FICO 10-Q Q1 2015
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2014
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-11689 
 
 
Fair Isaac Corporation
(Exact name of registrant as specified in its charter)
 
 
Delaware
94-1499887
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
181 Metro Drive, Suite 700
San Jose, California
95110-1346
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 408-535-1500
 
 
 
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  ý    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  ý    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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ý
Accelerated Filer
o
 
 
 
 
Non-Accelerated Filer
o
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).    ¨  Yes    ý  No
The number of shares of common stock outstanding on January 16, 2015 was 31,425,871 (excluding 57,430,912 shares held by us as treasury stock).
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
December 31,
2014
 
September 30,
2014
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
94,651

 
$
105,075

Accounts receivable, net
147,123

 
155,295

Prepaid expenses and other current assets
38,096

 
28,157

Total current assets
279,870

 
288,527

Marketable securities available for sale
9,530

 
8,751

Other investments
10,958

 
11,033

Property and equipment, net
36,791

 
36,677

Goodwill
774,107

 
779,928

Intangible assets, net
44,218

 
47,914

Deferred income taxes
4,927

 
13,061

Other assets
7,521

 
6,407

Total assets
$
1,167,922

 
$
1,192,298

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
25,559

 
$
22,000

Accrued compensation and employee benefits
30,081

 
56,650

Other accrued liabilities
21,752

 
36,235

Deferred revenue
57,331

 
56,519

Current maturities on debt
231,000

 
170,000

Total current liabilities
365,723

 
341,404

Senior notes
376,000

 
376,000

Other liabilities
22,978

 
20,280

Total liabilities
764,701

 
737,684

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock [$0.01 par value; 1,000 shares authorized; none issued and outstanding]

 

Common stock [$0.01 par value; 200,000 shares authorized, 88,857 shares issued and 31,724 and 32,047 shares outstanding at December 31, 2014 and September 30, 2014, respectively]
317

 
320

Paid-in-capital
1,118,285

 
1,129,317

Treasury stock, at cost [57,133 and 56,810 shares at December 31, 2014 and September 30, 2014, respectively]
(1,978,774
)
 
(1,936,095
)
Retained earnings
1,298,033

 
1,284,261

Accumulated other comprehensive loss
(34,640
)
 
(23,189
)
Total stockholders’ equity
403,221

 
454,614

Total liabilities and stockholders’ equity
$
1,167,922

 
$
1,192,298


See accompanying notes to condensed consolidated financial statements.

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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands, except per share data)
Revenues:
 
 
 
Transactional and maintenance
$
131,410

 
$
129,655

Professional services
35,198

 
34,286

License
22,942

 
20,402

Total revenues
189,550

 
184,343

Operating expenses:
 
 
 
Cost of revenues *
66,300

 
57,319

Research and development
22,637

 
18,092

Selling, general and administrative *
72,801

 
66,989

Amortization of intangible assets *
2,932

 
3,013

Restructuring and acquisition-related

 
3,660

Total operating expenses
164,670

 
149,073

Operating income
24,880

 
35,270

Interest expense, net
(7,205
)
 
(7,126
)
Other income (expense), net
649

 
(961
)
Income before income taxes
18,324

 
27,183

Provision for income taxes
3,917

 
10,206

Net income
14,407

 
16,977

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(11,451
)
 
4,005

Comprehensive income
$
2,956

 
$
20,982

Earnings per share:
 
 
 
Basic
$
0.45

 
$
0.49

Diluted
$
0.43

 
$
0.47

Shares used in computing earnings per share:
 
 
 
Basic
31,936

 
34,699

Diluted
33,128

 
35,820

 
 
* Cost of revenues and selling, general and administrative expenses exclude the amortization of intangible assets. See Note 4 to the condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.


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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except per share data)
 
 
Common Stock
 
 
 
 
 
Retained Earnings
 
Accumulated Other
Comprehensive Loss
 
Total
Stockholders’ Equity
 
Shares
 
Par Value
 
Paid-in-Capital
 
Treasury Stock
 
 
 
Balance at September 30, 2014
32,047

 
$
320

 
$
1,129,317

 
$
(1,936,095
)
 
$
1,284,261

 
$
(23,189
)
 
$
454,614

Share-based compensation

 

 
8,794

 

 

 

 
8,794

Issuance of treasury stock under employee stock plans
521

 
5

 
(26,205
)
 
17,906

 

 

 
(8,294
)
Tax effect from share-based payment arrangements

 

 
6,379

 

 

 

 
6,379

Repurchases of common stock
(844
)
 
(8
)
 

 
(60,585
)
 

 

 
(60,593
)
Dividends paid

 

 

 

 
(635
)
 

 
(635
)
Net income

 

 

 

 
14,407

 

 
14,407

Foreign currency translation adjustments

 

 

 

 

 
(11,451
)
 
(11,451
)
Balance at December 31, 2014
31,724

 
$
317

 
$
1,118,285

 
$
(1,978,774
)
 
$
1,298,033

 
$
(34,640
)
 
$
403,221

See accompanying notes to condensed consolidated financial statements.


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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
14,407

 
$
16,977

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,107

 
8,167

Share-based compensation
8,794

 
7,235

Deferred income taxes
5,676

 
(1,576
)
Tax effect from share-based payment arrangements
6,379

 
4,196

Excess tax benefits from share-based payment arrangements
(6,485
)
 
(4,551
)
Provision for doubtful accounts, net

 
278

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,863

 
2,755

Prepaid expenses and other assets
(8,843
)
 
1,344

Accounts payable
3,886

 
1,848

Accrued compensation and employee benefits
(26,046
)
 
(10,880
)
Other liabilities
(13,850
)
 
4,686

Deferred revenue
3,472

 
(2,101
)
Net cash provided by operating activities
1,360

 
28,378

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(5,667
)
 
(2,154
)
Distribution from cost method investees
75

 

Net cash used in investing activities
(5,592
)
 
(2,154
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
81,000

 
8,000

Payments on revolving line of credit
(20,000
)
 

Proceeds from issuance of treasury stock under employee stock plans
6,713

 
10,832

Taxes paid related to net share settlement of equity awards
(15,007
)
 
(8,821
)
Dividends paid
(635
)
 
(694
)
Repurchases of common stock
(60,593
)
 
(27,125
)
Excess tax benefits from share-based payment arrangements
6,485

 
4,551

Net cash used in financing activities
(2,037
)
 
(13,257
)
Effect of exchange rate changes on cash
(4,155
)
 
(208
)
Increase (decrease) in cash and cash equivalents
(10,424
)
 
12,759

Cash and cash equivalents, beginning of period
105,075

 
83,178

Cash and cash equivalents, end of period
$
94,651

 
$
95,937

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
8,844

 
$
1,285

Cash paid for interest
$
7,539

 
$
7,472

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
296

 
$
521

See accompanying notes to condensed consolidated financial statements.


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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 (“FICO”) is a provider of analytic, software and data management products and services that enable businesses to automate, improve and connect decisions. FICO provides a range of analytical solutions, credit scoring and credit account management products and services to banks, credit reporting agencies, credit card processing agencies, insurers, retailers, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.
In these condensed consolidated financial statements, Fair Isaac Corporation is referred to as “FICO,” “we,” “us,” “our,” or “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 applicable accounting guidance. 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, 2014. 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
We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the collectibility of accounts receivable; the appropriate levels of various accruals; labor hours in connection with fixed-fee service contracts; the amount of our tax provision and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Actual results may differ from our estimates.
New Accounting Pronouncements Recently Issued or Adopted
    
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Early adoption is not permitted. ASU 2014-09 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2016, which means it will be effective for our fiscal year beginning October 1, 2017. We have not yet selected a transition method and we are currently evaluating the impact that the updated standard will have on our consolidated financial statements.


2. Fair Value Measurements
Fair value is defined 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

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measurement date. The accounting guidance 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 assets are comprised of money market funds and certain equity securities.
Level 2 - uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation 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. We do not have any assets that are valued using inputs identified under a Level 2 hierarchy as of December 31, 2014 and September 30, 2014.
Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. We do not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of December 31, 2014 and September 30, 2014.
The following table represents financial assets that we measured at fair value on a recurring basis at December 31, 2014 and September 30, 2014:
December 31, 2014
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of December 31, 2014
Assets:
 
 
 
Cash equivalents (1)
$
439

 
$
439

Marketable securities (2)
9,530

 
9,530

Total
$
9,969

 
$
9,969

September 30, 2014
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of September 30, 2014
Assets:
 
 
 
Cash equivalents (1)
$
10,326

 
$
10,326

Marketable securities (2)
8,751

 
8,751

Total
$
19,077

 
$
19,077

 
(1)
Included in cash and cash equivalents on our condensed consolidated balance sheet at December 31, 2014 and September 30, 2014. Not included in this table are cash deposits of $94.2 million and $94.7 million at December 31, 2014 and September 30, 2014, respectively.
(2)
Represents securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees. Included in marketable securities available for sale on our condensed consolidated balance sheet at December 31, 2014 and September 30, 2014.
Where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing applies to our Level 1 investments. To the extent quoted prices in active markets for assets or liabilities are not available, 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. This methodology would apply to our Level 2 investments. We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period.
For the fair value of our derivative instruments and senior notes, see Note 3 and Note 7 to the condensed consolidated financial statements, respectively.

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3. Derivative Financial Instruments
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 receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their respective functional currencies. 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 exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro and Canadian dollar.
Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange 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 remeasured receivable and cash balances attributable to changes in foreign exchange rates. The forward contracts are short-term in nature and typically have average maturities at inception of less than three months.
The following tables summarize our outstanding foreign currency forward contracts, by currency, at December 31, 2014 and September 30, 2014:
 
December 31, 2014
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
2,400

 
$
2,072

 
$

Euro (EUR)
EUR 
4,550

 
$
5,536

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,643

 
$
10,350

 
$

 
September 30, 2014
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
3,300

 
$
2,960

 
$

Euro (EUR)
EUR 
3,800

 
$
4,790

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,795

 
$
11,000

 
$

The foreign currency forward contracts were entered into on December 31, 2014 and September 30, 2014, respectively; therefore, their fair value was $0 on each of these dates.
Gains (losses) on derivative financial instruments are recorded in our condensed consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following:
 
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands)
Gains (losses) on Foreign currency forward contracts
$
(329
)
 
$
338


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4. Goodwill and 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 and comprehensive income, consisted of the following:
 
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands)
Cost of revenues
$
1,836

 
$
1,799

Selling, general and administrative expenses
1,096

 
1,214

 
$
2,932

 
$
3,013


Cost of revenues reflects our amortization of completed technology and selling, general and administrative expenses reflects our amortization of other intangible assets. Intangible assets, gross were $140.8 million and $142.2 million as of December 31, 2014 and September 30, 2014, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at December 31, 2014, was as follows (in thousands):
Year Ended September 30,
 
2015 [excluding the quarter ended December 31, 2014]
$
8,727

2016
11,407

2017
10,284

2018
3,238

2019
2,776

Thereafter
7,786


$
44,218

The following table summarizes changes to goodwill during the quarter ended December 31, 2014, both in total and as allocated to our segments:
 
Applications
 
Scores
 
Tools
 
Total
 
(In thousands)
Balance at September 30, 2014
$
560,295

 
$
146,648

 
$
72,985

 
$
779,928

Foreign currency translation adjustment
(4,835
)
 

 
(986
)
 
(5,821
)
Balance at December 31, 2014
$
555,460

 
$
146,648

 
$
71,999

 
$
774,107

5. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization at December 31, 2014 and September 30, 2014:
 
 
December 31,
2014
 
September 30,
2014
 
(In thousands)
Property and equipment
$
167,872

 
$
164,548

Less: accumulated depreciation and amortization
(131,081
)
 
(127,871
)
 
$
36,791

 
$
36,677

6. Revolving Line of Credit
In December 2014 we refinanced our $200 million unsecured revolving line of credit, increasing our borrowing capacity to $400 million with a syndicate of banks that expires on December 30, 2019. Proceeds from the credit facility can be used for

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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, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0% to 0.875% and for LIBOR borrowings ranges from 1.000% to 1.875%, and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. The credit facility contains certain restrictive covenants including maintaining a minimum fixed charge ratio of 2.5 and a maximum consolidated leverage ratio of 3.0, subject to a step up to 3.5 following certain permitted acquisitions. The credit agreement also contains other covenants typical of unsecured facilities. As of December 31, 2014, we had $160.0 million in borrowings outstanding at a weighted average interest rate of 1.295% and were in compliance with all financial covenants under this credit facility.
7. Senior Notes
On May 7, 2008, we issued $275 million of senior notes in a private placement to a group of institutional investors (the “2008 Senior Notes”). The 2008 Senior Notes were issued in four series with maturities ranging from 5 to 10 years. The outstanding 2008 Senior Notes’ weighted average interest rate is 7.0% and the weighted average maturity is 9.0 years. On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors (the “2010 Senior Notes” and, with the 2008 Senior Notes, the “Senior Notes”). The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years. The 2010 Senior Notes’ weighted average interest rate is 5.2% and the weighted average maturity is 8.0 years. The Senior Notes require interest payments semi-annually and also include certain restrictive covenants. As of December 31, 2014, we were in compliance with all financial covenants which include the maintenance of consolidated net debt to consolidated EBITDA ratio and a fixed charge coverage ratio. The issuance of the Senior Notes also required us to make certain covenants typical of unsecured facilities. The carrying value of the Senior Notes was $447.0 million as of December 31, 2014 and September 30, 2014. The fair value of the Senior Notes was $464.5 million and $462.7 million as of December 31, 2014 and September 30, 2014, respectively. We measure the fair value of the Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.
8. Restructuring Expenses

The following table summarizes our restructuring accruals and certain FICO facility closures. These balances, which are expected to be paid by the end of the second quarter of our fiscal 2015, are recorded in other accrued current liabilities within the accompanying condensed consolidated balance sheets.
 
 
Accrual at
 
Cash
Payments
 
Accrual at
 
September 30, 2014
 
 
December 31, 2014
 
(In thousands)
Facilities charges
$
92

 
$
(46
)
 
$
46

Employee separation
170

 
(162
)
 
8

 
$
262

 
$
(208
)
 
$
54

9. Income Taxes
Effective Tax Rate
The effective income tax rate was 21.4% and 37.5% during the quarters ended December 31, 2014 and 2013, 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 also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The decrease in our effective tax rate year over year was primarily due to the retroactive extension of the U.S. Federal Research and Development Credit through 2014, which was enacted during the quarter ended December 31, 2014.
The total unrecognized tax benefit for uncertain tax positions is estimated to be approximately $5.3 million and $4.6 million at December 31, 2014 and September 30, 2014, respectively. We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our condensed consolidated statements of income and comprehensive income. We have accrued interest of $0.6 million and $0.5 million, related to unrecognized tax benefits as of December 31, 2014 and September 30, 2014, respectively.

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10. Share-Based Payments
We maintain the 2012 Long-Term Incentive Plan (the “2012 Plan”) under which we could grant equity awards, including stock options, stock appreciation rights, restricted stock awards, stock unit awards and other stock-based awards. All employees, consultants and advisors of FICO or any subsidiary, as well as all non-employee directors are eligible to receive awards under the 2012 Plan. We also have two other long-term incentive plans under which awards are currently outstanding: the 1992 Long-term Incentive Plan, which was adopted in February 1992 and expired in February 2012, and the 2003 Employment Inducement Award Plan, which was adopted in November 2003 and terminated in February 2012. Stock option awards granted after September 30, 2005 have a maximum term of seven years, and stock option awards granted prior to October 1, 2005 have a maximum term of ten years. Stock option awards and restricted stock unit awards not subject to market conditions vest ratably over three or four years. Restricted stock unit awards subject to market conditions vest annually over a period of three years based on achievement of specified criteria.
Stock Options
The following table summarizes option activity during the quarter ended December 31, 2014:
 
 
Shares
 
Weighted-average Exercise Price
 
Weighted-average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
Outstanding at October 1, 2014
 
2,089

 
$
36.24

 

 

Granted
 
493

 
72.06

 

 

Exercised
 
(217
)
 
30.92

 

 

Forfeited
 
(35
)
 
39.49

 

 

Outstanding at December 31, 2014
 
2,330

 
$
44.27

 
4.72
 
$
65,330

Options exercisable at December 31, 2014
 
1,103

 
$
33.79

 
3.80
 
$
42,477

Vested and expected to vest at December 31, 2014
 
2,151

 
$
43.17

 
4.68
 
$
62,664

Restricted Stock Units
The following table summarizes restricted stock unit activity during the quarter ended December 31, 2014:
 
 
Shares
 
Weighted- average Grant-date Fair Value
 
 
(In thousands)
 
 
Outstanding at October 1, 2014
 
1,440

 
$
46.68

Granted
 
389

 
70.33

Released
 
(356
)
 
43.11

Forfeited
 
(54
)
 
45.53

Outstanding at December 31, 2014
 
1,419

 
$
54.11


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Performance Stock Units
The following table summarizes performance stock unit activity during the quarter ended December 31, 2014:
 
 
Shares
 
Weighted- average Grant-date Fair Value
 
 
(In thousands)
 
 
Outstanding at October 1, 2014
 
381

 
$
47.19

Granted
 
83

 
71.86

Released
 
(135
)
 
45.58

Forfeited
 
(29
)
 
50.36

Outstanding at December 31, 2014
 
300

 
$
54.46


Market Stock Units
The following table summarizes market stock unit activity during the quarter ended December 31, 2014:
 
 
Shares
 
Weighted- average Grant-date Fair Value
 
 
(In thousands)
 
 
Outstanding at October 1, 2014
 
88

 
$
68.47

Granted
 
83

 
101.85

Released
 
(24
)
 
58.07

Forfeited
 
(11
)
 
66.37

Outstanding at December 31, 2014
 
136

 
$
90.89






11. Earnings Per Share
The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters ended December 31, 2014 and 2013:
 
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
Net Income
$
14,407

 
$
16,977

Denominator - share:
 
 
 
Basic weighted-average shares
31,936

 
34,699

Effect of dilutive securities
1,192

 
1,121

Diluted weighted-average shares
33,128

 
35,820

Earnings per share:
 
 
 
Basic
$
0.45

 
$
0.49

Diluted
$
0.43

 
$
0.47


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We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the options’ exercise price exceeds the average market price of our common stock as their inclusion would be antidilutive. There were approximately 493,000 options excluded for the quarter ended December 31, 2014. There were no options excluded for the quarter ended December 31, 2013.
12. Segment Information
We are organized into the following three reportable segments to align with internal management of our worldwide business operations based on product offerings.
 
Applications. Our Applications products are pre-configured decision management applications and associated professional services, designed for a specific type of business problem or process, such as marketing, account origination, customer management, fraud and insurance claims management.
Scores. This segment includes our business-to-business scoring solutions, our myFICO® solutions for consumers and associated professional services. Our scoring solutions give our clients access to analytics that can be easily integrated into their transaction streams and decision-making processes. Our scoring solutions are distributed through major credit reporting agencies, as well as services through which we provide our scores to clients directly.
Tools. The Tools segment is composed of software tools and associated professional services that clients can use to create their own custom decision management applications.
Our Chief Executive Officer evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel and depreciation. 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 broad-based incentive expense, share-based compensation expense, restructuring expense, amortization expense, various corporate charges 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 segment’s 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 amounts are allocated to the segments from their internal cost centers as described above.
The following tables summarize segment information for the quarters ended December 31, 2014 and 2013:
 
 
Quarter Ended December 31, 2014
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
78,551

 
$
42,937

 
$
9,922

 
$

 
$
131,410

Professional services
28,499

 
788

 
5,911

 

 
35,198

License
8,448

 
216

 
14,278

 

 
22,942

Total segment revenues
115,498

 
43,941

 
30,111

 

 
189,550

Segment operating expense
(88,894
)
 
(12,892
)
 
(29,539
)
 
(21,619
)
 
(152,944
)
Segment operating income
$
26,604

 
$
31,049

 
$
572

 
$
(21,619
)
 
36,606

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(8,794
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(2,932
)
Operating income
 
 
 
 
 
 
 
 
24,880

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(7,205
)
Unallocated other income, net
 
 
 
 
 
 
 
 
649

Income before income taxes
 
 
 
 
 
 
 
 
$
18,324

Depreciation expense
$
3,508

 
$
217

 
$
783

 
$
667

 
$
5,175


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Quarter Ended December 31, 2013
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
77,779

 
$
43,318

 
$
8,558

 
$

 
$
129,655

Professional services
26,787

 
589

 
6,910

 

 
34,286

License
7,350

 
3,273

 
9,779

 

 
20,402

Total segment revenues
111,916

 
47,180

 
25,247

 

 
184,343

Segment operating expense
(81,962
)
 
(10,375
)
 
(21,071
)
 
(21,757
)
 
(135,165
)
Segment operating income
$
29,954

 
$
36,805

 
$
4,176

 
$
(21,757
)
 
49,178

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(7,235
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,013
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(3,660
)
Operating income
 
 
 
 
 
 
 
 
35,270

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(7,126
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(961
)
Income before income taxes
 
 
 
 
 
 
 
 
$
27,183

Depreciation expense
$
3,637

 
$
212

 
$
614

 
$
691

 
$
5,154

13. 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 record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.
14. Subsequent Event
On January 12, 2015, we acquired 100% of the equity of TONBELLER Aktiengesellschaft ("TONBELLER"). TONBELLER is an innovative provider of financial crime and compliance ("FCC") solutions that support the demanding regulatory compliance requirements of more than a thousand banks and commercial organizations worldwide. This acquisition will allow us to capitalize on the escalating demand for new, risk-based, integrated FCC solutions. The pro forma impact of this acquisition is not expected to be material to our results of operations.


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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


FORWARD LOOKING STATEMENTS
Statements contained in this report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “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, research and development, and the sufficiency of capital resources; (iii) statements of assumptions underlying such statements, including those related to economic conditions; (iv) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; 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 Part II, Item 1A, Risk Factors. 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 FICO in fiscal 2015.

OVERVIEW
We provide products and services that enable businesses to automate, improve and connect decisions across the enterprise, an approach we commonly refer to as decision management. Our predictive analytics, which includes the industry-standard FICO® Score, and our decision management systems power hundreds of billions of customer decisions each year. We help thousands of companies in over 100 countries use our decision management technology to target and 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 insurers, retailers, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries. We also serve consumers through online services that enable people to purchase and understand their FICO® Scores, the standard measure in the U.S. of consumer credit risk, empowering them to manage their financial health. Most of our solutions address customer engagement, including customer acquisition, customer servicing and management, and customer protection. We also help businesses improve noncustomer decisions such as transaction and claims processing. Our solutions enable users to make decisions that are more precise, consistent and agile, and that systematically advance business goals. This helps our clients to reduce the cost of doing business, increase revenues and profitability, reduce losses from risks and fraud, and increase customer loyalty.
We derive a significant portion of our revenues from clients outside the U.S. International revenues accounted for 39% and 41% of total consolidated revenues for the quarters ended December 31, 2014 and 2013, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 68% and 75% of our revenues were derived from within this industry during the quarters ended December 31, 2014 and 2013, respectively. In addition, we derive a significant share of revenue from transactional or unit-based software license fees, transactional fees derived under scoring, network service or internal hosted software arrangements, annual software maintenance fees and annual license fees under long-term software license arrangements. Arrangements with transactional or unit-based pricing accounted for approximately 69% and 70% of our revenues during the quarters ended December 31, 2014 and 2013, respectively.


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Table of Contents

We continue to invest in growth initiatives that expand our addressable markets. For our Scores segment, we introduced the FICO® Score Open Access program in fiscal 2014 which allows our participating clients to provide their customers with a free FICO® Score along with materials to help them understand what affects their score. We now have more than 57 million consumer accounts with access to their free score through the FICO® Score Open Access program and with the addition of new participants we expect this to grow to more than 75 million. On December 29, 2014, we announced the FICO® Score is now available to consumers through Experian, a leading global information services provider. Consumers can go to Experian to access the credit score lenders use most when determining applicant eligibility for new credit cards, car loans, mortgages or other lines of credit.

We introduced a full suite of applications for the FICO® Analytic Cloud in fiscal 2014 and continue to invest in the areas of cloud computing and software as a service (“SaaS”). Through the expansion of our product offerings in our Applications and Tools segments, we can accommodate small-to-midsize companies that benefit from the affordability and simplicity of cloud-based solutions.

We continue to make acquisitions that deliver solutions to the financial services industry and adjacent vertical industries; our latest acquisition of TONBELLER was consummated to address the rapidly growing demand for integrated, enterprise-class financial crime and compliance solutions. We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter ended December 31, 2014, we repurchased approximately 0.8 million shares for a total value of $60.6 million.
Bookings
Management uses bookings as an indicator of our business performance. Bookings represent contracts signed in the current reporting period that generate current and future revenue streams. We consider contract terms, knowledge of the marketplace and experience with our customers, among other factors, when determining the estimated value of contract bookings.
Bookings calculations have varying degrees of certainty depending on the revenue type and individual contract terms. Our revenue types are transactional and maintenance, professional services and license. Our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update initial booking estimates in future periods for changes between estimated and actual results. Actual revenue and the timing thereof could differ materially from our initial estimates. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability.
Transactional and Maintenance Bookings
We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by the contractual rate. Transactional contracts generally span multiple years and require us to make estimates about future transaction volumes or number of active accounts. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated. This variability is primarily caused by the following:
 
The health of the economy and economic trends in our customers’ industries;
Individual performance of our customers relative to their competitors; and
Regulatory and other factors that affect the business environment in which our customers operate.
We calculate maintenance bookings directly from the terms stated in the contract.
Professional Services Bookings
We calculate professional services bookings as the estimated number of hours to complete a project multiplied by the rate per hour. We estimate the number of hours based on our understanding of the project scope, conversations with customer personnel and our experience in estimating professional services projects. Estimated bookings may differ from actual results primarily due to differences in the actual number of hours incurred. These differences typically result from customer decisions to alter the mix of FICO and customer services resources used to complete a project.

15

Table of Contents

License Bookings
Licenses are sold on a perpetual or term basis and bookings generally equal the fixed amount stated in the contract.

Bookings Trend Analysis
 
Bookings
 
Bookings
Yield (1)
 
Number of
Bookings
over $1
Million
 
Weighted-
Average
Term
 
(In millions)
 
 
 
 
 
(Months)
Quarter Ended December 31, 2014
$
69.6

 
32
%
 
14

 
21

Quarter Ended December 31, 2013
$
82.9

 
24
%
 
16

 
23

 
(1)
Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.

Transactional and maintenance bookings were 22% and 29% of total bookings for the quarters ended December 31, 2014 and 2013, respectively. Professional services bookings were 53% and 55% of total bookings for the quarters ended December 31, 2014 and 2013, respectively. License bookings were 25% and 16% of total bookings for the quarters ended December 31, 2014 and 2013, respectively.
The weighted-average term of bookings achieved measures the average term over which the bookings are expected to be recognized as revenue. As the weighted-average term increases, the average amount of revenues expected to be realized in a quarter decreases; however, the revenues are expected to be recognized over a longer period of time. As the weighted-average term decreases, the average amount of revenues expected to be realized in a quarter increases; however, the revenues are expected to be recognized over a shorter period of time.
Management regards the volume of bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor substituted for, an analysis of our revenues, and they are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance.
Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service related and are dependent upon estimates such as volume of transactions, number of active accounts, or number of hours incurred. Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog.

RESULTS OF OPERATIONS
Revenues
The following tables set forth certain summary information on a segment basis related to our revenues for the quarters ended December 31, 2014 and 2013:

 
 
Quarter Ended December 31,
 
Percentage of Revenues
 
Period-to-Period
 
Period-to-Period
Percentage
Segment
2014
 
2013
 
2014
 
2013
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
115,498

 
$
111,916

 
61
%
 
61
%
 
$
3,582

 
3
 %
Scores
43,941

 
47,180

 
23
%
 
25
%
 
(3,239
)
 
(7
)%
Tools
30,111

 
25,247

 
16
%
 
14
%
 
4,864

 
19
 %
Total
$
189,550

 
$
184,343

 
100
%
 
100
%
 
5,207

 
3
 %

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Table of Contents

Quarter Ended December 31, 2014 Compared to Quarter Ended December 31, 2013
Applications
 
Quarter Ended December 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
78,551

 
$
77,779

 
$
772

 
1
%
Professional services
28,499

 
26,787

 
1,712

 
6
%
License
8,448

 
7,350

 
1,098

 
15
%
Total
$
115,498

 
$
111,916

 
3,582

 
3
%
Applications segment revenues increased $3.6 million primarily due to a $2.5 million increase in our collections & recovery solutions and a $2.4 million increase in our originations solutions, partially offset by a $1.5 million decrease in our customer management solutions.
The increase in both collections & recovery solutions and originations revenues was primarily attributable to an increase in service and software revenues. The decrease in customer management solutions revenues was primarily attributable to a decrease in service revenue.

Scores
 
Quarter Ended December 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
42,937

 
$
43,318

 
$
(381
)
 
(1
)%
Professional services
788

 
589

 
199

 
34
 %
License
216

 
3,273

 
(3,057
)
 
(93
)%
Total
$
43,941

 
$
47,180

 
(3,239
)
 
(7
)%
Scores segment revenues decreased $3.2 million due to a decrease of $2.7 million in our business-to-business Scores revenue and a decrease of $0.5 million in our business-to-consumer services revenue. The decrease in our business-to-business Scores was primarily attributable to a decline in software revenue related to Global FICO® Score. The decrease in business-to-consumer services was primarily attributable to a decline in direct sales generated from the myFICO.com website as well as a decline in royalties derived from scores sold indirectly to consumers through credit reporting agencies.
During the quarters ended December 31, 2014 and 2013, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 15% and 16%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.
Tools
 
 
Quarter Ended December 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
9,922

 
$
8,558

 
$
1,364

 
16
 %
Professional services
5,911

 
6,910

 
(999
)
 
(14
)%
License
14,278

 
9,779

 
4,499

 
46
 %
Total
$
30,111

 
$
25,247

 
4,864

 
19
 %

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Table of Contents

Tools segment revenues increased $4.9 million primarily attributable to an increase in license revenue, driven by a one-time settlement with a customer related to under-reported royalties from a multi-year period.


Operating Expenses and Other Income / Expenses
The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters ended December 31, 2014 and 2013:
 

 
Quarter Ended December 31,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands, except
employees)
 
 
 
 
 
(In thousands,
except employees)
 
 
Revenues
$
189,550

 
$
184,343

 
100
 %
 
100
 %
 
$
5,207

 
3
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
66,300

 
57,319

 
35
 %
 
31
 %
 
8,981

 
16
 %
Research and development
22,637

 
18,092

 
12
 %
 
10
 %
 
4,545

 
25
 %
Selling, general and administrative
72,801

 
66,989

 
38
 %
 
36
 %
 
5,812

 
9
 %
Amortization of intangible assets
2,932

 
3,013

 
2
 %
 
2
 %
 
(81
)
 
(3
)%
Restructuring and acquisition-related

 
3,660

 
 %
 
2
 %
 
(3,660
)
 
(100
)%
Total operating expenses
164,670

 
149,073

 
87
 %
 
81
 %
 
15,597

 
10
 %
Operating income
24,880

 
35,270

 
13
 %
 
19
 %
 
(10,390
)
 
(29
)%
Interest expense, net
(7,205
)
 
(7,126
)
 
(4
)%
 
(3
)%
 
(79
)
 
1
 %
Other income (expense), net
649

 
(961
)
 
1
 %
 
(1
)%
 
1,610

 
(168
)%
Income before income taxes
18,324

 
27,183

 
10
 %
 
15
 %
 
(8,859
)
 
(33
)%
Provision for income taxes
3,917

 
10,206

 
2
 %
 
6
 %
 
(6,289
)
 
(62
)%
Net income
$
14,407

 
$
16,977

 
8
 %
 
9
 %
 
(2,570
)
 
(15
)%
Number of employees at quarter end
2,638

 
2,425

 
 
 
 
 
213

 
9
 %
Cost of Revenues
Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in developing, installing and supporting revenue products; travel costs; overhead costs; outside services; costs of computer service bureaus; internal network hosting costs; amounts payable to credit reporting agencies for scores; software costs; and expenses related to our business-to-consumer services.
Cost of revenues as a percentage of revenues increased to 35% for the quarter ended December 31, 2014 from 31% for the quarter ended December 31, 2013. The increase of $9.0 million was primarily attributable to a $4.5 million increase in outside services and a $3.7 million increase in personnel and labor costs. The increase in outside services was primarily attributable to an increase in our billable consulting projects utilizing temporary resources. The increase in personnel and labor costs was primarily attributable to an increase in professional services delivery cost, as well as an increase in salaries and benefits cost as a result of our increased headcount.
Over the next several quarters, we expect cost of revenues as a percentage of revenues will be consistent with or slightly lower than those incurred during the quarter ended December 31, 2014.

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Table of Contents

Research and Development
Research and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of Applications and Tools products.
Research and development expenses as a percentage of revenues increased to 12% for the quarter ended December 31, 2014 from 10% for the quarter ended December 31, 2013. The $4.5 million increase was mainly due to a $3.2 million increase in personnel and labor costs and a $0.8 million increase in outside services, primarily driven by our continued investment in the areas of cloud computing and SaaS, as well as our investment in several new products in the Tools segment.
Over the next several quarters, we expect that research and development expenditures as a percentage of revenues will be consistent with or slightly lower than those incurred during the quarter ended December 31, 2014.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee salaries, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; business development expenses and the cost of operating computer systems.
Selling, general and administrative expenses as a percentage of revenues increased to 38% for the quarter ended December 31, 2014 from 36% for the quarter ended December 31, 2013. The increase of $5.8 million was primarily attributable to a $2.9 million increase in labor and personnel costs and a $2.8 million increase in marketing expenses. The increase in labor and personnel costs was primarily attributable to an increase in salaries and benefits as a result of our increased headcount. The increase in marketing expenses was primarily attributable to a company-wide marketing event during the quarter ended December 31, 2014.
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 December 31, 2014.
Amortization of Intangible Assets
Amortization of intangible assets consists of amortization expense related to intangible assets recorded in connection with acquisitions accounted for by the acquisition method of accounting. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method over periods ranging from four to fifteen years.
The quarter over quarter decrease of $0.1 million in amortization expense was attributable to certain intangible assets associated with our CR Software, LLC acquisition becoming fully amortized in November 2013, partially offset by the addition of intangible assets associated with our InfoCentricity, Inc. and Karmasphere, Inc. acquisitions in April 2014.
Over the next several quarters we expect that amortization expense will be consistent with or slightly higher than the amortization expense we recorded during the quarter ended December 31, 2014.
Restructuring and Acquisition-related
There were no restructuring or acquisition-related charges during the quarter ended December 31, 2014.
During the quarter ended December 31, 2013, we incurred $3.7 million in severance charges due to the elimination of 83 positions throughout the company. Cash payments for all the restructuring costs will be paid by the end of the second quarter of our fiscal 2015. There were no acquisition-related charges during the period.
Interest Expense, Net
Interest expense included primarily interest on the senior notes issued in May 2008 and July 2010, as well as interest and credit facility fees on the revolving line of credit. Interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements, on our consolidated statements of income and comprehensive income.
The quarter over quarter increase in interest expense of $0.1 million was attributable to a higher average balance on our revolving line of credit, partially offset by a lower average balance on the senior notes for the quarter ended December 31, 2014.

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Over the next several quarters we expect net interest expense will be consistent with the net interest expense incurred during the quarter ended December 31, 2014.
Other Income (Expense), Net
Other income (expense), net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.
The quarter over quarter change in other income (expense), net of $1.6 million was primarily attributable to a nonrecurring charge related to our fixed assets balance during the quarter ended December 31, 2013, as well as a decrease in foreign currency exchange loss during the quarter ended December 31, 2014.
Provision for Income Taxes
The effective income tax rate was 21.4% and 37.5% during the quarters ended December 31, 2014 and 2013, 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 also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The decrease in our effective tax rate year over year was primarily due to the retroactive extension of the U.S. Federal Research and Development Credit through 2014, which was enacted during the quarter ended December 31, 2014.

Operating Income
The following tables set forth certain summary information on a segment basis related to our operating income for the quarters ended December 31, 2014 and 2013:
 
 
Quarter Ended December 31,
 
Period-to-Period
 
Period-to-Period
Percentage
Segment
2014
 
2013
 
Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Applications
$
26,604

 
$
29,954

 
$
(3,350
)
 
(11
)%
Scores
31,049

 
36,805

 
(5,756
)
 
(16
)%
Tools
572

 
4,176

 
(3,604
)
 
(86
)%
Corporate expenses
(21,619
)
 
(21,757
)
 
138

 
(1
)%
Total segment operating income
36,606

 
49,178

 
(12,572
)
 
(26
)%
Unallocated share-based compensation
(8,794
)
 
(7,235
)
 
(1,559
)
 
22
 %
Unallocated amortization expense
(2,932
)
 
(3,013
)
 
81

 
(3
)%
Unallocated restructuring and acquisition-related

 
(3,660
)
 
3,660

 
(100
)%
Operating income
$
24,880

 
$
35,270

 
(10,390
)
 
(29
)%
Applications
 
 
Quarter Ended 
 December 31,
 
Percentage of
Revenues
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
Segment revenues
$
115,498

 
$
111,916

 
100
 %
 
100
 %
Segment operating expense
(88,894
)
 
(81,962
)
 
(77
)%
 
(73
)%
Segment operating income
$
26,604

 
$
29,954

 
23
 %
 
27
 %


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Scores
 
 
Quarter Ended 
 December 31,
 
Percentage of
Revenues
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
Segment revenues
$
43,941

 
$
47,180

 
100
 %
 
100
 %
Segment operating expense
(12,892
)
 
(10,375
)
 
(29
)%
 
(22
)%
Segment operating income
$
31,049

 
$
36,805

 
71
 %
 
78
 %
Tools
 
 
Quarter Ended 
 December 31,
 
Percentage of
Revenues
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
Segment revenues
$
30,111

 
$
25,247

 
100
 %
 
100
 %
Segment operating expense
(29,539
)
 
(21,071
)
 
(98
)%
 
(83
)%
Segment operating income
$
572

 
$
4,176

 
2
 %
 
17
 %
The quarter over quarter $10.4 million decrease in operating income was mainly attributable to a $17.9 million increase in segment operating expenses and a $1.6 million increase in share-based compensation cost, partially offset by a $5.2 million increase in segment revenues and a $3.7 million decrease in restructuring and acquisition-related cost.
At the segment level, the quarter over quarter $12.6 million decrease in segment operating income was primarily driven by a $5.8 million decrease in our Scores segment operating income, a $3.6 million decrease in our Tools segment operating income and a $3.3 million decrease in our Applications segment operating income.
The quarter over quarter $3.3 million decrease in Applications segment operating income was due to a $6.9 million increase in segment operating expenses, partially offset by a $3.6 million increase in segment revenues. Segment operating income as a percentage of segment revenue for Applications decreased to 23% from 27% primarily due to an increase in professional services delivery cost, as well as an increase in salaries and benefits cost as a result of our increased headcount.
The quarter over quarter $5.8 million decrease in Scores segment operating income was due to a $3.3 million decrease in segment revenue and a $2.5 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores decreased to 71% from 78% primarily due to a decrease in sales of our higher-margin software products, as well as an increase in salaries and benefits cost as a result of our increased headcount.
The quarter over quarter $3.6 million decrease in Tools segment operating income was due to an $8.5 million increase in segment operating expenses, partially offset by a $4.9 million increase in segment revenue. Segment operating margin for Tools decreased to 2% from 17% primarily due to an increase in the research and development efforts related to our cloud-based FICO® Decision Management Platform and several new products in the Tools segment, as well as an increase in professional services delivery cost, partially offset by an increase in sales of our higher-margin software products.
CAPITAL RESOURCES AND LIQUIDITY
Outlook
As of December 31, 2014, we had $94.7 million in cash and cash equivalents which included $74.0 million held off-shore by our foreign subsidiaries. We believe these balances, as well as available borrowings from our $400 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements as well as the $71.0 million principal payment due in May 2015 on our Senior Notes issued in May 2008. Under our current

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financing arrangements we have no other significant debt obligations maturing over the next twelve months. Additionally, we do not anticipate the need to repatriate any undistributed earnings from our foreign subsidiaries for the foreseeable future.
In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.
Summary of Cash Flows 
 
Quarter Ended December 31,
 
2014
 
2013
 
(In thousands)
Cash provided by (used in):
 
 
 
Operating activities
$
1,360

 
$
28,378

Investing activities
(5,592
)
 
(2,154
)
Financing activities
(2,037
)
 
(13,257
)
Effect of exchange rate changes on cash
(4,155
)
 
(208
)
Increase (decrease) in cash and cash equivalents
$
(10,424
)
 
$
12,759


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 decreased to $1.4 million during the quarter ended December 31, 2014 from $28.4 million during the quarter ended December 31, 2013. The $27.0 million decrease was mainly attributable to a $15.2 million increase in our accrued incentive payout and a $7.7 million increase in our income tax payments.
Cash Flows from Investing Activities
Net cash used in investing activities increased to $5.6 million for the quarter ended December 31, 2014 from $2.2 million for the quarter ended December 31, 2013. The $3.4 million increase was primarily attributable to a $3.5 million increase in purchases of property and equipment.
Cash Flows from Financing Activities
Net cash used in financing activities decreased to $2.0 million for the quarter ended December 31, 2014 from $13.3 million for the quarter ended December 31, 2013. The $11.3 million decrease was primarily due to a $53.0 million increase in proceeds from our revolving line of credit, net of payments on our revolving line of credit. This was partially offset by a $33.5 million increase in repurchases of common stock, a $6.2 million increase in taxes paid related to net share settlement of equity awards and a $4.1 million decrease in proceeds from issuance of treasury stock under employee stock plans.
Repurchases of Common Stock
In August 2014, our Board of Directors approved a new stock repurchase program following the completion of our previous program. This program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions.
Pursuant to this program, during the quarter ended December 31, 2014 we repurchased 844,135 shares of our common stock for $60.6 million. As of December 31, 2014, we had $189.4 million remaining under the August 2014 authorization.
Dividends
During the quarter ended December 31, 2014, we paid a quarterly dividend of two cents per common share. 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

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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 Board’s business judgment with respect to these and other relevant factors.
Revolving Line of Credit
We have a $400 million unsecured revolving line of credit with a syndicate of banks that expires on December 30, 2019. 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, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0% to 0.875% and for LIBOR borrowings ranges from 1.000% to 1.875%, and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. The credit facility contains certain restrictive covenants including maintaining a minimum fixed charge ratio of 2.5 and a maximum consolidated leverage ratio of 3.0, subject to a step up to 3.5 following certain permitted acquisitions. The credit agreement also contains other covenants typical of unsecured facilities. As of December 31, 2014, we had $160.0 million in borrowings outstanding at a weighted average interest rate of 1.295% and were in compliance with all financial covenants under this credit facility.
Senior Notes
On May 7, 2008, we issued $275 million of senior notes in a private placement to a group of institutional investors (the “2008 Senior Notes”). The 2008 Senior Notes were issued in four series with maturities ranging from 5 to 10 years. The outstanding 2008 Senior Notes’ weighted average interest rate is 7.0% and the weighted average maturity is 9.0 years. On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors (the “2010 Senior Notes” and, with the 2008 Senior Notes, the “Senior Notes”). The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years. The 2010 Senior Notes’ weighted average interest rate is 5.2% and the weighted average maturity is 8.0 years. 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 agreements for the Senior Notes also include covenants typical of unsecured facilities. As of December 31, 2014 we were in compliance with all financial covenants under these facilities.
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, goodwill and other intangible assets resulting from business acquisitions, share-based compensation, income taxes and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

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Revenue Recognition
Software Licenses
Software license fee revenue is recognized when persuasive evidence of an arrangement exists, software is made available to our customers, the fee is fixed or determinable and collection is probable. The determination of whether fees are fixed or determinable and collection is probable involves the use of assumptions. 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 collectability is not probable, revenue is deferred until the earlier of when collectability becomes probable or the receipt of payment. If there is uncertainty as to the customer’s 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. We evaluate contract terms and customer information to ensure that these criteria are met prior to our recognition of license fee revenue.
We use the residual method to recognize revenue when a software arrangement includes one or more elements to be delivered at a future date provided the following criteria are met: (i) vendor-specific objective evidence (“VSOE”) of the fair value does not exist for one or more of the delivered items but exists for all undelivered elements, (ii) all other applicable revenue recognition criteria are met and (iii) the fair value of all of the undelivered elements is less than the arrangement fee. 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. 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 product’s estimated life cycle could materially impact the amount of earned and unearned revenue.

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.

Transactional-based Revenues

Transactional-based revenue is recognized when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is probable. Revenues from our credit scoring, data processing, data management and internet delivery services are recognized as these services are performed. Revenues from transactional or unit-based license fees under software license arrangements, network service and internally-hosted software agreements are recognized based on minimum contractual amounts or on system usage that exceeds minimum contractual amounts. Certain of our transactional-based revenues are based on transaction or active account volumes as reported by our clients. In instances where volumes are reported to us in arrears, we estimate volumes based on preliminary customer transaction information or 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 material 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 is received, and this could have a material impact on our consolidated results of operations.
Consulting Services
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 use a proportionate performance model with hours as the input method of attribution to determine progress towards completion, with consideration also given to output measures, such as contract milestones, when applicable. In such instances, management is required to estimate the total estimated hours of the project. 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 defer the associated revenue until the contract is completed. We have not experienced material variances between our estimates and actual hours in the past and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we are unable to accurately estimate the input measures, revenue would be deferred until the contract is complete, and this could have a material impact on our consolidated results of operations.

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Services that are sold in connection with software license arrangements generally qualify for separate accounting from the license element because they do not involve significant production, modification or customization of our products and are not otherwise considered to be essential to the functionality of our software. In arrangements where the professional services do not qualify for separate accounting from the license element, the combined software license and professional services revenue are recognized based on contract accounting using either the percentage-of-completion or completed-contract method.
Hosting Services
We are an application service provider (“ASP”), where we provide hosting services that allow customers access to software that resides on our servers. The ASP model typically includes an up-front fee and a monthly commitment from the customer that commences upon completion of the implementation through the remainder of the customer life. The up-front fee is the initial setup fee, or the implementation fee. The monthly commitment includes, but is not limited to, a fixed monthly fee or a transactional fee based on system usage that exceeds monthly minimums. Revenue is recognized from ASP transactions when there is persuasive evidence of an arrangement, the service has been provided to the customer, the amount of fees is fixed or determinable and the collection of our fees is probable. We do not view the activities of signing the contract or providing initial setup services as discrete earnings events. Revenue is typically deferred until the date the customer commences use of our services, at which point the up-front fees are recognized ratably over the expected life of the customer relationship. ASP transactional fees are recorded monthly as earned.
Multiple-Deliverable Arrangements Including Non-Software
When we enter into a multiple-deliverable arrangement that includes non-software, each deliverable is accounted for as a separate unit of accounting if the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer; for example, we conclude professional services offered along with our SaaS subscription services typically have standalone value using this criteria. Further, our revenue arrangements generally do not include a general right of return relative to delivered products. Revenue for multiple element arrangements is allocated to the software and non-software deliverables based on a relative selling price. We use VSOE in our allocation of arrangement consideration when it is available. We define VSOE as a median price of recent standalone transactions that are priced within a narrow range, as defined by us. If a product or service is seldom sold separately, it is unlikely that we can determine VSOE. In circumstances when VSOE does not exist, we then assess whether we can obtain third-party evidence (“TPE”) of the selling price. It may be difficult for us to obtain sufficient information on competitor pricing to substantiate TPE and therefore we may not always be able to use TPE. When we are unable to establish selling price using VSOE or TPE, we use estimated selling price (“ESP”) in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact if the product or service were sold by us on a standalone basis. Our determination of ESP involves weighting several factors based on the specific facts and circumstances of each arrangement. The factors include, but are not limited to, geographies, market conditions, gross margin objectives, pricing practices and controls, customer segment pricing strategies and the product lifecycle.
Gross vs. Net Revenue Reporting
We apply accounting guidance to determine whether we report revenue for certain transactions based upon the gross amount billed to the customer, or the net amount retained by us. In accordance with the guidance we record revenue on a gross basis for sales in which we have acted as the principal and on a net basis for those sales in which we have in substance acted as an agent or broker in the transaction.
Business Combinations
Accounting for our acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of income and comprehensive income.

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Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and contingent consideration, where applicable. If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, we will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our consolidated results of operations and financial position.
Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i) future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and (iii) the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our condensed consolidated statements of income and comprehensive income and could have a material impact on our consolidated results of operations and financial position.
Valuation of Goodwill and Other Intangible Assets – Impairment Assessment
Our business acquisitions typically result in the recognition of goodwill and other intangible assets, which affects 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. We amortize our finite-lived intangible assets over the estimated useful lives. Goodwill is not amortized, but is assessed at least annually 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; the acquired company’s 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. Management’s estimates of fair value and useful lives are based upon assumptions believed to be reasonable. Estimates using different assumptions, or unanticipated events and circumstances could produce significantly different results.
We assess potential impairments of our intangible assets when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified with respect to our previously recorded intangible assets with finite useful lives, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of net intangible 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 annual amortization expense in future periods.
We test goodwill for impairment at the reporting unit levels, which we have determined are the same as our reportable segments, at least annually during the fourth quarter of each fiscal year. The timing and frequency of our goodwill impairment test is based on an ongoing assessment of events and circumstances that would be an indicator of potential impairment of a reporting unit, with the fair value below its carrying value. 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 a weighted combination of discounted

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cash flow valuation model (known as the income approach) and a comparison of our reporting units to guideline publicly-traded companies (known as the market approach). These methods require estimates of our future revenues, profits, capital expenditures, working capital, costs of capital and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We evaluate historical trends, current budgets, operating plans, industry data, and other relevant factors when estimating these amounts. Using assumptions that are different from those used in our estimates, but in each case reasonable, could produce significantly different results and materially affect the determination of fair value and/or goodwill impairment for each reporting unit. For example, if the economic environment impacts our forecasts beyond what we have anticipated, it could cause the fair value of a reporting unit to fall below its respective carrying value.
The key assumptions that require significant management judgment for the income approach include revenue growth rates and weighted average cost of capital. In our analysis, revenue growth rates were primarily based on third-party studies of industry growth rates for each of our reporting units. Within each reporting unit, management refined these estimates based on their knowledge of the product, the needs of our customers and expected market opportunity. The weighted average cost of capital was determined based on publicly available data such as the long-term yield on U.S. treasury bonds, the expected rate of return on high quality bonds and the returns and betas of various equity instruments. As it relates to the market approach, there is less management judgment in determining the fair value of our reporting units other than selecting which guideline publicly-traded companies are included in our peer group.
In the fourth quarter of fiscal 2014 we performed our annual goodwill impairment test. In step one of that test we compared the estimated fair value of each reporting unit to its carrying value. The estimated fair value of each of our reporting units substantially exceeded its respective carrying value in fiscal 2014, indicating the underlying goodwill of each reporting unit was not impaired as of our most recent testing date. Accordingly, we were not required to complete the second step of the goodwill impairment test and recorded no goodwill impairment charges for the twelve months ended September 30, 2014.
As discussed above, estimates of fair value for all of our reporting units can be affected by a variety of external and internal factors. 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.

Share-Based Compensation
We account for share-based compensation using the fair value recognition provisions as required in the accounting literature. The fair value of options is estimated using the Black-Scholes option valuation model, which requires assumptions for expected volatility of our common stock, expected term of options, dividend yield and risk-free interest rate. The fair value of stock units not subject to market conditions is measured based on the grant date fair value of our common stock, discounted for non-participation in anticipated dividends during the vesting period. The fair value of stock units subject to market conditions is estimated using a Monte Carlo simulation model, which requires assumptions for expected volatility of our common stock, correlation coefficient, dividend yield and risk-free interest rate. Share-based compensation cost is recorded net of estimated forfeitures on a straight-line basis for awards not subject to market conditions, and on a graded-vesting basis for awards subject to market conditions, both over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience.
Income Taxes
We estimate our income taxes based on the various jurisdictions where we conduct business, which involves significant judgment in determining our income tax provision. We estimate our current tax liability using currently enacted tax rates and laws and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities recorded on our condensed consolidated balance sheet using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled. We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not likely, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding income tax expense in our condensed consolidated statements of income and comprehensive income. In assessing the need for the valuation allowance, we consider future taxable income in the jurisdictions we operate; an analysis of our deferred tax assets and the periods over which they will be realizable; and ongoing prudent and feasible tax planning strategies. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we record the increase.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the technical merits of the tax position indicate it is

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more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions and they are evaluated on a quarterly basis. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results.
A description of our accounting policies associated with tax-related contingencies and valuation allowances assumed as part of a business combination is provided under “Business Combinations” above.
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 Recently Issued or Adopted
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Early adoption is not permitted. ASU 2014-09 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2016, which means it will be effective for our fiscal year beginning October 1, 2017. We have not yet selected a transition method and we are currently evaluating the impact that the updated standard will have 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 and foreign exchange rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate
We maintain an investment portfolio consisting of bank deposits and money market funds. The funds provide daily liquidity and may be subject to interest rate risk and fall in value if market interest rates increase. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. The following table presents the principal amounts and related weighted-average yields for our investments with interest rate risk at December 31, 2014 and September 30, 2014:
 
 
December 31, 2014
 
September 30, 2014
 
Cost
Basis
 
Carrying
Amount
 
Average
Yield
 
Cost
Basis
 
Carrying
Amount
 
Average
Yield
 
(Dollars in thousands)
Cash and cash equivalents
$
94,651

 
$
94,651

 
0.12
%
 
$
105,075

 
$
105,075

 
0.03
%

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On May 7, 2008, we issued $275 million of senior notes to a group of institutional investors in a private placement (the “2008 Senior Notes”). On July 14, 2010 we issued an additional $245 million of senior notes to a group of institutional investors in a private placement (the “2010 Senior Notes” and, with the 2008 Senior Notes, the “Senior Notes”). The fair value of the Senior Notes may increase or decrease due to various factors, including fluctuations in market interest rates and fluctuations in general economic conditions. See “Management’s 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 the Senior Notes at December 31, 2014 and September 30, 2014:
 
 
December 31, 2014
 
September 30, 2014
 
Principal
 
Carrying
Amounts
 
Fair Value
 
Principal
 
Carrying
Amounts
 
Fair Value
 
(In thousands)
 
(In thousands)
The 2008 Senior Notes
$
202,000

 
$
202,000

 
$
213,908

 
$
202,000

 
$
202,000

 
$
214,170

The 2010 Senior Notes
$
245,000

 
$
245,000

 
$
250,548

 
$
245,000

 
$
245,000

 
$
248,557

We have a $400 million unsecured revolving line of credit with a syndicate of banks that expires on December 30, 2019. 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, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0% to 0.875% and for LIBOR borrowings ranges from 1.000% to 1.875%, 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 $160.0 million in borrowings outstanding at a weighted average interest rate of 1.295% under the credit facility as of December 31, 2014.

Foreign Currency Forward Contracts
We maintain a program to manage our foreign exchange rate risk on existing foreign-currency-denominated receivable and cash balances by entering into forward contracts to sell or buy foreign currencies. At period end, foreign-currency-denominated receivable and cash balances held by our various reporting entities are remeasured into their respective functional currencies at current market rates. The change in value from this remeasurement is then reported as a foreign exchange gain or loss for that period in our accompanying condensed consolidated statements of income and comprehensive income and the resulting gain or loss on the forward contract mitigates the foreign exchange rate risk of the associated assets. All of our foreign currency forward contracts have maturity periods of less than three months. Such derivative financial instruments are subject to market risk.
The following table summarizes our outstanding foreign currency forward contracts, by currency at December 31, 2014 and September 30, 2014:

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December 31, 2014
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
2,400

 
$
2,072

 
$

Euro (EUR)
EUR 
4,550

 
$
5,536

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,643

 
$
10,350

 
$

 
 
 
 
 
 
 
 
September 30, 2014
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
3,300

 
$
2,960

 
$

Euro (EUR)
EUR 
3,800

 
$
4,790

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,795

 
$
11,000

 
$

The foreign currency forward contracts were entered into on December 31, 2014 and September 30, 2014, respectively; therefore, their fair value was $0 on each of these dates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of FICO’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of FICO’s 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 FICO’s disclosure controls and procedures are effective to ensure that information required to be disclosed by FICO in reports that it files or submits 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 FICO’s 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.

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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
We continue to expand 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 continue to expand 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.

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.

We expect that revenues derived from our scoring solutions, fraud solutions, customer management solutions and tools 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 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 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.


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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. The businesses of our largest customers depend, in large part, on favorable macroeconomic conditions. If these customers are negatively impacted by weak global economic conditions, global economic volatility or 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 public agencies. 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, the U.S. and other key international economies have experienced in the past a downturn in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. The European Union continues to face great economic uncertainty which could impact the overall world economy or various other regional economies. The potential for economic disruption presents considerable risks to our business, including potential bankruptcies or credit deterioration of financial institutions with which we have substantial relationships. Such disruption could result in a 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. The loss of or a significant change in a relationship with one of these 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 major customer, 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.

Most of our products rely on distributors, and we intend to continue to market and distribute our products through existing and future distributor relationships. Our Scores 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.

Our acquisition and divestiture activities may disrupt our ongoing business and may involve increased expenses, and we may not realize the financial and strategic goals contemplated at the time of a transaction.

We have acquired and expect to continue to acquire companies, businesses, products, services and technologies. Acquisitions involve significant risks and uncertainties, including:

our ongoing business may be disrupted and our management’s attention may be diverted by acquisition, transition or integration activities;
an acquisition may not further our business strategy as we expected, we may not integrate an acquired company or technology as successfully as we expected or we may overpay for our investments, or otherwise not realize the expected return, which could adversely affect our business or operating results;
we may be unable to retain the key employees, customers and other business partners of the acquired operation;
we may have difficulties entering new markets where we have no or limited direct prior experience or where competitors may have stronger market positions;
our operating results or financial condition may be adversely impacted by claims or liabilities we assume from an acquired company, business, product or technology, including claims from government agencies, terminated employees, current or former customers, former stockholders or other third parties; pre-existing contractual relationships of an acquired company we would not have otherwise entered into; unfavorable revenue recognition or other accounting treatment as a result of an acquired company’s practices; and intellectual property claims or disputes;
we may fail to identify or assess the magnitude of certain liabilities or other circumstances prior to acquiring a company, business, product or technology, which could result in unexpected litigation or regulatory exposure, unfavorable

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accounting treatment, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition;
we may not realize the anticipated increase in our revenues from an acquisition for a number of reasons, including if a larger than predicted number of customers decline to renew their contracts, if we are unable to sell the acquired products to our customer base or if contract models of an acquired company do not allow us to recognize revenues on a timely basis;
we may have difficulty incorporating acquired technologies or products with our existing product lines and maintaining uniform standards, architecture, controls, procedures and policies;
our use of cash to pay for acquisitions may limit other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness;
to the extent we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and
we may experience additional or unexpected changes in how we are required to account for our acquisitions pursuant to U.S. generally accepted accounting principles, including arrangements we assume from an acquisition.

We have also divested ourselves of businesses in the past and may do so again in the future. Divestitures involve significant risks and uncertainties, including:

disruption of our ongoing business;
reductions of our revenues or earnings per share;
unanticipated liabilities, legal risks and costs;
the potential loss of key personnel;
distraction of management from our ongoing business; and
impairment of relationships with employees and customers as a result of migrating a business to new owners.

Because acquisitions and divestitures are inherently risky, our transactions may not be successful and may have a material adverse effect on our business, results of operations, financial condition or cash flows. Acquisitions of businesses having a significant presence outside the U.S. will increase our exposure to the risks of conducting operations in international markets.

Charges to earnings resulting from acquisitions may adversely affect our operating results.

Under business combination accounting standards, we recognize the identifiable assets acquired and the liabilities assumed in acquired companies generally at their acquisition-date fair values and separately from goodwill. Goodwill is measured as the excess amount of consideration transferred, which is also generally measured at fair value, and the net of the amounts of the identifiable assets acquired and the liabilities assumed as of the acquisition date. Our estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain. After we complete an acquisition, the following factors could result in material charges and adversely affect our operating results and may adversely affect our cash flows:

impairment of goodwill or intangible assets, or a reduction in the useful lives of intangible assets acquired;
amortization of intangible assets acquired;
identification of, or changes to, assumed contingent liabilities, both income tax and non-income tax related, after our final determination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first;
costs incurred to combine the operations of companies we acquire, such as transitional employee expenses and employee retention, redeployment or relocation expenses;
charges to our operating results to maintain certain duplicative pre-merger activities for an extended period of time or to maintain these activities for a period of time that is longer than we had anticipated, charges to eliminate certain duplicative pre-merger activities, and charges to restructure our operations or to reduce our cost structure; and
charges to our operating results resulting from expenses incurred to effect the acquisition.

Substantially all of these costs will be accounted for as expenses that will decrease our net income and earnings per share for the periods in which those costs are incurred. Charges to our operating results in any given period could differ substantially from other periods based on the timing and size of our future acquisitions and the extent of integration activities. A more detailed discussion of our accounting for business combinations and other items is presented in the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7).


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Our reengineering initiative may cause our growth prospects and profitability to suffer.

As part of our management approach, we implemented an ongoing reengineering initiative designed to grow revenues through strategic resource allocation and improve profitability through cost reductions. Our reengineering initiative may not be successful over the long term as a