ended June 30, 2009 and 2008, respectively and $6.6 million and $8.9 million for the nine
months ended June 30, 2009 and 2008, respectively.
5. Discontinued Operations
In connection with the sale of our Insurance Bill Review business in April 2008, we recorded a
charge of $0.4 million, net of tax, during the quarter ended March 31, 2009, resulting from the
resolution of a final working capital adjustment in favor of the purchaser.
7
6. Composition of Certain Financial Statement Captions
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Property and equipment |
|
$ |
204,021 |
|
|
$ |
203,236 |
|
Less accumulated depreciation and amortization |
|
|
(165,752 |
) |
|
|
(156,876 |
) |
|
|
|
|
|
|
|
|
|
$ |
38,269 |
|
|
$ |
46,360 |
|
|
|
|
|
|
|
|
7. Earnings Per Share
The following reconciles the numerators and denominators of basic and diluted earnings per
share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share data) |
|
Numerator for basic earnings per share income from continuing operations |
|
$ |
18,139 |
|
|
$ |
18,798 |
|
|
$ |
48,357 |
|
|
$ |
57,408 |
|
Interest expense on senior convertible notes, net of tax |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share from continuing operations |
|
$ |
18,139 |
|
|
$ |
18,799 |
|
|
$ |
48,357 |
|
|
$ |
57,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares |
|
|
48,835 |
|
|
|
48,521 |
|
|
|
48,707 |
|
|
|
49,111 |
|
Effect of dilutive securities |
|
|
151 |
|
|
|
206 |
|
|
|
70 |
|
|
|
522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares |
|
|
48,986 |
|
|
|
48,727 |
|
|
|
48,777 |
|
|
|
49,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.37 |
|
|
$ |
0.39 |
|
|
$ |
0.99 |
|
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.37 |
|
|
$ |
0.38 |
|
|
$ |
0.99 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted EPS for the quarters ended June 30, 2009 and 2008, excludes options
to purchase approximately 6,579,000 and 8,697,000 shares of common stock, respectively, and for the
nine months ended June 30, 2009 and 2008, excludes options to purchase approximately 7,597,000 and
7,722,000 shares of common stock, respectively, because the options exercise prices exceeded the
average market price of our common stock in these periods and their inclusion would be
antidilutive.
8. Segment Information
We are organized into the following four reportable segments, to align with the internal
management of our worldwide business operations based on product and service offerings:
|
|
|
Strategy Machine Solutions. These are pre-configured Decision Management
applications designed for a specific type of business problem or process, such as marketing,
account origination, customer management, fraud, collections and recovery and insurance claims
management. This segment also includes our myFICO solutions for consumers. |
|
|
|
|
Scoring Solutions. Our scoring solutions give our clients access to analytics that can be
easily integrated into their transaction streams and decision-making processes. Our scoring
solutions are distributed through major credit reporting agencies, as well as services through
which we provide our scores to clients directly. |
|
|
|
|
Professional Services. Through our professional services, we tailor our Decision
Management products to our clients environments, and we design more effective decisioning
environments for our clients. This segment includes revenues from custom engagements, business
solution and technical consulting services, systems integration services, and data management
services. |
|
|
|
|
Analytic Software Tools. This segment is composed of software tools that clients can use
to create their own custom Decision Management applications. |
8
Our Chief Executive Officer evaluates segment financial performance based on segment revenues
and operating income. Segment operating expenses consist of direct and indirect costs principally
related to personnel, facilities, consulting, travel, depreciation and amortization. Indirect
costs are allocated to the segments generally based on relative segment revenues, fixed rates
established by management based upon estimated expense contribution levels and other assumptions
that management considers reasonable. We do
not allocate share-based compensation expense, restructuring expense and certain other income
and expense measures to our segments. These income and expense items are not allocated because
they are not considered in evaluating the segments operating performance. Our Chief Executive
Officer does not evaluate the financial performance of each segment based on its respective assets
or capital expenditures; rather, depreciation and amortization amounts are allocated to the
segments from their internal cost centers as described above.
The following tables summarize segment information for the quarters and nine months ended June
30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2009 |
|
|
|
Strategy |
|
|
|
|
|
|
|
|
|
|
Analytic |
|
|
|
|
|
|
Machine |
|
|
Scoring |
|
|
Professional |
|
|
Software |
|
|
|
|
|
|
Solutions |
|
|
Solutions |
|
|
Services |
|
|
Tools |
|
|
Total |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
81,667 |
|
|
$ |
34,569 |
|
|
$ |
27,479 |
|
|
$ |
12,303 |
|
|
$ |
156,018 |
|
Operating expenses |
|
|
(62,997 |
) |
|
|
(14,049 |
) |
|
|
(28,470 |
) |
|
|
(9,823 |
) |
|
|
(115,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
$ |
18,670 |
|
|
$ |
20,520 |
|
|
$ |
(991 |
) |
|
$ |
2,480 |
|
|
|
40,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,694 |
) |
Unallocated restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237 |
|
Unallocated loss on sale of product line assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,229 |
|
Unallocated interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936 |
|
Unallocated interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,086 |
) |
Unallocated other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
6,407 |
|
|
$ |
1,351 |
|
|
$ |
1,173 |
|
|
$ |
724 |
|
|
$ |
9,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2008 |
|
|
|
Strategy |
|
|
|
|
|
|
|
|
|
|
Analytic |
|
|
|
|
|
|
Machine |
|
|
Scoring |
|
|
Professional |
|
|
Software |
|
|
|
|
|
|
Solutions |
|
|
Solutions |
|
|
Services |
|
|
Tools |
|
|
Total |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
94,855 |
|
|
$ |
37,553 |
|
|
$ |
39,132 |
|
|
$ |
11,775 |
|
|
$ |
183,315 |
|
Operating expenses |
|
|
(80,549 |
) |
|
|
(15,838 |
) |
|
|
(37,533 |
) |
|
|
(10,344 |
) |
|
|
(144,264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
14,306 |
|
|
$ |
21,715 |
|
|
$ |
1,599 |
|
|
$ |
1,431 |
|
|
|
39,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,755 |
) |
Unallocated restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,120 |
|
Unallocated interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,707 |
|
Unallocated interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,203 |
) |
Unallocated other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
6,435 |
|
|
$ |
1,298 |
|
|
$ |
1,449 |
|
|
$ |
708 |
|
|
$ |
9,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2009 |
|
|
|
Strategy |
|
|
|
|
|
|
|
|
|
|
Analytic |
|
|
|
|
|
|
Machine |
|
|
Scoring |
|
|
Professional |
|
|
Software |
|
|
|
|
|
|
Solutions |
|
|
Solutions |
|
|
Services |
|
|
Tools |
|
|
Total |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
255,874 |
|
|
$ |
99,797 |
|
|
$ |
86,188 |
|
|
$ |
36,954 |
|
|
$ |
478,813 |
|
Operating expenses |
|
|
(202,578 |
) |
|
|
(42,402 |
) |
|
|
(92,131 |
) |
|
|
(30,752 |
) |
|
|
(367,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
$ |
53,296 |
|
|
$ |
57,395 |
|
|
$ |
(5,943 |
) |
|
$ |
6,202 |
|
|
|
110,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,711 |
) |
Unallocated loss on sale of product line assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,904 |
|
Unallocated interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,836 |
|
Unallocated interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,771 |
) |
Unallocated other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
19,607 |
|
|
$ |
3,789 |
|
|
$ |
3,611 |
|
|
$ |
2,045 |
|
|
$ |
29,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2008 |
|
|
|
Strategy |
|
|
|
|
|
|
|
|
|
|
Analytic |
|
|
|
|
|
|
Machine |
|
|
Scoring |
|
|
Professional |
|
|
Software |
|
|
|
|
|
|
Solutions |
|
|
Solutions |
|
|
Services |
|
|
Tools |
|
|
Total |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
293,639 |
|
|
$ |
119,556 |
|
|
$ |
114,645 |
|
|
$ |
38,815 |
|
|
$ |
566,655 |
|
Operating expenses |
|
|
(250,400 |
) |
|
|
(49,719 |
) |
|
|
(110,409 |
) |
|
|
(33,892 |
) |
|
|
(444,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
43,239 |
|
|
$ |
69,837 |
|
|
$ |
4,236 |
|
|
$ |
4,923 |
|
|
|
122,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated share-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,456 |
) |
Unallocated restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,924 |
|
Unallocated interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,942 |
|
Unallocated interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,461 |
) |
Unallocated other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
18,151 |
|
|
$ |
4,116 |
|
|
$ |
4,086 |
|
|
$ |
2,047 |
|
|
$ |
28,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Fair Value Measurements
As discussed in Note 1, Adoption of Recent Accounting Pronouncements, on October 1, 2008, we
adopted SFAS 157 for financial assets and financial liabilities and for non-financial assets and
non-financial liabilities that we recognize or disclose at fair value on a recurring basis (at
least annually). As of the date of adoption, these included cash equivalents and available-for-sale
marketable securities. Consistent with the provisions of FSP 1572, we elected to defer the
provisions of SFAS 157 that relate to non-financial assets and non-financial liabilities that we do
not recognize or disclose at fair value on a recurring basis.
SFAS 157 defines fair value as the price that would be received from the sale of an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
SFAS 157 establishes a three-level hierarchy for disclosure that is based on the extent and level
of judgment
used to estimate the fair value of assets and liabilities.
Level 1 uses unadjusted quoted prices that are available in active markets for identical
assets or liabilities. Our Level 1 securities are predominantly comprised of money market funds.
Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or
indirectly observable through correlation
10
with market data. These include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; and inputs to valuation models or other pricing
methodologies that do not require significant judgment because the inputs used in the model, such
as interest rates and volatility, can be corroborated by readily observable market data. Our Level
2 securities are predominantly comprised of U.S. government obligations that are generally held to
maturity.
Level 3 uses one or more significant inputs that are unobservable and supported by little or
no market activity, and that reflect the use of significant management judgment. Level 3 assets and
liabilities include those whose fair value measurements are determined using pricing models,
discounted cash flow methodologies or similar valuation techniques, and significant management
judgment or estimation. We do not have any assets or liabilities that are valued using inputs
identified under a Level 3 hierarchy.
The following table represents financial assets that we measured at fair value on a recurring
basis at June 30, 2009. We have classified these assets in accordance with the fair value hierarchy
set forth in SFAS 157:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant Other |
|
|
Fair Value |
|
|
|
For Identical |
|
|
Observable |
|
|
As of |
|
|
|
Instruments |
|
|
Inputs |
|
|
June 30, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
2009 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1) |
|
$ |
173,564 |
|
|
$ |
|
|
|
$ |
173,564 |
|
Corporate debt (2) |
|
|
|
|
|
|
2,373 |
|
|
|
2,373 |
|
U.S. government obligations (2) |
|
|
|
|
|
|
125,466 |
|
|
|
125,466 |
|
Marketable equity securities (3) |
|
|
3,371 |
|
|
|
|
|
|
|
3,371 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
176,935 |
|
|
$ |
127,839 |
|
|
$ |
304,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in cash and cash equivalents on our balance sheet at June 30, 2009. Not
included in this table are $66,782 of cash deposit balances. |
|
(2) |
|
Included in marketable securities (short-term and long-term) on our balance sheet at
June 30, 2009. |
|
(3) |
|
Represents securities held under a supplemental retirement and savings plan for certain
officers and senior management employees, which are distributed upon termination or
retirement of the employees. Included in long-term marketable securities on our balance
sheet at June 30, 2009. |
The valuation techniques used to measure the fair values of our financial assets incorporate
market inputs, which include reported trades, broker/dealer quotes, benchmark yields, issuer
spreads, benchmark securities and other inputs derived from or corroborated by observable market
data.
10. Income Taxes
Effective Tax Rate
Our effective tax rate was 36.5% and 33.1% during the quarters ended June 30, 2009 and 2008,
respectively, and 30.5% and 34.4% during the nine months ended June 30, 2009 and 2008,
respectively. The provision for income taxes during interim quarterly reporting periods is based on
our estimates of the effective tax rates for the respective full fiscal year.
The effective tax rate in any quarter can be affected positively or negatively by adjustments
that are required to be reported in the specific quarter of resolution. The increase in our
effective tax rate in the third quarter of 2009 was due to an increase in domestic earnings
relative to our foreign jurisdictions and the sale of our RoamEx and LCT product lines. These
product line sales included a write-off of goodwill that was not deductible for income tax
purposes.
The total unrecognized tax benefit for uncertain tax positions under FASB Interpretation No.
48 at June 30, 2009 is estimated to be approximately $29.1 million. We recognize interest expense
related to unrecognized tax benefits and penalties as part of the provision for income taxes in our
consolidated statements of income. We recognize interest earned as interest income in our
consolidated statements of income. As of June 30, 2009, we have accrued interest of $3.7 million
related to the unrecognized tax benefits.
11
11. Credit Agreement
We have a $600.0 million unsecured revolving credit facility with a syndicate of banks that
expires in 2011. Proceeds from the credit facility can be used for working capital and general
corporate purposes and may also be used for the refinancing of existing debt, acquisitions, and the
repurchase of our common stock. Interest on amounts borrowed under the credit facility is based on
(i) a base rate, which is the greater of (a) the prime rate and (b) the Federal Funds rate plus
0.50% or (ii) LIBOR plus an applicable margin. The margin on LIBOR borrowings ranges from 0.30% to
0.55% and is determined based on our consolidated leverage ratio. In addition, we must pay
utilization fees if borrowings and commitments under the credit facility exceed 50% of the total
credit facility commitment, as well as facility fees. The credit facility contains certain
restrictive covenants, including maintenance of consolidated leverage and fixed charge coverage
ratios. The credit facility also contains covenants typical of unsecured facilities. As of June
30, 2009, we were in compliance with all covenants under this credit facility and we had $295.0
million of borrowings outstanding at an interest rate of 1.3%.
12. Senior Notes
In May 2008, we issued $275.0 million of Senior Notes in a private placement to a group of
institutional investors. The Senior Notes were issued in four series with maturities ranging from
5 to 10 years. The Senior Notes weighted average interest rate is 6.8%. The Senior Notes are
subject to certain restrictive covenants that are substantially similar to those in the credit
agreement for the revolving credit facility including maintenance of consolidated leverage and
fixed charge coverage ratios. The purchase agreement for the Senior Notes also includes covenants
typical of unsecured facilities.
The fair value of the senior notes was determined based on quoted market prices and interest
rate spreads of similar securities. The following table reflects the difference between the
carrying value and fair value of the senior notes as of June 30, 2009 and September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
September 30, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
|
(In thousands) |
Senior Notes |
|
$ |
275,000 |
|
|
$ |
272,598 |
|
|
$ |
275,000 |
|
|
$ |
239,153 |
|
13. Derivative Instruments
On January 1, 2009, we adopted SFAS 161 which requires expanded disclosures on derivative
investments and hedging activities. We use derivative instruments to manage risks caused by
fluctuations in foreign exchange rates. The primary objective of our derivative instruments is to
protect the value of foreign currency denominated accounts receivable and bank balances from the
effects of volatility in foreign exchange rates that might occur prior to their conversion to their
functional currency. We principally utilize foreign currency forward contracts, which enable us to
buy and sell foreign currencies in the future at fixed exchange rates and economically offset
changes in foreign currency exchange. We routinely enter into contracts to offset exposures
denominated primarily in the British Pound, EURO and Japanese Yen.
Foreign currency denominated accounts receivable and bank balances are re-measured at spot
rates in effect on the balance sheet date with the effects of changes in spot rates reported in
Other income (expense), net. The forward contracts are not designated as hedges and are marked to
market through Other income (expense), net. Fair value changes in the forward contracts help
mitigate the changes in the value of the re-measured accounts receivable and bank balances
attributable to changes in foreign currency exchange rates. The forward contracts are short-term
in nature and typically have average maturities at inception of less than three months.
The following table summarizes the fair value of our derivative instruments and their location
in the consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
(in thousands) |
|
Assets |
|
Liabilities |
Derivatives not designated as hedging instruments |
|
Balance Sheet Location |
|
Amount |
|
Balance Sheet Location |
|
Amount |
Foreign currency forward contracts |
|
Other current assets |
|
$ |
|
|
|
Other current liabilities |
|
$ |
|
|
12
The following table summarizes our outstanding forward foreign currency contracts, by currency
at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Amount |
|
|
|
|
Foreign |
|
|
|
|
|
Fair Value |
|
|
Currency |
|
US $ |
|
US $ |
|
|
(In thousands) |
Sell foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
|
EURO (EUR) |
|
EUR |
6,300 |
|
|
$ |
8,894 |
|
|
$ |
|
|
Japanese Yen (YEN) |
|
YEN |
94,100 |
|
|
|
978 |
|
|
|
|
|
Canadian Dollar (CAD) |
|
CAD |
1,300 |
|
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
|
British Pound (GBP) |
|
GBP |
3,541 |
|
|
$ |
5,870 |
|
|
$ |
|
|
The forward foreign currency contracts were all entered into on June 30, 2009; therefore, the
fair value was $0 on that date.
The location in the consolidated statements of income and amounts of gains and losses related
to derivative instruments not designated as hedging instruments are as follows:
|
|
|
|
|
|
|
Quarter ended June 30, 2009 |
|
|
(in thousands) |
|
Loss on Derivative Recognized in Income |
Derivatives not designated as hedging instruments |
|
Location |
|
Amount |
Foreign currency forward contracts |
|
Other income (expense), net |
|
$ |
(377 |
) |
|
|
|
|
|
Nine Months ended June 30, 2009 |
|
|
(in thousands) |
|
Loss on Derivative Recognized in Income |
Derivatives not designated as hedging instruments |
|
Location |
|
Amount |
Foreign currency forward contracts |
|
Other income (expense), net |
|
$ |
588 |
|
14. Contingencies
We are in disputes with certain customers regarding amounts owed in connection with the sale
of certain of our products and services. We also have had claims asserted by former employees
relating to compensation and other employment matters. We are also involved in various other
claims and legal actions arising in the ordinary course of business. We believe that none of these
aforementioned claims or actions will result in a material adverse impact to our consolidated
results of operations, liquidity or financial condition. However, the amount or range of any
potential liabilities associated with these claims and actions, if any, cannot be determined with
certainty. Set forth below are additional details concerning certain ongoing litigation.
Braun Consulting, Inc.
Braun (which we acquired in November 2004) was a defendant in a lawsuit filed on November 26,
2001, in the United States District Court for the Southern District of New York (Case No. 01 CV
10629) that alleges violations of federal securities laws in connection with Brauns initial public
offering in August 1999. This lawsuit is among approximately 300 coordinated putative class
actions against certain issuers, their officers and directors, and underwriters with respect to
such issuers initial public offerings. As successor-in-interest to Braun, we entered into a
Stipulation and Agreement of Settlement along with most of the other defendant issuers in this
coordinated litigation, where such issuers and their officers and directors would be dismissed with
prejudice, subject to
the satisfaction of certain conditions, including approval of the Court. Under the terms of
this Agreement, we would not pay any amount of the settlement. However, since December 2006,
certain procedural matters concerning the class status have been decided in the district and
appellate courts of the Second Circuit, ultimately determining that no class status exists for the
plaintiffs. Since there is no class status, there could be no agreement, thus the District Court
entered an order formally denying the motion for final approval of the settlement agreement.
13
The issuers and their insurers have recently reached a preliminary settlement agreement, which
they believe to be consistent with the earlier court rulings and which has been presented to all
parties for approval. The Company has given consent to the terms of the proposed settlement. Under
the terms of this Agreement, we would not pay any amount of the settlement. We expect that the
parties to the consolidated action will begin preparing formal settlement documents shortly.
However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate
outcome of this matter.
15. New Accounting Pronouncements Not Yet Adopted
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)).
SFAS 141(R) states that business combinations will result in all assets and liabilities of an
acquired business being recorded at their fair values. Certain forms of contingent consideration
and acquired contingencies will be recorded at fair value at the acquisition date. SFAS 141(R)
also states acquisition costs will generally be expensed as incurred and restructuring costs will
be expensed in periods after the acquisition date. This statement is effective for financial
statement issued for fiscal years beginning after December 15, 2008. We are in the process of
determining what effect, if any, the adoption of SFAS 141(R) will have on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 clarifies that a noncontrolling or minority interest in
a subsidiary is considered an ownership interest and, accordingly, requires all entities to report
such interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. We are in the process of determining
what effect, if any, the adoption of SFAS 160 will have on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP) SFAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP SFAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142, Goodwill and Other Intangible Assets. This new staff position is
intended to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R), Business Combinations. FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008. We are in the process of determining what effect, if any, the adoption of FSP
SFAS 142-3 will have on our consolidated financial statements.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement). The FSP requires that
proceeds from the issuance of convertible debt instruments be allocated between debt (at a
discount) and an equity component. The debt discount will be amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest expense. This FSP
is effective for fiscal years beginning after December 15, 2008, and will be applied
retrospectively to prior periods. This FSP changes the accounting treatment for our Senior
Convertible Notes, which were issued in August 2003. Even though we retired our Senior Convertible
Notes during fiscal 2008, this new accounting treatment still requires us to retrospectively record
a significant amount of non-cash interest expense in the periods when these notes were outstanding.
We are in the process of determining what effect the adoption of this FSP will have on our
consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R),
(SFAS 167) which revised the consolidation guidance for variable-interest entities. The
modifications include the elimination of the exemption for qualifying special purpose entities, a
new approach for determining who should consolidate a variable-interest entity, and changes to when
it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167
is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the
impact of SFAS 167 on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162,
(SFAS 168) and approved the FASB Accounting Standards Codification (Codification) as
the single source of authoritative nongovernmental US GAAP. The Codification does not change
current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing
all the authoritative literature related to a particular topic in one place. All existing
accounting standard documents will be superseded and all other accounting literature not included
in the Codification will be considered non-authoritative. SFAS 168 is effective for interim and
annual periods ending after September 15, 2009. We expect the implementation of SFAS 168 to
have no impact on our consolidated financial statements.
14
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not statements of historical fact should be
considered forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the Act). In addition, certain statements in our future filings with the
Securities and Exchange Commission (SEC), in press releases, and in oral and written statements
made by us or with our approval that are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per
share, the payment or nonpayment of dividends, capital structure and other statements concerning
future financial performance; (ii) statements of our plans and objectives by our management or
Board of Directors, including those relating to products or services; (iii) statements of
assumptions underlying such statements; (iv) statements regarding business relationships with
vendors, customers or collaborators; and (v) statements regarding products, their characteristics,
performance, sales potential or effect in the hands of customers. Words such as believes,
anticipates, expects, intends, targeted, should, potential, goals, strategy, and
similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. Forward-looking statements involve risks and uncertainties
that may cause actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking statements
include, but are not limited to, those described in Item 1A of Part II, Risk Factors, below. The
performance of our business and our securities may be adversely affected by these factors and by
other factors common to other businesses and investments, or to the general economy.
Forward-looking statements are qualified by some or all of these risk factors. Therefore, you
should consider these risk factors with caution and form your own critical and independent
conclusions about the likely effect of these risk factors on our future performance. Such
forward-looking statements speak only as of the date on which statements are made, and we undertake
no obligation to update any forward-looking statement to reflect events or circumstances after the
date on which such statement is made to reflect the occurrence of unanticipated events or
circumstances. Readers should carefully review the disclosures and the risk factors described in
this and other documents we file from time to time with the SEC, including our reports on Forms
10-Q and 8-K to be filed by the Company in fiscal 2009.
OVERVIEW
We are a leader in Decision Management (DM) solutions that enable businesses to automate,
improve and connect decisions to enhance business performance. Our predictive analytics and
decision management systems power hundreds of billions of customer decisions each year. We help
companies acquire customers more efficiently, increase customer value, reduce fraud and credit
losses, lower operating expenses and enter new markets more profitably. Most leading banks and
credit card issuers rely on our solutions, as do many insurers, retailers, healthcare
organizations, pharmaceutical companies and government agencies. We also serve consumers through
online services that enable people to purchase and understand their FICO® scores, the
standard measure in the United States of credit risk, empowering them to manage their financial
health.
Most of our revenues are derived from the sale of products and services within the consumer
credit, banking and insurance industries, and during the quarter ended June 30, 2009, 72% of our
revenues were derived from within these industries. A significant portion of our remaining revenues
is derived from the healthcare and retail industries. Our clients utilize our products and
services to facilitate a variety of business processes, including customer marketing and
acquisition, account origination, credit and underwriting risk management, fraud loss prevention
and control, and client account and policyholder management. A significant portion of our revenues
is derived from transactional or unit-based software license fees, annual license fees under
long-term software license arrangements, transactional fees derived under scoring, network service
or internal hosted software arrangements, and annual software maintenance fees. The recurrence of
these revenues is, to a significant degree, dependent upon our clients continued usage of our
products and services in their business activities. The more significant activities underlying the
use of our products in these areas include: credit and debit card usage or active account levels;
lending acquisition, origination and customer management activity; and customer acquisition, cross
selling and retention programs. Approximately 78% and 73% of our revenues during the quarters
ended June 30, 2009 and 2008, respectively, and 77% and 73% of our revenues for the nine months
ended June 30, 2009 and 2008, respectively, were derived from arrangements with transactional or
unit-based pricing. We also derive revenues from other sources which generally do not recur and
include, but are not limited to, perpetual or time-based licenses with upfront payment terms,
non-recurring professional service arrangements and gain-share arrangements where revenue is
derived based on percentages of client revenue growth or cost reductions attributable to our
products.
One measure used by management as an indicator of our business performance is the volume of
bookings achieved. We define a booking as estimated future contractual revenues, including
agreements with perpetual, multi-year and annual terms. Bookings values
15
may include: (i) estimates of variable fee components such as hours to be incurred under new
professional services arrangements and customer account or transaction activity for agreements with
transactional-based fee arrangements, (ii) additional or expanded business from renewals of
contracts, and (iii) to a lesser extent, previous customers that have attrited and been re-sold
only as a result of a significant sales effort. During the quarter ended June 30, 2009, we
achieved bookings of $49.0 million, with one deal with a booking value of $3.0 million or more. In
comparison, bookings in the prior year quarter ended June 30, 2008 were $64.2 million, including
two deals with bookings values of $3.0 million or more.
Management regards the volume of bookings achieved, among other factors, as an important
indicator of future revenues, but they are not comparable to, nor should they be substituted for,
an analysis of our revenues, and they are subject to a number of risks and uncertainties, including
those described in Item 1A of Part II, Risk Factors, concerning timing and contingencies
affecting product delivery and performance. Although many of our contracts have fixed
noncancelable terms, some of our contracts are terminable by the client on short notice or without
notice. Accordingly, we do not believe it is appropriate to characterize all of our bookings as
backlog that will generate future revenue.
Our revenues derived from clients outside the United States have generally grown, and may in
the future grow more rapidly than our revenues from domestic clients. International revenues
totaled $47.0 million and $57.7 million during the quarters ended June 30, 2009 and 2008,
respectively, representing 30% and 31% of total consolidated revenues in each of these periods.
International revenues totaled $149.4 million and $185.3 million during the nine months ended June
30, 2009 and 2008, respectively, representing 31% and 33% of total consolidated revenues in each of
these periods. Revenues declined $4.7 million and $15.5 million for the quarter and nine-month
period ended June 30, 2009, respectively, from prior-year periods, due to unfavorable currency
translation. We expect that the percentage of our revenues derived from international clients will
increase in the future, subject to the impact of foreign currency fluctuations.
Reengineering Plan
In April 2008, we announced the details of a reengineering plan designed to grow revenues
through strategic resource allocation and improve profitability through cost reduction. Key
components of the plan include rationalizing the business portfolio, simplifying management
hierarchy, eliminating low-priority positions, consolidating facilities and managing fixed and
variable costs. Also in connection with the plan, we sold our Insurance Bill Review business unit
and our LiquidCredit® Service for Telecom (LCT) and RoamEx product line assets, and we fully
exited our Cortronics neural research product line, Fast Panel diagnostics product line and
advertising services group.
In January 2009, we announced additional actions under the reengineering plan. The additional
actions were either completed or committed to by management prior to December 31, 2008 and were
primarily aimed at reducing costs through headcount reductions and facility consolidations. With
respect to the headcount reductions, we identified and eliminated 255 positions throughout the
Company. We expect annual cost savings as a result of these additional actions of approximately
$30 million. During the quarter ended March 31, 2009, we recognized a $1.2 million charge due to
unfavorable sublease arrangements we entered into for office space previously vacated. We plan to
achieve further cost savings by eliminating additional positions during fiscal 2009 through
attrition of non-revenue producing positions and restricting discretionary expenditures.
Current Business Environment
In 2008, the financial markets experienced significant volatility and general economic
conditions deteriorated. These conditions have had a substantial impact on our customers,
especially financial institutions. This has included an increased number of consolidations among
our customers, a significant decline in new account acquisition activities and extension of credit
by financial institutions and a general slowing of software purchases and related implementation
services by our customers. These unfavorable conditions have affected our business in the quarter
ended June 30, 2009 and are expected to continue to affect us during the remainder of fiscal 2009.
As a result of this difficult business environment, we continue to aggressively manage our
expenses in an effort to maintain solid earnings and cash flows. We also plan to continue to invest
in our Decision Management solutions, as well as our core business operations.
Acquisition and Divestiture Activity
In January 2008, we acquired Dash Optimization Ltd., a leading provider of decision modeling
and optimization software, for an aggregate purchase price of $34.1 million in cash. Results of
operations from this acquisition are included in our results prospectively
16
from the date of acquisition.
In April 2008, we completed the sale of our Insurance Bill Review business unit for $15.7
million in cash to Mitchell International, Inc. We recorded a $7.2 million pre-tax loss, but a
$3.3 million after-tax gain on the sale, as the amount of goodwill disposed of for income tax
purposes exceeded the amount determined for financial reporting purposes. Revenues from the
business were $3.5 million and $22.9 million for the quarter and nine month period ended June 30,
2008, respectively. The Insurance Bill Review business unit is classified as discontinued
operations in our consolidated condensed financial statements and in the following management
discussion and analysis.
In June 2009, we signed definitive agreements to sell the assets associated with our LCT and
RoamEx product lines for $6.2 million in cash. We recognized a $3.0 million pre-tax loss, and a
$3.9 million after-tax loss on the sale as the goodwill associated with the sale of these product
lines was not deductible for income tax purposes.
Segment Information
Our reportable segments are: Strategy Machine Solutions, Scoring Solutions, Professional
Services and Analytic Software Tools. Although we sell solutions and services into a large number
of end user product and industry markets, our reportable business segments reflect the primary
method in which management organizes and evaluates internal financial information to make operating
decisions and assess performance. Comparative segment revenues, operating income, and related
financial information for the quarters ended June 30, 2009 and 2008 are set forth in Note 8 to the
accompanying condensed consolidated financial statements.
RESULTS OF OPERATIONS
Revenues
The following tables set forth certain summary information on a segment basis related to our
revenues for the fiscal periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
June 30, |
|
|
Percentage of Revenues |
|
|
Period-to-Period |
|
|
Period-to-Period
Percentage |
|
Segment |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Strategy Machine Solutions |
|
$ |
81,667 |
|
|
$ |
94,855 |
|
|
|
52 |
% |
|
|
52 |
% |
|
$ |
(13,188 |
) |
|
|
(14 |
)% |
Scoring Solutions |
|
|
34,569 |
|
|
|
37,553 |
|
|
|
22 |
% |
|
|
21 |
% |
|
|
(2,984 |
) |
|
|
(8 |
)% |
Professional Services |
|
|
27,479 |
|
|
|
39,132 |
|
|
|
18 |
% |
|
|
21 |
% |
|
|
(11,653 |
) |
|
|
(30 |
)% |
Analytic Software Tools |
|
|
12,303 |
|
|
|
11,775 |
|
|
|
8 |
% |
|
|
6 |
% |
|
|
528 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
156,018 |
|
|
$ |
183,315 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
(27,297 |
) |
|
|
(15 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30, |
|
|
Percentage of Revenues |
|
|
Period-to-Period |
|
|
Period-to-Period
Percentage |
|
Segment |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Strategy Machine Solutions |
|
$ |
255,874 |
|
|
$ |
293,639 |
|
|
|
53 |
% |
|
|
52 |
% |
|
$ |
(37,765 |
) |
|
|
(13 |
)% |
Scoring Solutions |
|
|
99,797 |
|
|
|
119,556 |
|
|
|
21 |
% |
|
|
21 |
% |
|
|
(19,759 |
) |
|
|
(17 |
)% |
Professional Services |
|
|
86,188 |
|
|
|
114,645 |
|
|
|
18 |
% |
|
|
20 |
% |
|
|
(28,457 |
) |
|
|
(25 |
)% |
Analytic Software Tools |
|
|
36,954 |
|
|
|
38,815 |
|
|
|
8 |
% |
|
|
7 |
% |
|
|
(1,861 |
) |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
478,813 |
|
|
$ |
566,655 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
(87,842 |
) |
|
|
(16 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2009 Compared to Quarter Ended June 30, 2008 Revenues
Strategy Machine Solutions segment revenues decreased $13.2 million due to a $3.6 million
decrease in revenues from our collections and recovery solutions, a $3.6 million decrease in
revenues from our consumer solutions, a $3.3 million decrease in revenues from our fraud solutions,
a $1.7 million decrease in revenues from our originations solutions and a $1.0 million decrease in
revenues from our other strategy machine solutions.
17
Overall segment revenues were adversely impacted by difficult global economic conditions that
caused our customers to restrict investments in large technology projects. In addition, revenues
declined $2.0 million due to unfavorable currency translation related to the weakening of the
British Pound versus the U.S. dollar. At the product group level, the decrease in collections and
recovery solutions revenues resulted from a decline in license sales as the prior year quarter
included several large license sales. The decrease in consumer solutions was primarily attributed
to revenues lost from Experian terminating its relationship with myFICO.com. The decrease in fraud
solutions revenues was attributable primarily to decreases in volumes associated with
transactional-based agreements as well as the restructuring of one large customer contract. The
decrease in originations solutions revenues was due a decrease in volumes associated with
transactional-based agreements.
Scoring Solutions segment revenues decreased $3.0 million due primarily to a $2.2 million
reduction in revenues derived from the credit reporting agencies, which resulted from a decline in
volumes. Volumes declined as financial institutions have significantly reduced new account
acquisition activities and extension of credit. Revenues were also impacted by a reduction in
revenues from our services sold directly to users, which resulted from increased pricing pressures
and a decline in volumes due to a decrease in prescreening initiatives by our customers. We expect
that competitive pricing pressures as well as reduced volumes due to weakness in the U.S. financial
credit market will continue to adversely affect segment revenues in fiscal 2009.
During the quarters ended June 30, 2009 and 2008, revenues generated from our agreements with
Equifax, TransUnion and Experian collectively accounted for approximately 20% and 18%,
respectively, of our total revenues, including revenues from these customers that are recorded in
our other segments.
Professional Services segment revenues decreased $11.7 million as difficult global economic
conditions have caused customers to slow down contracted services, and as a result of the weakening
of the British Pound versus the U.S. dollar, which accounts for $1.7 million of the decrease. The
decline in revenues also reflects the overall decline in license sales, which results in a
corresponding decline in implementation services. In addition, the decline in revenues is the
result of our decision to stop pursuing certain lower margin consulting service engagements.
Analytic Software Tools segment revenues increased $0.5 million due to an increase in sales of
our Blaze Advisor and Model Builder products.
Nine Months Ended June 30, 2009 Compared to Nine Months Ended June 30, 2008 Revenues
Strategy Machine Solutions segment revenues decreased $37.8 million due to an $11.1 million
decrease in revenues from our collections and recovery solutions, a $8.7 million decrease in
revenues from our fraud solutions, a $7.9 million decrease in revenues from our customer management
solutions, a $3.4 million decrease in revenues from our consumer solutions, a $2.1 million decrease
in revenues from our marketing solutions, a $1.8 million decrease in revenues from our originations
solutions, a $1.8 million decrease in revenues from our analytics solutions, and a $1.0 million
decrease in revenues from our other strategy machine solutions.
Overall segment revenues were adversely impacted by difficult global economic conditions that
caused our customers to restrict investments in large technology projects. In addition, revenues
declined $4.6 million due to unfavorable currency translation related to the weakening of the
British Pound versus the U.S. dollar. At the product group level, the decrease in collections and
recovery solutions revenues resulted from a decline in license sales as the prior year quarter
included several large license sales and the loss of one large customer. The decrease in fraud
solutions revenues was attributable primarily to decreases in volumes associated with
transactional-based agreements. The decline was partially the result of a decrease in revenues
associated with our solutions for telecommunication service providers, which we determined were not
strategic and thus divested in June 2009. Revenues were also adversely impacted by the
restructuring of a large customer contract. The decrease in customer management solutions revenues
was attributable to a decline in license sales, as the prior year period included several large
license sales. In addition, there was a decline in customer management solutions transactional
revenues. The decrease in consumer solutions was primarily attributed to revenues lost from
Experian terminating its relationship with myFICO.com. The decrease in marketing solutions
revenues was attributable primarily to a decline in sales volumes resulting from the loss last year
of several large customer accounts. The decrease in originations solutions revenues was
attributable primarily to a decline in sales volumes associated with our LCT product, which was
divested in June 2009. The decrease in analytics solutions revenues was attributable primarily to
a decline in product sales.
Scoring Solutions segment revenues decreased $19.8 million due primarily to a $15.8 million
reduction in revenues derived from the credit reporting agencies, which resulted from a decline in
volumes. Volumes declined as financial institutions have significantly reduced new account
acquisition activities and extension of credit. Revenues were also impacted by a $3.1 million
reduction in revenues from our services sold directly to users, which resulted from increased
pricing pressures and a decline in volumes due to a
18
decrease in prescreening initiatives by our customers. We expect that competitive pricing
pressures as well as reduced volumes due to weakness in the U.S. financial credit market will
continue to adversely affect segment revenues in fiscal 2009.
During the nine months ended June 30, 2009 and 2008, revenues generated from our agreements
with Equifax, TransUnion and Experian, collectively accounted for approximately 19% of our total
revenues, including revenues from these customers that are recorded in our other segments.
Professional Services segment revenues decreased $28.5 million as difficult global economic
conditions have caused customers to slow down contracted services, and as a result of the weakening
of the British Pound versus the U.S. dollar, which accounted for $5.4 million of the decrease. The
decline in revenues also reflects the overall decline in license sales, which results in a
corresponding decline in implementation services. In addition, the decline in revenues is the
result of our decision to stop pursuing certain lower margin consulting service engagements.
Analytic Software Tools segment revenues decreased $1.9 million due to a $5.6 million decline
in sales of our Blaze Advisor®, Decision Optimizer and Model Builder products which was partially
offset by $3.7 million increase from products acquired in our January 2008 acquisition of Dash
Optimization Ltd.
Operating Expenses and Other Income (Expense)
The following table sets forth certain summary information related to our statements of income
for the fiscal periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
Period-to-Period |
|
|
|
June 30, |
|
|
Percentage of Revenues |
|
|
Period-to-Period |
|
|
Percentage |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenues |
|
$ |
156,018 |
|
|
$ |
183,315 |
|
|
|
100 |
% |
|
|
100 |
% |
|
$ |
(27,297 |
) |
|
|
(15 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
48,160 |
|
|
|
68,709 |
|
|
|
31 |
% |
|
|
38 |
% |
|
|
(20,549 |
) |
|
|
(30 |
)% |
Research and development |
|
|
18,364 |
|
|
|
18,779 |
|
|
|
12 |
% |
|
|
10 |
% |
|
|
(415 |
) |
|
|
(2 |
)% |
Selling, general and administrative |
|
|
50,290 |
|
|
|
59,734 |
|
|
|
32 |
% |
|
|
33 |
% |
|
|
(9,444 |
) |
|
|
(16 |
)% |
Amortization of intangible assets |
|
|
3,219 |
|
|
|
3,797 |
|
|
|
2 |
% |
|
|
2 |
% |
|
|
(578 |
) |
|
|
(15 |
)% |
Restructuring |
|
|
(237 |
) |
|
|
2,176 |
|
|
|
|
|
|
|
1 |
% |
|
|
(2,413 |
) |
|
|
(111 |
)% |
Loss on sale of product line assets |
|
|
2,993 |
|
|
|
|
|
|
|
2 |
% |
|
|
|
|
|
|
2,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
122,789 |
|
|
|
153,195 |
|
|
|
79 |
% |
|
|
84 |
% |
|
|
(30,406 |
) |
|
|
(20 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
33,229 |
|
|
|
30,120 |
|
|
|
21 |
% |
|
|
16 |
% |
|
|
3,109 |
|
|
|
10 |
% |
Interest income |
|
|
936 |
|
|
|
1,707 |
|
|
|
1 |
% |
|
|
1 |
% |
|
|
(771 |
) |
|
|
(45 |
)% |
Interest expense |
|
|
(6,086 |
) |
|
|
(5,203 |
) |
|
|
(4 |
)% |
|
|
(3 |
)% |
|
|
(883 |
) |
|
|
17 |
% |
Other income net |
|
|
503 |
|
|
|
1,478 |
|
|
|
|
|
|
|
1 |
% |
|
|
(975 |
) |
|
|
(66 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
28,582 |
|
|
|
28,102 |
|
|
|
18 |
% |
|
|
15 |
% |
|
|
480 |
|
|
|
2 |
% |
Provision for income taxes |
|
|
10,443 |
|
|
|
9,304 |
|
|
|
6 |
% |
|
|
5 |
% |
|
|
1,139 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
18,139 |
|
|
|
18,798 |
|
|
|
12 |
% |
|
|
10 |
% |
|
|
(659 |
) |
|
|
(4 |
)% |
Income from discontinued operations |
|
|
|
|
|
|
7,703 |
|
|
|
|
|
|
|
4 |
% |
|
|
(7,703 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,139 |
|
|
$ |
26,501 |
|
|
|
12 |
% |
|
|
14 |
% |
|
|
(8,362 |
) |
|
|
(32 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at quarter end |
|
|
2,143 |
|
|
|
2,597 |
|
|
|
|
|
|
|
|
|
|
|
(454 |
) |
|
|
(17 |
)% |
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
June 30, |
|
|
Percentage of Revenues |
|
|
Period-to-Period |
|
|
Period-to-Period
Percentage |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenues |
|
$ |
478,813 |
|
|
$ |
566,655 |
|
|
|
100 |
% |
|
|
100 |
% |
|
$ |
(87,842 |
) |
|
|
(16 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
160,655 |
|
|
|
208,627 |
|
|
|
33 |
% |
|
|
37 |
% |
|
|
(47,972 |
) |
|
|
(23 |
)% |
Research and development |
|
|
55,409 |
|
|
|
58,910 |
|
|
|
11 |
% |
|
|
10 |
% |
|
|
(3,501 |
) |
|
|
(6 |
)% |
Selling, general and administrative |
|
|
157,519 |
|
|
|
187,858 |
|
|
|
33 |
% |
|
|
33 |
% |
|
|
(30,339 |
) |
|
|
(16 |
)% |
Amortization of intangible assets |
|
|
9,622 |
|
|
|
10,481 |
|
|
|
2 |
% |
|
|
2 |
% |
|
|
(859 |
) |
|
|
(8 |
)% |
Restructuring |
|
|
8,711 |
|
|
|
7,855 |
|
|
|
2 |
% |
|
|
2 |
% |
|
|
856 |
|
|
|
11 |
% |
Loss on sale of product line assets |
|
|
2,993 |
|
|
|
|
|
|
|
1 |
% |
|
|
|
|
|
|
2,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
394,909 |
|
|
|
473,731 |
|
|
|
82 |
% |
|
|
84 |
% |
|
|
(78,822 |
) |
|
|
(17 |
)% |
Operating income |
|
|
83,904 |
|
|
|
92,924 |
|
|
|
18 |
% |
|
|
16 |
% |
|
|
(9,020 |
) |
|
|
(10 |
)% |
Interest income |
|
|
3,836 |
|
|
|
5,942 |
|
|
|
1 |
% |
|
|
1 |
% |
|
|
(2,106 |
) |
|
|
(35 |
)% |
Interest expense |
|
|
(19,771 |
) |
|
|
(13,461 |
) |
|
|
(4 |
)% |
|
|
(2 |
)% |
|
|
(6,310 |
) |
|
|
47 |
% |
Other income, net |
|
|
1,651 |
|
|
|
2,095 |
|
|
|
|
|
|
|
|
|
|
|
(444 |
) |
|
|
(21 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
69,620 |
|
|
|
87,500 |
|
|
|
15 |
% |
|
|
15 |
% |
|
|
(17,880 |
) |
|
|
(20 |
)% |
Provision for income taxes |
|
|
21,263 |
|
|
|
30,092 |
|
|
|
5 |
% |
|
|
5 |
% |
|
|
(8,829 |
) |
|
|
(29 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
48,357 |
|
|
|
57,408 |
|
|
|
10 |
% |
|
|
10 |
% |
|
|
(9,051 |
) |
|
|
(16 |
)% |
Income (loss) from discontinued
operations |
|
|
(363 |
) |
|
|
2,766 |
|
|
|
|
|
|
|
1 |
% |
|
|
(3,129 |
) |
|
|
(113 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
47,994 |
|
|
$ |
60,174 |
|
|
|
10 |
% |
|
|
11 |
% |
|
|
(12,180 |
) |
|
|
(20 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
Cost of revenues consists primarily of employee salaries and benefits for personnel directly
involved in creating, installing and supporting revenue products; travel and related overhead
costs; costs of computer service bureaus; internal network hosting costs; amounts payable to credit
reporting agencies for scores; software costs; and expenses related to our consumer score services
through myFICO.com.
Cost of revenues as a percentage of revenues was 31% for the quarter ended June 30, 2009, as
compared to 38% for the quarter ended June 30, 2008. The quarter over quarter decrease of $20.5
million in cost of revenues resulted from a $12.8 million decrease in personnel and other
labor-related costs, a $3.9 million decrease in facilities and infrastructure costs, a $1.8 million
decrease in billable travel costs, a $1.5 million decrease in third party software and data, and a
$0.5 million decrease in other costs. The decrease in personnel and other labor-related costs was
attributable primarily to a decline in salary and related benefit costs resulting from staff
reductions and from the decline in professional services activities. The decrease in facilities
and infrastructure costs was attributable primarily to a decline in allocated costs resulting from
a reduction in cost of revenue expenses. The decrease in third party software and data costs was
due to decreased sales in our consumer solutions that required data acquisition. The decrease in
travel costs was from the overall reduction in professional services activities.
The year-to-date period over period decrease of $48.0 million in cost of revenues resulted
from a $31.5 million decrease in personnel and other labor-related costs, a $6.2 million decrease
in facilities and infrastructure costs, a $4.8 million decrease in third party software and data, a
$3.8 million decrease in billable travel costs, and a $1.7 million decrease in other costs. The
overall decrease in cost of revenues for the year-to-date period was attributable to the same
factors that affected the quarter over quarter comparison.
Over the next several quarters, we expect that cost of revenues as a percentage of revenues
will be slightly higher than those incurred during the quarter ended June 30, 2009.
Research and Development
Research and development expenses include the personnel and related overhead costs incurred in
the development of new products and services, including the research of mathematical and
statistical models and the development of new versions of Strategy Machine Solutions and Analytic
Software Tools.
20
The quarter over quarter decrease of $0.4 million in research and development expenditures was
attributable primarily to a $0.6 million decrease in personnel and related costs and a $0.2 million
increase in other expenses. The decrease in personnel and related costs was driven by a reductions
associated with our reengineering program.
The year-to-date period decrease of $3.5 million in research and development expenditures was
attributable primarily to a $4.6 million decrease in personnel and related costs and a $1.4 million
decrease in other expenses, partially offset by a $2.5 million increase in data related expenses.
The decrease in personnel and related costs was driven by staff reductions associated with our
reengineering program. The increase in data expenses was due to higher costs for data that is used
for product development initiatives.
Over the next several quarters, we expect that research and development expenditures as a
percentage of revenues will be consistent with those incurred during the quarter ended June 30,
2009.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee salaries and
benefits, travel, overhead, advertising and other promotional expenses, corporate facilities
expenses, legal expenses, business development expenses, and the cost of operating computer
systems.
The quarter over quarter decrease of $9.4 million in selling, general and administrative
expenses was attributable to a $4.9 million decrease in personnel and other labor-related costs, a
$1.1 million decrease in facilities and infrastructure costs, a $1.1 million decrease in bad debt
expense, a $1.0 million decrease in travel costs and a $1.3 million net decrease in other expenses.
The decrease in personnel and labor-related costs related primarily to a decline in salary and
benefit costs resulting from staff reductions associated with our reengineering program. The
decrease in facilities and infrastructure costs was attributable primarily to a decline in
allocated costs resulting from staff reductions and exiting certain facilities. The decrease in
bad debt expense is due to successful collection efforts and a decrease in revenues. The decrease
in travel expenses was driven by management programs focused on reducing expenses.
The year-to-date period over period decrease of $30.3 million in selling, general and
administrative expenses was attributable to a $22.5 million decrease in personnel and other
labor-related costs, a $4.1 million decrease in travel costs, a $2.3 million decrease in bad debt
expense and a $1.4 million net decrease in other expenses. The decrease in personnel and
labor-related costs related primarily to a decline in salary and benefit costs resulting from staff
reductions associated with our reengineering program. The decline in travel expenses was driven by
management programs focused on reducing expenses. The decrease in bad debt expense is due to
successful collection efforts and a decrease in revenues.
Over the next several quarters, we expect that selling, general and administrative expenses as
a percentage of revenues will be consistent with those incurred during the quarter ended June 30,
2009.
Amortization of Intangible Assets
Amortization of intangible assets consists of amortization expense related to intangible
assets recorded in connection with acquisitions accounted for by the purchase method of accounting.
Our definite-lived intangible assets, consisting primarily of completed technology and customer
contracts and relationships, are being amortized using the straight-line method or based on
forecasted cash flows associated with the assets over periods ranging from two to fifteen years.
In fiscal 2009, we expect that amortization expense will be consistent with the amortization
expense we recorded in fiscal 2008.
Restructuring
During the quarter ended June 30, 2009, we recorded a $0.2 million expense reversal related to
a lease termination.
During the quarter ended March 31, 2009, we recognized a $1.2 million charge due to
unfavorable sublease arrangements we entered into for office space previously vacated. The charge
was offset by a $0.4 million reduction in other restructuring liabilities.
During the quarter ended December 31, 2008, in connection with our reengineering program, we
incurred net charges totaling $8.1 million. The charges included $5.9 million for severance costs
associated with the reduction of 255 positions throughout the
21
Company. Cash payments for substantially all the severance costs were paid during the quarter
ended March 31, 2009. We also recognized charges of $2.6 million associated with vacating excess
leased space located in Georgia and California. The charge represents future cash lease payments,
net of estimated sublease income, which will be paid out over the next nine years.
Loss on Sale of Product Line Assets
In June 2009, we signed definitive agreements to sell the assets associated with our LCT and
RoamEx product lines for $6.2 million in cash. We recognized a $3.0 million pre-tax loss, and a
$3.9 million after-tax loss on the sale as the goodwill associated with the sale of these product
lines was not deductible for income tax purposes.
Interest Income
Interest income is derived primarily from the investment of funds in excess of our immediate
operating requirements. The quarter over quarter decrease in interest income of $0.8 million was
attributable to a decline in interest rates and investment income yields due to market conditions.
The year-to-date period decrease in interest income of $2.1 million was attributable to a
decline in interest rates and investment income yields due to market conditions.
Interest Expense
Interest expense recorded during the quarter ended June 30, 2009 included interest on Senior
Notes that were issued in May 2008 and interest associated with borrowings under our revolving
credit facility. Interest expense recorded during the quarter ended June 30, 2008 related to our
Senior Convertible Notes as well as interest associated with borrowing under our revolving credit
facility. We repurchased all of the outstanding Senior Convertible Notes during fiscal 2008.
The quarter over quarter increase in interest expense of $0.9 million was the result of higher
average interest rates on outstanding borrowings. The increase in the average interest rate was
due to the issuance of $275.0 million of Senior Notes in May 2008, which had a weighted average
interest rate of 6.8%. In the prior year, we had $267.2 million of Senior Convertible Notes
outstanding that had an interest rate of 1.5%.
The year-to-date period increase in interest expense of $6.3 million was attributable to the
same factors that affected the quarter over quarter comparison.
Other Income, Net
Other income, net consists primarily of realized investment gains/losses, exchange rate
gains/losses resulting from re-measurement of foreign-denominated receivable and cash balances held
by our U.S. reporting entities into the U.S. dollar functional currency at period-end market rates,
net of the impact of offsetting forward exchange contracts, and other non-operating items.
Other income, net in the quarter ended June 30, 2009, primarily consisted of $0.7 million of
dividend income that we recognized in the quarter and foreign exchange currency losses of $0.4
million. In the quarter ended June 30, 2008, other income, net resulted from $0.8 million of
dividend income that we recognized in the quarter and a $0.5 million gain on the redemption of
$100.0 million of Senior Convertible Notes.
Other income, net was $1.7 million for the nine months ended June 30, 2009 compared with other
income, net of $2.1 million for the nine months ended June 30, 2008. The decrease in other income,
net was primarily due to $0.9 million gain recognized in the nine months ended June 30, 2008 on the
redemption of $123.7 million of Senior Convertible Notes partially offset by foreign exchange
currency gains of $0.6 million that were recognized in the nine months ended June 30, 2009 compared
to $0.3 million in the prior year period.
Provision for Income Taxes
Our effective tax rate was 36.5% and 33.1% during the quarters ended June 30, 2009 and 2008,
respectively, and 30.5% and 34.4% during the nine months ended June 30, 2009 and 2008,
respectively. The provision for income taxes during interim quarterly reporting periods is based on
our estimates of the effective tax rates for the respective full fiscal year.
22
The effective tax rate in any quarter can be affected positively or negatively by adjustments
that are required to be reported in the specific quarter of resolution. The increase in our
effective tax rate in the third quarter of 2009 was due to an increase in domestic earnings
relative to other foreign jurisdictions and the sale of our RoamEx and LCT product lines. These
product line sales included a write-off of goodwill that was not deductible for income tax
purposes.
Operating Income
The following table sets forth certain summary information on a segment basis related to our
operating income for the fiscal periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
Period-to-Period |
|
|
|
June 30, |
|
|
Period-to-Period |
|
|
Percentage |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Change |
|
Segment |
|
(In thousands) |
|
|
|
|
Strategy Machine Solutions |
|
$ |
18,670 |
|
|
$ |
14,306 |
|
|
$ |
4,364 |
|
|
|
31 |
% |
Scoring Solutions |
|
|
20,520 |
|
|
|
21,715 |
|
|
|
(1,195 |
) |
|
|
(6 |
)% |
Professional Services |
|
|
(991 |
) |
|
|
1,599 |
|
|
|
(2,590 |
) |
|
|
(162 |
)% |
Analytic Software Tools |
|
|
2,480 |
|
|
|
1,431 |
|
|
|
1,049 |
|
|
|
73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
40,679 |
|
|
|
39,051 |
|
|
|
1,628 |
|
|
|
4 |
% |
Unallocated share-based compensation |
|
|
(4,694 |
) |
|
|
(6,755 |
) |
|
|
2,061 |
|
|
|
(31 |
)% |
Unallocated restructuring |
|
|
237 |
|
|
|
(2,176 |
) |
|
|
2,413 |
|
|
|
(111 |
)% |
Unallocated loss on sale of product line assets |
|
|
(2,993 |
) |
|
|
|
|
|
|
(2,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
33,229 |
|
|
$ |
30,120 |
|
|
|
3,109 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
Period-to-Period |
|
|
|
June 30, |
|
|
Period-to-Period |
|
|
Percentage |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Change |
|
Segment |
|
(In thousands) |
|
|
|
|
Strategy Machine Solutions |
|
$ |
53,296 |
|
|
$ |
43,239 |
|
|
$ |
10,057 |
|
|
|
23 |
% |
Scoring Solutions |
|
|
57,395 |
|
|
|
69,837 |
|
|
|
(12,442 |
) |
|
|
(18 |
)% |
Professional Services |
|
|
(5,943 |
) |
|
|
4,236 |
|
|
|
(10,179 |
) |
|
|
(240 |
)% |
Analytic Software Tools |
|
|
6,202 |
|
|
|
4,923 |
|
|
|
1,279 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
110,950 |
|
|
|
122,235 |
|
|
|
(11,285 |
) |
|
|
(9 |
)% |
Unallocated share-based compensation |
|
|
(15,342 |
) |
|
|
(21,456 |
) |
|
|
6,114 |
|
|
|
(28 |
)% |
Unallocated restructuring |
|
|
(8,711 |
) |
|
|
(7,855 |
) |
|
|
(856 |
) |
|
|
11 |
% |
Unallocated loss on sale of product line assets |
|
|
(2,993 |
) |
|
|
|
|
|
|
(2,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
83,904 |
|
|
$ |
92,924 |
|
|
|
(9,020 |
) |
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The quarter over quarter increase of $3.1 million in operating income was attributable to a
decline in segment operating expenses, restructuring charges and share-based compensation expenses
partially offset by a loss on the sale of product line assets and a decrease in segment revenues.
At the segment level, the increase in segment operating income was driven by a $4.3 million
increase in our Strategy Machine Solutions operating income and a $1.0 million increase in our
Analytical Software Tools segment income partially offset by a $2.6 million decrease in our
Professional Services segment operating income and a $1.2 million decrease in our Scoring Solutions
segment operating income. The increase in Strategy Machine Solutions segment operating income was
attributable to a significant decline in operating expenses, which was driven by our reengineering
program. Under the reengineering program, we have reduced operating costs through staff
reductions, facility consolidations and restriction of discretionary expenditures. The increase in
Strategy Machine Solutions operating income was partially offset by a decline in revenues. Segment
revenues were adversely impacted by difficult global economic conditions that caused our customers
to restrict investments in large technology projects. In our Analytic Software Tools segment, the
increase in segment operating income was due to higher segment revenues and a decline in operating
expenses. The decrease in Scoring Solutions segment operating income was attributable primarily to
a decline in revenues derived from services to the credit reporting agencies and for services that
we provided directly to users in financial services partially offset by reduced operating expenses.
The decrease in Professional Services segment operating results was due to the decline in
23
revenues partially offset by reduced operating expenses. Professional Services revenues
decreased as difficult global economic conditions have caused customers to slow down contracted
services. The decline in revenues also reflects the overall decline in license sales, which
results in a corresponding decline in implementation services. We expect the difficult business
environment to continue to adversely affect Professional Services segment results, and accordingly
we are aggressively managing our expenses in order to offset the revenue declines.
The year-to-date period over period decrease of $9.0 million in operating income was
attributable to a decrease in segment revenues, a loss on the sale of product line assets and an
increase in restructuring charges, partially offset by a decline in segment operating expenses and
share-based compensation expenses. At the segment level, the decline in segment operating income
was driven by a $12.4 million decrease in our Scoring Solutions segment operating income and a
$10.2 million decrease in our Professional Services segment operating income. The decline was
partially offset by a $10.0 million increase in our Strategy Machine Solutions segment operating
income and a $1.3 million increase in our Analytical Software Tools segment operating income. The
decrease in Scoring Solutions segment operating income was attributable primarily to a decline in
revenues derived from services to the credit reporting agencies and for services that we provided
directly to users in financial services partially offset by reduced operating expenses. The
decrease in Professional Services segment operating income was due to the decline in revenues
partially offset by reduced operating expenses. Professional Services revenues decreased as
difficult global economic conditions have caused customers to slow down contracted services. The
decline in revenues also reflects the overall decline in license sales, which resulted in a
corresponding decline in implementation services. We expect the difficult business environment to
continue to adversely affect Professional Services segment results, and accordingly we are
aggressively managing our expenses in order to offset the revenue declines. The increase in
Strategy Machine Solutions segment operating income was attributable to a significant decline in
operating expenses, which was driven by our reengineering program. Under the reengineering
program, we have reduced operating costs through staff reductions, facility consolidations and
restriction of discretionary expenditures. The increase in Strategy Machine Solutions operating
income was partially offset by a decline in revenues. Segment revenues were adversely impacted by
difficult global economic conditions that caused our customers to restrict investments in large
technology projects. In our Analytic Software Tools segment, the increase in segment operating
income was due to lower operating expenses offset by lower revenues.
Discontinued Operations
In March 2009, we recorded a charge of $0.4 million, net of tax, resulting from the resolution
of a final working capital adjustment in favor of the purchaser of our Insurance Bill Review
business unit.
In March 2008, we entered into a definitive agreement for the sale of our Insurance Bill
Review business unit. On April 30, 2008, the Company completed the sale of the business unit for
$14.2 million of cash, subject to the aforementioned final working capital adjustment as defined
under the agreement.
Capital Resources and Liquidity
Cash Flows from Operating Activities
Our primary method for funding operations and growth has been through cash flows generated
from operating activities. Net cash provided by operating activities increased from $113.8 million
during the nine months ended June 30, 2008 to $124.3 million during the nine months ended June 30,
2009. Operating cash flows were positively impacted by a decrease in accounts receivable of $35.3
million, which resulted from the timing of cash receipts and an increase in deferred revenue.
Operating cash flows were negatively impacted by a decrease in other liabilities and a decline in
earnings during the nine months ended June 30, 2009.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $12.2 million during the nine months ended June
30, 2009, compared to net cash used in investing activities of $26.6 million in the nine months
ended June 30, 2008. The change in cash flows from investing activities was primarily due to $33.3
million paid for the acquisition of Dash Optimization Ltd. in January 2008, $14.2 million cash
received in April 2008 from the sale of our Insurance Bill Review business unit, a $11.8 million
decrease in proceeds from sales and maturities of marketable securities, net of purchases and a
$6.3 million decrease in capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities totaled $20,000 during the nine months ended June
30, 2009, compared to net cash used by financing activities of $80.0 million during the nine months
ended June 30, 2008. The change in cash flows from financing
24
activities was primarily due to a $116.6 million decrease in common stock repurchased,
partially offset by a $20.2 million decrease in cash proceeds from net borrowings under our
revolving credit facility, senior notes and senior convertible notes and a $16.8 million decrease
in proceeds from the issuance of common stock under employee stock plans.
Repurchases of Common Stock
From time to time, we repurchase our common stock in the open market pursuant to programs
approved by our Board of Directors. During the nine months ended June 30, 2009, we did not
repurchase any of our common stock. During the nine months ended June 30, 2008, we expended $116.6
million in connection with our repurchase of common stock under such programs.
In November 2007, our Board of Directors approved a new common stock repurchase program that
replaced a previous program. The new program allows us to purchase shares of our common stock up
to an aggregate cost of $250.0 million. As of June 30, 2009, we had $148.2 million remaining under
this authorization.
Dividends
During the quarter ended June 30, 2009, we paid a quarterly dividend of two cents per common
share, which is representative of the eight cents per year dividend we have paid in recent years.
Our dividend rate is set by the Board of Directors on a quarterly basis taking into account a
variety of factors, including among others our operating results and cash flows, general economic
and industry conditions, our obligations, changes in applicable tax laws and other factors deemed
relevant by the Board. Although we expect to continue to pay dividends at the current rate, our
dividend rate is subject to change from time to time based on the Boards business judgment with
respect to these and other relevant factors.
Credit Agreement
We have a $600.0 million unsecured revolving credit facility with a syndicate of banks that
expires in 2011. Proceeds from the credit facility can be used for working capital and general
corporate purposes and may also be used for the refinancing of existing debt, acquisitions, and the
repurchase of our common stock. Interest on amounts borrowed under the credit facility is based on
(i) a base rate, which is the greater of (a) the prime rate and (b) the Federal Funds rate plus
0.50% or (ii) LIBOR plus an applicable margin. The margin on LIBOR borrowings ranges from 0.30% to
0.55% and is determined based on our consolidated leverage ratio. In addition, we must pay
utilization fees if borrowings and commitments under the credit facility exceed 50% of the total
credit facility commitment, as well as facility fees. The credit facility contains certain
restrictive covenants, including maintenance of consolidated leverage and fixed charge coverage
ratios. The credit facility also contains covenants typical of unsecured facilities. As of June
30, 2009, we were in compliance with all covenants under this credit facility and we had $295.0
million of borrowings outstanding at an interest rate of 1.3%.
Senior Notes
In May 2008, we issued $275.0 million of Senior Notes in a private placement to a group of
institutional investors. The Senior Notes were issued in four series with maturities ranging from
5 to 10 years. The Senior Notes weighted average interest rate is 6.8%. The Senior Notes are
subject to certain restrictive covenants that are substantially similar to those in the credit
agreement for the revolving credit facility including maintenance of consolidated leverage and
fixed charge coverage ratios. The purchase agreement for the Senior Notes also includes covenants
typical of unsecured facilities.
Capital Resources and Liquidity Outlook
As of June 30, 2009, we had $371.6 million in cash, cash equivalents and marketable security
investments. We believe that these balances, as well as borrowings available from our revolving
credit facility and anticipated cash flows from operating activities, will be sufficient to fund
our working and other capital requirements and any scheduled repayments of existing debt over the
course of the next twelve months. Under our current financing arrangements we have no significant
debt obligations maturing until fiscal 2012. In the normal course of business, we evaluate the
merits of acquiring technology or businesses, or establishing strategic relationships with or
investing in these businesses. We may elect to use available cash and cash equivalents and
marketable security investments to fund such activities in the future. In the event additional
needs for cash arise, we may raise additional funds from a combination of sources, including the
potential issuance of debt or equity securities. Additional financing might not be available on
terms favorable to us, or at all. If adequate funds were not available or were not available on
acceptable terms, our ability to take advantage of unanticipated opportunities or respond to
competitive pressures could be limited.
25
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with U.S. generally accepted
accounting principles. These accounting principles require management to make certain judgments and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. We periodically evaluate our
estimates including those relating to revenue recognition, the allowance for doubtful accounts,
goodwill and other intangible assets resulting from business acquisitions, income taxes and
contingencies and litigation. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable based on the specific circumstances, the results of
which form the basis for making judgments about the carrying value of certain assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates.
We believe the following critical accounting policies involve the most significant judgments
and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
Software license fee revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product has occurred at our customers location, the fee is fixed or determinable
and collection is probable. We use the residual method to recognize revenue when an arrangement
includes one or more elements to be delivered at a future date and vendor-specific objective
evidence (VSOE) of the fair value of all undelivered elements exists. VSOE of fair value is
based on the normal pricing practices for those products and services when sold separately by us
and customer renewal rates for post-contract customer support services. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements
does not exist, the revenue is deferred and recognized when delivery of those elements occurs or
when fair value can be established. The determination of whether fees are fixed or determinable
and collection is probable involves the use of assumptions. We evaluate contract terms and
customer information to ensure that these criteria are met prior to our recognition of license fee
revenue. Changes to the elements in a software arrangement, the ability to identify VSOE for those
elements, the fair value of the respective elements, and change to a products estimated life cycle
could materially impact the amount of earned and unearned revenue.
When software licenses are sold together with implementation or consulting services, license
fees are recognized upon delivery provided that the above criteria are met, payment of the license
fees is not dependent upon the performance of the services, and the services do not provide
significant customization or modification of the software products and are not essential to the
functionality of the software that was delivered. For arrangements with services that are
essential to the functionality of the software, the license and related service revenues are
recognized using contract accounting as described below.
If at the outset of an arrangement we determine that the arrangement fee is not fixed or
determinable, revenue is deferred until the arrangement fee becomes fixed or determinable, assuming
all other revenue recognition criteria have been met. If at the outset of an arrangement we
determine that collectibility is not probable, revenue is deferred until the earlier of when
collectibility becomes probable or the receipt of payment. If there is uncertainty as to the
customers acceptance of our deliverables, revenue is not recognized until the earlier of receipt
of customer acceptance, expiration of the acceptance period, or when we can demonstrate we meet the
acceptance criteria.
Revenues from post-contract customer support services, such as software maintenance, are
recognized on a straight-line basis over the term of the support period. The majority of our
software maintenance agreements provide technical support as well as unspecified software product
upgrades and releases when and if made available by us during the term of the support period.
Revenues recognized from our credit scoring, data processing, data management and internet
delivery services are recognized as these services are performed, provided persuasive evidence of
an arrangement exists, fees are fixed or determinable, and collection is reasonably assured. The
determination of certain of our credit scoring and data processing revenues requires the use of
estimates, principally related to transaction volumes in instances where these volumes are reported
to us by our clients on a monthly or quarterly basis in arrears. In these instances, we estimate
transaction volumes based on preliminary customer transaction information, if
26
available, or based on average actual reported volumes for an immediate trailing period.
Differences between our estimates and actual final volumes reported are recorded in the period in
which actual volumes are reported. We have not experienced significant variances between our
estimates and actual reported volumes in the past and anticipate that we will be able to continue
to make reasonable estimates in the future. If for some reason we were unable to reasonably
estimate transaction volumes in the future, revenue may be deferred until actual customer data was
received, and this could have a material impact on our results of operations during the period of
time that we changed accounting methods.
Transactional or unit-based license fees under software license arrangements, network service
and internally-hosted software agreements are recognized as revenue based on system usage or when
fees based on system usage exceed monthly minimum license fees, provided persuasive evidence of an
arrangement exists, fees are fixed or determinable and collection is probable. The determination of
certain of our transactional or unit-based license fee revenues requires the use of estimates,
principally related to transaction usage or active account volumes in instances where this
information is reported to us by our clients on a monthly or quarterly basis in arrears. In these
instances, we estimate transaction volumes based on preliminary customer transaction information,
if available, or based on average actual reported volumes for an immediate trailing period.
Differences between our estimates and actual final volumes reported are recorded in the period in
which actual volumes are reported. We have not experienced significant variances between our
estimates and actual reported volumes in the past and anticipate that we will be able to continue
to make reasonable estimates in the future. If for some reason we were unable to reasonably
estimate customer account or transaction volumes in the future, revenue would be deferred until
actual customer data was received, and this could have a material impact on our consolidated
results of operations.
We provide consulting, training, model development and software integration services under
both hourly-based time and materials and fixed-priced contracts. Revenues from these services are
generally recognized as the services are performed. For fixed-price service contracts, we apply
the percentage-of-completion method of contract accounting to determine progress towards
completion, which requires the use of estimates. In such instances, management is required to
estimate the input measures, generally based on hours incurred to date compared to total estimated
hours of the project, with consideration also given to output measures, such as contract
milestones, when applicable. Adjustments to estimates are made in the period in which the facts
requiring such revisions become known and, accordingly, recognized revenues and profits are subject
to revisions as the contract progresses to completion. Estimated losses, if any, are recorded in
the period in which current estimates of total contract revenue and contract costs indicate a loss.
If substantive uncertainty related to customer acceptance of services exists, we apply the
completed contract method of accounting and defer the associated revenue until the contract is
completed. If we are unable to accurately estimate the input measures used for
percentage-of-completion accounting, revenue would be deferred until the contract is complete, and
this could have a material impact on our consolidated results of operations.
Revenue recognized under the percentage-of-completion method in excess of contract billings is
recorded as an unbilled receivable. Such amounts are generally billable upon reaching certain
performance milestones as defined by individual contracts. Billings collected in advance of
performance and recognition of revenue under contracts are recorded as deferred revenue.
In certain of our non-software arrangements, we enter into contracts that include the delivery
of a combination of two or more of our service offerings. Typically, such multiple element
arrangements incorporate the design and development of data management tools or systems and an
ongoing obligation to manage, host or otherwise run solutions for our customer. Such arrangements
are divided into separate units of accounting provided that the delivered item has stand-alone
value and there is objective and reliable evidence of the fair value of the undelivered items. The
total arrangement fee is allocated to the undelivered elements based on their fair values and to
the initial delivered elements using the residual method. Revenue is recognized separately, and in
accordance with our revenue recognition policy, for each element.
As described above, sometimes our customer arrangements have multiple deliverables, including
service elements. Generally, our multiple element arrangements fall within the scope of specific
accounting standards that provide guidance regarding the separation of elements in
multiple-deliverable arrangements and the allocation of consideration among those elements (e.g.,
American Institute of Certified Public Accountants Statement of Position (SOP) No. 97-2, Software
Revenue Recognition, as amended). If not, we apply the separation provisions of Emerging Issues
Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The
provisions of EITF Issue No. 00-21 require us to unbundle multiple element arrangements into
separate units of accounting when the delivered element(s) has stand-alone value and fair value of
the undelivered element(s) exists. When we are able to unbundle the arrangement into separate
units of accounting, we apply one of the accounting policies described above to each unit. If we
are unable to unbundle the arrangement into separate units of accounting, we apply one of the
accounting policies described above to the entire arrangement. Sometimes this results in
recognizing the entire arrangement fee when delivery of the last element in a multiple element
arrangement occurs. For example, if the last undelivered element is a service, we recognize
revenue for the entire
27
arrangement fee as the service is performed, or if no pattern of performance is discernable,
we recognize revenue on a straight-line basis over the term of the arrangement.
We record revenue on a net basis for those sales in which we have in substance acted as an
agent or broker in the transaction.
Allowance for Doubtful Accounts
We make estimates regarding the collectibility of our accounts receivable. When we evaluate
the adequacy of our allowance for doubtful accounts, we analyze specific accounts receivable
balances, historical bad debts, customer creditworthiness, current economic trends and changes in
our customer payment cycles. Material differences may result in the amount and timing of expense
for any period if we were to make different judgments or utilize different estimates. If the
financial condition of our customers deteriorates resulting in an impairment of their ability to
make payments, additional allowances might be required. We have not experienced significant
variances in the past between our estimated and actual doubtful accounts and anticipate that we
will be able to continue to make reasonable estimates in the future. If for some reason we did not
reasonably estimate the amount of our doubtful accounts in the future, it could have a material
impact on our consolidated results of operations.
Business Acquisitions; Valuation of Goodwill and Other Intangible Assets
Our business acquisitions typically result in the recognition of goodwill and other intangible
assets, and in certain cases non-recurring charges associated with the write-off of in-process
research and development (IPR&D), which affect the amount of current and future period charges
and amortization expense. Goodwill represents the excess of the purchase price over the fair value
of net assets acquired, including identified intangible assets, in connection with our business
combinations accounted for by the purchase method of accounting. We amortize our definite-lived
intangible assets using the straight-line method or based on forecasted cash flows associated with
the assets over the estimated useful lives, while IPR&D is recorded as a non-recurring charge on
the acquisition date. Goodwill is not amortized, but rather is periodically assessed for
impairment.
The determination of the value of these components of a business combination, as well as
associated asset useful lives, requires management to make various estimates and assumptions.
Critical estimates in valuing certain of the intangible assets include but are not limited to:
future expected cash flows from product sales and services, maintenance agreements, consulting
contracts, customer contracts, and acquired developed technologies and patents or trademarks;
expected costs to develop the IPR&D into commercially viable products and estimating cash flows
from the projects when completed; the acquired companys brand awareness and market position, as
well as assumptions about the period of time the acquired products and services will continue to be
used in our product portfolio; and discount rates. Managements estimates of fair value and useful
lives are based upon assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable. Unanticipated events and circumstances may occur and assumptions may change.
Estimates using different assumptions could also produce significantly different results.
We continually review the events and circumstances related to our financial performance and
economic environment for factors that would provide evidence of the impairment of our intangible
assets. When impairment indicators are identified with respect to our previously recorded
intangible assets, then we test for impairment using undiscounted cash flows. If such tests
indicate impairment, then we measure the impairment as the difference between the carrying value of
the asset and the fair value of the asset, which is measured using discounted cash flows.
Significant management judgment is required in forecasting of future operating results, which are
used in the preparation of the projected discounted cash flows and should different conditions
prevail, material write downs of net intangible assets and other long-lived assets could occur. We
periodically review the estimated remaining useful lives of our acquired intangible assets. A
reduction in our estimate of remaining useful lives, if any, could result in increased amortization
expense in future periods.
We test goodwill for impairment at the reporting unit level at least annually during the
fourth quarter of each fiscal year and more frequently if impairment indicators are identified. We
have determined that our reporting units are the same as our reportable segments. The first step of
the goodwill impairment test is a comparison of the fair value of a reporting unit to its carrying
value. We estimate the fair values of our reporting units using discounted cash flow valuation
models and by comparing our reporting units to guideline publicly-traded companies. These methods
require estimates of our future revenues, profits, capital expenditures, working capital, and other
relevant factors, as well as selecting appropriate guideline publicly-traded companies for each
reporting unit. We estimate these amounts by evaluating historical trends, current budgets,
operating plans, industry data, and other relevant factors. The estimated fair value of each of our
reporting units exceeded its respective carrying value in fiscal 2008, indicating the underlying
goodwill of each reporting unit was not impaired. Accordingly, we were not required to complete the
second step of the goodwill impairment test. The timing and frequency of our goodwill impairment
test is based on an ongoing assessment of events and circumstances that would more than likely
reduce the fair value of a reporting unit below its carrying value. There are various
28
assumptions and estimates underlying the determination of an impairment loss, and estimates
using different, but each reasonable, assumptions could produce significantly different results and
materially affect the determination of fair value and/or goodwill impairment for each reporting
unit. We believe that the assumptions and estimates utilized were appropriate based on the
information available to management. The timing and recognition of impairment losses by us in the
future, if any, may be highly dependent upon our estimates and assumptions.
During the quarter ended December 31, 2008, based on a combination of factors, including the
current economic environment and a decline in our operating results and market capitalization, we
concluded that there were sufficient indicators to require us to perform an interim goodwill
impairment analysis as of December 1, 2008 (the interim testing date). Based on our analysis, we
concluded that the estimated fair value of each of our reporting units exceeded its respective
carrying value as of the interim testing date, indicating the underlying goodwill of each reporting
unit was not impaired. During the quarter ended June 30, 2009, we determined that no additional
indicators existed which would require an update from the analysis performed during the prior
quarter. However, if difficult market and economic conditions continue over a sustained period, we
may experience a further decline in the fair value of one or more of our reporting units as
compared to the interim testing date levels. Such further declines in fair value may require us to
record an impairment charge related to goodwill.
Share-Based Compensation
We account for share-based compensation using the fair value recognition provisions of SFAS
123(R), Share-Based Payment. We estimate the fair value of options granted using the Black-Scholes
option valuation model. We estimate the volatility of our common stock at the date of grant based
on a combination of the implied volatility of publicly traded options on our common stock and our
historical volatility rate, consistent with SFAS No. 123(R) and Securities and Exchange Commission
Staff Accounting Bulletin No. 107 (SAB 107). Our decision to use implied volatility was based
upon the availability of actively traded options on our common stock and our assessment that
implied volatility is more representative of future stock price trends than historical volatility.
Beginning in fiscal 2008, we estimated the expected term of options granted based on historical
exercise patterns. In fiscal 2006 and 2007, we estimated the expected term consistent with the
simplified method identified in SAB 107 for share-based awards. We elected to use the simplified
method as we changed the contractual life for share-based awards from ten to seven years starting
in fiscal 2006. The simplified method calculates the expected term as the average of the vesting
and contractual terms of the award. Prior to fiscal 2006, we estimated expected term based on
historical exercise patterns. The dividend yield assumption is based on historical dividend
payouts. The risk-free interest rate assumption is based on observed interest rates appropriate
for the term of our employee options. We use historical data to estimate pre-vesting option
forfeitures and record share-based compensation expense only for those awards that are expected to
vest. For options granted, we amortize the fair value on a straight-line basis. All options are
amortized over the requisite service periods of the awards, which are generally the vesting
periods. If factors change we may decide to use different assumptions under the Black-Scholes
option valuation model in the future, which could materially affect our share-based compensation
expense, net income and earnings per share.
Income Taxes
We use the asset and liability approach to account for income taxes. This methodology
recognizes deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax base of assets and liabilities and
operating loss and tax credit carryforwards. We then record a valuation allowance to reduce
deferred tax assets to an amount that more likely than not will be realized. We consider future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, which requires the use of estimates. If we determine during any period
that we could realize a larger net deferred tax asset than the recorded amount, we would adjust the
deferred tax asset to increase income for the period or reduce goodwill if such deferred tax asset
relates to an acquisition. Conversely, if we determine that we would be unable to realize a
portion of our recorded deferred tax asset, we would adjust the deferred tax asset to record a
charge to income for the period or increase goodwill if such deferred tax asset relates to an
acquisition. Although we believe that our estimates are reasonable, there is no assurance that our
the valuation allowance will not need to be increased to cover additional deferred tax assets that
may not be realizable, and such an increase could have a material adverse impact on our income tax
provision and results of operations in the period in which such determination is made. In addition,
the calculation of tax liabilities also involves significant judgment in estimating the impact of
uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner
inconsistent with managements expectations could also have a material impact on our income tax
provision and results of operations in the period in which such determination is made.
29
We adopted the provisions of FASB Interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes, on October 1, 2007. The cumulative effect of the change did not
result in an adjustment to the beginning balance of retained earnings. Following implementation,
the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a
component of income tax expense.
Contingencies and Litigation
We are subject to various proceedings, lawsuits and claims relating to products and services,
technology, labor, shareholder and other matters. We are required to assess the likelihood of any
adverse outcomes and the potential range of probable losses in these matters. If the potential loss
is considered probable and the amount can be reasonably estimated, we accrue a liability for the
estimated loss. If the potential loss is considered less than probable or the amount cannot be
reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or
disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if
warranted by new developments or revised strategies. Due to uncertainties related to these matters,
accruals or disclosures are based on the best information available at the time. Significant
judgment is required in both the assessment of likelihood and in the determination of a range of
potential losses. Revisions in the estimates of the potential liabilities could have a material
impact on our consolidated financial position or consolidated results of operations.
New Accounting Pronouncements Not Yet Adopted
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)).
SFAS 141(R) states that business combinations will result in all assets and liabilities of an
acquired business being recorded at their fair values. Certain forms of contingent consideration
and acquired contingencies will be recorded at fair value at the acquisition date. SFAS 141(R)
also states acquisition costs will generally be expensed as incurred and restructuring costs will
be expensed in periods after the acquisition date. This statement is effective for financial
statement issued for fiscal years beginning after December 15, 2008. We are in the process of
determining what effect, if any, the adoption of SFAS 141(R) will have on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 clarifies that a noncontrolling or minority interest in
a subsidiary is considered an ownership interest and, accordingly, requires all entities to report
such interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. We are in the process of determining
what effect, if any, the adoption of SFAS 160 will have on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP) SFAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP SFAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142, Goodwill and Other Intangible Assets. This new staff position is
intended to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R), Business Combinations. FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008. We are in the process of determining what effect, if any, the adoption of FSP
SFAS 142-3 will have on our consolidated financial statements.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement). The FSP requires that
proceeds from the issuance of convertible debt instruments be allocated between debt (at a
discount) and an equity component. The debt discount will be amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest expense. This FSP
is effective for fiscal years beginning after December 15, 2008, and will be applied
retrospectively to prior periods. This FSP changes the accounting treatment for our Senior
Convertible Notes, which were issued in August 2003. Even though we retired our Senior Convertible
Notes during fiscal 2008, this new accounting treatment still requires us to retrospectively record
a significant amount of non-cash interest expense in the periods when these notes were outstanding.
We are in the process of determining what effect the adoption of this FSP will have on our
consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R),
(SFAS 167) which revised the consolidation guidance for variable-interest entities. The
modifications include the elimination of the exemption for qualifying special purpose entities, a
new approach for determining who should consolidate a variable-interest entity, and changes to when
it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167
is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the
impact of SFAS 167 on our consolidated financial statements.
30
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162,
(SFAS 168) and approved the FASB Accounting Standards Codification (Codification) as
the single source of authoritative nongovernmental US GAAP. The Codification does not change
current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing
all the authoritative literature related to a particular topic in one place. All existing
accounting standard documents will be superseded and all other accounting literature not included
in the Codification will be considered non-authoritative. SFAS 168 is effective for interim and
annual periods ending after September 15, 2009. We expect the implementation of SFAS 168 to have
no impact on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
We are exposed to market risk related to changes in interest rates, equity market prices, and
foreign currency exchange rates. We do not use derivative financial instruments for speculative or
trading purposes.
Interest Rate Risk
We maintain an investment portfolio consisting mainly of income securities with an average
maturity of three years or less. These available-for-sale securities are subject to interest rate
risk and will fall in value if market interest rates increase. We have the ability to hold our
fixed income investments until maturity, and therefore we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio. The following table presents the principal amounts and
related weighted-average yields for our investments with interest rate risk at June 30, 2009 and
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
September 30, 2008 |
|
|
|
Cost |
|
|
Carrying |
|
|
Average |
|
|
Cost |
|
|
Carrying |
|
|
Average |
|
|
|
Basis |
|
|
Amount |
|
|
Yield |
|
|
Basis |
|
|
Amount |
|
|
Yield |
|
|
|
(Dollars in thousands) |
|
Cash and cash equivalents |
|
$ |
240,346 |
|
|
$ |
240,346 |
|
|
|
0.21 |
% |
|
$ |
129,678 |
|
|
$ |
129,678 |
|
|
|
2.56 |
% |
Short-term investments |
|
|
75,408 |
|
|
|
75,743 |
|
|
|
1.82 |
% |
|
|
57,065 |
|
|
|
57,049 |
|
|
|
3.42 |
% |
Long-term investments |
|
|
51,572 |
|
|
|
52,096 |
|
|
|
2.18 |
% |
|
|
67,274 |
|
|
|
67,397 |
|
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
367,326 |
|
|
$ |
368,185 |
|
|
|
0.82 |
% |
|
$ |
254,017 |
|
|
$ |
254,124 |
|
|
|
3.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2008, we issued $275.0 million of Senior Notes to a group of institutional investors in
a private placement. The fair value of our Senior Notes may increase or decrease due to various
factors, including fluctuations in market interest rates and fluctuations in general economic
conditions. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Capital Resources and Liquidity, above, for additional information on the Senior
Notes. The following table presents the principal amounts, carrying amounts, and fair values for
our Senior Notes at June 30, 2009 and September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
September 30, 2008 |
|
|
|
|
|
|
Carrying |
|
Fair |
|
|
|
|
|
Carrying |
|
Fair |
|
|
Principal |
|
Amount |
|
Value |
|
Principal |
|
Amount |
|
Value |
|
|
(In thousands) |
Senior Notes |
|
$ |
275,000 |
|
|
$ |
275,000 |
|
|
$ |
272,598 |
|
|
$ |
275,000 |
|
|
$ |
275,000 |
|
|
$ |
239,153 |
|
We have interest rate risk with respect to our five-year $600 million unsecured revolving
credit facility. Interest on amounts borrowed under the credit facility is based on (i) a base
rate, which is the greater of (a) the prime rate and (b) the Federal Funds rate plus 0.50% or (ii)
LIBOR plus an applicable margin. The margin on LIBOR borrowings ranges from 0.30% to 0.55% and is
determined based on our consolidated leverage ratio. A change in interest rates on this variable
rate debt impacts the interest incurred and cash flows, but does not impact the fair value of the
instrument. We had $295.0 million of borrowings outstanding on this facility as of June 30, 2009
and September 30, 2008.
Forward Foreign Currency Contracts
We maintain a program to manage our foreign currency exchange rate risk on existing foreign
currency receivable and bank balances by entering into forward contracts to sell or buy foreign
currency. At period end, foreign-denominated receivables and cash balances held by our U.S.
reporting entities are re-measured into the U.S. dollar functional currency at current market
rates. The
31
change in value from this re-measurement is then reported as a foreign exchange gain or loss
for that period in our accompanying consolidated statements of income and the resulting gain or
loss on the forward contract mitigates the exchange rate risk of the associated assets. All of our
forward foreign currency contracts have maturity periods of less than three months. Such derivative
financial instruments are subject to market risk.
The following table summarizes our outstanding forward foreign currency contracts, by currency
at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Amount |
|
|
|
|
Foreign |
|
|
|
|
|
Fair Value |
|
|
Currency |
|
US $ |
|
US $ |
|
|
(In thousands) |
Sell foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
|
EURO (EUR) |
|
EUR |
6,300 |
|
|
$ |
8,894 |
|
|
$ |
|
|
Japanese Yen (YEN) |
|
YEN |
94,100 |
|
|
|
978 |
|
|
|
|
|
Canadian Dollar (CAD) |
|
CAD |
1,300 |
|
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
|
British Pound (GBP) |
|
GBP |
3,541 |
|
|
$ |
5,870 |
|
|
$ |
|
|
The forward foreign currency contracts were all entered into on June 30, 2009; therefore, the
fair value was $0 on that date.
|
|
|
Item 4. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the
period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms and (ii) accumulated and communicated to the Chief Executive Officer and
Chief Financial Officer to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting was identified in connection with
the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period
covered by this quarterly report and that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
On October 11, 2006, we filed a lawsuit in the U.S. District Court for the District of
Minnesota captioned Fair Isaac Corporation and myFICO Consumer Services Inc. v. Equifax Inc.,
Equifax Information Services LLC, Experian Information Solutions, Inc., TransUnion LLC,
VantageScore Solutions LLC, and Does I through X. The lawsuit related in part to the development,
marketing, and distribution of VantageScore, a credit score product developed by VantageScore
Solutions LLC, which is jointly owned by the three national credit reporting companies. We alleged
in the lawsuit violations of antitrust laws, unfair competitive practices and false advertising,
trademark infringement, and breach of contract. We have been seeking injunctive relief, and
compensatory and punitive damages. On June 6, 2008, we entered into a settlement agreement with
Equifax Inc. and Equifax Information Services LLC, and on June 13, 2008, Equifax Inc. and Equifax
Information Services LLC were formally dismissed from this lawsuit. On February 9, 2009, the Court
granted our motion to strike counterclaims the remaining defendants had attempted to bring against
us in the case, allowing them to assert only a counterclaim for trademark cancellation. On July 24,
2009, the Court issued a summary judgment order, which limited the claims that will proceed to
trial. The Court dismissed our antitrust claims, contract, and certain false advertising claims.
The Court allowed our trademark infringement, unfair competition, and passing off claims to proceed
to trial. We will continue to
32
pursue our claims, with trial expected later this year. We expect to appeal the dismissal of
our antitrust, contract, and false advertising claims following trial.
Risks Related to Our Business
We have expanded the pursuit of our Decision Management strategy, and we may not be successful,
which could cause our growth prospects and results of operations to suffer.
We have focused the pursuit of our business objective to become a leader in helping businesses
automate and improve decisions across their enterprises, an approach that we commonly refer to as
Decision Management, or DM. Our DM strategy is designed to enable us to increase our business by
selling multiple products to clients, as well as to enable the development of custom client
solutions that may lead to opportunities to develop new proprietary scores or other new proprietary
products. The market may be unreceptive to this general DM business approach, including being
unreceptive to purchasing multiple products from us or unreceptive to our customized solutions. If
our DM strategy is not successful, we may not be able to grow our business, growth may occur more
slowly than we anticipate or our revenues and profits may decline.
Our reengineering plan may not be successful which could cause our growth prospects and
profitability to suffer.
We are implementing a reengineering plan designed to grow revenues through strategic resource
allocation and improve profitability through cost reductions. Initially, implementation of the
reengineering plan will reduce our revenues as a result of our exit from non-strategic product
lines. Our reengineering plan may not be successful as a result of our failure to reduce expenses
at the anticipated level, our inability to exit all non-strategic product lines included in the
plan, a loss of more revenues than currently anticipated as a result of implementing the plan or a
lower, or no, positive impact on revenues from strategic resource allocation. If our reengineering
plan is not successful, our revenues, results of operations and business may suffer.
We derive a substantial portion of our revenues from a small number of products and services, and
if the market does not continue to accept these products and services, our revenues will decline.
As we implement our DM strategy, we expect that revenues derived from our scoring solutions,
account management solutions, fraud solutions, originations, collections and recovery solutions
products and services will continue to account for a substantial portion of our total revenues for
the foreseeable future. Our revenues will decline if the market does not continue to accept these
products and services. Factors that might affect the market acceptance of these products and
services include the following:
|
|
|
changes in the business analytics industry; |
|
|
|
|
changes in technology; |
|
|
|
|
our inability to obtain or use key data for our products; |
|
|
|
|
saturation or contraction of market demand; |
|
|
|
|
loss of key customers; |
|
|
|
|
industry consolidation; |
|
|
|
|
failure to execute our client-centric selling approach; and |
|
|
|
|
inability to successfully sell our products in new vertical markets. |
If we are unable to access new markets or develop new distribution channels, our business and
growth prospects could suffer.
We expect that part of the growth that we seek to achieve through our DM strategy will be
derived from the sale of DM products and service solutions in industries and markets we do not
currently serve. We also expect to grow our business by delivering our DM solutions through
additional distribution channels. If we fail to penetrate these industries and markets to the
degree we anticipate utilizing our DM strategy, or if we fail to develop additional distribution
channels, we may not be able to grow our business, growth may occur more slowly than we anticipate
or our revenues and profits may decline.
If we are unable to develop successful new products or if we experience defects, failures and
delays associated with the introduction of new products, our business could suffer serious harm.
Our growth and the success of our DM strategy depend upon our ability to develop and sell new
products or suites of products. If we are unable to develop new products, or if we are not
successful in introducing new products, we may not be able to grow our
33
business, or growth may occur more slowly than we anticipate. In addition, significant
undetected errors or delays in new products or new versions of products may affect market
acceptance of our products and could harm our business, financial condition or results of
operations. In the past, we have experienced delays while developing and introducing new products
and product enhancements, primarily due to difficulties developing models, acquiring data and
adapting to particular operating environments. We have also experienced errors or bugs in our
software products, despite testing prior to release of the products. Software errors in our
products could affect the ability of our products to work with other hardware or software products,
could delay the development or release of new products or new versions of products and could
adversely affect market acceptance of our products. Errors or defects in our products that are
significant, or are perceived to be significant, could result in rejection of our products, damage
to our reputation, loss of revenues, diversion of development resources, an increase in product
liability claims, and increases in service and support costs and warranty claims.
We rely on relatively few customers, as well as our contracts with the three major credit
reporting agencies, for a significant portion of our revenues and profits. Certain of our large
customers have been negatively impacted by the recent financial crisis. If these customers
continue to be negatively impacted, or if the terms of these relationships otherwise change, our
revenues and operating results could decline.
Most of our customers are relatively large enterprises, such as banks, credit card processors,
insurance companies, healthcare firms, retailers and telecommunications carriers. As a result,
many of our customers and potential customers are significantly larger than we are and may have
sufficient bargaining power to demand reduced prices and favorable nonstandard terms.
In addition, since mid-2007, global financial markets have suffered substantial stress,
volatility, illiquidity and disruption. These forces reached unprecedented levels in the fall of
2008, resulting in the bankruptcy or acquisition of, or government assistance to, several major
domestic and international financial institutions which are customers of our Company. The
potential for increased and continuing economic disruption presents considerable risks to our
business, including potential bankruptcies or credit deterioration of financial institutions with
which we have substantial relationships. Further deterioration or a continuation of the market
conditions experienced since the fall of 2008 is likely to lead to a continued decline in the
volume of transactions that we execute for our customers.
We also derive a substantial portion of our revenues and operating income from our contracts
with the three major credit reporting agencies, TransUnion, Equifax and Experian, and other parties
that distribute our products to certain markets. We are also currently involved in litigation with
TransUnion and Experian arising from their development and marketing of a credit scoring product
competitive with our products. We have asserted various claims, including unfair competition,
antitrust, and breach of contract against these credit reporting agencies and their collective
joint venture entity, VantageScore, LLC. This litigation could have a material adverse effect on
our relationship with one or more of the major credit reporting agencies, or with major customers.
The loss of or a significant change in a relationship with a major customer, the loss of or a
significant change in a relationship with one of the major credit reporting agencies with respect
to their distribution of our products or with respect to our myFICO® offerings, the loss
of or a significant change in a relationship with a significant third-party distributor or the
delay of significant revenues from these sources, could have a material adverse effect on our
revenues and results of operations.
We rely on relationships with third parties for marketing, distribution and certain services. If
we experience difficulties in these relationships, our future revenues may be adversely affected.
Our Scoring Solutions segment and Strategy Machine Solutions segment rely on distributors, and
we intend to continue to market and distribute our products through existing and future distributor
relationships. Our Scoring Solutions segment relies on, among others, TransUnion, Equifax and
Experian. Failure of our existing and future distributors to generate significant revenues,
demands by such distributors to change the terms on which they offer our products or our failure to
establish additional distribution or sales and marketing alliances could have a material adverse
effect on our business, operating results and financial condition. In addition, certain of our
distributors presently compete with us and may compete with us in the future either by developing
competitive products themselves or by distributing competitive offerings. For example, TransUnion,
Equifax and Experian have developed a credit scoring product to compete directly with our products
and are collectively attempting to sell the product. Competition from distributors or other sales
and marketing partners could significantly harm sales of our products and services.
If we do not engage in acquisition activity to the extent we have in the past, we may be unable to
increase our revenues at historical growth rates.
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Our historical revenue growth has been augmented by numerous acquisitions, and we anticipate
that acquisitions may continue to be an important part of our revenue growth. Our future revenue
growth rate may decline if we do not make acquisitions of similar size and at a comparable rate as
in the past.
If we engage in acquisitions, significant investments in new businesses, or divestitures of
existing businesses, we will incur a variety of risks, any of which may adversely affect our
business.
We have made in the past, and may make in the future, acquisitions of, or significant
investments in, businesses that offer complementary products, services and technologies. Any
acquisitions or investments will be accompanied by the risks commonly encountered in acquisitions
of businesses, which may include:
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failure to achieve the financial and strategic goals for the acquired and combined
business; |
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overpayment for the acquired companies or assets; |
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difficulty assimilating the operations and personnel of the acquired businesses; |
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product liability and other exposure associated with acquired businesses or the sale of
their products; |
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disruption of our ongoing business; |
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dilution of our existing stockholders and earnings per share; |
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unanticipated liabilities, legal risks and costs; |
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retention of key personnel; |
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distraction of management from our ongoing business; and |
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impairment of relationships with employees and customers as a result of integration of
new management personnel. |
We have also divested ourselves of businesses in the past and may do so again in the future.
Any divestitures will be accompanied by the risks commonly encountered in the sale of businesses,
which may include:
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disruption of our ongoing business; |
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reductions of our revenues or earnings per share; |
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unanticipated liabilities, legal risks and costs; |
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the potential loss of key personnel; |
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distraction of management from our ongoing business; and |
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impairment of relationships with employees and customers as a result of migrating a
business to new owners. |
These risks could harm our business, financial condition or results of operations,
particularly if they occur in the context of a significant acquisition. Acquisitions of businesses
having a significant presence outside the U.S. will increase our exposure to the risks of
conducting operations in international markets.
The occurrence of certain negative events may cause fluctuations in our stock price.
The market price of our common stock may be volatile and could be subject to wide fluctuations
due to a number of factors, including variations in our revenues and operating results. We believe
that you should not rely on period-to-period comparisons of financial results as an indication of
future performance. Because many of our operating expenses are fixed and will not be affected by
short-term fluctuations in revenues, short-term fluctuations in revenues may significantly impact
operating results. Additional factors that may cause our stock price to fluctuate include the
following:
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variability in demand from our existing customers; |
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failure to meet the expectations of market analysts; |
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changes in recommendations by market analysts; |
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the lengthy and variable sales cycle of many products, combined with the relatively large
size of orders for our products, increases the likelihood of short-term fluctuation in
revenues; |
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consumer dissatisfaction with, or problems caused by, the performance of our products; |
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the timing of new product announcements and introductions in comparison with our
competitors; |
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the level of our operating expenses; |
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changes in competitive and other conditions in the consumer credit, banking and insurance
industries; |
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fluctuations in domestic and international economic conditions, including a continuation
of the substantial disruption currently being experienced by the global financial markets; |
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our ability to complete large installations on schedule and within budget; |
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acquisition-related expenses and charges; and |
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timing of orders for and deliveries of software systems. |
In addition, the financial markets have experienced significant price and volume fluctuations
that have particularly affected the stock prices of many technology companies and financial
services companies, and these fluctuations sometimes have been unrelated to the operating
performance of these companies. Broad market fluctuations, as well as industry-specific and
general economic conditions may adversely affect the market price of our common stock.
Due to ongoing uncertainty in economic conditions and weakness in financial credit markets,
the fair value of our businesses has recently declined. If difficult market and economic
conditions continue over a sustained period, we may experience a further decline in the fair value
of one or more of our businesses from current levels. Such further declines in fair value may
require us to record an impairment charge related to goodwill, which could adversely affect our
results of operations, stock price and business.
Our products have long and variable sales cycles. If we do not accurately predict these cycles,
we may not forecast our financial results accurately, and our stock price could be adversely
affected.
We experience difficulty in forecasting our revenues accurately because the length of our
sales cycles makes it difficult for us to predict the quarter in which sales will occur. In
addition, our Integrated Client Networks, or ICN, selling approach is more complex than our prior
sales approach because it emphasizes the sale of complete DM solutions involving multiple products
or services across our customers organizations. This makes forecasting of revenues in any given
period more difficult. As a result of our ICN approach and lengthening sales cycles, revenues and
operating results may vary significantly from period to period. For example, the sales cycle for
licensing our products typically ranges from 60 days to 18 months. Customers are often cautious in
making decisions to acquire our products, because purchasing our products typically involves a
significant commitment of capital, and may involve shifts by the customer to a new software and/or
hardware platform or changes in the customers operational procedures. Since our DM strategy
contemplates the sale of multiple decision solutions to a customer, expenditures by any given
customer are expected to be larger than with our prior sales approach. This may cause customers,
particularly those experiencing financial stress or budgetary constraints, to make purchasing
decisions more cautiously. Delays in completing sales can arise while customers complete their
internal procedures to approve large capital expenditures and test and accept our applications.
Consequently, we face difficulty predicting the quarter in which sales to expected customers will
occur and experience fluctuations in our revenues and operating results. If we are unable to
accurately forecast our revenues, our stock price could be adversely affected.
We typically have revenue-generating transactions concentrated in the final weeks of a quarter,
which may prevent accurate forecasting of our financial results and cause our stock price to
decline.
Large portions of our software license agreements are consummated in the weeks immediately
preceding quarter end. Before these agreements are consummated, we create and rely on forecasted
revenues for planning, modeling and earnings guidance. Forecasts, however, are only estimates and
actual results may vary for a particular quarter or longer periods of time. Consequently,
significant discrepancies between actual and forecasted results could limit our ability to plan,
budget or provide accurate guidance, which could adversely affect our stock price. Any
publicly-stated revenue or earnings projections are subject to this risk.
The failure to recruit and retain additional qualified personnel could hinder our ability to
successfully manage our business.
Our DM strategy and our future success will depend in large part on our ability to attract and
retain experienced sales, consulting, research and development, marketing, technical support and
management personnel. The complexity of our products requires highly trained customer service and
technical support personnel to assist customers with product installation and deployment. The
labor market for these individuals is very competitive due to the limited number of people
available with the necessary technical skills and understanding and may become more competitive
with general market and economic improvement. We cannot be certain that our compensation
strategies will be perceived as competitive by current or prospective employees. This could impair
our ability to recruit and retain personnel. We have experienced difficulty in recruiting
qualified personnel, especially technical, sales and consulting personnel, and we may need
additional staff to support new customers and/or increased customer needs. We may also recruit
skilled technical professionals from other countries to work in the United States. Limitations
imposed by immigration laws in the United States and abroad and the availability of visas in the
countries where we do business could hinder our ability to attract necessary qualified personnel
and harm our business and future operating results. There is a risk that even if we invest
significant resources in attempting to attract, train and retain qualified personnel, we will not
succeed in our efforts, and our business could be harmed. The failure of the value of our stock to
appreciate may adversely affect our ability to use equity and equity based incentive plans to
attract and retain personnel, and may require us to use alternative and more expensive forms of
compensation for this purpose.
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The failure to obtain certain forms of model construction data from our customers or others could
harm our business.
We must develop or obtain a reliable source of sufficient amounts of current and statistically
relevant data to analyze transactions and update our products. In most cases, these data must be
periodically updated and refreshed to enable our products to continue to work effectively in a
changing environment. We do not own or control much of the data that we require, most of which is
collected privately and maintained in proprietary databases. Customers and key business alliances
provide us with the data we require to analyze transactions, report results and build new models.
Our DM strategy depends in part upon our ability to access new forms of data to develop custom and
proprietary analytic tools. If we fail to maintain sufficient data sourcing relationships with our
customers and business alliances, or if they decline to provide such data due to legal privacy
concerns, competition concerns, prohibitions or a lack of permission from their customers, we could
lose access to required data and our products, and the development of new products might become
less effective. In addition, certain of our products use data from state workers compensation fee
schedules adopted by state regulatory agencies. Third parties have asserted copyright interests in
these data, and these assertions, if successful, could prevent us from using these data. Any
interruption of our supply of data could seriously harm our business, financial condition or
results of operations.
We will continue to rely upon proprietary technology rights, and if we are unable to protect them,
our business could be harmed.
Our success depends, in part, upon our proprietary technology and other intellectual property
rights. To date, we have relied primarily on a combination of copyright, patent, trade secret, and
trademark laws, and nondisclosure and other contractual restrictions on copying and distribution to
protect our proprietary technology. This protection of our proprietary technology is limited, and
our proprietary technology could be used by others without our consent. In addition, patents may
not be issued with respect to our pending or future patent applications, and our patents may not be
upheld as valid or may not prevent the development of competitive products. Any disclosure, loss,
invalidity of, or failure to protect our intellectual property could negatively impact our
competitive position, and ultimately, our business. There can be no assurance that our protection
of our intellectual property rights in the United States or abroad will be adequate or that others,
including our competitors, will not use our proprietary technology without our consent.
Furthermore, litigation may be necessary to enforce our intellectual property rights, to protect
our trade secrets, or to determine the validity and scope of the proprietary rights of others.
Such litigation could result in substantial costs and diversion of resources and could harm our
business, financial condition or results of operations.
Some of our technologies were developed under research projects conducted under agreements
with various U.S. government agencies or subcontractors. Although we have commercial rights to
these technologies, the U.S. government typically retains ownership of intellectual property rights
and licenses in the technologies developed by us under these contracts, and in some cases can
terminate our rights in these technologies if we fail to commercialize them on a timely basis.
Under these contracts with the U.S. government, the results of research may be made public by the
government, limiting our competitive advantage with respect to future products based on our
research.
If we are subject to infringement claims, it could harm our business.
We expect that products in the industry segments in which we compete, including software
products, will increasingly be subject to claims of patent and other intellectual property
infringement as the number of products and competitors in our industry segments grow. We may need
to defend claims that our products infringe intellectual property rights, and as a result we may:
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incur significant defense costs or substantial damages; |
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be required to cease the use or sale of infringing products; |
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expend significant resources to develop or license a substitute non-infringing
technology; |
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discontinue the use of some technology; or |
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be required to obtain a license under the intellectual property rights of the third party
claiming infringement, which license may not be available or might require substantial
royalties or license fees that would reduce our margins. |
Breaches of security, or the perception that e-commerce is not secure, could harm our business.
Our business requires the appropriate and secure utilization of consumer and other sensitive
information. Internet-based electronic commerce requires the secure transmission of confidential
information over public networks, and several of our products are accessed through the Internet,
including our consumer services accessible through the www.myfico.com website. Security breaches
in connection with the delivery of our products and services, including products and services
utilizing the Internet, or well-publicized security breaches, and the trend toward broad consumer
and general public notification of such incidents, could significantly harm our business, financial
condition or results of operations. We cannot be certain that advances in criminal capabilities,
discovery of new
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vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts, physical
system or network break-ins or inappropriate access, or other developments will not compromise or
breach the technology protecting the networks that access our net-sourced products, consumer
services and proprietary database information.
Protection from system interruptions is important to our business. If we experience a sustained
interruption of our telecommunication systems, it could harm our business.
Systems or network interruptions could delay and disrupt our ability to develop, deliver or
maintain our products and services, causing harm to our business and reputation and resulting in
loss of customers or revenue. These interruptions can include fires, floods, earthquakes, power
losses, equipment failures and other events beyond our control.
Risks Related to Our Industry
Our ability to increase our revenues will depend to some extent upon introducing new products and
services. If the marketplace does not accept these new products and services, our revenues may
decline.
We have a significant share of the available market in portions of our Scoring Solutions
segment and for certain services in our Strategy Machine Solutions segment, specifically, the
markets for account management services at credit card processors and credit card fraud detection
software. To increase our revenues, we must enhance and improve existing products and continue to
introduce new products and new versions of existing products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements and achieve market
acceptance. We believe much of the future growth of our business and the success of our DM
strategy will rest on our ability to continue to expand into newer markets for our products and
services. Such areas are relatively new to our product development and sales and marketing
personnel. Products that we plan to market in the future are in various stages of development. We
cannot assure you that the marketplace will accept these products. If our current or potential
customers are not willing to switch to or adopt our new products and services, either as a result
of the quality of these products and services or due to other factors, such as economic conditions,
our revenues will decrease.
If we fail to keep up with rapidly changing technologies, our products could become less
competitive or obsolete.
In our markets, technology changes rapidly, and there are continuous improvements in computer
hardware, network operating systems, programming tools, programming languages, operating systems,
database technology and the use of the Internet. If we fail to enhance our current products and
develop new products in response to changes in technology or industry standards, or if we fail to
bring product enhancements or new product developments to market quickly enough, our products could
rapidly become less competitive or obsolete. For example, the rapid growth of the Internet
environment creates new opportunities, risks and uncertainties for businesses, such as ours, which
develop software that must also be designed to operate in Internet, intranet and other online
environments. Our future success will depend, in part, upon our ability to:
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innovate by internally developing new and competitive technologies; |
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use leading third-party technologies effectively; |
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continue to develop our technical expertise; |
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anticipate and effectively respond to changing customer needs; |
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initiate new product introductions in a way that minimizes the impact of customers
delaying purchases of existing products in anticipation of new product releases; and |
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influence and respond to emerging industry standards and other technological changes. |
If our competitors introduce new products and pricing strategies, it could decrease our product
sales and market share, or could pressure us to reduce our product prices in a manner that reduces
our margins.
We may not be able to compete successfully against our competitors, and this inability could
impair our capacity to sell our products. The market for business analytics is new, rapidly
evolving and highly competitive, and we expect competition in this market to persist and intensify.
Our regional and global competitors vary in size and in the scope of the products and services
they offer, and include:
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in-house analytic and systems developers; |
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scoring model builders; |
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enterprise resource planning (ERP) and customer relationship management (CRM) packaged
solutions providers; |
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business intelligence solutions providers; |
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credit report and credit score providers; |
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business process management solution providers; |
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process modeling tools providers; |
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automated application processing services providers; |
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data vendors; |
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neural network developers and artificial intelligence system builders; |
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third-party professional services and consulting organizations; |
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account/workflow management software providers; and |
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software tools companies supplying modeling, rules, or analytic development tools. |
We expect to experience additional competition from other established and emerging companies,
as well as from other technologies. For example, certain of our fraud solutions products compete
against other methods of preventing credit card fraud, such as credit cards that contain the
cardholders photograph, smart cards, cardholder verification and authentication solutions and
other card authorization techniques. Many of our anticipated competitors have greater financial,
technical, marketing, professional services and other resources than we do, and industry
consolidation is creating even larger competitors in many of our markets. As a result, our
competitors may be able to respond more quickly to new or emerging technologies and changes in
customer requirements. They may also be able to devote greater resources than we can to develop,
promote and sell their products. Many of these companies have extensive customer relationships,
including relationships with many of our current and potential customers. Furthermore, new
competitors or alliances among competitors may emerge and rapidly gain significant market share.
For example, TransUnion, Equifax and Experian have formed an alliance that has developed a credit
scoring product competitive with our products. If we are unable to respond as quickly or
effectively to changes in customer requirements as our competition, our ability to expand our
business and sell our products will be negatively affected.
Our competitors may be able to sell products competitive to ours at lower prices individually
or as part of integrated suites of several related products. This ability may cause our customers
to purchase products that directly compete with our products from our competitors. Price
reductions by our competitors could negatively impact our margins, and could also harm our ability
to obtain new long-term contracts and renewals of existing long-term contracts on favorable terms.
Legislation that is enacted by the U.S. Congress, the states, Canadian provinces, and other
countries, and government regulations that apply to us or to our customers may expose us to
liability, affect our ability to compete in certain markets, limit the profitability of or demand
for our products, or render our products obsolete. If these laws and regulations require us to
change our current products and services, it could adversely affect our business and results of
operations.
Legislation and governmental regulation affect how our business is conducted and, in some
cases, subject us to the possibility of future lawsuits arising from our products and services.
Globally, legislation and governmental regulation also influence our current and prospective
customers activities, as well as their expectations and needs in relation to our products and
services. Both our core businesses and our newer initiatives are affected globally by federal,
regional, provincial, state and other jurisdictional regulations, including those in the following
significant regulatory areas:
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Use of data by creditors and consumer reporting agencies. Examples in the U.S. include
the Fair Credit Reporting Act (FCRA), the Fair and Accurate Credit Transactions Act
(FACTA), which amends FCRA, and certain proposed regulations and studies mandated by
FACTA, under consideration; |
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Laws and regulations that limit the use of credit scoring models such as state mortgage
trigger laws, state inquiries laws, state insurance restrictions on the use of credit
based insurance scores, and the Consumer Credit Directive in the European Union. |
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Fair lending practices, such as the Equal Credit Opportunity Act (ECOA) and Regulation
B. |
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Privacy and security laws and regulations that limit the use and disclosure of personally
identifiable information or require security procedures, including but not limited to the
provisions of the Financial Services Modernization Act of 1999, also known as the Gramm
Leach Bliley Act (GLBA); FACTA; the Health Insurance Portability and Accountability Act of
1996 (HIPAA); the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act); identity
theft, file freezing, security breach notification and similar state privacy laws; |
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Extension of credit to consumers through the Electronic Fund Transfers Act, as well as
nongovernmental VISA and MasterCard electronic payment standards; |
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Regulations applicable to secondary market participants such as Fannie Mae and Freddie
Mac that could have an impact on our products; |
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Insurance laws and regulations applicable to our insurance clients and their use of our
insurance products and services; |
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The application or extension of consumer protection laws, including, laws governing the
use of the Internet and telemarketing, and credit repair; |
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Laws and regulations applicable to operations in other countries, for example, the
European Unions Privacy Directive and the Foreign Corrupt Practices Act; and |
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Sarbanes-Oxley Act (SOX) requirements to maintain and verify internal process controls,
including controls for material event awareness and notification. |
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The implementation of the Emergency Economic Stabilization Act of 2008 and the American
Recovery and Reinvestment Act of 2009 by federal regulators to manage the recent financial
crisis in the United States; |
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Laws and regulations regarding export controls as they apply to FICO products delivered
in non-US countries. |
In making credit evaluations of consumers, or in performing fraud screening or user
authentication, our customers are subject to requirements of multiple jurisdictions, which may
impose onerous and contradictory requirements. Privacy legislation such as GLBA or the European
Unions Privacy Directive may also affect the nature and extent of the products or services that we
can provide to customers, as well as our ability to collect, monitor and disseminate information
subject to privacy protection. In addition to existing regulation, changes in legislative,
judicial, regulatory or consumer environments could harm our business, financial condition or
results of operations. These regulations and amendments to them could affect the demand for or
profitability of some of our products, including scoring and consumer products. New regulations
pertaining to financial institutions could cause them to pursue new strategies, reducing the demand
for our products.
In response to recent market disruptions, legislators and financial regulators implemented a
number of mechanisms designed to add stability to the financial markets, including the provision of
direct and indirect assistance to distressed financial institutions, assistance by the banking
authorities in arranging acquisitions of weakened banks and broker-dealers, and implementation of
programs by the Federal Reserve to provide liquidity to the commercial paper markets. The overall
effects of these and other legislative and regulatory efforts on the financial markets are
uncertain, and they may not have the intended stabilization effects. Should these or other
legislative or regulatory initiatives fail to stabilize and add liquidity to the financial markets,
our business, financial condition, results of operations and prospects could be materially and
adversely affected. Whether or not legislative or regulatory initiatives or other efforts designed
to address recent economic conditions successfully stabilize and add liquidity to the financial
markets, we may need to modify our strategies, businesses or operations, and we may incur
additional costs in order to compete in a changed business environment.
Our revenues depend, to a great extent, upon conditions in the consumer credit, banking and
insurance industries. If our clients industries continue to experience a downturn, it will
likely harm our business, financial condition or results of operations.
During fiscal 2008, 71% of our revenues were derived from sales of products and services to
the consumer credit, banking and insurance industries. Since mid-2007, global credit and other
financial markets have suffered substantial stress, volatility, illiquidity and disruption. These
forces reached unprecedented levels in the fall of 2008, resulting in the bankruptcy or acquisition
of, or government assistance to, several major domestic and international financial institutions.
The recent market developments and the potential for increased and continuing disruptions present
considerable risks to our businesses and operations. These risks include potential bankruptcies or
credit deterioration of financial institutions, many of which are our customers. Further
deterioration or a continuation of recent market conditions is likely to lead to a continued
decline in the revenue we receive from financial and other institutions.
While the rate of account growth in the U.S. bankcard industry has been slowing and many of
our large institutional customers have consolidated in recent years, we have generated most of our
revenue growth from our bankcard-related scoring and account management businesses by selling and
cross-selling our products and services to large banks and other credit issuers. As the banking
industry continues to experience contraction in the number of participating institutions, we may
have fewer opportunities for revenue growth due to reduced or changing demand for our products and
services that support customer acquisition programs of our customers. In addition, industry
contraction could affect the base of recurring revenues derived from contracts in which we are paid
on a per-transaction basis as formerly separate customers combine their operations under one
contract. There can be no assurance that we will be able to prevent future revenue contraction or
effectively promote future revenue growth in our businesses.
While we are attempting to expand our sales of consumer credit, banking and insurance products
and services into international markets, the risks are greater as these markets are also
experiencing substantial disruption and we are less well-known in them.
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Risk Related to External Conditions
Continuing material adverse developments in global economic conditions, or the occurrence of
certain other world events, could affect demand for our products and services and harm our
business.
Purchases of technology products and services and decisioning solutions are subject to adverse
economic conditions. When an economy is struggling, companies in many industries delay or reduce
technology purchases, and we experience softened demand for our decisioning solutions and other
products and services. Since mid-2007, global credit and other financial markets have suffered
substantial stress, volatility, illiquidity and disruption. These forces reached unprecedented
levels in the fall of 2008, resulting in the bankruptcy or acquisition of, or government assistance
to, several major domestic and international financial institutions. The widespread economic
downturn has also negatively affected the businesses and purchasing decisions of companies in the
other industries we serve. These recent market developments and the potential for increased and
continuing disruptions present considerable risks to our businesses and operations. If global
economic conditions continue to experience stress and negative volatility, or if there is an
escalation in regional or global conflicts or terrorism, we will likely experience reductions in
the number of available customers and in capital expenditures by our remaining customers, longer
sales cycles, deferral or delay of purchase commitments for our products and increased price
competition, which may adversely affect our business, results of operations and liquidity.
Whether or not legislative or regulatory initiatives or other efforts successfully stabilize
and add liquidity to the financial markets, we may need to modify our strategies, businesses or
operations, and we may incur additional costs in order to compete in a changed business
environment. Given the volatile nature of the current economic downturn and the uncertainties
underlying efforts to mitigate or reverse the downturn, we may not timely anticipate or manage
existing, new or additional risks, as well as contingencies or developments, which may include
regulatory developments and trends in new products and services. Our failure to do so could
materially and adversely affect our business, financial condition, results of operations and
prospects.
In operations outside the United States, we are subject to unique risks that may harm our
business, financial condition or results of operations.
A growing portion of our revenues is derived from international sales. During fiscal 2008,
33% of our revenues were derived from business outside the United States. As part of our growth
strategy, we plan to continue to pursue opportunities outside the United States, including
opportunities in countries with economic systems that are in early stages of development and that
may not mature sufficiently to result in growth for our business. Accordingly, our future
operating results could be negatively affected by a variety of factors arising out of international
commerce, some of which are beyond our control. These factors include:
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general economic and political conditions in countries where we sell our products and
services; |
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difficulty in staffing and efficiently managing our operations in multiple geographic
locations and in various countries; |
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effects of a variety of foreign laws and regulations, including restrictions on access to
personal information; |
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|
import and export licensing requirements; |
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|
longer payment cycles; |
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reduced protection for intellectual property rights; |
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|
currency fluctuations; |
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|
changes in tariffs and other trade barriers; and |
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|
|
difficulties and delays in translating products and related documentation into foreign
languages. |
There can be no assurance that we will be able to successfully address each of these
challenges in the near term. Additionally, some of our business will be conducted in currencies
other than the U.S. dollar. Foreign currency transaction gains and losses are not currently
material to our cash flows, financial position or results of operations. However, an increase in
our foreign revenues could subject us to increased foreign currency transaction risks in the
future.
In addition to the risk of depending on international sales, we have risks incurred in having
research and development personnel located in various international locations. We currently have a
substantial portion of our product development staff in international locations, some of which have
political and developmental risks. If such risks materialize, our business could be damaged.
41
Our anti-takeover defenses could make it difficult for another company to acquire control of FICO,
thereby limiting the demand for our securities by certain types of purchasers or the price
investors are willing to pay for our stock.
Certain provisions of our Restated Certificate of Incorporation, as amended, could make a
merger, tender offer or proxy contest involving us difficult, even if such events would be
beneficial to the interests of our stockholders. These provisions include adopting a Shareholder
Rights Agreement, commonly known as a poison pill, and giving our board the ability to issue
preferred stock and determine the rights and designations of the preferred stock at any time
without stockholder approval. The rights of the holders of our common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of
our outstanding voting stock. These factors and certain provisions of the Delaware General
Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or
preventing changes in control or changes in our management, including transactions in which our
stockholders might otherwise receive a premium over the fair market value of our common stock.
If we experience changes in tax laws or adverse outcomes resulting from examination of our income
tax returns, it could adversely affect our results of operations.
We are subject to federal and state income taxes in the United States and in certain foreign
jurisdictions. Significant judgment is required in determining our worldwide provision for income
taxes. Our future effective tax rates could be adversely affected by changes in tax laws, by our
ability to generate taxable income in foreign jurisdictions in order to utilize foreign tax losses,
and by the valuation of our deferred tax assets. In addition, we are subject to the examination of
our income tax returns by the Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from such examinations to determine the
adequacy of our provision for income taxes. There can be no assurance that the outcomes from such
examinations will not have an adverse effect on our operating results and financial condition.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities (1)
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|
|
|
|
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|
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|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Maximum Dollar Value |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
of Shares that May |
|
|
Total Number of |
|
Average Price |
|
Announced Plans |
|
Yet Be Purchased Under |
Period |
|
Shares Purchased (2) |
|
Paid per Share |
|
or Programs |
|
the Plans or Programs |
April 1, 2009 through April 30, 2009 |
|
|
3,568 |
|
|
$ |
16.82 |
|
|
|
|
|
|
$ |
148,161,062 |
|
May 1, 2009 through May 31 , 2009 |
|
|
3,416 |
|
|
$ |
16.88 |
|
|
|
|
|
|
$ |
148,161,062 |
|
June 1, 2009 through June 30, 2009 |
|
|
2,681 |
|
|
$ |
17.06 |
|
|
|
|
|
|
$ |
148,161,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,665 |
|
|
$ |
16.91 |
|
|
|
|
|
|
$ |
148,161,062 |
|
|
|
|
|
|
|
|
|
|
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(1) |
|
In November 2007, our Board of Directors approved a common stock repurchase program
that allows us to purchase shares of our common stock up to an aggregate cost of $250.0
million in the open market or through negotiated transactions. The November 2007 program
does not have a fixed expiration date. |
|
(2) |
|
Includes 9,665 shares delivered in satisfaction of the tax withholding obligations
resulting from the vesting of restricted stock units and non-vested shares held by
employees during the quarter ended June 30, 2009. |
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
Not applicable.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
Not applicable.
42
|
|
|
Item 5. |
|
Other Information |
Not applicable.
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
4.1 |
|
|
Amendment No. 1, dated as of May 21, 2009, to the Rights
Agreement, dated as of August 9, 2001, by and between the
Company and Mellon Investor Services LLC. (Incorporated by
reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed with the SEC on May 26, 2009.) |
|
|
|
|
|
|
10.1 |
|
|
Voting Agreement, dated as of May 21, 2009, by and between
the Company and Southeastern Asset Management, Inc.
(Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on May 26,
2009.) |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CEO. |
|
|
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|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CFO. |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification of CEO. |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification of CFO. |
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
FAIR ISAAC CORPORATION
|
|
DATE: August 6, 2009 |
By |
/s/ THOMAS A. BRADLEY
|
|
|
Thomas A. Bradley |
|
|
Executive Vice President and Chief Financial Officer
(for Registrant as duly authorized officer and
as Principal Financial Officer) |
|
|
DATE: August 6, 2009
|
|
|
|
|
|
|
|
|
By |
/s/ MICHAEL J. PUNG
|
|
|
Michael J. Pung |
|
|
Vice President, Finance
(Principal Accounting Officer) |
|
|
44
EXHIBIT INDEX
To Fair Isaac Corporation Report On Form 10-Q
For The Quarterly Period Ended June 30, 2009
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
|
|
4.1 |
|
|
Amendment No. 1, dated as of May 21, 2009, to the
Rights Agreement, dated as of August 9, 2001, by and
between the Company and Mellon Investor Services LLC.
|
|
Incorporated by Reference |
|
|
|
|
|
|
|
|
10.1 |
|
|
Voting Agreement, dated as of May 21, 2009, by and
between the Company and Southeastern Asset
Management, Inc.
|
|
Incorporated by Reference |
|
|
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CEO.
|
|
Filed Electronically |
|
|
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CFO.
|
|
Filed Electronically |
|
|
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification of CEO.
|
|
Filed Electronically |
|
|
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification of CFO.
|
|
Filed Electronically |
45
exv31w1
Exhibit 31.1
CERTIFICATIONS
I, Mark N. Greene, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Fair Isaac Corporation; |
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and |
|
b) |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: August 6, 2009
|
|
|
/s/ MARK N. GREENE |
|
|
|
|
|
Chief Executive Officer |
|
|
exv31w2
Exhibit 31.2
CERTIFICATIONS
I, Thomas A. Bradley, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Fair Isaac Corporation; |
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
|
b) |
|
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
|
c) |
|
evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
d) |
|
disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and |
|
b) |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: August 6, 2009
|
|
|
/s/ THOMAS A. BRADLEY |
|
|
|
|
|
Chief Financial Officer |
|
|
exv32w1
EXHIBIT 32.1
CERTIFICATION UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that this
periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all
material respects, the financial condition and results of operations of Fair Isaac Corporation.
|
|
|
|
|
|
|
|
Date: August 6, 2009 |
/s/ MARK N. GREENE
|
|
|
Mark N. Greene |
|
|
Chief Executive Officer |
|
exv32w2
EXHIBIT 32.2
CERTIFICATION UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that this
periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all
material respects, the financial condition and results of operations of Fair Isaac Corporation.
|
|
|
|
|
|
|
|
Date: August 6, 2009 |
/s/ THOMAS A. BRADLEY
|
|
|
Thomas A. Bradley |
|
|
Chief Financial Officer |
|
|