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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 (Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
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
95110-1346
San Jose
California
 
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 408-535-1500
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
FICO
New York Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated Filer
 
 
 
 
Non-Accelerated Filer
Smaller Reporting Company
 
 
 
 
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes
No
The number of shares of common stock outstanding on January 17, 2020 was 29,148,054 (excluding 59,708,729 shares held by us as treasury stock).
 



TABLE OF CONTENTS
 
 



i


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
December 31,
2019
 
September 30, 2019
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
111,216

 
$
106,426

Accounts receivable, net
281,640

 
297,427

Prepaid expenses and other current assets
68,138

 
51,853

Total current assets
460,994

 
455,706

Marketable securities
23,732

 
20,222

Other investments
1,656

 
1,643

Property and equipment, net
56,156

 
53,027

Operating lease right-of-use assets
88,475

 

Goodwill
812,850

 
803,542

Intangible assets, net
12,484

 
14,139

Deferred income taxes
7,100

 
6,006

Other assets
81,591

 
79,163

Total assets
$
1,545,038

 
$
1,433,448

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
32,474

 
$
23,118

Accrued compensation and employee benefits
71,780

 
106,240

Other accrued liabilities
43,111

 
32,454

Deferred revenue
114,667

 
111,016

Current maturities on debt
180,000

 
218,000

Total current liabilities
442,032

 
490,828

Long-term debt
738,259

 
606,790

Operating lease liabilities
80,424

 

Other liabilities
43,362

 
46,063

Total liabilities
1,304,077

 
1,143,681

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 29,186 and 28,944 shares outstanding at December 31, 2019 and September 30, 2019, respectively)
292

 
289

Additional paid-in-capital
1,148,190

 
1,225,365

Treasury stock, at cost (59,671 and 59,913 shares at December 31, 2019 and September 30, 2019, respectively)
(2,843,097
)
 
(2,802,450
)
Retained earnings
2,011,569

 
1,956,648

Accumulated other comprehensive loss
(75,993
)
 
(90,085
)
Total stockholders’ equity
240,961

 
289,767

Total liabilities and stockholders’ equity
$
1,545,038

 
$
1,433,448



See accompanying notes.

1


FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

 
Quarter Ended December 31,
 
2019
 
2018
 
(In thousands, except per share data)
Revenues:
 
 
 
Transactional and maintenance
$
220,374

 
$
194,193

Professional services
44,025

 
40,808

License
34,105

 
27,255

Total revenues
298,504

 
262,256

Operating expenses:
 
 
 
Cost of revenues
90,758

 
76,066

Research and development
38,943

 
35,426

Selling, general and administrative
112,021

 
100,258

Amortization of intangible assets
1,796

 
1,502

Restructuring and acquisition-related
3,104

 

Total operating expenses
246,622

 
213,252

Operating income
51,882

 
49,004

Interest expense, net
(9,768
)
 
(9,676
)
Other expense, net
(219
)
 
(2,172
)
Income before income taxes
41,895

 
37,156

Income tax benefit
(13,026
)
 
(2,851
)
Net income
54,921

 
40,007

Other comprehensive gain (loss):
 
 
 
Foreign currency translation adjustments
14,092

 
(3,265
)
Comprehensive income
$
69,013

 
$
36,742

Earnings per share:
 
 
 
Basic
$
1.89

 
$
1.38

Diluted
$
1.82

 
$
1.32

Shares used in computing earnings per share:
 
 
 
Basic
29,025

 
28,961

Diluted
30,169

 
30,336



See accompanying notes.


2


FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Common Stock
 
Additional
Paid-in-Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other
Comprehensive Loss
 
Total
Stockholders’ Equity
(In thousands) 
Shares
 
Par Value
 
 
 
 
 
Balance at September 30, 2019
28,944

 
$
289

 
$
1,225,365

 
$
(2,802,450
)
 
$
1,956,648

 
$
(90,085
)
 
$
289,767

Share-based compensation

 

 
23,145

 

 

 

 
23,145

Issuance of treasury stock under employee stock plans
410

 
4

 
(100,320
)
 
19,361

 

 

 
(80,955
)
Repurchases of common stock
(168
)
 
(1
)
 

 
(60,008
)
 

 

 
(60,009
)
Net income

 

 

 

 
54,921

 

 
54,921

Foreign currency translation adjustments

 

 

 

 

 
14,092

 
14,092

Balance at December 31, 2019
29,186

 
$
292

 
$
1,148,190

 
$
(2,843,097
)
 
$
2,011,569

 
$
(75,993
)
 
$
240,961

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in-Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other
Comprehensive Loss
 
Total
Stockholders’ Equity
(In thousands) 
Shares
 
Par Value
 
 
 
 
 
Balance at September 30, 2018
29,015

 
$
290

 
$
1,211,051

 
$
(2,612,007
)
 
$
1,764,524

 
$
(76,421
)
 
$
287,437

Share-based compensation

 

 
21,854

 

 

 

 
21,854

Issuance of treasury stock under employee stock plans
466

 
5

 
(56,135
)
 
20,692

 

 

 
(35,438
)
Repurchases of common stock
(425
)
 
(4
)
 

 
(82,696
)
 

 

 
(82,700
)
Net income

 

 

 

 
40,007

 

 
40,007

Foreign currency translation adjustments

 

 

 

 

 
(3,265
)
 
(3,265
)
Balance at December 31, 2018
29,056

 
$
291

 
$
1,176,770

 
$
(2,674,011
)
 
$
1,804,531

 
$
(79,686
)
 
$
227,895

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes.

3


FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Quarter Ended December 31,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
54,921

 
$
40,007

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,856

 
7,967

Share-based compensation
23,145

 
21,854

Deferred income taxes
(1,016
)
 
(50
)
Net (gain) loss on marketable securities
(944
)
 
3,050

Operating lease costs (amortization of operating lease right-of-use assets)
4,493

 

Provision for doubtful accounts, net
281

 
180

Net (gain) loss on sales of property and equipment
48

 
(22
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
22,391

 
18,191

Prepaid expenses and other assets
(21,711
)
 
(10,787
)
Accounts payable
10,349

 
1,671

Accrued compensation and employee benefits
(35,566
)
 
(28,918
)
Other liabilities
(4,379
)
 
(4,848
)
Deferred revenue
497

 
562

Net cash provided by operating activities
60,365

 
48,857

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(6,500
)
 
(6,474
)
Proceeds from sales of marketable securities
167

 
102

Purchases of marketable securities
(2,733
)
 
(2,303
)
Distribution from other investments
55

 

Net cash used in investing activities
(9,011
)
 
(8,675
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
117,000

 
103,000

Payments on revolving line of credit
(367,000
)
 
(35,000
)
Proceeds from issuance of senior notes
350,000

 

Payments on debt issuance costs
(6,805
)
 

Payments on finance leases
(425
)
 

Proceeds from issuance of treasury stock under employee stock plans
5,091

 
7,550

Taxes paid related to net share settlement of equity awards
(86,047
)
 
(42,987
)
Repurchases of common stock
(60,009
)
 
(82,700
)
Net cash used in financing activities
(48,195
)
 
(50,137
)
Effect of exchange rate changes on cash
1,631

 
(172
)
Increase (decrease) in cash and cash equivalents
4,790

 
(10,127
)
Cash and cash equivalents, beginning of period
106,426

 
90,023

Cash and cash equivalents, end of period
$
111,216

 
$
79,896

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
2,391

 
$
1,394

Cash paid for interest
$
12,856

 
$
13,439

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
93

 
$
433

Finance lease obligations incurred
$
3,045

 
$


See accompanying notes.

4


FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business
Fair Isaac Corporation
Incorporated under the laws of the State of Delaware, Fair Isaac Corporation (“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 this Quarterly Report on Form 10-Q, 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 all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements 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 fiscal year ended September 30, 2019. 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.
As discussed in New Accounting Pronouncements below and Note 14, effective October 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, “Topic 842”) using the modified retrospective approach, under which financial results reported in prior periods were not restated.  As a result, the condensed consolidated balance sheet as of December 31, 2019 is not comparable with that as of September 30, 2019. See our Annual Report on Form 10-K filed with the SEC on November 8, 2019 for lease policies that were in effect in prior periods before adoption of Topic 842.
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 collectability 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 Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Topic 842, which requires the recognition of operating lease assets and lease liabilities on the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new standard, disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

5


In the first quarter of fiscal 2020, we adopted Topic 842 using the “Comparatives Under 840 Option” approach to transition. In accordance with the standard, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Topic 842 provided a package of practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing leases. We elected to apply the package of practical expedients, and did not elect the hindsight practical expedient in determining the lease term for existing leases as of October 1, 2019.
Adoption of Topic 842 did not result in the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The most significant impact of adoption was the recognition of operating lease assets and operating lease liabilities of $89.8 million and $98.9 million, respectively, while our accounting for existing capital leases (now referred to as finance leases) remained substantially unchanged. We expect the impact of adoption to be immaterial to our consolidated statements of income and comprehensive income and consolidated statements of cash flows on an ongoing basis. As part of our adoption, we also modified our control procedures and processes, none of which materially affected our internal control over financial reporting. See Note 14 for additional information regarding our accounting policy for leases and additional disclosures.
Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means that it will be effective for our fiscal year beginning October 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-15 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means it will be effective for our fiscal year beginning October 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of Topic 326 on our consolidated financial statements.

We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.
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 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 marketable securities. We do not have any liabilities that are valued using inputs identified under a Level 1 hierarchy as of December 31, 2019 and September 30, 2019.
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, 2019 and September 30, 2019. 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.

6


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, 2019 and September 30, 2019.
The following tables represent financial assets that we measured at fair value on a recurring basis at December 31, 2019 and September 30, 2019:
December 31, 2019
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of December 31, 2019
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
26,320

 
$
26,320

Marketable securities (2)
23,732

 
23,732

Total
$
50,052

 
$
50,052

 
 
 
 
September 30, 2019
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of September 30, 2019
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
28,901

 
$
28,901

Marketable securities (2)
20,222

 
20,222

Total
$
49,123

 
$
49,123

(1)
Included in cash and cash equivalents on our condensed consolidated balance sheets at December 31, 2019 and September 30, 2019. Not included in these tables are cash deposits of $84.9 million and $77.5 million at December 31, 2019 and September 30, 2019, 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 on our condensed consolidated balance sheets at December 31, 2019 and September 30, 2019.
For the fair value of our derivative instruments and senior notes, see Note 3 and Note 7, respectively.
There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the quarters ended December 31, 2019 and 2018.
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 Singapore 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 expense, net. The forward contracts are not designated as hedges and are marked to market through other 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.

7


The following tables summarize our outstanding foreign currency forward contracts, by currency, at December 31, 2019 and September 30, 2019:
 
December 31, 2019
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
10,000

 
$
11,172

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,277

 
$
8,300

 
$

Singapore dollar (SGD)
SGD
5,631

 
$
4,200

 
$

 
September 30, 2019
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
10,800

 
$
11,723

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
5,200

 
$
6,400

 
$

Singapore dollar (SGD)
SGD
5,798

 
$
4,200

 
$


The foreign currency forward contracts were entered into on December 31, 2019 and September 30, 2019, respectively; therefore, their fair value was $0 on each of these dates.
Gain (losses) on derivative financial instruments are recorded in our condensed consolidated statements of income and comprehensive income as a component of other expense, net, and consisted of the following: 
 
Quarter Ended December 31,
 
2019
 
2018
 
(In thousands)
Gains (losses) on foreign currency forward contracts
$
1,145

 
$
(404
)


4. Goodwill and Intangible Assets
Amortization expense associated with our intangible assets is reflected as a separate operating expense caption — amortization of intangible assets — and is excluded from cost of revenues and selling, general and administrative expenses within the accompanying condensed consolidated statements of income and comprehensive income. Amortization expense consisted of the following: 
 
Quarter Ended December 31,
 
2019
 
2018
 
(In thousands)
Completed technology
$
575

 
$
494

Customer contracts and relationships
1,140

 
1,008

Trade names
37

 

Non-compete agreements
44

 

       Total
$
1,796

 
$
1,502



8



Estimated future intangible asset amortization expense associated with intangible assets existing at December 31, 2019 was as follows:
Year Ending September 30,
(In thousands)
2020 (excluding the quarter ended December 31, 2019)
$
3,214

2021
3,664

2022
3,372

2023
1,317

2024
917


$
12,484


The following table summarizes changes to goodwill during the quarter ended December 31, 2019, both in total and as allocated to our segments:
 
Applications
 
Scores
 
Decision Management Software
 
Total
 
(In thousands)
Balance at September 30, 2019
$
588,614

 
$
146,648

 
$
68,280

 
$
803,542

Foreign currency translation adjustment
8,292

 

 
1,016

 
9,308

Balance at December 31, 2019
$
596,906

 
$
146,648

 
$
69,296

 
$
812,850



5. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at December 31, 2019 and September 30, 2019:
 
December 31,
2019
 
September 30,
2019
 
(In thousands)
Property and equipment
$
181,176

 
$
172,075

Less: accumulated depreciation and amortization
(125,020
)
 
(119,048
)
 
$
56,156

 
$
53,027


6. Revolving Line of Credit
We have a $400 million unsecured revolving line of credit with a syndicate of banks that expires on May 8, 2023 with an option to increase it by another $100 million. 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 maximum consolidated leverage ratio of 3.25, subject to a step up to 3.75 following certain permitted acquisitions; and a minimum fixed charge ratio of 2.50 through the maturity of our 2010 Senior Notes in July 2020, upon which maintaining a minimum interest coverage ratio of 3.00. The credit agreement also contains other covenants typical of unsecured facilities. As of December 31, 2019, we had $95.0 million in borrowings outstanding at a weighted average interest rate of 2.900%. We were in compliance with all financial covenants under this credit facility as of December 31, 2019.


9


7. Senior Notes
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”). The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years. The outstanding 2010 Senior Notes’ weighted average interest rate is 5.6% and the weighted average maturity is 10.0 years. The 2010 Senior Notes require interest payments semi-annually and contain certain restrictive covenants, including the maintenance of a maximum consolidated net debt to consolidated EBITDA ratio of 3.00 and a minimum fixed charge coverage ratio of 2.50. We were in compliance with all financial covenants under the 2010 Senior Notes as of December 31, 2019.
On May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25% per annum and will mature on May 15, 2026.
On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes”, along with the 2010 Senior Notes and 2018 Senior Notes, the “Senior Notes”). We have used the net proceeds to repay a large portion of the outstanding balance on our revolving credit facility. The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028.
The purchase agreements for the 2010 Senior Notes, as well as the indentures for the 2018 Senior Notes and 2019 Senior Notes contain certain covenants typical of unsecured obligations.
The following table presents the carrying amounts and fair values for the Senior Notes at December 31, 2019 and September 30, 2019:
 
December 31, 2019
 
September 30, 2019
 
Carrying
Amounts (*)
 
Fair Value
 
Carrying
Amounts (*)
 
Fair Value
 
(In thousands)
The 2010 Senior Notes
85,000

 
85,892

 
85,000

 
86,121

The 2018 Senior Notes
400,000

 
442,000

 
400,000

 
428,000

The 2019 Senior Notes
350,000

 
353,937

 

 

       Total
$
835,000

 
$
881,829

 
$
485,000

 
$
514,121


(*) Amounts exclusive of net debt issuance cost of $11.7 million and $5.2 million at December 31, 2019 and September 30, 2019, 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
During the quarter ended December 31, 2019, we incurred $3.1 million in employee separation costs due to the elimination of 69 positions throughout the Company. Cash payment for all of the employee separation costs will be paid by the end of the second quarter of our fiscal 2020.
There were no restructuring expenses incurred during the quarter ended December 31, 2018.
The following table summarizes our restructuring accruals related to facility closures and employee separation. The balances at December 31, 2019 and September 30, 2019 were classified as current liabilities and recorded in other accrued liabilities within the accompanying condensed consolidated balance sheets.
 
Accrual at
 
Expense
Additions
 
Cash
Payments
 
Adjustment (*)
 
Accrual at
 
September 30, 2019
 
 
 
 
December 31, 2019
 
(In thousands)
Facilities charges
$
1,378

 
$

 
$

 
$
(1,378
)
 
$

Employee separation

 
3,104

 
(1,105
)
 

 
1,999

 
1,378

 
$
3,104

 
$
(1,105
)
 
$
(1,378
)
 
1,999


 
(*) Upon adoption of Topic 842, accrued lease exit obligations of $1.4 million were reclassed to operating lease liabilities.

10



9. Income Taxes
Effective Tax Rate
The effective income tax rate was (31.1)% and (7.7)% during the quarters ended December 31, 2019 and 2018, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.
The effective tax rate for the quarters ended December 31, 2019 and 2018 was significantly impacted by the recording of excess tax benefits relating to stock awards that vested in December of each period. The impact is dependent upon the future stock price in relation to the fair value of awards on grant date. Therefore, the increase in stock price for stock awards that vested in December 2019 resulted in an increased excess tax benefit for the quarter ended December 31, 2019.
The total unrecognized tax benefit for uncertain tax positions is estimated to be $6.5 million and $5.8 million at December 31, 2019 and September 30, 2019, 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 $0.4 million and $0.3 million related to unrecognized tax benefits as of December 31, 2019 and September 30, 2019, respectively.
10. Share-Based Payments
We maintain the 2012 Long-Term Incentive Plan (the “2012 Plan”) under which we 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 awards currently outstanding under the 1992 Long-Term Incentive Plan, which was adopted in February 1992 and expired in February 2012. Stock option awards have a maximum term of seven years. In general, stock option awards and restricted stock unit awards not subject to market or performance conditions vest annually over four years. Restricted stock unit awards subject to market or performance conditions vest annually over three years based on the achievement of specified criteria.
We also maintain the 2019 Employee Stock Purchase Plan, which authorizes the issuance of common stock to eligible employees. Employees have up to 15% of their eligible pay withheld through payroll deductions to purchase FICO common stock during semi-annual offering periods. The purchase price of the stock is 85% of the closing sales price on the last trading day of each offering period. Offering period means the approximately six-month long periods commencing (a) on the first trading day on or after September 1 and terminating on the last trading day in the following February, and (b) on the first trading day on or after March 1 and terminating on the last trading day in the following August.
Stock Options
The following table summarizes option activity during the quarter ended December 31, 2019:
 
Shares
 
Weighted-average Exercise Price
 
Weighted-average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
Outstanding at September 30, 2019
616

 
$
89.36

 
 
 
 
       Granted
16

 
352.18

 
 
 
 
       Exercised
(93
)
 
54.51

 
 
 
 
       Forfeited
(1
)
 
185.05

 
 
 
 
Outstanding at December 31, 2019
538

 
$
103.12

 
2.94
 
$
146,033

Exercisable at December 31, 2019
458

 
$
81.93

 
2.39
 
$
134,066

Vested and expected to vest at December 31, 2019
533

 
$
101.77

 
2.91
 
$
145,490



11


Restricted Stock Units
The following table summarizes restricted stock unit activity during the quarter ended December 31, 2019:
 
Shares
 
Weighted-average Grant-date Fair Value
 
(In thousands)
 
 
Outstanding at September 30, 2019
998

 
$
159.99

       Granted
201

 
353.37

       Released
(331
)
 
138.52

       Forfeited
(28
)
 
166.59

Outstanding at December 31, 2019
840

 
$
214.39


Performance Share Units
The following table summarizes performance share unit activity during the quarter ended December 31, 2019:
 
Shares
 
Weighted-average Grant-date Fair Value
 
(In thousands)
 
 
Outstanding at September 30, 2019
195

 
$
163.38

       Granted
53

 
354.18

       Released
(101
)
 
152.45

       Forfeited
(20
)
 
175.50

Outstanding at December 31, 2019
127

 
$
248.97


Market Share Units
The following table summarizes market share unit activity during the quarter ended December 31, 2019:
 
Shares
 
Weighted-average Grant-date Fair Value
 
(In thousands)
 
 
Outstanding at September 30, 2019
100

 
$
188.63

       Granted
97

 
249.13

       Released
(124
)
 
171.42

       Forfeited
(10
)
 
202.48

Outstanding at December 31, 2019
63

 
$
311.91


Employee Stock Purchase Plan
As our first semi-annual offering period started on September 1, 2019, no shares have been purchased during the quarter ended December 31, 2019.

12



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, 2019 and 2018: 
 
Quarter Ended December 31,
 
2019
 
2018
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
Net Income
$
54,921

 
$
40,007

Denominator - share:
 
 
 
Basic weighted-average shares
29,025

 
28,961

Effect of dilutive securities
1,144

 
1,375

Diluted weighted-average shares
30,169

 
30,336

Earnings per share:
 
 
 
Basic
$
1.89

 
$
1.38

Diluted
$
1.82

 
$
1.32


We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the exercise price of the options exceeds the average market price of our common stock as their inclusion would be antidilutive. There were approximately 15,000 options excluded for the quarter ended December 31, 2019. There were no options excluded for the quarter ended December 31, 2018.
12. Segment Information
We are organized into the following three operating segments, each of which is a reportable segment, to align with internal management of our worldwide business operations based on product offerings.
 
Applications. This segment includes pre-configured decision management applications designed for a specific type of business problem or process — such as marketing, account origination, customer management, fraud, collections and insurance claims management — as well as associated professional services. These applications are available to our customers as on-premises software, and many are available as hosted, software-as-a-service (“SaaS”) applications through the FICO® Analytic Cloud or third-party public clouds, such as those provided by Amazon Web Services (“AWS”).
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.
Decision Management Software. This segment is composed of analytic and decision management software tools that clients can use to create their own custom decision management applications, our FICO® Decision Management Suite, as well as associated professional services. These tools are available to our customers as on-premises software or through the FICO® Analytic Cloud or third-party public clouds, such as those provided by AWS.
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, nor capital expenditures where depreciation amounts are allocated to the segments from their internal cost centers as described above.

13


The following tables summarize segment information for the quarters ended December 31, 2019 and 2018:
 
Quarter Ended December 31, 2019
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
98,837

 
$
107,446

 
$
14,091

 
$

 
$
220,374

Professional services
34,023

 
264

 
9,738

 

 
44,025

License
19,318

 
7,428

 
7,359

 

 
34,105

Total segment revenues
152,178

 
115,138

 
31,188

 

 
298,504

Segment operating expense
(116,010
)
 
(17,712
)
 
(50,645
)
 
(34,210
)
 
(218,577
)
Segment operating income (loss)
$
36,168

 
$
97,426

 
$
(19,457
)
 
$
(34,210
)
 
79,927

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(23,145
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(1,796
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(3,104
)
Operating income
 
 
 
 
 
 
 
 
51,882

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(9,768
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(219
)
Income before income taxes
 
 
 
 
 
 
 
 
$
41,895

Depreciation expense
$
4,349

 
$
116

 
$
986

 
$
225

 
$
5,676

 
Quarter Ended December 31, 2018
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
97,165

 
$
84,821

 
$
12,207

 
$

 
$
194,193

Professional services
31,462

 
701

 
8,645

 

 
40,808

License
19,032

 
161

 
8,062

 

 
27,255

Total segment revenues
147,659

 
85,683

 
28,914

 

 
262,256

Segment operating expense
(107,598
)
 
(13,482
)
 
(39,562
)
 
(29,254
)
 
(189,896
)
Segment operating income (loss)
$
40,061

 
$
72,201

 
$
(10,648
)
 
$
(29,254
)
 
72,360

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(21,854
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(1,502
)
Operating income
 
 
 
 
 
 
 
 
49,004

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(9,676
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(2,172
)
Income before income taxes
 
 
 
 
 
 
 
 
$
37,156

Depreciation expense
$
4,797

 
$
125

 
$
989

 
$
233

 
$
6,144


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


14


Information about disaggregated revenue by product deployment methods was as follows:
 
Quarter Ended December 31, 2019
Reportable Segments
On-Premises
 
SaaS
 
Scores
 
Total
 
Percentage
 
(Dollars in thousands)
Applications
$
85,978

 
$
66,200

 
$

 
$
152,178

 
51
%
Scores

 

 
115,138

 
115,138

 
39
%
Decision Management Software
23,679

 
7,509

 

 
31,188

 
10
%
      Total
$
109,657

 
$
73,709

 
$
115,138

 
$
298,504

 
100
%
 
Quarter Ended December 31, 2018
Reportable Segments
On-Premises
 
SaaS
 
Scores
 
Total
 
Percentage
 
(Dollars in thousands)
Applications
$
89,595

 
$
58,064

 
$

 
$
147,659

 
56
%
Scores

 

 
85,683

 
85,683

 
33
%
Decision Management Software
23,609