Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following: a business overview that provides a high level summary of our strategies and initiatives, financial results and bookings trends that affect our business; a more detailed analysis of our results of operations; our liquidity and capital resources, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments; and a summary of our critical accounting policies and estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Our MD&A should be read in conjunction with Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ from those referred to herein due to a number of factors, including but not limited to risks described in Item 1A, Risk Factors, in this Annual Report on Form 10-K.

BUSINESS OVERVIEW

Strategies and Initiatives

During fiscal 2016, our growth initiatives continued to generate significant free cash flow. We utilized our cash to enhance shareholder value through investments in long-term growth initiatives; acquisitions of relevant technologies and products that strengthen our portfolio and competitive position; and our share repurchase programs.

We continued to invest in our growth initiatives that expand our addressable markets. We expanded our traditional on-premises software into cloud-based solutions in our Applications and Decision Management Software (formerly “Tools”) segments to provide growth opportunities with customers that can benefit from the affordability and simplicity of these solutions. Our software solutions are available through the FICO® Analytic Cloud, and we are adding delivery via third-party cloud environments, which are offered through large vendors in other geographic locations across the world. We continue to offer our solutions on-premises for many customers who prefer to install and run our software in-house. In addition, we introduced the FICO® Decision Management Suite 2.0 (“DMS”), which provides an easy way for customers to evaluate, customize, deploy and scale state-of-the-art analytics. The DMS allows customers to quickly integrate our tools and components with their data, helping organizations of all sizes realize the promise of advanced analytics and decision management in a cost-effective, scalable cloud or on-premise solution.

For our Scores segment, our industry leading business-to-business FICO® Scores expanded further into the larger, faster growing U.S. consumer market. The FICO® Score Open Access program, which allows our participating clients to provide their customers with a free FICO® Score along with content to help them understand the FICO® Score their lender uses, continued its expansion during the current year. Through this program, we now have more than 180 million consumers with access to their free FICO® Score. The partnership agreement we launched in fiscal 2015 with Experian, a leading global information services provider, continued to accelerate during the current year. This partnership provides consumers the FICO® Score that lenders most commonly use in evaluating credit when determining applicant eligibility for new credit cards, car loans, mortgages or other lines of credit and can be accessed through Experian.com. We have partnered and continue to pursue additional partners, to distribute the FICO® Scores with their product offerings sold directly to consumers. In addition, we are pursuing opportunities to make the FICO® Scores available to third-parties for affinity, white-labeled programs to further penetrate and expand the markets where our scores are available.

We continued to make acquisitions that deliver solutions to the financial services industry and adjacent vertical industries. Our acquisition of Quadmetrics, a provider of enterprise security assessment analytics, accelerates our efforts to provide a suite of complementary cyber-related analytics solutions to market.

With our strong portfolio of products now in place and the accelerating growth we are experiencing in our cloud-based offerings, we shifted some of our resources to distribution in our expanded market. During fiscal 2016, we expanded our distribution and go-to-market for both the Applications and Decision Management Software segments, which include significant sales training and increasing sales resources to reach new market segments. In fiscal 2017, we expect to broaden our investment into product delivery, support and infrastructure operations.

We also returned significant cash to shareholders through our stock repurchase program. During fiscal 2016, we repurchased approximately 1.3 million shares at a total repurchase price of $138.4 million. As of September 30, 2016, we had $230.0 million remaining under our current stock repurchase program.

Overview of Financial Results

Total revenues for fiscal 2016 were $881.4 million, an increase of 5% from $838.8 million in fiscal 2015. Revenue in each of our segments increased, with our Scores segment the primary driver increasing by 16% in fiscal 2016 compared to fiscal 2015. Our Applications and Decision Management Software segments increased by 1% and 2% in fiscal 2016 compared to fiscal 2015, respectively. We derive a significant portion of revenue internationally, and 36% and 40% of total consolidated revenues were derived from clients outside the U.S. during fiscal 2016 and 2015, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 72% and 69% of our revenues were derived from within this industry during fiscal 2016 and 2015, 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 69% and 67% of our revenues during fiscal 2016 and 2015, respectively. Revenue fluctuations in our business are primarily driven by changes in the transactional volume and license fees.

Operating income for fiscal 2016 was $169.6 million, an increase of 23% from $137.5 million in fiscal 2015. Operating margin increased to 19% from 16%. The margin increase was primarily attributable to a higher percentage of revenues derived from our higher-margin products including revenues generated from our Experian agreement, no restructuring cost in the current year following the write-down of facilities in the prior year and a decrease in our professional services delivery cost. Net income increased 27% to $109.4 million in fiscal 2016 from $86.5 million in fiscal 2015 primarily due to the increase in operating margin, partially offset by lower income tax expense in fiscal 2015, largely driven by a favorable tax adjustment. Diluted earnings per share for fiscal 2016 was $3.39, an increase of 28% from $2.65 in fiscal 2015.

Bookings

Management regards the volume of bookings achieved as an important indicator of future revenues, but they are not comparable to nor a substitute for an analysis of our revenues. Bookings represent contracts signed in the current reporting period that generate current and future revenue streams. We estimate bookings as of the end of the period in which a contract is signed and initial booking estimates are not updated in future periods for changes between estimated and actual results. Our calculations have varying degrees of certainty depending on the revenue type and individual contract terms. They are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance, and estimates consider contract terms, knowledge of the marketplace and experience with our customers, among other factors. Actual revenue and the timing thereof could differ materially from our initial estimates.

Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service related that depend 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. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability for each revenue type.

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 estimates of 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 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.

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

BookingsBookings Yield (1)Number of Bookings over $1 MillionWeighted- Average Term (2)
(In millions)(months)
Quarter ended September 30, 2016$80.320%1337
Quarter ended September 30, 2015$105.321%1918
Year ended September 30, 2016$378.040%57NM(a)
Year ended September 30, 2015$314.745%41NM(a)
(1)Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.
(2)Weighted-average term of bookings measures the average term over which bookings are expected to be recognized as revenue.
(a)NM - Measure is not meaningful as our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results.

Transactional and maintenance bookings were 35% and 31% of total bookings for the years ended September 30, 2016 and 2015, respectively. Professional services bookings were 45% and 47% of total bookings for the years ended September 30, 2016 and 2015, respectively. License bookings were 20% and 22% of total bookings for the years ended September 30, 2016 and 2015, respectively.

RESULTS OF OPERATIONS

We are organized into the following three reportable segments: Applications, Scores and Decision Management Software. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. Comparative segment revenues, operating income, and related financial information for the years ended September 30, 2016, 2015 and 2014 are set forth in Note 17 to the accompanying consolidated financial statements.

Revenues

The following tables set forth certain summary information on a segment basis related to our revenues for fiscal 2016, 2015 and 2014:

Revenues Year Ended September 30,Period-to-Period ChangePeriod-to-Period Percentage Change
Segment2016201520142016 to 20152015 to 20142016 to 20152015 to 2014
(In thousands)(In thousands)
Applications$532,642$526,274$504,256$6,368$22,0181%4%
Scores241,059207,007186,46934,05220,53816%11%
Decision Management Software107,655105,50098,2602,1557,2402%7%
Total$881,356$838,781$788,98542,57549,7965%6%
Percentage of Revenues Year Ended September 30,
Segment201620152014
Applications61%63%64%
Scores27%25%24%
Decision Management Software12%12%12%
Total100%100%100%

Applications

Year Ended September 30,Period-to-Period ChangePeriod-to-Period Percentage Change
2016201520142016 to 20152015 to 20142016 to 20152015 to 2014
(In thousands)(In thousands)
Transactional and maintenance$328,472$320,596$313,316$7,876$7,2802%2%
Professional services138,775124,562121,10014,2133,46211%3%
License65,39581,11669,840(15,721)11,276(19)%16%
Total$532,642$526,274$504,2566,36822,0181%4%

Applications segment revenues increased $6.4 million in fiscal 2016 from 2015 primarily due to an $11.3 million increase in our originations solutions, a $10.9 million increase in our customer communication services, and a $5.1 million increase in our compliance solutions, partially offset by a $19.2 million decrease in our fraud solutions. The increase in originations solutions was primarily attributable to an increase in services revenue. The increase in customer communication services was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication market. The increase in compliance solutions was primarily attributable to our acquisition of TONBELLER in January 2015. The decrease in fraud solutions was primarily attributable to a decrease in software revenues mainly driven by decreased number of large multi-year license deals occurring during our fiscal 2016.

Applications segment revenues increased $22.0 million in fiscal 2015 from 2014 primarily due to an $11.1 million increase in our compliance solutions, a $10.0 million increase in our fraud solutions, and a $4.1 million increase in our customer communication services, partially offset by a $3.3 million decrease in our marketing solutions. The increase in compliance solutions was attributable to our acquisition of TONBELLER in January 2015. The increase in fraud solutions was primarily attributable to increased number of large multi-year license transactions during fiscal 2015, as well as an increase in transactional revenues driven by increased volumes. The increase in customer communication services was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication market. The decrease in marketing solutions was primarily attributable to terminations of several customers in fiscal 2015.

Scores

Year Ended September 30,Period-to-Period ChangePeriod-to-Period Percentage Change
2016201520142016 to 20152015 to 20142016 to 20152015 to 2014
(In thousands)(In thousands)
Transactional and maintenance$233,655$200,426$178,023$33,229$22,40317%13%
Professional services4,1852,9012,7841,28411744%4%
License3,2193,6805,662(461)(1,982)(13)%(35)%
Total$241,059$207,007$186,46934,05220,53816%11%

Scores segment revenues increased $34.1 million in fiscal 2016 from 2015 due to a $17.8 million increase in our business-to-consumer services revenues and a $16.3 million increase in our business-to-business scores revenue. The increase in business-to-consumer services was primarily attributable to revenue generated from the agreement with Experian that launched in December 2014 and made FICO® Scores available to consumers on Experian.com. The increase in business-to-business scores was primarily attributable to an increase in our transactional scores driven by new originations, account management and prescreen.

Scores segment revenues increased $20.5 million in fiscal 2015 from 2014 due to a $20.6 million increase in our business-to-consumer services revenues, partially offset by a decrease of $0.1 million in our business-to-business scores revenue. The increase in business-to-consumer services was primarily attributable to revenue generated from the agreement with Experian that launched in December 2014 and made FICO® Score available to consumers on Experian.com. The decrease in our business-to-business scores was primarily attributable to decreased software revenue related to our Global FICO® Score, and a royalty true-up during fiscal 2014, partially offset by an increase in our transactional scores driven by new originations and prescreen.

During fiscal 2016, 2015 and 2014, revenues generated from our agreements with Equifax, TransUnion and Experian, collectively accounted for approximately 19%, 16% and 15%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.

Decision Management Software

Year Ended September 30,Period-to-Period ChangePeriod-to-Period Percentage Change
2016201520142016 to 20152015 to 20142016 to 20152015 to 2014
(In thousands)(In thousands)
Transactional and maintenance$43,792$43,210$36,224$582$6,9861%19%
Professional services26,77824,31025,9502,468(1,640)10%(6)%
License37,08537,98036,086(895)1,894(2)%5%
Total$107,655$105,500$98,2602,1557,2402%7%

Decision Management Software segment revenues increased $2.2 million in fiscal 2016 from 2015 primarily attributable to an increase in services revenue, largely due to an increase in our FICO® Decision Management Platform product partially offset by a decrease in our FICO® Blaze Advisor product.

Decision Management Software segment revenues increased $7.2 million in fiscal 2015 from 2014 primarily due to an increase in our FICO® Decision Management Platform license sales as well as related services and transactional revenues, a one-time settlement with a customer related to under-reported royalties from a multi-year period, as well as increased transactional revenues from our InfoCentricity acquisition in April 2014. The increase was partially offset by a decrease in optimization tools primarily attributable to decreased license sales on our FICO® Decision Optimizer and FICO® Xpress Optimization products.

Operating Expenses and Other Income (Expense), Net

The following tables set forth certain summary information related to our consolidated statements of income and comprehensive income for the fiscal 2016, 2015 and 2014:

Period-to-Period ChangePeriod-to-Period Percentage Change
Year Ended September 30,2016 to 20152015 to 20142016 to 20152015 to 2014
201620152014
(In thousands, except employees)(In thousands, except employees)
Revenues$881,356$838,781$788,985$42,575$49,7965%6%
Operating expenses:
Cost of revenues265,173270,535249,281(5,362)21,254(2)%9%
Research and development103,66998,82483,4354,84515,3895%18%
Selling, general and administrative328,940300,002278,20328,93821,79910%8%
Amortization of intangible assets13,98213,67311,9173091,7562%15%
Restructuring and acquisition-related—18,2424,281(18,242)13,961(100)%326%
Total operating expenses711,764701,276627,11710,48874,1591%12%
Operating income169,592137,505161,86832,087(24,363)23%(15)%
Interest expense, net(26,633)(29,150)(28,550)2,517(600)(9)%2%
Other income (expense), net1,610883(187)7271,07082%(572)%
Income before income taxes144,569109,238133,13135,331(23,893)32%(18)%
Provision for income taxes35,12122,73638,25212,385(15,516)54%(41)%
Net income$109,448$86,502$94,87922,946(8,377)27%(9)%
Number of employees at fiscal year-end3,0882,8032,64628515710%6%
Percentage of Revenues Year Ended September 30,
201620152014
Revenues100%100%100%
Operating expenses:
Cost of revenues30%32%31%
Research and development12%12%11%
Selling, general and administrative37%36%35%
Amortization of intangible assets2%2%1%
Restructuring and acquisition-related—%2%1%
Total operating expenses81%84%79%
Operating income19%16%21%
Interest expense, net(3)%(3)%(4)%
Income before income taxes16%13%17%
Provision for income taxes4%3%5%
Net income12%10%12%

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; internal network hosting costs; software royalty fees; and credit bureau data and processing services.

Cost of revenues as a percentage of revenues decreased to 30% during fiscal year 2016 from 32% during fiscal 2015. The $5.4 million decrease was primarily attributable to a $12.9 million decrease in outside services, partially offset by a $4.6 million increase in personnel and labor costs and a $2.4 million increase in direct materials cost. The decrease in outside services was primarily attributable to a decrease in our billable consulting projects utilizing temporary resources. The increase in personnel and labor costs was primarily attributable to an increase in incentive cost and share based compensation cost, partially offset by a decrease in professional services delivery cost. The increase in direct materials was primarily attributable to an increase in telecommunications cost associated with the increase in our customer communications services subscription based revenue.

Cost of revenues as a percentage of revenues increased to 32% during fiscal year 2015 from 31% during fiscal 2014. The $21.3 million increase was primarily attributable to an $8.8 million increase in outside services, a $7.9 million increase in direct materials, and a $6.4 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 direct materials was primarily attributable to an increase in third-party royalties cost associated with increased software license sales, as well as an increase in third-party data cost associated with the increase in our business-to-consumer subscription based revenue. The increase in personnel and labor costs was primarily attributable to an increase in professional services delivery cost, including a nonrecurring charge related to a large implementation project; an increase in salaries and benefits cost as a result of our increased headcount; and an increase in stock based compensation cost driven by the increase in our stock price, partially offset by a decrease in incentive cost.

In fiscal 2017, we expect cost of revenues as a percentage of revenues will be consistent with or slightly higher than those incurred during fiscal 2016.

Research and Development

Research and development expenses include the personnel and related overhead costs incurred in the development of new products and services, including the research of mathematical and statistical models and the development of new versions of our products.

The fiscal year 2016 over 2015 increase of $4.8 million in research development expenses was primarily attributable to a $6.7 million increase in personnel and labor costs, partially offset by a $2.1 million decrease in outside services. The increase in personnel and labor costs was primarily driven by an increase in incentive cost and our continued investment in the areas of cloud computing and software-as-a-service (“SaaS”), as well as several new products primarily in the Decision Management Software segment. The decrease in outside services was primarily attributable to fewer internal projects utilizing temporary resources. Research and development expenses as a percentage of revenues were 12% during fiscal 2016, consistent with those incurred during fiscal 2015.

Research and development expenses as a percentage of revenues increased to 12% during fiscal 2015 from 11% during fiscal 2014. The $15.4 million increase was attributable to a $15.3 million increase in personnel and labor costs, primarily driven by our continued investment in the areas of cloud computing and SaaS, as well as several new products primarily in the Decision Management Software segment.

In fiscal 2017, we expect that research and development expenditures as a percentage of revenues will be consistent with or slightly higher than those incurred during fiscal 2016.

Selling, General and Administrative

Selling, general and administrative expenses consist principally of employee salaries 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 37% during fiscal 2016 from 36% during fiscal 2015. The $28.9 million increase was primarily attributable to a $23.5 million increase in labor and personnel costs and a $1.6 million increase in marketing expenses. The increase in personnel and costs was primarily attributable to an increase in salaries and benefits as a result of our increased headcount, an increase in incentive cost, and an increase in stock-based compensation cost primarily related to the reduction in our estimated forfeiture rate as well as higher stock price. The increase in marketing expenses was primarily attributable to our investment in expanding and refining our distribution capabilities.

Selling, general and administrative expenses as a percentage of revenues increased to 36% during fiscal 2015 from 35% during fiscal 2014. The $21.8 million increase was primarily attributable to a $16.4 million increase in personnel and labor costs, a $2.0 million increase in allocated facilities and infrastructure costs, and a $1.7 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, an increase in commissions cost as a result of increased revenues, as well as an increase in stock-based compensation cost driven by the increase in our stock price. The increase in allocated facilities and infrastructure costs was primarily due to increased resource requirement as a result of our recent acquisitions. The increase in marketing expenses was primarily attributable to a company-wide marketing event during fiscal 2015.

In fiscal 2017, we expect that selling, general and administrative expenses as a percentage of revenues will be consistent with those incurred during fiscal 2016.

Amortization of Intangible Assets

Amortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions. Our finite-lived intangible assets consist primarily of completed technology and customer contracts and relationships, which are being amortized using the straight-line method over periods ranging from five to fifteen years.

The fiscal 2016 over 2015 increase in amortization expense of $0.3 million was primarily attributable to the addition of intangible assets associated with our TONBELLER acquisition in January 2015, partially offset by certain assets associated with our Entiera acquisition becoming fully amortized in May 2016.

The fiscal 2015 over 2014 increase in amortization expense of $1.7 million was primarily attributable to the addition of intangible assets associated with our TONBELLER acquisition in January 2015.

In fiscal 2017, we expect amortization expense will be slightly lower than that incurred in 2016.

Restructuring and Acquisition-Related

There were no restructuring or acquisition-related expenses incurred during fiscal 2016.

During fiscal 2015, we incurred net charges totaling $17.5 million consisting of $13.6 million in facilities charges associated with vacating excess leased space in Roseville, Minnesota and San Rafael, California, and $3.9 million in severance charges due to the elimination of 97 positions throughout the company. Cash payments for all the facilities charges will be paid by the end of our fiscal 2020. Cash payments for all the severance costs were paid by the end of the third quarter of our fiscal 2016. We also incurred $0.7 million in acquisition-related cost primarily associated with our TONBELLER acquisition.

In fiscal 2014, we incurred net charges totaling $4.1 million consisting of $0.2 million in facilities charges and $3.9 million in severance charges due to the elimination of 88 positions throughout the Company. Cash payments for all the restructuring charges were paid by the end of the second quarter of our fiscal 2015. We also incurred $0.2 million in acquisition-related cost primarily associated with our InfoCentricity acquisition.

The following table sets forth certain summary information on restructuring expenses for the fiscal 2016, 2015 and 2014:

Year Ended September 30,
201620152014
(In thousands)
Severance costs$—$3,908$3,963
Lease exit costs and other adjustments—13,571167
Total restructuring expense$—$17,479$4,130

Interest Expense, Net

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

The fiscal 2016 over 2015 decrease in net interest expense of $2.5 million was primarily attributable to the $71.0 million principal payment in May 2015 on the senior notes issued in May 2008 and the $60.0 million principal payment in July 2016 on the senior notes issued in July 2010, resulting in lower average debt balances for fiscal 2016 for both senior notes, partially offset by a higher average balance on our revolving line of credit.

The fiscal 2015 over 2014 increase in net interest expense of $0.6 million was primarily attributable to a higher average balance on our revolving line of credit, partially offset by the $71.0 million principal payment in May 2015 on the senior notes issued in May 2008 resulting in lower average debt balance for fiscal 2015.

In fiscal 2017, we expect net interest expense will be lower than what we incurred during fiscal 2016 due to the $60.0 million principal payment made in July 2016 and the $72.0 million principal payment due in July 2017 on our senior notes issued in July 2010.

Other Income (Expense), Net

Other income (expense), net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from re-measurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.

The fiscal 2016 over 2015 change in other income (expense), net of $0.7 million was primarily attributable to an increase in foreign currency exchange gain during fiscal 2016.

The fiscal 2015 over 2014 change in other income (expense), net of $1.1 million was primarily attributable to a decrease in foreign currency exchange loss during fiscal 2015.

Provision for Income Taxes

Our effective tax rates were 24.3%, 20.8% and 28.7% in fiscal 2016, 2015 and 2014, respectively.

The increase in our effective tax rate in fiscal 2016 compared to 2015 was primarily due to a higher percentage of revenue in higher taxing jurisdictions during the current year, and the favorable settlement of the fiscal 2006-2009 state audits and the 2010 foreign transfer pricing assessment in fiscal 2015, partially offset by higher foreign tax credits, research credits and domestic production deduction credits in fiscal 2016.

The decrease in our effective tax rate in fiscal 2015 compared to 2014 was due primarily to the favorable settlement of the fiscal 2006-2009 state audits and the favorable settlement of the 2010 foreign transfer pricing assessment, as well as the December 2014 reenactment of the calendar 2014 U.S. Federal Research and Development Credit, which resulted in a catch up adjustment for the R&D credit during fiscal 2015.

As of September 30, 2016, we have not made a provision for U.S. or additional foreign withholding taxes on approximately $45.3 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries. We intend to reinvest the earnings of its non-U.S. subsidiaries in those operations indefinitely, except where we are able to repatriate these earnings to the United States without material incremental tax provision. The determination and estimation of the future income tax consequences in all relevant taxing jurisdictions involves the application of highly complex tax laws in the countries involved, particularly in the United States, and is based on our tax profile in the year of earnings repatriation. Accordingly, it is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

Operating Income

The following tables set forth certain summary information on a segment basis related to our operating income for the fiscal 2016, 2015 and 2014:

Year Ended September 30,Period-to-Period ChangePeriod-to-Period Percentage Change
Segment2016201520142016 to 20152015 to 20142016 to 20152015 to 2014
(In thousands)(In thousands)
Applications$168,271$159,608$169,494$8,663$(9,886)5%(6)%
Scores185,084151,214142,28233,8708,93222%6%
Decision Management Software(3,660)(6,350)4,2032,690(10,553)(42)%(251)%
Unallocated corporate expenses(110,612)(89,744)(101,551)(20,868)11,80723%(12)%
Total segment operating income239,083214,728214,42824,35530011%—%
Unallocated share-based compensation(55,509)(45,308)(36,362)(10,201)(8,946)23%25%
Unallocated amortization expense(13,982)(13,673)(11,917)(309)(1,756)2%15%
Unallocated restructuring and acquisition-related—(18,242)(4,281)18,242(13,961)(100)%326%
Operating income$169,592$137,505$161,86832,087(24,363)23%(15)%

Applications

Year Ended September 30,Percentage of Revenues
201620152014201620152014
(In thousands)
Segment revenues$532,642$526,274$504,256100%100%100%
Segment operating expenses(364,371)(366,666)(334,762)(68)%(70)%(66)%
Segment operating income$168,271$159,608$169,49432%30%34%

Scores

Year Ended September 30,Percentage of Revenues
201620152014201620152014
(In thousands)
Segment revenues$241,059$207,007$186,469100%100%100%
Segment operating expenses(55,975)(55,793)(44,187)(23)%(27)%(24)%
Segment operating income$185,084$151,214$142,28277%73%76%

Decision Management Software

Year Ended September 30,Percentage of Revenues
201620152014201620152014
(In thousands)
Segment revenues$107,655$105,500$98,260100%100%100%
Segment operating expenses(111,315)(111,850)(94,057)(103)%(106)%(96)%
Segment operating income (loss)$(3,660)$(6,350)$4,203(3)%(6)%4%

The increase in operating income between fiscal 2016 and 2015 of $32.1 million was attributable to a $42.7 million increase in segment revenues, an $18.2 million decrease in restructuring and acquisition-related expenses and a $2.6 million decrease in segment operating expenses, partially offset by a $20.9 million increase in unallocated corporate expenses, a $10.2 million increase in share-based compensation expense and a $0.3 million increase in amortization expense. The increase in corporate expenses was primarily driven by a higher incentive cost. The increase in share-based compensation cost was primarily related to the reduction in our estimated forfeiture rate as well as higher stock price.

At the segment level, the $24.4 million increase in segment operating income was the result of an $8.7 million increase in our Applications segment operating income, a $33.9 million increase in our Scores segment operating income and a $2.7 million decrease in our Decision Management Software segment operating loss, partially offset by a $20.9 million increase in unallocated corporate expenses.

The $8.7 million increase in Applications segment operating income was attributable to a $6.4 million increase in segment revenues and a $2.3 million decrease in segment operating expenses. Segment operating income as a percentage of segment revenues for Applications increased to 32% from 30% primarily due to improved efficiency in our professional services operations, partially offset by a decrease in sales of our higher-margin software products.

The $33.9 million increase in Scores segment operating income was attributable to a $34.1 million increase in segment revenues, partially offset by a $0.2 million increase in segment operating expenses. Segment operating income as a percentage of segment revenues for Scores increased to 77% from 73% mainly due to an increase in sales of our higher-margin score products.

The $2.7 million decrease in Decision Management Software segment operating loss was attributable to a $2.2 million increase in segment revenues and a $0.5 million decrease in segment operating expenses. Segment operating margin for Decision Management Software improved to a negative 3% from a negative 6% mainly due to improved efficiency in our professional services operations.

The decrease in operating income between fiscal 2015 and 2014 of $24.4 million was attributable to a $61.3 million increase in segment operating expenses, a $14.0 million increase in restructuring and acquisition-related expenses, an $8.9 million increase in share-based compensation expense and a $1.8 million increase in amortization expense, partially offset by a $49.8 million increase in segment revenues and an $11.8 million decrease in unallocated corporate expenses.

At the segment level, the $0.3 million increase in segment operating income was the result of an $11.8 million decrease in unallocated corporate expenses and an $8.9 million increase in our Scores segment, partially offset by a $10.5 million decrease in our Decision Management Software segment and a $9.9 million decrease in our Applications segment.

The $9.9 million decrease in Applications segment operating income was attributable to a $31.9 million increase in segment operating expenses, partially offset by a $22.0 million increase in segment revenues. Segment operating income as a percentage of segment revenues for Applications decreased to 30% from 34% 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, partially offset by an increase in sales of our higher-margin software products .

The $8.9 million increase in Scores segment operating income was attributable to a $20.5 million increase in segment revenues, partially offset by an $11.6 million increase in segment operating expenses. Segment operating income as a percentage of segment revenues for Scores decreased to 73% from 76% mainly due to a decrease in sales of our higher-margin software products, an increase in salaries and benefits cost as a result of our increased headcount, and a nonrecurring charge in third-party data cost. In addition, the margin was positively impacted by an increase in our higher-margin revenues generated from the Experian agreement.

The $10.5 million decrease in Decision Management Software segment operating income (loss) was attributable to a $17.8 million increase in segment operating expenses, partially offset by a $7.3 million increase in segment revenues. Segment operating income as a percentage of segment revenues for Decision Management Software was a negative 6% for fiscal 2015 compared to a positive 4% for fiscal 2014 mainly 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 Decision Management Software segment, as well as an increase in professional services delivery cost, partially offset by an increase in sales of higher-margin software products.

The $11.8 million decrease in unallocated corporate expenses was primarily attributable to a decrease in incentive cost, as well as a decrease in certain corporate charges including bad debt.

CAPITAL RESOURCES AND LIQUIDITY

Outlook

As of September 30, 2016, we had $75.9 million in cash and cash equivalents which included $63.1 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 $72.0 million principal payment due in July 2017 on our senior notes issued in July 2010. Under our current 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

Year Ended September 30,
201620152014
(In thousands)
Cash provided by (used in):
Operating activities$185,231$132,977$175,034
Investing activities(27,615)(81,916)(19,843)
Financing activities(164,978)(58,635)(130,391)
Effect of exchange rate changes on cash(2,832)(11,381)(2,903)
Increase (decrease) in cash and cash equivalents$(10,194)$(18,955)$21,897

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 totaled $185.2 million in fiscal 2016 compared to $133.0 million in fiscal 2015. The $52.2 million increase was mainly attributable to a $22.9 million increase in net income and a $22.9 million decrease in income tax payments.

Net cash provided by operating activities totaled $133.0 million in fiscal 2015 compared to $175.0 million in fiscal 2014. The $42.0 million decrease was mainly attributable to a $27.6 million decrease caused by timing of receipts and payments in our ordinary course of business, a $15.2 million increase in payment associated with our accrued incentive from prior year and an $11.4 million increase in our income tax payments.

Cash Flows from Investing Activities

Net cash used in investing activities totaled $27.6 million in fiscal 2016 compared to $81.9 million in fiscal 2015. The $54.3 million decrease was attributable to a $51.3 million decrease in net cash used for acquisitions and a $3.0 million decrease in net cash used for purchases of property and equipment.

Net cash used in investing activities totaled $81.9 million in fiscal 2015 compared to $19.8 million in fiscal 2014. The $62.1 million increase was attributable to a $49.7 million increase in net cash used for acquisitions and a $12.4 million increase in net cash used for purchases of property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $165.0 million in fiscal 2016 compared to $58.6 million in fiscal 2015. The $106.4 million increase was primarily due to a $110.0 million decrease in proceeds, net of payments from our revolving line of credit and a $10.5 million increase in taxes paid related to net share settlement of equity awards, partially offset by an $11.0 million decrease in payment on our senior notes.

Net cash used in financing activities totaled $58.6 million in fiscal 2015 compared to $130.4 million in fiscal 2014. The $71.8 million decrease was primarily due to an $86.3 million decrease in common stock repurchased and a $49.0 million increase in proceeds, net of payments from our revolving line of credit, partially offset by a $63.0 million increase in payment on our senior notes.

Repurchases of Common Stock

In July 2016, our Board of Directors approved a stock repurchase program following the termination of the previously authorized 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. As of September 30, 2016, we had $230.0 million remaining under this authorization. During fiscal 2016, 2015 and 2014, we expended $138.4 million, $130.7 million and $214.9 million, respectively, under this and previously authorized stock repurchase programs.

Dividends

We paid quarterly dividends of $0.02 per share during each of fiscal 2016, 2015 and 2014. Our dividend rate is set by the Board of Directors on a quarterly basis taking into account a variety of factors, including among others, our operating results and cash flows, general economic and industry conditions, our obligations, changes in applicable tax laws and other factors deemed relevant by the Board. Although we expect to continue to pay dividends at the current rate, our dividend rate is subject to change from time to time based on the 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 September 30, 2016, we had $255.0 million in borrowings outstanding at a weighted average interest rate of 1.661% and were in compliance with all financial covenants under this credit facility.

Senior Notes

In May 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 five to ten years. The weighted average interest rate is 7.2% and the weighted average maturity is 10.0 years for the remaining 2008 Senior Notes. In addition, in July 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 six to ten years. The weighted average interest rate is 5.4% and the weighted average maturity is 8.7 years for the remaining 2010 Senior Notes. 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 September 30, 2016, the carrying value of the Senior Notes was $316.0 million and we were in compliance with all financial covenants under these purchase agreements.

Contractual Obligations

The following table presents a summary of our contractual obligations at September 30, 2016:

Year Ended September 30,ThereafterTotal
20172018201920202021
(In thousands)
Senior notes (1)$72,000$131,000$28,000$85,000$—$—$316,000
Interest due on debt obligations (2)19,30315,6756,2694,752——45,999
Operating lease obligations22,06920,89017,8069,5416,00413,96690,276
Unrecognized tax benefits (3)——————6,799
Total commitments$113,372$167,565$52,075$99,293$6,004$13,966$459,074
(1)Represents the unpaid principal amount of the Senior Notes.
(2)Represents interest payments on the Senior Notes.
(3)Represents unrecognized tax benefits related to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the section of the table showing payment by fiscal year.

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 consolidated financial statements:

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 significant variances between our estimates and actual reported volumes in the past and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we were unable to reasonably estimate transaction volumes in the future, revenue may be deferred until actual customer data 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 significant 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.

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. Historically, there have been no significant changes in our ESP used in allocation of arrangement consideration. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.

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 consolidated statements of income and comprehensive income.

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and contingent consideration, where applicable. If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, we will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial position.

Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i) future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and (iii) the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Historically, there have been no significant changes in our estimates or assumptions. To the extent a significant acquisition is made during a fiscal year, as appropriate we will expand the discussion to include specific assumptions and inputs used to determine the fair value of our acquired intangible assets.

In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our consolidated statements of income and comprehensive income and could have a material impact on our results of operations and financial position. Historically, there have been no significant changes in our valuation allowances or uncertain tax positions as it relates to business combinations. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.

Goodwill, Acquisition Intangibles and Other Long-Lived Assets - Impairment Assessment

Goodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations. We assess goodwill for impairment for each of our reporting units on an annual basis during the fourth quarter using a July 1 measurement date unless circumstances require a more frequent measurement. We have determined that our reporting units are the same as our reportable segments. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we would bypass the two-step impairment test. Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and the overall financial performance of the reporting units. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting units to guideline publicly-traded companies. These methods require estimates of our future revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. 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.

For fiscal 2016 and 2015, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment. After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not that the fair value of any of our reporting units was less their carrying amounts. Consequently, we did not perform a step one quantitative analysis in fiscal 2016 and 2015. For fiscal 2014, we elected to proceed directly to the step one quantitative analysis rather than perform the step zero qualitative assessment. There was a substantial excess of fair value over carrying value for each of our reporting units and we determined goodwill was not impaired for any of our reporting units.

Our intangible assets that have finite useful lives and other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of our intangible assets or other long-lived assets could occur. We review the estimated remaining useful lives of our acquired intangible assets at each reporting period. A reduction in our estimate of remaining useful lives, if any, could result in increased annual amortization expense in future periods. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2016, 2015 and 2014.

As discussed above, while we believe that the assumptions and estimates utilized were appropriate based on the information available to management, different assumptions, judgments and estimates could materially affect our impairment assessments for our goodwill, acquired intangibles with finite lives and other long-lived assets. Historically, there have been no significant changes in our estimates or assumptions that would have had a material impact for our goodwill or intangible assets impairment assessment. We believe our projected operating results and cash flows would need to be significantly less favorable to have a material impact on our impairment assessment. However, based upon our historical experience with operations, we do not believe there is a reasonable likelihood of a significant change in our projections.

Share-Based Compensation

We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years). We use the Black-Scholes valuation model to determine the fair value of our stock options and a Monte Carlo valuation model to determine the fair value of our market share units. Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, expected dividend yield, employee turnover rates and employee stock option exercise behaviors. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions. See Note 14 to the accompanying consolidated financial statements for further discussion of our share-based employee benefit plans.

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 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 more likely than not, 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 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; our ability to carry back tax attributes to prior years; 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 have historically had minimal changes in our valuation allowances related to deferred tax assets, as described in Note 13 to the accompanying consolidated financial statements.

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 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. Historically, settlements related to our unrecognized tax benefits have been minimal as described in Note 13 to the accompanying consolidated financial statements.

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. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 applies to all entities that present a classified statement of financial position. ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. ASU 2015-17 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. We elected to early adopt the standard prospectively as of March 31, 2016, which did not have a significant impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is effective for fiscal years and interim periods beginning after December 15, 2017, which means it will be effective for our fiscal year beginning October 1, 2018. ASU 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. Early adoption is permitted in the first interim period of an entity's annual financial statements. We are currently evaluating the timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016, which means it will be effective for our fiscal year beginning October 1, 2017. Early adoption is permitted. We plan to early adopt ASU 2016-09 on a prospective basis in the first quarter of our fiscal 2017 (the quarter ended December 31, 2016), which is expected to have an impact on the recording of excess tax benefits and deficiencies in our consolidated balance sheets and consolidated statements of income and comprehensive income, as well as our operating and financing cash flows on our consolidated statements of cash Flows. The magnitude of such impact is dependent upon our future grants of stock-based compensation, our future stock price in relation to the fair value of awards on grant date and the exercise behavior of the our stock option holders.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 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 timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.

In May 2014, the FASB 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. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods), which means it will be effective for our fiscal year beginning October 1, 2018. Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). 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.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance” (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015, which means it is effective for our fiscal year beginning October 1, 2016. Early adoption was permitted. We do not believe that adoption of ASU 2015-03 will have a significant impact on our consolidated financial statements.

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