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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 March 31, 2019
|
| |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company, or an emerging growth company. See 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 | ý | Accelerated Filer | o |
| | | |
Non-Accelerated Filer | o | Smaller Reporting Company | o |
| | | |
| | Emerging Growth Company | o |
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. 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 April 19, 2019 was 28,990,026 (excluding 59,866,757 shares held by us as treasury stock).
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. | | |
| |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
| March 31, 2019 | | September 30, 2018 |
| | | As Adjusted |
| (In thousands, except par value data) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 76,885 |
| | $ | 90,023 |
|
Accounts receivable, net | 271,632 |
| | 266,742 |
|
Prepaid expenses and other current assets | 48,483 |
| | 39,624 |
|
Total current assets | 397,000 |
| | 396,389 |
|
Marketable securities | 18,888 |
| | 18,059 |
|
Other investments | 1,702 |
| | 1,697 |
|
Property and equipment, net | 44,760 |
| | 48,837 |
|
Goodwill | 800,696 |
| | 800,890 |
|
Intangible assets, net | 11,422 |
| | 14,536 |
|
Deferred income taxes | 13,678 |
| | 13,805 |
|
Other assets | 39,965 |
| | 36,254 |
|
Total assets | $ | 1,328,111 |
| | $ | 1,330,467 |
|
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 16,249 |
| | $ | 20,251 |
|
Accrued compensation and employee benefits | 67,349 |
| | 84,292 |
|
Other accrued liabilities | 28,747 |
| | 31,025 |
|
Deferred revenue | 106,275 |
| | 103,335 |
|
Current maturities on debt | 218,000 |
| | 235,000 |
|
Total current liabilities | 436,620 |
| | 473,903 |
|
Long-term debt | 604,369 |
| | 528,944 |
|
Other liabilities | 39,644 |
| | 40,183 |
|
Total liabilities | 1,080,633 |
| | 1,043,030 |
|
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 29,056 and 29,015 shares outstanding at March 31, 2019 and September 30, 2018, respectively) | 291 |
| | 290 |
|
Additional Paid-in-capital | 1,190,341 |
| | 1,211,051 |
|
Treasury stock, at cost (59,801 and 59,842 shares at March 31, 2019 and September 30, 2018, respectively) | (2,704,305 | ) | | (2,612,007 | ) |
Retained earnings | 1,837,912 |
| | 1,764,524 |
|
Accumulated other comprehensive loss | (76,761 | ) | | (76,421 | ) |
Total stockholders’ equity | 247,478 |
| | 287,437 |
|
Total liabilities and stockholders’ equity | $ | 1,328,111 |
| | $ | 1,330,467 |
|
See accompanying notes.
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Quarter Ended March 31, | | Six Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 |
| | | As Adjusted | | | | As Adjusted |
| (In thousands, except per share data) |
Revenues: | | | | | | | |
Transactional and maintenance | $ | 211,779 |
| | $ | 192,791 |
| | $ | 405,972 |
| | $ | 363,194 |
|
Professional services | 50,555 |
| | 46,731 |
| | 91,363 |
| | 89,859 |
|
License | 15,900 |
| | 16,738 |
| | 43,155 |
| | 35,568 |
|
Total revenues | 278,234 |
| | 256,260 |
| | 540,490 |
| | 488,621 |
|
Operating expenses: | | | | | | | |
Cost of revenues * | 85,568 |
| | 79,493 |
| | 161,634 |
| | 153,925 |
|
Research and development | 37,684 |
| | 32,519 |
| | 73,110 |
| | 61,493 |
|
Selling, general and administrative * | 104,930 |
| | 96,125 |
| | 205,188 |
| | 186,467 |
|
Amortization of intangible assets * | 1,503 |
| | 1,684 |
| | 3,005 |
| | 3,472 |
|
Total operating expenses | 229,685 |
| | 209,821 |
| | 442,937 |
| | 405,357 |
|
Operating income | 48,549 |
| | 46,439 |
| | 97,553 |
| | 83,264 |
|
Interest expense, net | (10,008 | ) | | (7,116 | ) | | (19,684 | ) | | (13,576 | ) |
Other income (expense), net | 1,433 |
| | (161 | ) | | (739 | ) | | 352 |
|
Income before income taxes | 39,974 |
| | 39,162 |
| | 77,130 |
| | 70,040 |
|
Provision for income taxes | 6,593 |
| | 7,993 |
| | 3,742 |
| | 5,992 |
|
Net income | 33,381 |
| | 31,169 |
| | 73,388 |
| | 64,048 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 2,925 |
| | 9,125 |
| | (340 | ) | | 12,196 |
|
Comprehensive income | $ | 36,306 |
| | $ | 40,294 |
| | $ | 73,048 |
| | $ | 76,244 |
|
Earnings per share: | | | | | | | |
Basic | $ | 1.15 |
| | $ | 1.04 |
| | $ | 2.53 |
| | $ | 2.13 |
|
Diluted | $ | 1.10 |
| | $ | 1.00 |
| | $ | 2.42 |
| | $ | 2.04 |
|
Shares used in computing earnings per share: | | | | | | | |
Basic | 29,074 |
| | 29,985 |
| | 29,017 |
| | 30,032 |
|
Diluted | 30,259 |
| | 31,300 |
| | 30,297 |
| | 31,431 |
|
*
See accompanying notes.
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 December 31, 2018 | 29,056 |
| | $ | 291 |
| | $ | 1,176,770 |
| | $ | (2,674,011 | ) | | $ | 1,804,531 |
| | $ | (79,686 | ) | | $ | 227,895 |
|
Share-based compensation | — |
| | — |
| | 20,482 |
| | — |
| | — |
| | — |
| | 20,482 |
|
Issuance of treasury stock under employee stock plans | 150 |
| | 2 |
| | (6,911 | ) | | 6,727 |
| | — |
| | — |
| | (182 | ) |
Repurchases of common stock | (150 | ) | | (2 | ) | | — |
| | (37,021 | ) | | — |
| | — |
| | (37,023 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 33,381 |
| | — |
| | 33,381 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 2,925 |
| | 2,925 |
|
Balance at March 31, 2019 | 29,056 |
| | $ | 291 |
| | $ | 1,190,341 |
| | $ | (2,704,305 | ) | | $ | 1,837,912 |
| | $ | (76,761 | ) | | $ | 247,478 |
|
| | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in-Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
(In thousands) | Shares | | Par Value | | | | | |
Balance at December 31, 2017 (As Adjusted) | 30,246 |
| | $ | 302 |
| | $ | 1,160,274 |
| | $ | (2,337,205 | ) | | $ | 1,670,921 |
| | $ | (63,424 | ) | | $ | 430,868 |
|
Share-based compensation | — |
| | — |
| | 19,239 |
| | — |
| | — |
| | — |
| | 19,239 |
|
Issuance of treasury stock under employee stock plans | 50 |
| | 1 |
| | (2,608 | ) | | 2,038 |
| | — |
| | — |
| | (569 | ) |
Repurchases of common stock | (461 | ) | | (5 | ) | | — |
| | (75,004 | ) | | — |
| | — |
| | (75,009 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 31,169 |
| | — |
| | 31,169 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 9,125 |
| | 9,125 |
|
Balance at March 31, 2018 (As Adjusted) | 29,835 |
| | $ | 298 |
| | $ | 1,176,905 |
| | $ | (2,410,171 | ) | | $ | 1,702,090 |
| | $ | (54,299 | ) | | $ | 414,823 |
|
| | | | | | | | | | | | | |
| 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 (As Adjusted) | 29,015 |
| | $ | 290 |
| | $ | 1,211,051 |
| | $ | (2,612,007 | ) | | $ | 1,764,524 |
| | $ | (76,421 | ) | | $ | 287,437 |
|
Share-based compensation | — |
| | — |
| | 42,336 |
| | — |
| | — |
| | — |
| | 42,336 |
|
Issuance of treasury stock under employee stock plans | 616 |
| | 6 |
| | (63,046 | ) | | 27,420 |
| | — |
| | — |
| | (35,620 | ) |
Repurchases of common stock | (575 | ) | | (5 | ) | | — |
| | (119,718 | ) | | — |
| | — |
| | (119,723 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 73,388 |
| | — |
| | 73,388 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | (340 | ) | | (340 | ) |
Balance at March 31, 2019 | 29,056 |
| | $ | 291 |
| | $ | 1,190,341 |
| | $ | (2,704,305 | ) | | $ | 1,837,912 |
| | $ | (76,761 | ) | | $ | 247,478 |
|
| | | | | | | | | | | | | |
| 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, 2017 (As Adjusted) | 30,243 |
| | $ | 302 |
| | $ | 1,195,431 |
| | $ | (2,301,097 | ) | | $ | 1,638,042 |
| | $ | (66,495 | ) | | $ | 466,183 |
|
Share-based compensation | — |
| | — |
| | 35,749 |
| | — |
| | — |
| | — |
| | 35,749 |
|
Issuance of treasury stock under employee stock plans | 388 |
| | 4 |
| | (54,275 | ) | | 15,529 |
| | — |
| | — |
| | (38,742 | ) |
Repurchases of common stock | (796 | ) | | (8 | ) | | — |
| | (124,603 | ) | | — |
| | — |
| | (124,611 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 64,048 |
| | — |
| | 64,048 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 12,196 |
| | 12,196 |
|
Balance at March 31, 2018 (As Adjusted) | 29,835 |
| | $ | 298 |
| | $ | 1,176,905 |
| | $ | (2,410,171 | ) | | $ | 1,702,090 |
| | $ | (54,299 | ) | | $ | 414,823 |
|
See accompanying notes.
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Six Months Ended March 31, |
| 2019 | | 2018 |
| | | As Adjusted |
| (In thousands) |
Cash flows from operating activities: | | | |
Net income | $ | 73,388 |
| | $ | 64,048 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 15,786 |
| | 15,095 |
|
Share-based compensation | 42,336 |
| | 35,749 |
|
Deferred income taxes | 74 |
| | (3,152 | ) |
Net (gain) loss on marketable securities | 1,300 |
| | (198 | ) |
Provision for doubtful accounts, net | 391 |
| | 482 |
|
Net (gain) loss on sales of property and equipment | (5 | ) | | 27 |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable | (5,015 | ) | | (9,019 | ) |
Prepaid expenses and other assets | (12,219 | ) | | (5,904 | ) |
Accounts payable | (2,210 | ) | | (515 | ) |
Accrued compensation and employee benefits | (16,970 | ) | | (20,650 | ) |
Other liabilities | (2,672 | ) | | (418 | ) |
Deferred revenue | 2,462 |
| | 2,465 |
|
Net cash provided by operating activities | 96,646 |
| | 78,010 |
|
Cash flows from investing activities: | | | |
Purchases of property and equipment | (10,644 | ) | | (11,111 | ) |
Proceeds from sales of marketable securities | 2,267 |
| | 2,383 |
|
Purchases of marketable securities | (4,396 | ) | | (4,528 | ) |
Net cash used in investing activities | (12,773 | ) | | (13,256 | ) |
Cash flows from financing activities: | | | |
Proceeds from revolving line of credit | 138,000 |
| | 147,000 |
|
Payments on revolving line of credit | (80,000 | ) | | (48,000 | ) |
Payments on debt issuance costs | — |
| | (240 | ) |
Proceeds from issuance of treasury stock under employee stock plans | 12,850 |
| | 1,706 |
|
Taxes paid related to net share settlement of equity awards | (48,470 | ) | | (40,448 | ) |
Repurchases of common stock | (119,723 | ) | | (124,715 | ) |
Net cash used in financing activities | (97,343 | ) | | (64,697 | ) |
Effect of exchange rate changes on cash | 332 |
| | 2,193 |
|
Increase (decrease) in cash and cash equivalents | (13,138 | ) | | 2,250 |
|
Cash and cash equivalents, beginning of period | 90,023 |
| | 105,618 |
|
Cash and cash equivalents, end of period | $ | 76,885 |
| | $ | 107,868 |
|
Supplemental disclosures of cash flow information: | | | |
Cash paid for income taxes, net of refunds | $ | 7,962 |
| | $ | 6,669 |
|
Cash paid for interest | $ | 19,686 |
| | $ | 13,324 |
|
Supplemental disclosures of non-cash investing and financing activities: | | | |
Purchase of property and equipment included in accounts payable | $ | 77 |
| | $ | 6,006 |
|
Unsettled repurchases of common stock | $ | — |
| | $ | 5,557 |
|
See accompanying notes.
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, 2018. 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.
Effective October 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) using the full retrospective method. In connection with this adoption, the results and related disclosures for the comparative fiscal 2018 periods presented in this Form 10-Q were adjusted to be presented as if ASU 2014‑09 had been in effect during such fiscal 2018 periods. See “New Accounting Pronouncements” below and Note 8. All amounts and disclosures set forth in this Form 10-Q reflect these changes.
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.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services.
See Note 8 for further discussion on revenues.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09. The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from the contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (“full retrospective method”), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (“modified retrospective method”).
We adopted ASU 2014-09 in the first quarter of our fiscal 2019 using the full retrospective method which required us to adjust each prior reporting period presented. This adoption primarily affected timing of revenue recognition of license revenue on term licenses and transactional revenue on guaranteed minimum fees related to our on-premises software products. Under the new standard, we recognize revenue when control of the license is transferred to the customer, rather than at the date payments become due and payable when there are extended payment terms, or ratably over the term of the contract as required under the previous standard. In addition, revenue attributable to a software license renewal is recognized at the beginning of the applicable renewal period rather than at the signing of the renewal agreement as required under the previous standard. Additionally, under the new standard, when we enter into noncancellable contracts that provide unconditional rights to payment from our customers for services we have not yet completed or services we will provide in the near future, we present receivables — our unconditional rights to payments — and deferred revenues on a gross basis, rather than on a net basis. Finally, under the new standard we capitalize and amortize contract acquisition costs such as commissions paid for software-as-a-service (“SaaS”) cloud services contracts in excess of one year. Following the adoption of ASU 2014-09, the revenue recognition for our other sales arrangements remained materially consistent with our historical practice.
Upon adoption of ASU 2014-09, we applied the standard’s practical expedients that permit the omission of prior-period information about our performance obligations.
Adoption of the standard impacted our previously reported results as follows:
Condensed Consolidated Balance Sheets
|
| | | | | | | | |
| September 30, 2018 |
| As Previously Reported | | Adjustment | | As Adjusted |
| (In thousands) |
Accounts receivable, net | 208,865 |
| | 57,877 |
| | 266,742 |
|
Deferred income taxes | 20,117 |
| | (6,312 | ) | | 13,805 |
|
Other assets | 12,431 |
| | 23,823 |
| | 36,254 |
|
Other accrued liabilities | 30,457 |
| | 568 |
| | 31,025 |
|
Deferred revenue | 52,215 |
| | 51,120 |
| | 103,335 |
|
Stockholders’ equity | 263,737 |
| | 23,700 |
| | 287,437 |
|
Condensed Consolidated Statements of Income and Comprehensive Income
|
| | | | | | | | | | | | | | | | | |
| Quarter Ended March 31, 2018 | | Six Months Ended March 31, 2018 |
| As Previously Reported | | Adjustment | | As Adjusted | | As Previously Reported | | Adjustment | | As Adjusted |
| (In thousands, except per share amounts) |
Revenues | 257,858 |
| | (1,598 | ) | | 256,260 |
| | 493,179 |
| | (4,558 | ) | | 488,621 |
|
Cost of revenues | 78,519 |
| | 974 |
| | 79,493 |
| | 152,878 |
| | 1,047 |
| | 153,925 |
|
Selling, general and administrative | 97,057 |
| | (932 | ) | | 96,125 |
| | 187,353 |
| | (886 | ) | | 186,467 |
|
Provision for income taxes | 8,527 |
| | (534 | ) | | 7,993 |
| | 15,185 |
| | (9,193 | ) | | 5,992 |
|
Net income | 32,275 |
| | (1,106 | ) | | 31,169 |
| | 59,574 |
| | 4,474 |
| | 64,048 |
|
Comprehensive income | 41,400 |
| | (1,106 | ) | | 40,294 |
| | 71,770 |
| | 4,474 |
| | 76,244 |
|
Basic earnings per share | 1.08 |
| | (0.04 | ) | | 1.04 |
| | 1.98 |
| | 0.15 |
| | 2.13 |
|
Diluted earnings per share | 1.03 |
| | (0.03 | ) | | 1.00 |
| | 1.90 |
| | 0.14 |
| | 2.04 |
|
Condensed Consolidated Statement of Cash Flows
|
| | | | | | | | |
| Six Months Ended March 31, 2018 |
| As Previously Reported | | Adjustment | | As Adjusted |
| (In thousands) |
Cash flows from operating activities: | | | | | |
Net income | 59,574 |
| | 4,474 |
| | 64,048 |
|
Deferred income taxes | 6,041 |
| | (9,193 | ) | | (3,152 | ) |
Changes in operating assets and liabilities | (38,760 | ) | | 4,719 |
| | (34,041 | ) |
Recent Accounting Pronouncements Not Yet Adopted
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act (defined below) and requires certain disclosures about stranded tax effects. The guidance is effective for fiscal years and interim periods beginning after December 15, 2018, which means it will be effective for our fiscal year beginning October 1, 2019. ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We do not believe that adoption of ASU 2018-02 will have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued 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). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. Topic 842 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, which means it will be effective for our fiscal year beginning October 1, 2019. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of Topic 842 on our consolidated financial statements. We expect that most of our operating leases will be recognized as right-of-use assets and corresponding lease liabilities on our consolidated balance sheets, which will increase our total assets and total liabilities upon adoption.
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 equity securities. We do not have any liabilities that are valued using inputs identified under a Level I hierarchy as of March 31, 2019 and September 30, 2018. |
| |
• | 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 March 31, 2019 and September 30, 2018. 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. |
| |
• | 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 March 31, 2019 and September 30, 2018. |
The following tables represent financial assets that we measured at fair value on a recurring basis at March 31, 2019 and September 30, 2018:
|
| | | | | | | |
March 31, 2019 | Active Markets for Identical Instruments (Level 1) | | Fair Value as of March 31, 2019 |
| (In thousands) |
Assets: | | | |
Cash equivalents (1) | $ | 22,607 |
| | $ | 22,607 |
|
Marketable securities (2) | 18,888 |
| | 18,888 |
|
Total | $ | 41,495 |
| | $ | 41,495 |
|
| | | |
September 30, 2018 | Active Markets for Identical Instruments (Level 1) | | Fair Value as of September 30, 2018 |
| (In thousands) |
Assets: | | | |
Cash equivalents (1) | $ | 18,413 |
| | $ | 18,413 |
|
Marketable securities (2) | 18,059 |
| | 18,059 |
|
Total | $ | 36,472 |
| | $ | 36,472 |
|
| |
(1) | March 31, 2019 and September 30, 2018. Not included in these tables are cash deposits of $54.3 million and $71.6 million at March 31, 2019 and September 30, 2018, respectively. |
| |
(2) | March 31, 2019 and September 30, 2018. |
We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period. For the fair value of our derivative instruments and senior notes, see Note 3 and Note 7, respectively.
3. Derivative Financial Instruments
We use derivative instruments to manage risks caused by fluctuations in foreign exchange rates. The primary objective of our derivative instruments is to protect the value of foreign-currency-denominated receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their respective functional currencies. We principally utilize foreign currency forward contracts, which enable us to buy and sell foreign currencies in the future at fixed exchange rates and economically offset changes in foreign exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro, and Singapore dollar.
Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income (expense), net. The forward contracts are not designated as hedges and are marked to market through other income (expense), net. Fair value changes in the forward contracts help mitigate the changes in the value of the remeasured receivable and cash balances attributable to changes in foreign exchange rates. The forward contracts are short-term in nature and typically have average maturities at inception of less than three months.
The following tables summarize our outstanding foreign currency forward contracts, by currency, at March 31, 2019 and September 30, 2018:
|
| | | | | | | | | | | |
| March 31, 2019 |
| Contract Amount | | Fair Value |
| Foreign Currency | | US$ | | US$ |
| (In thousands) |
Sell foreign currency: | | | | | | |
Euro (EUR) | EUR | 8,400 |
| | $ | 9,443 |
| | $ | — |
|
Buy foreign currency: | | | | | | |
British pound (GBP) | GBP | 8,851 |
| | $ | 11,600 |
| | $ | — |
|
Singapore dollar (SGD) | SGD | 5,689 |
| | $ | 4,200 |
| | $ | — |
|
|
| | | | | | | | | | | |
| September 30, 2018 |
| Contract Amount | | Fair Value |
| Foreign Currency | | US$ | | US$ |
| (In thousands) |
Sell foreign currency: | | | | | | |
Euro (EUR) | EUR | 9,000 |
| | $ | 10,372 |
| | $ | — |
|
Buy foreign currency: | | | | | | |
British pound (GBP) | GBP | 8,598 |
| | $ | 11,200 |
| | $ | — |
|
Singapore dollar (SGD) | SGD | 9,580 |
| | $ | 7,000 |
| | $ | — |
|
The foreign currency forward contracts were entered into on March 31, 2019 and September 30, 2018, respectively; therefore, their fair value was $0 on each of these dates.
Gains 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 March 31, | | Six Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) |
Gains on foreign currency forward contracts | $ | 720 |
| | $ | 425 |
| | $ | 316 |
| | $ | 619 |
|
4. Goodwill and Intangible Assets
Amortization expense associated with our intangible assets are reflected as a separate operating expense caption — amortization of intangible assets — and are 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 March 31, | | Six Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) |
Completed technology | $ | 494 |
| | $ | 615 |
| | $ | 988 |
| | $ | 1,321 |
|
Other intangible assets | 1,009 |
| | 1,069 |
| | 2,017 |
| | 2,151 |
|
Total | $ | 1,503 |
| | $ | 1,684 |
| | $ | 3,005 |
| | $ | 3,472 |
|
Estimated future intangible asset amortization expense associated with intangible assets existing at March 31, 2019 was as follows (in thousands):
|
| | | |
Year Ending September 30, | |
2019 (excluding the six months ended March 31, 2019) | $ | 2,907 |
|
2020 | 3,619 |
|
2021 | 2,412 |
|
2022 | 2,267 |
|
2023 | 217 |
|
| $ | 11,422 |
|
The following table summarizes changes to goodwill during the six months ended March 31, 2019, both in total and as allocated to our segments:
|
| | | | | | | | | | | | | | | |
| Applications | | Scores | | Decision Management Software | | Total |
| (In thousands) |
Balance at September 30, 2018 | $ | 585,161 |
| | $ | 146,648 |
| | $ | 69,081 |
| | $ | 800,890 |
|
Addition from acquisitions | 980 |
| | — |
| | — |
| | 980 |
|
Foreign currency translation adjustment | (1,254 | ) | | — |
| | 80 |
| | (1,174 | ) |
Balance at March 31, 2019 | $ | 584,887 |
| | $ | 146,648 |
| | $ | 69,161 |
| | $ | 800,696 |
|
5. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at March 31, 2019 and September 30, 2018:
|
| | | | | | | |
| March 31, 2019 | | September 30, 2018 |
| (In thousands) |
Property and equipment | $ | 163,687 |
| | $ | 156,154 |
|
Less: accumulated depreciation and amortization | (118,927 | ) | | (107,317 | ) |
| $ | 44,760 |
| | $ | 48,837 |
|
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 March 31, 2019, we had $315.0 million in borrowings outstanding at a weighted average interest rate of 3.869%, of which $125.0 million was classified as a long-term liability and recorded in long-term debt within the accompanying condensed consolidated balance sheets. We were in compliance with all financial covenants under this credit facility as of March 31, 2019.
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 9.8 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 March 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”, and with the 2010 Senior Notes, the “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. The purchase agreements for the 2010 Senior Notes and the indenture for the 2018 Senior Notes contain certain covenants typical of unsecured obligations.
The following table presents the carrying amounts and fair values for the Senior Notes at March 31, 2019 and September 30, 2018:
|
| | | | | | | | | | | | | | | |
| March 31, 2019 | | September 30, 2018 |
| Carrying Amounts (*) | | Fair Value | | Carrying Amounts (*) | | Fair Value |
| (In thousands) |
The 2010 Senior Notes | 113,000 |
| | 114,386 |
| | 113,000 |
| | 114,413 |
|
The 2018 Senior Notes | 400,000 |
| | 412,000 |
| | 400,000 |
| | 404,000 |
|
Total | $ | 513,000 |
| | $ | 526,386 |
| | $ | 513,000 |
| | $ | 518,413 |
|
(*) Amounts exclusive of net debt issuance cost of $5.6 million and $6.1 million at March 31, 2019 and September 30, 2018, 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. Revenue from Contracts with Customers
Contracts with Customers
Our revenue is primarily derived from term-based or perpetual licensing of software and scoring products and solutions, and associated maintenance; SaaS subscription services; scoring and credit monitoring services for consumers; and professional services. For contracts with customers that contain various combinations of products and services, we evaluate whether the products or services are distinct — distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. Revenue is recognized when control of the promised goods or services is transferred to our customers.
License revenue is derived from contracts in which we grant our direct customers or distributors the right to deploy or resell our software and scoring products and solutions on-premises. Our software offerings often include a perpetual or term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately. The transaction price is either in the form of a fixed consideration with separate stated prices for license and maintenance, or a sales or usage-based royalty — sometimes subject to a guaranteed minimum — for the license and maintenance bundle. When the amount is in the form of a fixed consideration, including the guaranteed minimum in sales or usage-based royalty, license revenue from distinct on-premises license is recognized at the point in time when the software or scoring solution is made available to the customer or distributor. Any royalties not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as transactional revenue when the subsequent sales or usage occurs. Revenue allocated to maintenance is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits.
In addition to sales or usage-based royalty on our software and scoring products, transactional revenue is also derived from SaaS contracts in which we provide customers with access to and standard support for our software application either in the FICO® Analytic Cloud or Amazon Web Services (“AWS”), our primary cloud infrastructure provider, on a subscription basis. The transaction price typically includes a fixed consideration in the form of a guaranteed minimum that allows up to a certain level of usage and a variable consideration in the form of usage or transaction-based fees in excess of the minimum threshold; or usage or transaction-based variable amount not subject to a minimum threshold. We determined the nature of our SaaS arrangements is to provide continuous access to our hosted application in the cloud, i.e., a stand-ready obligation that comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). We estimate the total variable consideration at contract inception — subject to any constraints that may apply — and update the estimates as new information becomes available and recognize the amount ratably over the SaaS service period, unless we determine it is appropriate to allocate the variable amount to each distinct service period and recognize revenue as each distinct service period is performed.
We also derive transactional revenue from credit scoring and monitoring services that provide consumers access to their credit reports and enable them to monitor their credit. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. We determined the nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). Revenue from one-time or monthly subscription services is recognized during the period when service is performed. Revenue from annual subscription services is recognized ratably over the subscription period.