Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Fair Isaac Corporation

San Jose, California

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Fair Isaac Corporation and subsidiaries (the "Company") as of September 30, 2018 and 2017, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2018, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.

Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP
San Diego, CA
November 9, 2018
We have served as the Company’s auditor since 2004.

FAIR ISAAC CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,
	2018				2017
	(In thousands, except par value data)
Assets
Current assets:
Cash and cash equivalents	$	90,023			$	105,618
Accounts receivable, net	208,865				168,586
Prepaid expenses and other current assets	39,624				36,727
Total current assets	338,512				310,931
Marketable securities	18,059				13,791
Other investments	1,697				11,724
Property and equipment, net	48,837				40,703
Goodwill	800,890				804,414
Intangible assets, net	14,536				21,185
Deferred income taxes	20,117				47,204
Other assets	12,431				5,668
Total assets	$	1,255,079			$	1,255,620
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	20,251			$	19,510
Accrued compensation and employee benefits	84,292				77,610
Other accrued liabilities	30,457				32,104
Deferred revenue	52,215				55,431
Current maturities on debt	235,000				142,000
Total current liabilities	422,215				326,655
Long-term debt	528,944				462,801
Other liabilities	40,183				39,627
Total liabilities	991,342				829,083
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 29,015 and 30,243 shares outstanding at September 30, 2018 and September 30, 2017, respectively)	290				302
Paid-in-capital	1,211,051				1,195,431
Treasury stock, at cost (59,842 and 58,614 shares at September 30, 2018 and September 30, 2017, respectively)	(2,612,007		)		(2,301,097		)
Retained earnings	1,740,810				1,598,395
Accumulated other comprehensive loss	(76,407		)		(66,494		)
Total stockholders’ equity	263,737				426,537
Total liabilities and stockholders’ equity	$	1,255,079			$	1,255,620

See accompanying notes.

FAIR ISAAC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Year Ended September 30,
	2018				2017				2016
	(In thousands, except per share data)
Revenues:
Transactional and maintenance	$	766,059			$	652,660			$	605,919
Professional services	176,804				179,569				169,738
License	89,612				99,940				105,699
Total revenues	1,032,475				932,169				881,356
Operating expenses:
Cost of revenues (1)	310,699				287,123				265,173
Research and development	128,383				110,870				103,669
Selling, general and administrative (1)	380,362				339,796				328,940
Amortization of intangible assets (1)	6,594				12,709				13,982
Restructuring and acquisition-related	—				4,471				—
Total operating expenses	826,038				754,969				711,764
Operating income	206,437				177,200				169,592
Interest expense, net	(31,311		)		(25,790		)		(26,633		)
Other income (expense), net	12,884				(86		)		1,610
Income before income taxes	188,010				151,324				144,569
Provision for income taxes	45,595				23,068				35,121
Net income	142,415				128,256				109,448
Other comprehensive income (loss):
Foreign currency translation adjustments	(9,913		)		10,517				(26,296		)
Comprehensive income	$	132,502			$	138,773			$	83,152
Basic earnings per share	$	4.79			$	4.16			$	3.52
Shares used in computing basic earnings per share	29,711				30,862				31,129
Diluted earnings per share	$	4.57			$	3.98			$	3.39
Shares used in computing diluted earnings per share	31,180				32,245				32,308

(1)	Cost of revenues and selling, general and administrative expenses exclude the amortization of intangible assets. See Note 7.

See accompanying notes.

FAIR ISAAC CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended September 30, 2018, 2017 and 2016

(In thousands, except per share data)

	Common Stock																			Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
	Shares			Par Value				Paid-in- Capital				Treasury Stock				Retained Earnings
Balance at September 30, 2015	31,290			$	313			$	1,156,626			$	(2,033,644	)		$	1,364,418			$	(50,715	)		$	436,998
Share-based compensation	—			—				55,509				—				—				—				55,509
Issuance of treasury stock under employee stock plans	980			10				(47,406		)		35,269				—				—				(12,127		)
Tax effect from share-based payment arrangements	—			—				24,184				—				—				—				24,184
Repurchases of common stock	(1,335	)		(14		)		—				(138,385		)		—				—				(138,399		)
Dividends paid	—			—				—				—				(2,489		)		—				(2,489		)
Net income	—			—				—				—				109,448				—				109,448
Foreign currency translation adjustments	—			—				—				—				—				(26,296		)		(26,296		)
Balance at September 30, 2016	30,935			309				1,188,913				(2,136,760		)		1,471,377				(77,011		)		446,828
Share-based compensation	—			—				61,222				—				—				—				61,222
Issuance of treasury stock under employee stock plans	774			8				(54,704		)		28,938				—				—				(25,758		)
Repurchases of common stock	(1,466	)		(15		)		—				(193,275		)		—				—				(193,290		)
Dividends paid	—			—				—				—				(1,238		)		—				(1,238		)
Net income	—			—				—				—				128,256				—				128,256
Foreign currency translation adjustments	—			—				—				—				—				10,517				10,517
Balance at September 30, 2017	30,243			302				1,195,431				(2,301,097		)		1,598,395				(66,494		)		426,537
Share-based compensation	—			—				74,814				—				—				—				74,814
Issuance of treasury stock under employee stock plans	633			7				(59,194		)		26,006				—				—				(33,181		)
Repurchases of common stock	(1,861	)		(19		)		—				(336,916		)		—				—				(336,935		)
Net income	—			—				—				—				142,415				—				142,415
Foreign currency translation adjustments	—			—				—				—				—				(9,913		)		(9,913		)
Balance at September 30, 2018	29,015			$	290			$	1,211,051			$	(2,612,007	)		$	1,740,810			$	(76,407	)		$	263,737

See accompanying notes.

FAIR ISAAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended September 30,
	2018				2017				2016
	(In thousands)
Cash flows from operating activities:
Net income	$	142,415			$	128,256			$	109,448
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	30,182				36,214				31,633
Share-based compensation	74,814				61,222				55,509
Deferred income taxes	25,729				(6,049		)		(26,007		)
Tax effect from share-based payment arrangements	—				—				24,184
Provision of doubtful accounts	623				1,640				2,011
Net gain on marketable securities	(1,449		)		—				—
Gain on sale of cost-method investment	(10,000		)		—				—
Net loss on sales of property and equipment	231				14				6
Changes in operating assets and liabilities:
Accounts receivable	(42,403		)		(1,265		)		(18,225		)
Prepaid expenses and other assets	(8,504		)		(7,115		)		12,848
Accounts payable	843				(2,027		)		564
Accrued compensation and employee benefits	7,352				6,464				17,079
Other liabilities	6,416				(683		)		(4,282		)
Deferred revenue	(3,197		)		8,973				5,500
Net cash provided by operating activities	223,052				225,644				210,268
Cash flows from investing activities:
Purchases of property and equipment	(31,299		)		(19,828		)		(21,969		)
Proceeds from sales of marketable securities	3,230				—				—
Purchases of marketable securities	(6,050		)		—				—
Proceeds from sale of cost-method investment	20,000				—				—
Cash paid for acquisitions, net of cash acquired	—				—				(5,683		)
Distribution from (purchase of) cost-method investment	—				(777		)		37
Net cash used in investing activities	(14,119		)		(20,605		)		(27,615		)
Cash flows from financing activities:
Proceeds from revolving line of credit	427,000				190,000				122,000
Payments on revolving line of credit	(531,000		)		(84,000		)		(99,000		)
Proceeds from issuance of senior notes	400,000				—				—
Payments on senior notes	(131,000		)		(72,000		)		(60,000		)
Payments on debt issuance costs	(7,849		)		—				—
Proceeds from issuance of treasury stock under employee stock plans	11,023				14,474				17,828
Taxes paid related to net share settlement of equity awards	(44,205		)		(40,232		)		(29,955		)
Dividends paid	—				(1,238		)		(2,489		)
Repurchases of common stock	(342,596		)		(187,629		)		(138,399		)
Net cash used in financing activities	(218,627		)		(180,625		)		(190,015		)
Effect of exchange rate changes on cash	(5,901		)		5,278				(2,832		)
Increase (decrease) in cash and cash equivalents	(15,595		)		29,692				(10,194		)
Cash and cash equivalents, beginning of year	105,618				75,926				86,120
Cash and cash equivalents, end of year	$	90,023			$	105,618			$	75,926
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds of $3,079, $3,757 and $11,363 during the years ended September 30, 2018, 2017 and 2016, respectively	$	13,398			$	31,315			$	10,855
Cash paid for interest	$	26,106			$	26,083			$	26,884
Supplemental disclosures of non-cash investing and financing activities:
Unsettled repurchases of common stock	$	—			$	5,661			$	—
Purchase of property and equipment included in accounts payable	$	1,913			$	1,751			$	3,287

See accompanying notes.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

1. Nature of Business and Summary of Significant Accounting Policies

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, healthcare organizations and public agencies.

In these consolidated financial statements, FICO is referred to as “we,” “us,” “our,” or “the Company.”

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of FICO and its subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of Estimates

We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the collectibility of accounts receivable; the appropriate levels of various accruals; labor hours in connection with fixed-fee service contracts; the amount of our tax provision and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Actual results may differ from our estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and investments with an original maturity of 90 days or less at time of purchase.

Fair Value of Financial Instruments

The fair value of certain of our financial instruments, including cash and cash equivalents, receivables, other current assets, accounts payable, accrued compensation and employee benefits, other accrued liabilities and amounts outstanding under our revolving line of credit, approximate their carrying amounts because of the short-term maturity of these instruments. The fair values of our cash and cash equivalents and marketable security investments are disclosed in Note 4. The fair value of our derivative instruments is disclosed in Note 5. The fair value of our senior notes is disclosed in Note 10.

Investments

We categorize our investments in debt and equity instruments as trading, available-for-sale or held-to-maturity at the time of purchase. Trading securities are carried at fair value with unrealized gains or losses included in income (expense). Available-for-sale securities are carried at fair value measurements using quoted prices in active markets for identical assets or liabilities with unrealized gains or losses included in accumulated other comprehensive income (loss). Held-to-maturity securities are carried at amortized cost. Dividends and interest income are accrued as earned. Realized gains and losses are determined on a specific identification basis and are included in other income (expense). We review marketable securities for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. We did not classify any securities as held-to-maturity during each of the three years ended September 30, 2018. Investments with remaining maturities over one year are classified as long-term investments.

Our investments in equity securities of companies over which we do not have significant influence are accounted for under the cost method. The investment is originally recorded at cost and adjusted for additional contributions or distributions. Management periodically reviews cost-method investments for instances where fair value is less than the carrying amount and the decline in value is determined to be other than temporary. If the decline in value is judged to be other than temporary, the carrying amount of the security is written down to fair value and the resulting loss is charged to operations. We currently do not have investments in which we own 20% to 50% and exercise significant influence over operating and financial policies, therefore we do not account for any investment under the equity method.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

Concentration of Risk

Financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable, which are generally not collateralized. Our policy is to place our cash, cash equivalents, and marketable securities with high quality financial institutions, commercial corporations and government agencies in order to limit the amount of credit exposure. We have established guidelines relative to diversification and maturities for maintaining safety and liquidity. We generally do not require collateral from our customers, but our credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. We maintain allowances for potential credit losses.

A significant portion of our revenues are derived from the sales of products and services to the consumer credit and banking industries.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the following estimated useful lives:

	Estimated Useful Life
Data processing equipment and software	3 to 6 years
Office furniture and equipment	3 to 7 years
Leasehold improvements	Shorter of estimated useful life or lease term

The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are removed from the applicable accounts and resulting gains or losses are recorded in our consolidated statements of income and comprehensive income. Depreciation and amortization on property and equipment totaled $22.6 million, $23.0 million and $17.7 million during fiscal 2018, 2017 and 2016, respectively.

Internal-Use Software

Costs incurred to develop internal-use software during the application development stage are capitalized and reported at cost. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized costs are amortized using the straight-line method over two to three years. Software development costs required to be capitalized for internal-use software have not been material to date.

Capitalized Software and Research and Development Costs

Software development costs relating to products to be sold in the normal course of business are expensed as incurred as research and development costs until technological feasibility is established. Technological feasibility for our products occurs approximately concurrently with the general release of our products; accordingly, we have not capitalized any development or production costs. Costs we incur to maintain and support our existing products after the general release of the product are expensed in the period they are incurred and included in research and development costs in our consolidated statements of income and comprehensive income.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

Goodwill, Acquisition Intangibles and Other Long-Lived Assets

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. Alternatively, we may bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing step one of the goodwill impairment test.

For fiscal 2018 and 2016, 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, and did not perform a step one quantitative analysis. For fiscal 2017, we elected to proceed directly to the step one quantitative analysis for all of our reporting units, and determined goodwill was not impaired for any of our reporting units as there was a substantial excess of fair value over carrying value for each of our reporting units. Consequently, we did not recognize any goodwill impairment charges in fiscal 2018, 2017 or 2016.

We amortize our finite-lived intangible assets which result from our acquisitions over the following estimated useful lives:

	Estimated Useful Life
Completed technology	4 to 10 years
Customer contracts and relationships	5 to 15 years
Trade names	3 years

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. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2018, 2017 and 2016.

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 judgment. 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.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

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 SaaS subscription services are recognized as these services are performed. Revenues from transactional or unit-based license fees under software license arrangements, credit scoring, data processing, data management and SaaS subscription services agreements are recognized based on minimum contractual amounts or on system usage that exceeds minimum contractual amounts. Certain of our transactional-based revenues are based on transaction or active account volumes as reported by our clients. In instances where volumes are reported to us in arrears, we estimate volumes based on preliminary customer transaction information or average actual reported volumes for an immediate trailing period. Differences between our estimates and actual final volumes reported are recorded in the period in which actual volumes are reported. We have not experienced material variances between our estimates and actual reported volumes in the past and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we were unable to reasonably estimate transaction volumes in the future, revenue may be deferred until actual customer data is received, and this could have a material impact on our consolidated results of operations.

Consulting Services

We provide consulting, training, model development and software integration services under both hourly-based time and materials and fixed-priced contracts. Revenues from these services are generally recognized as the services are performed. For fixed-price service contracts, we use a proportionate performance model with hours as the input method of attribution to determine progress towards completion, with consideration also given to output measures, such as contract milestones, when applicable. In such instances, management is required to estimate the total estimated hours of the project. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues and profits are subject to revisions as the contract progresses to completion. Estimated losses, if any, are recorded in the period in which current estimates of total contract revenue and contract costs indicate a loss. If substantive uncertainty related to customer acceptance of services exists, we defer the associated revenue until the contract is completed. We have not experienced material variances between our estimates and actual hours in the past and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we are unable to accurately estimate the input measures, revenue would be deferred until the contract is complete, and this could have a material impact on our consolidated results of operations.

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.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

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.

If a deliverable does not have standalone value because the aforementioned criteria are not met, we combine it with the other applicable undelivered item(s) within the arrangement and account for the multiple deliverables as one combined unit of accounting. For example, for hosting arrangements requiring a highly specialized and unique set of initial implementation and setup services prior to the commencement of hosting services, we typically conclude that these implementation or setup services do not have value to the customer on a stand-alone basis; therefore, we combine them with the hosting services as a combined unit of accounting. Revenue is recognized upon commencement of our hosting services over the expected life of the customer relationship.

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 consolidated results of operations and financial position.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i) future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and (iii) the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statements of income and comprehensive income and could have a material impact on our consolidated results of operations and financial position.

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.

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), as signed by the U.S. President on December 22, 2017, significantly revises U.S. tax law. The legislation reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were indefinitely reinvested and creates new taxes on certain foreign sourced earnings. The Tax Act adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low taxed income (“GILTI”), the base erosion anti-abuse tax, a deduction for foreign derived intangible income, and the repeal of the deduction for domestic production activities. Some of these provisions, such as tax on GILTI, the repeal of the deduction for domestic production activities, and executive compensation, may not apply to the Company with full effect until future years. The Company is assessing the impact of the provisions of the Tax Act that do not apply until later years. The items that impact the Company for fiscal 2018 include, but are not limited to, 1) reduction of the U.S. federal corporate income tax rate; (2) a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries; and (3) repeal of the performance-based compensation exception to the $1 million deduction limitation.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) in December 2017, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under FASB Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes” (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

The Tax Act was effective in the first quarter of fiscal 2018. As of September 30, 2018, we have not completed our accounting for the estimated tax effects for the Transition Tax nor the excessive employee remuneration. During fiscal 2018, we recorded a provisional net charge of $9.6 million related to the Tax Act based on reasonable estimates for those tax effects and $14.0 million for the re-measurement of the deferred tax assets and liabilities, in which accounting is now complete. Due to the timing of the enactment and the complexity in applying the provisions of the Tax Act, the provisional net charge is subject to revisions as we continue to complete our analysis, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the estimated tax effects of the Tax Act will be completed during the measurement period, which is not expected to extend beyond one year from the enactment date.

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.

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.

Earnings per Share

Basic earnings per share are computed on the basis of the weighted-average number of common shares outstanding during the period under measurement. Diluted earnings per share are based on the weighted-average number of common shares outstanding and potential common shares. Potential common shares result from the assumed exercise of outstanding stock options or other potentially dilutive equity instruments, when they are dilutive under the treasury stock method.

Comprehensive Income

Comprehensive income is the change in our equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. It includes net income, foreign currency translation adjustments and unrealized gains and losses on our investments in marketable securities, net of tax.

Foreign Currency and Derivative Financial Instruments

We have determined that the functional currency of each foreign operation is the local currency. Assets and liabilities denominated in their local foreign currencies are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. Foreign currency translation adjustments are accumulated as a separate component of consolidated stockholders’ equity.

We utilize derivative instruments to manage market risks associated with fluctuations in certain foreign currency exchange rates as they relate to specific balances of accounts receivable and cash denominated in foreign currencies. We principally utilize foreign currency forward contracts to protect against market risks arising in the normal course of business. Our policies prohibit the use of derivative instruments for the sole purpose of trading for profit on price fluctuations or to enter into contracts that intentionally increase our underlying exposure. All of our foreign currency forward contracts have maturity periods of less than three months.

At the end of the reporting period, foreign-currency-denominated assets and liabilities are remeasured into the functional currencies of the reporting entities at current market rates. The change in value from this remeasurement is reported as a foreign exchange gain or loss for that period in other income (expense), net in the accompanying consolidated statements of income and comprehensive income.

We recorded transactional foreign exchange gains (losses) of $0.4 million, $(1.1) million and $0.2 million during fiscal 2018, 2017 and 2016, respectively.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

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). See Note 14 for further discussion of our share-based employee benefit plans.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of income and comprehensive income. Advertising and promotion costs totaled $4.1 million, $3.1 million and $3.6 million in fiscal 2018, 2017 and 2016, respectively.

New Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 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 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 as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued. We do not believe that adoption of ASU 2016-16 will have a significant impact on our consolidated financial statements.

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 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.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“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 method), or the retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We have adopted the standard using the full retrospective method.

The standard is effective for us beginning October 1, 2018. In preparation for adoption of the new standard, we have implemented internal controls and key system functionality to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the standard, including our assessment of the impact of accounting for costs incurred to obtain a contract.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

The most significant impact of the standard relates to the timing of revenue recognition for term licenses and transactional revenue on guaranteed minimum fees related to our on-premises software products. Under the new standard, we expect to recognize revenue when control of the license transfers 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 current standard. In addition, revenue attributable to a software license renewal will be recognized at the beginning of the applicable renewal period, rather than at the signing of the renewal agreement as required under the current standard. Finally, 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 expect to present the unconditional rights as receivables regardless of whether cash has been received from customers.

In addition, Accounting Standards Codification Subtopic 340-40, “Other Assets and Deferred Costs - Contracts with Customers” (“ASC 340”), requires us to recognize an asset for the incremental costs of obtaining a contract with a customer if our sales incentive programs meet requirements for capitalization. Previously we recorded these incremental costs of obtaining a contract, primarily commission expense, when we booked a sales transaction, whereas under ASC 340, we record an asset for the incremental cost to obtain a contract and recognize the cost over the expected revenue recognition period.

We estimate the adoption of the standard will result in a revenue reduction of approximately $32.3 million and an increase of approximately $2.8 million during our fiscal years 2018 and 2017, respectively. This is primarily due to change in timing of recognition of license revenue — when control of license transfers versus when fees became due and payable, and only at the beginning of the renewal period when applicable — from arrangements entered into during fiscal years 2018 and 2017, as well as arrangements entered into prior to fiscal 2017. In addition, while we continue to evaluate other impacts Topic 606 will have on our consolidated financial statements, including those related to our commission costs and receivables accounts as mentioned above, we do not expect the impact will be material to our consolidated financial statements.

In future periods, the new standard will require us to disclose additional information in the notes to our consolidated financial statements, including disaggregation of our revenue, remaining performance obligations, and other quantitative and qualitative information about our contracts with customers.

2. Business Combinations

There were no acquisitions incurred during fiscal 2018 and 2017.

In fiscal 2016, we acquired 100% of the equity of QuadMetrics, Inc. for $5.7 million in cash. We recorded $2.0 million of intangible assets, which are being amortized using the straight-line method over a weighted average useful life of approximately 4.0 years. We allocated $3.9 million of goodwill to our Applications segment that was not deductible for tax purposes.

3. Cash, Cash Equivalents and Marketable Securities

The following is a summary of cash, cash equivalents and marketable securities at September 30, 2018 and 2017:

	September 30, 2018								September 30, 2017
	Amortized Cost				Fair Value				Amortized Cost				Fair Value
	(In thousands)
Cash and Cash Equivalents:
Cash	$	71,610			$	71,610			$	90,323			$	90,323
Money market funds	13,813				13,813				6,471				6,471
Bank time deposits	4,600				4,600				8,824				8,824
Total	$	90,023			$	90,023			$	105,618			$	105,618
Long-term Marketable Securities:
Marketable securities	$	14,313			$	18,059			$	10,788			$	13,791

The assets included in marketable securities represent long-term marketable equity securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees. These investments are treated as trading securities and recorded at fair value.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

4. 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.

•

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 September 30, 2018 and 2017.

•

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 September 30, 2018 and 2017.

The following table represents financial assets that we measured at fair value on a recurring basis at September 30, 2018 and 2017:

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

September 30, 2017	Active Markets for Identical Instruments (Level 1)				Fair Value as of September 30, 2017
	(In thousands)
Assets:
Cash equivalents (1)	$	15,295			$	15,295
Marketable securities (2)	13,791				13,791
Total	$	29,086			$	29,086

(1)	Included in cash and cash equivalents on our balance sheet at September 30, 2018 and 2017. Not included in this table are cash deposits of $71.6 million and $90.3 million at September 30, 2018 and 2017, respectively.

(2)	Represents securities held under a supplemental retirement and savings plan for certain officers and senior management employees, which are distributed upon termination or retirement of the employees. Included in long-term marketable securities on our consolidated balance sheets at September 30, 2018 and 2017.

Where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing applies to our Level 1 investments. To the extent quoted prices in active markets for assets or liabilities are not available, the valuation techniques used to measure the fair values of our financial assets incorporate market inputs, which include reported trades, broker/dealer quotes, benchmark yields, issuer spreads, benchmark securities and other inputs derived from or corroborated by observable market data. This methodology would apply to our Level 2 investments. We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

For the fair value of our derivative instruments and senior notes, see Note 5 and Note 10, respectively.

5. 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 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 September 30, 2018 and 2017:

	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			—

	September 30, 2017
	Contract Amount								Fair Value
	Foreign Currency				US$				US$
		(In thousands)
Sell foreign currency:
Euro (EUR)	EUR	5,050			$	5,968			—
Buy foreign currency:
British pound (GBP)	GBP	9,341			$	12,500			—

The foreign currency forward contracts were entered into on September 30 of each fiscal year; therefore, their fair value was $0 at September 30, 2018 and 2017.

Gains (losses) on derivative financial instruments are recorded in our consolidated statements of income and comprehensive income as a component of other income (expense), net. These amounts are shown below for the years ended September 30, 2018, 2017 and 2016:

	Year Ended September 30,
	2018				2017				2016
	(In thousands)
Gain (loss) on foreign currency forward contracts	$	(476	)		$	210			$	(2,911	)

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

6. Accounts Receivable, Net

Accounts receivable, net at September 30, 2018 and 2017 consisted of the following:

	September 30,
	2018				2017
	(In thousands)
Billed	$	157,333			$	126,887
Unbilled (1)	54,971				44,640
	212,304				171,527
Less: allowance for doubtful accounts	(3,439		)		(2,941		)
Accounts receivable, net	$	208,865			$	168,586

(1)	Represents revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be realized within one year.

Activity in the allowance for doubtful accounts was as follows:

	Year Ended September 30,
	2018				2017
	(In thousands)
Balance, beginning of year	$	2,941			$	2,192
Add: expense	623				1,640
Less: write-offs (net of recoveries)	(125		)		(891		)
Balance, end of year	$	3,439			$	2,941

7. Goodwill and Intangible Assets

Intangible assets that are subject to amortization consisted of the following at September 30, 2018 and 2017:

	September 30, 2018														September 30, 2017
	(In thousands, except average life)
	Gross Carrying Amount				Accumulated Amortization				Net				Average Life		Gross Carrying Amount				Accumulated Amortization				Net				Average Life
Completed technology	$	82,295			$	(77,400	)		$	4,895			5		$	84,955			$	(77,682	)		$	7,273			5
Customer contracts and relationships	28,692				(19,051		)		9,641				8		28,947				(15,091		)		13,856				8
Trade names	—				—				—				0		603				(547		)		56				3
	$	110,987			$	(96,451	)		$	14,536			6		$	114,505			$	(93,320	)		$	21,185			6

Amortization expense associated with our intangible assets, which has been reflected as a separate operating expense caption within the accompanying consolidated statements of income and comprehensive income, consisted of the following during fiscal 2018, 2017 and 2016:

	Year Ended September 30,
	2018				2017				2016
	(In thousands)
Cost of revenues	$	2,380			$	6,511			$	7,300
Selling, general and administrative expenses	4,214				6,198				6,682
Total	$	6,594			$	12,709			$	13,982

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

In the table above, cost of revenues reflects our amortization of completed technology, and selling, general and administrative expenses reflect our amortization of other intangible assets.

Estimated future intangible asset amortization expense associated with intangible assets existing at September 30, 2018, was as follows (in thousands):

Year Ending September 30,
2019	$	6,001
2020	3,647
2021	2,408
2022	2,263
2023	217
Thereafter	—
Total	$	14,536

The following table summarizes changes to goodwill during fiscal 2018 and 2017, both in total and as allocated to our operating segments. We have not recognized any goodwill impairment losses to date.

	Applications				Scores				Decision Management Software				Total
	(In thousands)
Balance at September 30, 2016	$	582,720			$	146,648			$	69,047			$	798,415
Foreign currency translation adjustment	5,568				—				431				5,999
Balance at September 30, 2017	588,288				146,648				69,478				804,414
Foreign currency translation adjustment	(3,127		)		—				(397		)		(3,524		)
Balance at September 30, 2018	$	585,161			$	146,648			$	69,081			$	800,890

8. Composition of Certain Financial Statement Captions

The following table presents the composition of property and equipment at September 30, 2018 and 2017:

	September 30,
	2018				2017
	(In thousands)
Property and equipment:
Data processing equipment and software	$	104,789			$	88,830
Office furniture and equipment	22,207				20,763
Leasehold improvements	29,158				25,767
Less: accumulated depreciation and amortization	(107,317		)		(94,657		)
Total	$	48,837			$	40,703

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

9. Revolving Line of Credit

On May 8, 2018, we amended our credit agreement with a syndicate of banks, extending the maturity date of the unsecured revolving line of credit from December 30, 2019 to May 8, 2023, while reducing our borrowing capacity to $400 million 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 and (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. The credit agreement also contains other covenants typical of unsecured facilities. As of September 30, 2018, we had $257.0 million in borrowings outstanding at a weighted average interest rate of 3.555%, of which $50.0 million was classified as a long-term liability and recorded in long-term debt within the accompanying consolidated balance sheets. We were in compliance with all financial covenants under this credit facility as of September 30, 2018.

10. Senior Notes

On May 7, 2008, we issued $275 million of senior notes in a private placement to a group of institutional investors (the “2008 Senior Notes”). The 2008 Senior Notes were issued in four series as follows:

Series	Amount			Interest Rate		Maturity Date
	(In millions)
A	$	41.0		6.37	%	May 7, 2013
B	$	40.0		6.37	%	May 7, 2015
C	$	63.0		6.71	%	May 7, 2015
D	$	131.0		7.18	%	May 7, 2018

On May 7, 2018, the aggregate principal amount of the fourth series of 2008 Senior Notes was repaid at maturity. At September 30, 2018, the 2008 Senior Notes are no longer outstanding.

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 as follows:

Series	Amount			Interest Rate		Maturity Date
	(In millions)
E	$	60.0		4.72	%	July 14, 2016
F	$	72.0		5.04	%	July 14, 2017
G	$	28.0		5.42	%	July 14, 2019
H	$	85.0		5.59	%	July 14, 2020

The 2010 Senior Notes require us to pay the entire unpaid principal balances of each note series on its maturity date. The 2010 Senior Notes also 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. As of September 30, 2018, we were in compliance with all financial covenants.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

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 2008 Senior Notes and the 2010 Senior Notes, the “Senior Notes”). We have used the net proceeds to repay all the outstanding aggregate principal amount of the 2008 Senior Notes at maturity, as well as a portion of the outstanding balance on our revolving credit facility. 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 2008 and 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 September 30, 2018 and 2017:

	September 30, 2018								September 30, 2017
	Carrying Amounts (1)				Fair Value				Carrying Amounts (1)				Fair Value
	(In thousands)
The 2008 Senior Notes	$	—			$	—			$	131,000			$	134,250
The 2010 Senior Notes	113,000				114,413				113,000				119,106
The 2018 Senior Notes	400,000				404,000				—				—
Total	$	513,000			$	518,413			$	244,000			$	253,356

(1) Amounts exclusive of net debt issuance cost of $6.1 million and $0.2 million at September 30, 2018 and 2017, 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.

Future principal payments for the Senior Notes are as follows (in thousands):

Year Ending September 30,
2019	$	28,000
2020	85,000
2021	—
2022	—
2023	—
Thereafter	400,000
Total	$	513,000

11. Employee Benefit Plans

Defined Contribution Plans

We sponsor the Fair Isaac Corporation 401(k) plan for eligible employees in the U.S. Under this plan, eligible employees may contribute up to 25% of compensation, not to exceed statutory limits. We also provide a company matching contribution. Investment in FICO common stock is not an option under this plan. Our contributions into all 401(k) plans, including former-acquired-company-sponsored plans that have since merged into the Fair Isaac Corporation 401(k) plan or have been frozen, totaled $8.8 million, $8.4 million and $7.3 million during fiscal 2018, 2017 and 2016, respectively.

Employee Incentive Plans

We maintain various employee incentive plans for the benefit of eligible employees, including officers. The awards generally are based on the achievement of certain financial and performance objectives subject to the discretion of management. Total expenses under our employee incentive plans were $48.4 million, $41.6 million and $40.0 million during fiscal 2018, 2017 and 2016, respectively.

12. Restructuring Expenses

There was no restructuring expense incurred during fiscal 2018.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

During fiscal 2017, we incurred net charges totaling $4.5 million consisting of $1.7 million in facilities charges associated with vacating excess leased space in San Rafael, California and $2.8 million in employee separation costs due to the elimination of 79 positions throughout the Company. Cash payments for all the facilities charges will be paid by the end of fiscal 2020. Cash payments for all the employee separation costs were paid before the end of the second quarter of fiscal 2018.

There was no restructuring expense incurred during fiscal 2016.

The following tables summarize our restructuring accruals associated with the above actions. The current portion and non-current portion was recorded in other accrued liabilities and other liabilities, respectively, within the accompanying consolidated balance sheets.

	Accrual at September 30, 2016				Expense Additions				Cash Payments				Accrual at September 30, 2017
	(In thousands)
Facilities charges	$	9,233			$	1,729			$	(2,842	)		$	8,120
Employee separation	—				2,742				(2,557		)		185
	9,233				$	4,471			$	(5,399	)		8,305
Less: current portion	(4,266		)										(3,077		)
Non-current	$	4,967											$	5,228

	Accrual at September 30, 2017				Expense Additions				Cash Payments				Accrual at September 30, 2018
	(In thousands)
Facilities charges	$	8,120							$	(2,892	)		$	5,228
Employee separation	185								(185		)		—
	8,305				$	—			$	(3,077	)		5,228
Less: current portion	(3,077		)										(3,850		)
Non-current	$	5,228											$	1,378

13. Income Taxes

Recent Tax Legislation:

On December 22, 2017, The Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S. government. The Tax Act makes broad and complex changes to the U.S. tax code that affect our fiscal year ended September 30, 2018, including, but not limited to: (1) reducing the U.S. federal corporate income tax rate; (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries; and (3) repealing the performance-based compensation exception to the $1 million deduction limitation.

The Tax Act reduces the federal corporate tax rate from 35% to 21% effective January 1, 2018. In accordance with Section 15 of the Internal Revenue Code, we have utilized a blended rate of 24.5% for our fiscal 2018 tax year by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date. We recorded charges for the re-measurement of the deferred tax assets and liabilities of $14.0 million to our income tax expense for the fiscal year ended September 30, 2018.

The Tax Act has expanded the scope of previously enacted rules for certain covered employees that receive remuneration in excess of $1 million. As these new Section 162(m) rules impact the future deductibility of the related performance-based compensation, we recorded a provisional charge of $6.0 million.

The Deemed Repatriation Transition Tax (the “Transition Tax”) is a tax on previously untaxed accumulated earnings and profits (“E&P”) of deferred foreign income. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate and recorded a provisional Transition Tax obligation of $3.6 million.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) in December 2017, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under FASB Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes” (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Tax Act was effective in the first quarter of fiscal 2018. As of September 30, 2018, we have not completed our accounting for the estimated tax effects for the Transition Tax nor the excessive employee remuneration. During fiscal 2018, we recorded a provisional net charge of $9.6 million related to the Tax Act based on reasonable estimates for those tax effects and $14.0 million for the re-measurement of the deferred tax assets and liabilities, in which accounting is now complete. Due to the timing of the enactment and the complexity in applying the provisions of the Tax Act, the provisional net charge is subject to revisions as we continue to complete our analysis, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the estimated tax effects of the Tax Act will be completed during the measurement period, which is not expected to extend beyond one year from the enactment date.

The Tax Act includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries, a foreign derived intangible income (“FDII”), and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. The GILTI, FDII, and BEAT provisions of the Tax Act will be effective for us beginning October 1, 2018.

The provision for income taxes was as follows during fiscal 2018, 2017 and 2016:

	Year ended September 30,
	2018				2017				2016
	(In thousands)
Current:
Federal	$	8,071			$	19,576			$	50,631
State	2,236				1,055				2,900
Foreign	9,559				8,486				7,597
	19,866				29,117				61,128
Deferred:
Federal	28,013				(5,027		)		(23,592		)
State	132				(296		)		(225		)
Foreign	(2,416		)		(726		)		(2,190		)
	25,729				(6,049		)		(26,007		)
Total provision	$	45,595			$	23,068			$	35,121

The foreign provision was based on foreign pre-tax earnings of $13.0 million, $27.8 million and $33.0 million in fiscal 2018, 2017 and 2016, respectively. Current foreign tax expense related to foreign tax withholdings was $6.0 million, $4.6 million and $6.5 million in fiscal 2018, 2017 and 2016, respectively. Foreign withholding tax and related foreign tax credits are included in current tax expense above.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

Deferred tax assets and liabilities at September 30, 2018 and 2017 were as follows:

	September 30,
	2018				2017
	(In thousands)
Deferred tax assets:
Loss and credit carryforwards	$	24,400			$	34,383
Compensation benefits	30,388				45,823
Property and equipment	—				3,476
Other assets	9,674				12,239
	64,462				95,921
Less valuation allowance	(19,564		)		(17,657		)
Total deferred tax assets	44,898				78,264
Deferred tax liabilities:
Intangible assets	(15,921		)		(25,346		)
Property and equipment	(2,616		)		—
Other liabilities	(6,229		)		(5,714		)
Total deferred tax liabilities	(24,766		)		(31,060		)
Deferred tax assets, net	$	20,132			$	47,204

Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowance at September 30, 2018.

As of September 30, 2018, we had available U.S. federal, state and foreign net operating loss (“NOL”) carryforwards of approximately $13.7 million, $0.2 million, and $41.9 million, respectively. The U.S. NOLs were acquired in connection with our acquisitions of Braun in fiscal 2005, Adeptra in fiscal 2012 and Infoglide in fiscal 2013. The U.S. federal NOL carryforward will expire at various dates beginning in fiscal 2020, if not utilized. The state NOL carryforward will expire at various dates beginning in fiscal 2021, if not utilized. The $41.9 million of foreign NOL includes $25.1 million related to China. Due to a limited ability to utilize the China NOLs, a full valuation allowance has been recorded on the China NOLs, resulting in no tax benefit. Utilization of the U.S. federal and state NOL are subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. In fiscal 2016 and 2017 we generated excess foreign tax credits associated with dividends received from two of our foreign subsidiaries. In fiscal 2018 the excess foreign tax credits generated in prior years were completely utilized. We also have available excess California state research credit of approximately $10.5 million. The California state research credit does not have an expiration date; however, based on enacted law and expected future cash taxes, we have recorded a valuation allowance of $10.5 million.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

A reconciliation of the provision for income taxes, with the amount computed by applying the U.S. federal statutory income tax rate (24.5% in fiscal 2018, and 35% in fiscal 2017 and 2016) to income before provision for income taxes for fiscal 2018, 2017 and 2016 is shown below:

	Year Ended September 30,
	2018				2017				2016
	(In thousands)
Income tax provision at U.S. federal statutory rate	$	46,119			$	52,963			$	50,599
State income taxes, net of U.S. federal benefit	3,429				2,193				2,244
Foreign tax rate differential	(42		)		(1,761		)		(4,661		)
Intercompany interest	—				(477		)		(1,223		)
Research credits	(3,486		)		(2,572		)		(4,398		)
Domestic production deduction	(3,041		)		(3,075		)		(3,726		)
Amended returns/audit settlements/statute expirations	(2,349		)		(1,296		)		(248		)
Foreign	4,040				744				(1,702		)
Valuation allowance	1,907				2,512				1,262
Foreign tax credit	1,320				(1,342		)		(3,286		)
Excess tax benefits relating to stock-based compensation	(22,253		)		(24,746		)		—
Tax effect of the Tax Act	23,579				—				—
Other	(3,628		)		(75		)		260
Recorded income tax provision	$	45,595			$	23,068			$	35,121

The increase in our income tax provision in fiscal 2018 compared to fiscal 2017 is primarily due to recording the impact related to the enactment of the Tax Act in fiscal 2018. This includes re-measurement to our deferred tax assets and liabilities for the tax rate changes, the one-time Transition Tax, and a provisional charge related to the loss of deductibility of performance-based compensation for certain employees.

The decrease in our income tax provision in fiscal 2017 compared to fiscal 2016 was due primarily to the adoption of ASU 2016-09 on October 1, 2016. We no longer record excess tax benefits as an increase to additional paid-in capital, but instead record such excess tax benefits on a prospective basis as a reduction of income tax expense.

Prior to the enactment of the Tax Act we had not made a provision for U.S. income or additional foreign withholding taxes on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries as we intended to reinvest the earnings of our non-U.S. subsidiaries in those operations indefinitely, except where we were able to repatriate these earnings to the U.S. without material incremental tax provision. As of September 30, 2018, we have approximately $79.7 million of unremitted earnings of non-U.S. subsidiaries, of which $57.9 million was included in our current year provision for income taxes due to the one-time Transition Tax on the deemed repatriation of deferred foreign income under the Tax Act. The Company generates substantial cash flow in the U.S. and does not have a current need for the cash to be returned to the U.S. from the foreign entities. While the Transition Tax resulted in the reduction of the excess of the amount for financial reporting over the tax basis in our foreign subsidiaries such that a repatriation may not result in additional U.S. income tax, an actual repatriation from our non-US subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes.

Unrecognized Tax Benefit for Uncertain Tax Positions

We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With a few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for fiscal years prior to 2014. We are currently under audit by Illinois for fiscal 2014 and 2015, Minnesota for fiscal 2013, 2014, 2015 and 2016 and California for fiscal 2016 and 2017. We do not anticipate any adjustments related to those audits that will result in a material change to our consolidated financial statements.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Year Ended September 30,
	2018				2017				2016
	(In thousands)
Gross unrecognized tax benefits at beginning of year	$	6,480			$	6,799			$	4,634
Gross increases for tax positions in prior years	404				57				1,004
Gross decreases for tax positions in prior years	—				(19		)		(117		)
Gross increases based on tax positions related to the current year	1,625				1,291				1,310
Decreases for settlements and payments	—				(151		)		(32		)
Decreases due to statue expiration	(2,396		)		(1,497		)		—
Gross unrecognized tax benefits at end of year	$	6,113			$	6,480			$	6,799

We had $6.1 million of total unrecognized tax benefits as of September 30, 2018, including $5.8 million of tax benefits that, if recognized, would impact the effective tax rate. Although the timing and outcome of audit settlements are uncertain, it is unlikely there will be a reduction of the uncertain tax benefits in the next twelve months.

We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income and comprehensive income. We recognize interest earned related to income tax matters as interest income in our consolidated statements of income and comprehensive income. As of September 30, 2018, we have accrued interest of $0.3 million related to the unrecognized tax benefits.

14. Stock-Based Employee Benefit Plans

Description of Stock Option and Share Plans

We maintain the 2012 Long-Term Incentive Plan (the “2012 Plan”) under which we are authorized to issue equity awards, including stock options, stock appreciation rights, restricted stock awards, stock unit awards and other stock-based awards. All employees, consultants and advisors of FICO or any subsidiary, as well as all non-employee directors are eligible to receive awards under the 2012 Plan. We also have awards currently outstanding under the 1992 Long-Term Incentive Plan, which was adopted in February 1992 and expired in February 2012. Stock option awards have a maximum term of seven years. In general, stock option awards and restricted stock unit awards not subject to market or performance conditions vest annually over four years. Restricted stock unit awards subject to market or performance conditions vest annually over three years based on the achievement of specified criteria. At September 30, 2018, there were 4,202,040 shares available for issuance under the 2012 Plan.

Description of Employee Stock Purchase Plan

Under our 1999 Employee Stock Purchase Plan (the “1999 Purchase Plan”), we are authorized to issue up to 5,062,500 shares of common stock to eligible employees. Employees may have up to 10% of their base salary withheld through payroll deductions to purchase FICO common stock during semi-annual offering periods. The purchase price of the stock is 85% of the fair market value on the exercise date (the last day of each offering period). Offering period means approximately six-month periods commencing (a) on the first trading day on or after January 1 and terminating on the last trading day in the following June, and (b) on the first trading day on or after July 1 and terminating on the last trading day in the following December. The 1999 Purchase Plan was suspended effective January 1, 2009 and employees cannot contribute to the 1999 Purchase Plan until the suspension is repealed. At September 30, 2018, there were 2,707,966 shares available for issuance under the 1999 Purchase Plan.

We satisfy stock option exercises, vesting of restricted stock units and the 1999 Purchase Plan issuances from treasury shares.

Share-Based Compensation Expense and Related Income Tax Benefits

We recorded share-based compensation expense of $74.8 million, $61.2 million and $55.5 million in fiscal years 2018, 2017 and 2016, respectively. The total tax benefit related to this share-based compensation expense was $15.7 million, $20.4 million and $18.7 million in fiscal 2018, 2017 and 2016, respectively. As of September 30, 2018, there was $105.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.33 years.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

In fiscal 2018 we received $11.0 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $10.7 million.

Stock-Based Activity

Stock Options

We estimate the fair value of stock options granted using the Black-Scholes option valuation model and we amortize the fair value on a straight-line basis over the vesting period. We used the following assumptions to estimate the fair value of our stock options during fiscal 2018, 2017 and 2016:

	Year Ended September 30,
	2018			2017			2016
Stock Options:
Average expected term (years)	4.78			5.00			4.83
Expected volatility (range)	33.6 - 35.1	%		35.3	%		35.3 - 36.4	%
Weighted average volatility	34.6	%		35.3	%		36.0	%
Risk-free interest rate (range)	2.03 - 2.65	%		2.02	%		1.21 - 1.49	%
Average expected dividend yield	—	%		0.07	%		0.09	%
Expected dividend yield (range)	—	%		0.07	%		0.09 - 0.10	%

Expected Volatility. We estimate the volatility of our common stock at the date of grant based on a combination of the implied volatility of publicly traded options on our common stock and our historical volatility rate.

Expected Term. The expected term represents the period that our stock options are expected to be outstanding. We estimate the expected term based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.

Dividends. In fiscal 2017 and 2016 the dividend yield assumption was based on historical dividend payments, which were discontinued in May 2017.

Risk-Free Interest Rate. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our employee options.

Forfeitures. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.

The following table summarizes option activity during fiscal 2018:

	Shares			Weighted- average Exercise Price				Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)							(In years)		(In thousands)
Outstanding at October 1, 2017	1,230			$	56.54
Granted	29			167.27
Exercised	(257	)		42.85
Forfeited	(6	)		88.17
Outstanding at September 30, 2018	996			$	63.13			2.51		$	164,716
Exercisable at September 30, 2018	847			$	59.10			2.31		$	143,529
Vested and expected to vest at September 30, 2018	993			$	62.97			2.50		$	164,500

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

The weighted average fair value of options granted were $56.61, $43.80 and $31.06 during fiscal 2018, 2017 and 2016, respectively. The aggregate intrinsic value of options outstanding at September 30, 2018 was calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 1.0 million outstanding shares, which had exercise prices lower than the $228.55 market price of our common stock at September 30, 2018. The total intrinsic value of options exercised was $41.4 million, $27.0 million and $41.3 million during fiscal 2018, 2017 and 2016, respectively, determined as of the date of exercise.

Restricted Stock Units

The fair value of restricted stock units (“RSUs”) granted is the closing market price of our common stock on the date of grant, adjusted for the expected dividend yield, if applicable. We amortize the fair value on a straight-line basis over the vesting period.

The following table summarizes the RSUs activity during fiscal 2018:

	Shares			Weighted-average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2017	1,144			$	97.95
Granted	458			161.85
Released	(439	)		88.21
Forfeited	(50	)		115.57
Outstanding at September 30, 2018	1,113			$	127.34

The weighted average fair value of the RSUs granted were $161.85, $122.47 and $94.77 during fiscal 2018, 2017 and 2016, respectively. The total intrinsic value of the RSUs that vested was $70.7 million, $58.7 million and $49.8 million during fiscal 2018, 2017 and 2016, respectively, determined as of the date of vesting.

Performance Share Units

Performance share units (“PSUs”) are granted to our senior officers and earned based on pre-established performance goals approved by the Leadership Development and Compensation Committee of our Board of Directors for any given performance period. The range of payout is zero to 200% of the number of granted PSUs, based on the outcome of the performance conditions. We estimate the fair value of the PSUs using the closing market price of our common stock on the date of grant, adjusted for the expected dividend yield if applicable, based on the performance condition that is probable of achievement. We amortize the fair values over the requisite service period for each vesting tranche of the award. We reassess the probability at each reporting period and recognize the cumulative effect of the change in estimate in the period of change.

The following table summarizes the PSUs activity during fiscal 2018:

	Shares			Weighted- average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2017	204			$	105.37
Granted	102			157.17
Released	(96	)		98.15
Outstanding at September 30, 2018	210			$	133.76

The weighted average fair value of the PSUs granted were $157.17, $121.30 and $91.74 during fiscal 2018, 2017 and 2016, respectively. The total intrinsic value of the PSUs that vested was $15.1 million, $16.6 million and $14.0 million during fiscal 2018, 2017 and 2016, respectively, determined as of the date of vesting.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

Market Share Units

Market share units (“MSUs”) are granted to our senior officers and earned based on our total stockholder return relative to the Russell 3000 Index over performance periods of one, two and three years. We estimate the fair value of MSUs granted using the Monte Carlo valuation model and amortize the fair values over the requisite service period for each vesting tranche of the award. In addition, we do not reverse the compensation cost solely because the market condition is not satisfied, and the award is therefore not earned by the employee, provided the requisite service is rendered. We used the following assumptions to estimate the fair value of our MSUs during fiscal 2018, 2017 and 2016:

	Year Ended September 30,
	2018			2017			2016
Expected volatility in FICO’s stock price	24.6	%		27.4	%		24.1	%
Expected volatility in Russell 3000 Index	12.7	%		13.6	%		12.8	%
Correlation between FICO and the Russell 3000 Index	63.1	%		59.8	%		60.2	%
Risk-free interest rate	1.92	%		1.40	%		1.25	%
Average expected dividend yield	—	%		0.07	%		0.09	%

The expected volatility was determined based on daily historical movements in our stock price and the Russell 3000 Index for the three years preceding the grant date. The correlation between FICO and the Russell 3000 Index was determined based on historical daily stock price movements for the three years preceding the grant date. The dividend yield was determined using the historical dividend payout and a trailing twelve month closing stock price on the grant date for fiscal 2017 and 2016, and in May 2017 we discontinued dividend payments. The risk-free rate was determined based on U.S. Treasury zero-coupon yields over the three-year performance period.

The following table summarizes the MSUs activity during fiscal 2018:

	Shares			Weighted- average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2017	131			$	123.82
Granted	102			151.78
Released	(119	)		113.70
Outstanding at September 30, 2018	114			$	159.34

The weighted average fair value of the MSUs granted were $151.78, $108.09 and $100.63 during fiscal 2018, 2017 and 2016, respectively. The total intrinsic value of the MSUs that vested was $18.7 million, $20.2 million and $9.2 million during fiscal 2018, 2017 and 2016, respectively, determined as of the date of vesting.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

15. Earnings per Share

The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) during fiscal 2018, 2017 and 2016:

	Year Ended September 30,
	2018				2017				2016
	(In thousands, except per share data)
Numerator for basic and diluted earnings per share — net income	$	142,415			$	128,256			$	109,448
Denominator — share:
Basic weighted-average shares	29,711				30,862				31,129
Effect of dilutive securities	1,469				1,383				1,179
Diluted weighted-average shares	31,180				32,245				32,308
Earnings per share:
Basic	$	4.79			$	4.16			$	3.52
Diluted	$	4.57			$	3.98			$	3.39

The computation of diluted EPS excludes options to purchase approximately 5,000, 8,000, and 9,000 shares of common stock for fiscal 2018, 2017 and 2016, respectively, because the exercise prices of the options exceeded the average market price of our common stock in these fiscal years and their inclusion would be antidilutive.

16. Segment Information

We are organized into the following three operating segments, each of which is a reportable segment, to align with internal management of our worldwide business operations based on product offerings.

•

Applications. This segment includes pre-configured decision management applications designed for a specific type of business problem or process — such as marketing, account origination, customer management, fraud, collections and insurance claims management — as well as associated professional services. These applications are available to our customers as on-premises software, and many are available as hosted, software-as-a-service applications through the FICO® Analytic Cloud and/or Amazon Web Services, Inc. (“AWS”), our primary cloud infrastructure provider.

•

Scores. This segment includes our business-to-business scoring solutions, our myFICO® solutions for consumers and associated professional services. Our scoring solutions give our clients access to analytics that can be easily integrated into their transaction streams and decision-making processes. Our scoring solutions are distributed through major credit reporting agencies, as well as services through which we provide our scores to clients directly.

•	Decision Management Software. This segment is composed of analytic and decision management software tools that clients can use to create their own custom decision management applications, our new FICO® Decision Management Suite, as well as associated professional services. These tools are available to our customers as on-premises software or through the FICO® Analytic Cloud and/or AWS.

Our Chief Executive Officer evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel and depreciation. Indirect costs are allocated to the segments generally based on relative segment revenues, fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. We do not allocate broad-based incentive expense, share-based compensation expense, restructuring and acquisition-related expense, amortization expense, various corporate charges and certain other income and expense measures to our segments. These income and expense items are not allocated because they are not considered in evaluating the segment’s operating performance. Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets or capital expenditures; rather, depreciation amounts are allocated to the segments from their internal cost centers as described above.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

The following tables summarize segment information for fiscal 2018, 2017 and 2016:

	Year Ended September 30, 2018
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	381,109			$	337,530			$	47,420			$	—			$	766,059
Professional services	142,908				1,751				32,145				—				176,804
License	61,554				3,367				24,691				—				89,612
Total segment revenues	585,571				342,648				104,256				—				1,032,475
Segment operating expense	(420,995		)		(63,477		)		(134,903		)		(125,255		)		(744,630		)
Segment operating income (loss)	$	164,576			$	279,171			$	(30,647	)		$	(125,255	)		$	287,845
Unallocated share-based compensation expense																	(74,814		)
Unallocated amortization expense																	(6,594		)
Operating income																	206,437
Unallocated interest expense, net																	(31,311		)
Unallocated other income, net																	12,884
Income before income taxes																	$	188,010
Depreciation expense	$	15,651			$	555			$	5,471			$	956			$	22,633

	Year Ended September 30, 2017
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	348,861			$	259,780			$	44,019			$	—			$	652,660
Professional services	141,857				2,849				34,863				—				179,569
License	62,449				3,725				33,766				—				99,940
Total segment revenues	553,167				266,354				112,648				—				932,169
Segment operating expense	(393,667		)		(54,436		)		(123,466		)		(104,998		)		(676,567		)
Segment operating income (loss)	$	159,500			$	211,918			$	(10,818	)		$	(104,998	)		255,602
Unallocated share-based compensation expense																	(61,222		)
Unallocated amortization expense																	(12,709		)
Unallocated restructuring and acquisition-related expenses																	(4,471		)
Operating income																	177,200
Unallocated interest expense, net																	(25,790		)
Unallocated other expense, net																	(86		)
Income before income taxes																	$	151,324
Depreciation expense	$	15,857			$	991			$	4,783			$	1,349			$	22,980

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

	Year Ended September 30, 2016
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	328,472			$	233,655			$	43,792			$	—			$	605,919
Professional services	138,775				4,185				26,778				—				169,738
License	65,395				3,219				37,085				—				105,699
Total segment revenues	532,642				241,059				107,655				—				881,356
Segment operating expense	(364,371		)		(55,975		)		(111,315		)		(110,612		)		(642,273		)
Segment operating income (loss)	$	168,271			$	185,084			$	(3,660	)		$	(110,612	)		239,083
Unallocated share-based compensation expense																	(55,509		)
Unallocated amortization expense																	(13,982		)
Operating income																	169,592
Unallocated interest expense, net																	(26,633		)
Unallocated other income, net																	1,610
Income before income taxes																	$	144,569
Depreciation expense	$	11,852			$	814			$	3,657			$	1,328			$	17,651

Our revenues and percentage of revenues by reportable market segments were as follows for fiscal 2018, 2017 and 2016, the majority of which were derived from the sale of products and services within the banking (including consumer credit) industry:

	Year Ended September 30,
	2018							2017							2016
	(Dollars in thousands)
Applications	$	585,571			57	%		$	553,167			59	%		$	532,642			61	%
Scores	342,648				33	%		266,354				29	%		241,059				27	%
Decision Management Software	104,256				10	%		112,648				12	%		107,655				12	%
Total	$	1,032,475			100	%		$	932,169			100	%		$	881,356			100	%

Within our Applications segment our fraud solutions accounted for 17%, 19% and 20% of total revenues in each of fiscal 2018, 2017 and 2016, respectively, our customer communication services accounted for 10%, 10% and 9% of total revenues in each of these periods, respectively; and our customer management solutions accounted for 8%, 8% and 9% of total revenues in each of these periods, respectively.

Our revenues and percentage of revenues on a geographical basis are summarized below for fiscal 2018, 2017 and 2016:

	Year Ended September 30,
	2018							2017							2016
	(Dollars in thousands)
United States	$	679,425			66	%		$	598,765			64	%		$	567,443			64	%
United Kingdom	77,053				7	%		71,989				8	%		86,485				10	%
Other countries	275,997				27	%		261,415				28	%		227,428				26	%
Total	$	1,032,475			100	%		$	932,169			100	%		$	881,356			100	%

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

Revenue generated from a single customer or a group of customers which represented 10% or greater of total revenue are summarized below for fiscal 2018, 2017 and 2016:

	Year Ended September 30,
	2018							2017							2016
	(Dollars in thousands)
Experian	$	109,638			11	%		$	80,347			9	%		$	65,753			8	%
TransUnion and Equifax	143,922				14	%		104,475				11	%		97,427				11	%
Other customers	778,915				75	%		747,347				80	%		718,176				81	%
Total	$	1,032,475			100	%		$	932,169			100	%		$	881,356			100	%

At September 30, 2018 and 2017, no individual customer accounted for 10% or more of total consolidated receivables.

Our property and equipment, net, on a geographical basis are summarized below at September 30, 2018 and 2017:

	September 30,
	2018							2017
	(Dollars in thousands)
United States	$	39,593			81	%		$	30,773			76	%
United Kingdom	4,296				9	%		4,893				12	%
Other countries	4,948				10	%		5,037				12	%
Total	$	48,837			100	%		$	40,703			100	%

17. Commitments

Minimum future commitments under non-cancelable operating leases and other obligations were as follows at September 30, 2018:

Year Ending September 30,	Future Minimum Lease Commitments
	(In thousands)
2019	$	24,224
2020	15,694
2021	15,768
2022	14,151
2023	12,866
Thereafter	33,030
Total	$	115,733

Lease Commitments

We occupy the majority of our facilities under non-cancelable operating leases with lease terms in excess of one year. Such facility leases generally provide for annual increases based upon the Consumer Price Index or fixed increments. Rent expense under operating leases, including month-to-month leases, totaled $19.8 million, $18.6 million and $17.6 million during fiscal 2018, 2017 and 2016, respectively.

Other Commitments

In the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.

We are also a party to a management agreement with 22 of our executives providing for certain payments and other benefits in the event of a qualified change in control of FICO, coupled with a termination of the officer during the following year.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

18. Contingencies

We are in disputes with certain customers regarding amounts owed in connection with the sale of certain of our products and services. We also have had claims asserted by former employees relating to compensation and other employment matters. We are also involved in various other claims and legal actions arising in the ordinary course of business. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.

19. Guarantees

In the ordinary course of business, we are not subject to potential obligations under guarantees, except for standard indemnification and warranty provisions that are contained within many of our customer license and service agreements and certain supplier agreements, including underwriter agreements, as well as standard indemnification agreements that we have executed with certain of our officers and directors, and give rise only to the disclosure in the consolidated financial statements. In addition, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable.

Indemnification and warranty provisions contained within our customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in our industry. The duration of our product warranties generally does not exceed 90 days following delivery of our products. We have not incurred significant obligations under customer indemnification or warranty provisions historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential customer indemnification or warranty-related obligations. The indemnification agreements that we have executed with certain of our officers and directors would require us to indemnify such officers and directors in certain instances. We have not incurred obligations under these indemnification agreements historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential officer or director indemnification obligations. The maximum potential amount of future payments that we could be required to make under the indemnification provisions in our customer license and service agreements, and officer and director agreements is unlimited.

20. Supplementary Financial Data (Unaudited)

The following table presents selected unaudited consolidated financial results for each of the eight quarters in the two-year period ended September 30, 2018. In the opinion of management, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of only normal recurring adjustments, except as noted below) necessary for a fair statement of the consolidated financial information for the period presented.

	Quarter Ended
	September 30, 2018				June 30, 2018				March 31, 2018				December 31, 2017
	(In thousands, except per share data)
Revenues	$	279,791			$	259,505			$	257,858			$	235,321
Cost of revenues (1)	79,431				78,390				78,519				74,359
Gross profit	200,360				181,115				179,339				160,962
Net income	$	50,480			$	32,361			$	32,275			$	27,299
Earnings per share (2):
Basic	$	1.74			$	1.09			$	1.08			$	0.91
Diluted	$	1.64			$	1.04			$	1.03			$	0.86
Shares used in computing earnings per share:
Basic	29,077				29,708				29,985				30,078
Diluted	30,702				31,161				31,300				31,561

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2018, 2017 and 2016

	Quarter Ended
	September 30, 2017				June 30, 2017				March 31, 2017				December 31, 2016
	(In thousands, except per share data)
Revenues	$	253,205			$	230,986			$	228,378			$	219,600
Cost of revenues (1)	75,202				69,793				72,131				69,997
Gross profit	178,003				161,193				156,247				149,603
Net income	$	40,044			$	25,227			$	25,084			$	37,901
Earnings per share (2):
Basic	$	1.31			$	0.82			$	0.81			$	1.22
Diluted	$	1.25			$	0.78			$	0.78			$	1.16
Shares used in computing earnings per share:
Basic	30,534				30,914				31,017				30,989
Diluted	31,963				32,224				32,260				32,536

(1)	Cost of revenues excludes amortization expense of $0.5 million, $0.6 million, $0.6 million, $0.7 million, $1.4 million, $1.7 million, $1.7 million and $1.7 million for the quarters ended September 30, 2018, June 30, 2018, March 31, 2018, December 31, 2017, September 30, 2017, June 30, 2017, March 31, 2017 and December 31, 2016, respectively.

(2)	Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts may not equal the totals for the respective years.