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FAIR ISAAC CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD LOOKING STATEMENTS Statements contained in this Report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). In addition, certain statements in our future filings with the Securities and Exchange Commission ("SEC"), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as "believes," "anticipates," "expects," "intends," "targeted," "should," "potential," "goals," "strategy," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Part II, Item 1A, Risk Factors. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K to be filed by the Company in fiscal 2011. OVERVIEW We are a leader in Decision Management solutions that enable businesses to automate, improve and connect decisions to enhance business performance. Our predictive analytics, which include the industry standard FICO® score, and our Decision Management systems power billions of customer decisions each year. We help companies acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower operating expenses and enter new markets more profitably. Most leading banks and credit card issuers rely on our solutions, as do many insurers, retailers, healthcare organizations, pharmaceutical companies and government agencies. We also serve consumers through online services that enable people to purchase and understand their FICO® scores, the standard measure in the United States of credit risk, empowering them to manage their financial health. Most of our revenues are derived from the sale of products and services within the banking (including consumer credit) and insurance industries, approximately 79% and 75% of our revenues during the quarters ended June 30, 2011 and 2010, respectively, and 78% and 76% of our revenues for the nine months ended June 30, 2011 and 2010, respectively, were derived from within these industries. A significant portion of our remaining revenues is derived from the healthcare and retail industries. Our clients utilize our products and services to facilitate a variety of business processes, including customer marketing and acquisition, account origination, credit and underwriting risk management, fraud loss prevention and control, and client account and policyholder management. A significant portion of our revenues is derived from transactional or unit-based software license fees, annual license fees under long-term software license arrangements, transactional fees derived under scoring, network service or internal hosted software arrangements, and annual software maintenance fees. The recurrence of these revenues is, to a significant degree, dependent upon our clients' continued usage of our products and services in their business activities. The more significant activities underlying the use of our products in these areas include: credit and debit card usage or active account levels; lending acquisition, origination and customer management activity; and customer acquisition, cross selling and retention programs. Approximately 74% and 75% of our revenues during the quarters ended June 30, 2011 and 2010, respectively, and 74% and 77% of our revenues for the nine months ended June 30, 2011 and 2010 were derived from maintenance or arrangements with transactional or unit-based pricing. We also derive revenues from other sources which generally do not recur and include, but are not limited to, perpetual or time-based licenses with upfront payment terms and non-recurring professional service arrangements. 15-------------------------------------------------------------------------------- Table of Contents Our revenues derived from clients outside the United States have generally grown, and may in the future grow, more rapidly than our revenues from domestic clients. International revenues totaled $54.9 million and $54.2 million during the quarters ended June 30, 2011 and 2010, representing 36% and 35% of total consolidated revenues in each of these periods. International revenues totaled $171.5 million and $152.6 million during the nine months ended June 30, 2011 and 2010, representing 37% and 34% of total consolidated revenues in each of these periods. We expect that the percentage of our revenues derived from international clients will increase in the future, subject to the impact of foreign currency fluctuations. Bookings Management uses bookings as an indicator of our business performance. Bookings represent contracts signed in the current reporting period that will generate current and future revenue streams. We consider contract terms, knowledge of the marketplace and experience with our customers, among other factors, when determining the estimated value of contract bookings. Bookings calculations have varying degrees of certainty depending on the revenue type and individual contract terms. Our revenue types are transactional and maintenance, professional services and license. Our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results. Actual revenue and the timing thereof could differ materially from our initial estimates. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability. Transactional and Maintenance Bookings We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by a contractual rate. Transactional contracts generally span multiple years and require us to make estimates about future transaction volumes or number of active accounts. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated. This variability is primarily caused by the following: • The health of the economy and economic trends in our customer's industries; • Individual performance of our customers relative to their competitors; and • Regulatory and other factors that affect the business environment in which our customers operate. We calculate maintenance bookings directly from the terms stated in the contract. Professional Services Bookings We calculate professional services bookings as the estimated number of hours to complete a project multiplied by the rate per hour. We estimate the number of hours based on our understanding of the project scope, conversations with customer personnel and our experience in estimating professional services projects. Estimated bookings may differ from actual results primarily due to differences in the actual number of hours incurred. These differences typically result from customer decisions to alter the mix of FICO and internal services resources used to complete a project. License Bookings Licenses are sold on a perpetual or term basis and bookings generally equal the fixed amount stated in the contract. 16-------------------------------------------------------------------------------- Table of Contents Bookings Trend Analysis Number of Bookings Weighted- Bookings over $1 Average Bookings Yield* Million Term (in millions) (months) Quarter ended June 30, 2011 $ 50.0 24 % 10 19 Quarter ended June 30, 2010 $ 63.5 29 % 12 28 Nine months ended June 30, 2011 $ 191.6 36 % 32 NM Nine months ended June 30, 2010 $ 177.7 35 % 35 NM * Bookings yield represents the percentage of revenue recognized from bookings for the period indicated. NM Measure is not meaningful Transactional and maintenance bookings were 35% and 44% of total bookings for the quarters ended June 30, 2011 and 2010, respectively. Professional services bookings were 46% and 35% of total bookings for the quarters ended June 30, 2011 and 2010, respectively. License bookings were 19% and 22% of total bookings for the quarters ended June 30, 2011 and 2010, respectively. Transactional and maintenance bookings were 44% and 49% of total bookings for the nine months ended June 30, 2011 and 2010, respectively. Professional services bookings were 38% and 35% of total bookings for the nine months ended June 30, 2011 and 2010, respectively. License bookings were 18% and 16% of total bookings for the nine months ended June 30, 2011 and 2010, respectively. The weighted-average term of bookings achieved measures the average term over which the bookings are expected to be recognized as revenue. As the weighted-average term increases, the average amount of revenues expected to be realized in a quarter decreases, however, the revenues are expected to be recognized over a longer period of time. As the weighted-average term decreases, the average amount of revenues expected to be realized in a quarter increases; however, the revenues are expected to be recognized over a shorter period of time. Management regards the volume of bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor should they be substituted for, an analysis of our revenues, and they are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance. Although many of our contracts contain noncancelable terms, most of our bookings are transactional or service related and are dependent upon estimates such as volume of transactions, number of active accounts, or number of hours incurred. Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog. Current Business Environment General economic conditions have stabilized, however high levels of unemployment and a difficult housing market continue to impact our customers in the United States and the pace of global recovery is likely to be modest across the majority of the geographical markets we serve. During the latter half of fiscal 2010 our business stabilized and we currently see signs of gradual improvement. We will continue to manage our expenses in an effort to maintain solid earnings and cash flows. We also plan to continue to invest in our Decision Management solutions as well as our core business operations to drive revenue growth. Prior year's negative economic conditions were considered in the estimates we used in our July 1, 2010 annual goodwill impairment testing, and in particular, for our Applications segment, which had $448.0 million in goodwill as of July 1, 2010. If market conditions decline more quickly than we can reduce costs, our margins may decrease and we may experience a decline in the fair value of our reporting units. Such declines in fair value may require us to record an impairment charge related to goodwill. 17-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Revenues The following table sets forth certain summary information on a segment basis related to our revenues for the fiscal periods indicated: Period-to-Period Quarter Ended June 30, Percentage of Revenues Period-to-Period Percentage Segment 2011 2010 2011 2010 Change Change (In thousands) (In thousands) Applications $ 92,060 $ 91,430 61 % 59 % $ 630 1 % Scores 41,793 46,505 28 % 30 % (4,712 ) (10 )% Tools 16,826 17,394 11 % 11 % (568 ) (3 )% Total revenue $ 150,679 $ 155,329 100 % 100 % (4,650 ) (3 )% Period-to-Period Nine Months Ended June 30, Percentage of Revenues Period-to-Period Percentage Segment 2011 2010 2011 2010 Change Change (In thousands) (In thousands) Applications $ 285,632 $ 271,198 62 % 60 % $ 14,434 5 % Scores 123,568 130,592 27 % 29 % (7,024 ) (5 )% Tools 50,234 48,755 11 % 11 % 1,479 3 % Total revenue $ 459,434 $ 450,545 100 % 100 % 8,889 2 % Quarter Ended June 30, 2011 Compared to Quarter Ended June 30, 2010 Period-to-Period Quarter Ended June 30, Period-to-Period Percentage Applications 2011 2010 Change Change (In thousands) (In thousands)Transactional and maintenance $ 63,355 $ 62,939 $ 416 1 % Professional services 25,893 21,500 4,393 20 % License 2,812 6,991 (4,179 ) (60 )% Total $ 92,060 $ 91,430 630 1 % Applications segment revenues increased $0.6 million due to a $3.0 million increase in our fraud solutions, partially offset by a $1.3 million decrease in marketing solutions and a $1.1 million decrease in our other applications solutions. The increase in fraud solutions revenues was primarily due to an increase in professional services revenue from software implementations and an increase in volumes associated with transactional-based revenues. The decrease in marketing solutions was primarily attributable to a decrease in volumes associated with transactional-based revenues from our Retail Action Manager solution. 18-------------------------------------------------------------------------------- Table of Contents Quarter Ended June 30, Period-to-Period Period-to-Period Percentage Scores 2011 2010 Change Change (In thousands) (In thousands) Transactional and maintenance $ 40,798 $ 46,153 $ (5,355 ) (12 )% Professional services 610 352 258 73 % License 385 - 385 - % Total $ 41,793 $ 46,505 (4,712 ) (10 )% Scores segment revenues decreased $4.7 million due to a decrease of $3.8 million in our business-to-business Scores revenue and a decrease of $0.9 million in our myFICO business-to-consumer services revenue. The decline in our business-to-business Scores was primarily due to a true up of royalty fees with one of the credit reporting agencies in fiscal 2010. The decrease in our business-to-consumer services was primarily attributable to a decrease in transaction volumes from our bureau channel partner selling FICO scores to consumers, which was partially offset by an increase in revenue generated from direct sales to consumers. During the quarters ended June 30, 2011 and 2010, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 19% and 22%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments. Quarter Ended June 30, Period-to-Period Period-to-Period Percentage Tools 2011 2010 Change Change (In thousands) (In thousands) Transactional and maintenance $ 7,587 $ 6,810 $ 777 11 % Professional services 3,079 3,689 (610 ) (17 )% License 6,160 6,895 (735 ) (11 )% Total $ 16,826 $ 17,394 (568 ) (3 )% Tools segment revenues decreased $0.6 million primarily due to a decrease of license sales related to our Decision Optimizer products. Nine Months Ended June 30, 2011 Compared to Nine Months Ended June 30, 2010 Nine Months Ended June 30, Period-to-Period Period-to-Period Percentage Applications 2011 2010 Change Change (In thousands) (In thousands) Transactional and maintenance $ 194,054 $ 194,376 $ (322 ) - % Professional services 74,128 62,583 11,545 18 % License 17,450 14,239 3,211 23 % Total $ 285,632 $ 271,198 14,434 5 % Applications segment revenues increased $14.4 million due to a $13.3 million increase in our fraud solutions and a $4.8 million increase in our originations solutions. This revenue increase was partially offset by a $3.3 million decrease in customer management solutions and a $0.4 million decrease in our other applications solutions. The increase in fraud solutions revenues was primarily due to an increase in volumes associated with transactional-based revenues and an increase in license sales. The increase in originations solutions was attributable to an increase in license sales and an increase in professional services revenue from software implementations. The decrease in customer management solutions was attributable to a decrease in transactional-based revenues. 19-------------------------------------------------------------------------------- Table of Contents Nine Months Ended June 30, Period-to-Period Period-to-Period Percentage Scores 2011 2010 Change Change (In thousands) (In thousands) Transactional and maintenance $ 121,197 $ 129,181 $ (7,984 ) (6 )% Professional services 1,579 1,411 168 12 % License 792 - 792 - % Total $ 123,568 $ 130,592 (7,024 ) (5 )% Scores segment revenues decreased $7.0 million due to a $5.1 million decrease in our business-to-business Scores revenue and a $1.9 million decrease in our myFICO business-to-consumer services revenue. The decline in our business-to-business Scores was primarily due to a true up of royalty fees with one of the credit reporting agencies in fiscal 2010 and a decrease in volume of transactional revenues derived from the credit reporting agencies. The decrease in our myFICO business-to-consumer services was primarily attributable to a decrease in transaction volumes from our bureau channel partner selling FICO scores to consumers, which was partially offset by an increase in revenue generated from direct sales to consumers. During the nine months ended June 30, 2011 and 2010, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 18% and 21%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments. Nine Months Ended June 30, Period-to-Period Period-to-Period Percentage Tools 2011 2010 Change Change (In thousands) (In thousands) Transactional and maintenance $ 22,682 $ 21,152 $ 1,530 7 % Professional services 8,824 11,710 (2,886 ) (25 )% License 18,728 15,893 2,835 18 % Total $ 50,234 $ 48,755 1,479 3 % Tools segment revenues increased $1.5 million primarily due to an increase of license sales related to our Blaze Advisor products. 20-------------------------------------------------------------------------------- Table of Contents Operating Expenses and Other Income (Expense) The following table sets forth certain summary information related to our statements of income for the fiscal periods indicated: Period-to-Period Quarter Ended June 30, Percentage of Revenues Period-to-Period Percentage 2011 2010 2011 2010 Change Change (In thousands, except (In thousands, except employees) employees) Revenues $ 150,679 $ 155,329 100 % 100 % $ (4,650 ) (3 )% Operating expenses: Cost of revenues 43,398 45,316 29 % 29 % (1,918 ) (4 )% Research and development 14,290 19,176 9 % 12 % (4,886 ) (25 )% Selling, general and administrative 53,643 57,077 36 % 37 % (3,434 ) (6 )% Amortization of intangible assets 1,942 2,683 1 % 2 % (741 ) (28 )% Total operating expenses 113,273 124,252 75 % 80 % (10,979 ) (9 )% Operating income 37,406 31,077 25 % 20 % 6,329 20 % Interest income 1,923 393 1 % - % 1,530 389 % Interest expense (8,023 ) (5,462 ) (5 )% (3 )% (2,561 ) 47 % Other income, net 631 701 - % - % (70 ) (10 )% Income from operations before income taxes 31,937 26,709 21 % 17 % 5,228 20 % Provision for income taxes 8,748 8,771 6 % 5 % (23 ) - % Net income $ 23,189 $ 17,938 15 % 12 % 5,251 29 % Number of employees at quarter end 1,998 2,153 (155 ) (7 )% 21 -------------------------------------------------------------------------------- Table of Contents Nine Months Ended June 30, Percentage of Revenues Period-to-Period Period-to- Percentage 2011 2010 2011 2010 Period Change Change (In thousands) (In thousands) Revenues $ 459,434 $ 450,545 100 % 100 % $ 8,889 2 % Operating expenses: Cost of revenues 137,707 132,476 30 % 29 % 5,231 4 % Research and development 48,573 57,403 11 % 13 % (8,830 ) (15 )% Selling, general and administrative 168,725 165,977 36 % 37 % 2,748 2 % Amortization of intangible assets 5,804 8,918 1 % 2 % (3,114 ) (35 )% Restructuring 12,391 - 3 % - % 12,391 - % Total operating expenses 373,200 364,774 81 % 81 % 8,426 2 % Operating income 86,234 85,771 19 % 19 % 463 1 % Interest income 2,084 1,439 - % - % 645 45 % Interest expense (24,401 ) (16,293 ) (5 )% (3 )% (8,108 ) 50 % Other income, net 477 1,347 - % - % (870 ) (65 )% Income from operations before income taxes 64,394 72,264 14 % 16 % (7,870 ) (11 )% Provision for income taxes 17,451 23,648 4 % 5 % (6,197 ) (26 )% Net income $ 46,943 $ 48,616 10 % 11 % (1,673 ) (3 )% Cost of Revenues Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in developing, installing and supporting revenue products; travel costs; overhead costs; costs of computer service bureaus; internal network hosting costs; amounts payable to credit reporting agencies for scores; software costs; and expenses related to our business-to-consumer services. The quarter over quarter decrease of $1.9 million in cost of revenues resulted from a $4.0 million decrease in third party software and data cost and a $1.2 million decrease in facilities and infrastructure costs, partially offset by a $2.9 million increase in personnel and related costs and a $0.4 million increase in other expenses. The decrease in third party software and data costs is due to decreased sales that require data acquisition. The decrease in facilities and infrastructure costs was attributable primarily to a decline in allocated costs resulting from overhead reductions and exiting certain facilities. The increase in personnel and other labor-related costs was attributable to an increase in salary and related benefit costs. The year-to-date period over period increase of $5.2 million in cost of revenues resulted from an $8.4 million increase in personnel and labor costs and $0.8 million increase in other expenses, partially offset by a $2.6 million decrease in third party software and data cost and a $1.4 million decrease in facilities and infrastructure costs. The increase in personnel and other labor-related costs was attributable to an increase in salary and related benefit costs. The decrease in third party software and data costs was attributable to decreased sales that require data acquisition. The decrease in facilities and infrastructure costs was attributable primarily to a decline in allocated costs resulting from overhead reductions and exiting certain facilities. Over the next several quarters, we expect that cost of revenues as a percentage of revenues will be consistent or slightly higher than those incurred during the quarter ended June 30, 2011. Research and Development Research and development expenses include the personnel and related overhead costs incurred in the development of new products and services, including the research of mathematical and statistical models and the development of new versions of Applications and Tools products. The quarter over quarter decrease of $4.9 million in research and development expenditures was attributable primarily to a $3.8 million decrease in personnel and related costs and a $1.1 million decrease in facilities and infrastructure costs. The decrease in personnel and related costs was due to decreased salary and incentive expenses for the quarter ended June 30, 2011. The decrease in facilities and infrastructure costs was attributable primarily to a decline in allocated costs resulting from overhead reductions and exiting certain facilities. 22 -------------------------------------------------------------------------------- Table of Contents The year-to-date period over period decrease of $8.8 million in research and development expenditures was attributable primarily to a $7.8 million decrease in personnel and related costs and a $1.3 million decrease in facilities and infrastructure costs partially offset by a $0.3 million increase in other expenses. The decrease in personnel and related costs was due to decreased salary and incentive expenses for the nine months ended June 30, 2011. The decrease in facilities and infrastructure costs was attributable primarily to a decline in allocated costs resulting from overhead reductions and exiting certain facilities. Over the next several quarters, we expect that research and development expenditures as a percentage of revenues will be slightly higher than those incurred during the quarter ended June 30, 2011. Selling, General and Administrative Selling, general and administrative expenses consist principally of employee salaries and benefits, travel, overhead, advertising and other promotional expenses, corporate facilities expenses, legal expenses, business development expenses, and the cost of operating computer systems. The quarter over quarter decrease of $3.4 million in selling, general and administrative expenses was attributable to a $2.7 million decrease in marketing expenses, a $0.9 million decrease in facilities and infrastructure costs and a $0.7 million decrease in other expenses, partially offset by a $0.9 million increase in professional fees. The decrease in marketing expenses was due to a reduction in marketing programs. The decrease in facilities and infrastructure costs was attributable primarily to a decline in allocated costs resulting from overhead reductions and exiting certain facilities. The increase in professional fees was primarily due to increased legal expenses. The year-to-date period over period increase of $2.7 million in selling, general and administrative expenses was attributable to a $8.8 million increase in personnel and related costs and a $0.5 million increase in other costs, partially offset by a $4.1 million decrease in marketing expenses, a $1.4 million decrease in professional fees and a $1.1 million decrease in facilities and infrastructure costs. The increase in personnel and related cost was due to increased salary and commission expenses. The decrease in marketing expenses was due to a reduction in marketing programs. The decrease in professional fees was primarily due to decreased legal fees. The decrease in facilities and infrastructure costs was attributable primarily to a decline in allocated costs resulting from overhead reductions and exiting certain facilities. Over the next several quarters, we expect that selling, general and administrative expenses as a percentage of revenues will be slightly higher than those incurred during the quarter ended June 30, 2011. Amortization of Intangible Assets Amortization of intangible assets consists of amortization expense related to intangible assets recorded in connection with acquisitions accounted for by the purchase method of accounting. Our definite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method or based on forecasted cash flows associated with the assets over periods ranging from two to fifteen years. Over the next several quarters we expect that amortization expense will be slightly lower than the amortization expense we recorded during the quarter ended June 30, 2011. Restructuring During the quarter ended March 31, 2011, in connection with our reengineering initiative, we incurred net charges totaling $11.5 million consisting mainly of $8.2 million for severance costs associated with the reduction of 177 positions throughout the company and $3.3 million of costs for vacating excess leased space. During the quarter ended December 31, 2010, we incurred net charges totaling $0.9 million consisting of costs for vacating excess leased space. 23-------------------------------------------------------------------------------- Table of Contents Interest Income Interest income is derived primarily from the investment of funds in excess of our immediate operating requirements. The quarter over quarter increase in interest income of $1.5 million was primarily attributable to interest received on tax refunds during the quarter. The year-to-date period over period increase in interest income of $0.6 million was attributable to interest received on tax refunds partially offset by lower investment balances and a decline in interest rates and investment income yields due to market conditions. Interest Expense The quarter over quarter increase in interest expense of $2.6 million was primarily due to the interest expense recorded on our $245 million Senior Notes issued in July 2010. The year-to-date period over period increase in interest expense of $8.1 million was primarily due to the interest expense recorded on our $245 million Senior Notes issued in July 2010. Over the next several quarters we expect that interest expense will be consistent with levels recorded during the quarter ended June 30, 2011. Other Income, Net Other income, net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from re-measurement of foreign-denominated receivable and cash balances into the U.S. dollar functional currency at period-end market rates, net of the impact of offsetting forward exchange contracts, and other non-operating items. Other income, net in the quarter ended June 30, 2011 and June 30, 2010, primarily consisted of foreign exchange currency losses and other dividend income. Other income, net in the nine months ended June 30, 2011, primarily consisted of foreign exchange currency losses and other dividend income. In the nine months ended June 30, 2010, other income, net consisted of exchange currency losses, other dividend income and gains on the sale of assets of $0.8 million. Provision for Income Taxes Our effective tax rate was 27.4% and 32.8% during the quarters ended June 30, 2011 and 2010, respectively, and 27.1% and 32.7% during the nine months ended June 30, 2011 and 2010, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the respective full fiscal year. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. Our effective tax rate for the quarter and nine months ended June 30, 2011 was positively affected by the reinstatement of the Federal Research and Development credit, changes in the foreign and domestic earnings mix and a favorable tax settlement in one of our jurisdictions. 24 -------------------------------------------------------------------------------- Table of Contents Operating Income The following table sets forth certain summary information on a segment basis related to our operating income for the fiscal periods indicated. Quarter Ended June 30, Period-to-Period Period-to-Period Percentage Segment 2011 2010 Change Change (In thousands) (In thousands) Applications $ 27,647 $ 23,427 $ 4,220 18 % Scores 30,054 30,598 (544 ) (2 )% Tools 3,556 1,985 1,571 79 % Corporate expenses (18,352 ) (18,397 ) 45 - % Total segment operating income 42,905 37,613 5,292 14 % Unallocated share-based compensation (3,557 ) (3,853 ) 296 (8 )% Unallocated amortization expense (1,942 ) (2,683 ) 741 (28 )% Operating income $ 37,406 $ 31,077 6,329 20 % Nine Months Ended June 30, Period-to-Period Period-to-Period Percentage Segment 2011 2010 Change Change (In thousands) (In thousands) Applications $ 74,470 $ 69,673 $ 4,797 7 % Scores 81,316 85,206 (3,890 ) (5 )% Tools 8,817 5,457 3,360 62 % Corporate expenses (48,412 ) (52,412 ) 4,000 (8 )% Total segment operating income 116,191 107,924 8,267 8 % Unallocated share-based compensation (11,762 ) (13,235 ) 1,473 (11 )% Unallocated amortization expense (5,804 ) (8,918 ) 3,114 (35 )% Unallocated restructuring (12,391 ) - (12,391 ) - % Operating income $ 86,234 $ 85,771 463 1 % The quarter over quarter $6.3 million increase in operating income was attributable to a decrease in segment operating expenses and a decrease in amortization expenses, partially offset by a decrease in segment revenues. At the segment level, the quarter over quarter $5.3 million increase in segment operating income was driven by a $4.2 million increase in segment operating income in our Applications segment and a $1.6 million increase in segment operating income in our Tools segment, partially offset by a $0.5 million decrease in our Scores segment operating income. The increase in Applications segment operating income was attributable to a decrease in segment operating expenses. The increase in Tools segment operating income was attributable to a decrease in segment operating expenses. The decrease in Scores segment operating income was attributable primarily to a decline in revenues derived from business-to-business services and business-to-consumer services partially offset by a decrease in digital marketing and third party data costs. The year-to-date period over period increase of $0.5 million in operating income was attributable to an increase in segment revenues, a decrease in amortization expenses, a decrease in share-based compensation expenses and a decrease in corporate overhead expenses, partially offset by an increase in restructuring expenses and segment operating expenses. At the segment level, the year-to-date period over period $8.3 million increase in segment operating income was driven by a $4.8 million increase in our Applications segment, a $3.4 million increase in our Tools segment and a $4.0 million decrease in corporate overhead expenses, partially offset by a $3.9 million decrease in segment operating income in our Scores segment. 25-------------------------------------------------------------------------------- Table of Contents The increase in Applications segment operating income was attributable to an increase in revenues. The increase in Tools segment operating income was attributable to a decrease in segment operating expenses. The decrease in Scores segment operating income was attributable primarily to a decline in revenues derived from business-to-business services and business-to-consumer services partially offset by a decrease in digital marketing and third party data costs. The decrease in corporate expenses was due to facility consolidations, driven by our reengineering initiative. Capital Resources and Liquidity Cash Flows from Operating Activities Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities increased to $105.1 million during the nine months ended June 30, 2011 from $84.0 million during the nine months ended June 30, 2010. The increase in operating cash flows was primarily due to an increase in cash provided by accounts receivable, prepaid expenses and other assets, other liabilities and deferred revenue. The increase was partially offset by the cash used for accrued compensation and employee benefits. Cash Flows from Investing Activities Net cash used in investing activities totaled $57.7 million during the nine months ended June 30, 2011, compared to net cash provided by investing activities of $40.3 million in the nine months ended June 30, 2010. The change in cash flows from investing activities was primarily attributable to $49.5 million of cash used in purchases of marketable securities, net of sales and maturities, during the nine months ended June 30, 2011 compared to $50.8 million of proceeds from sales and maturities of marketable securities, net of purchases for the nine months ended June 30, 2010. Cash Flows from Financing Activities Net cash used in financing activities totaled $54.9 million in the nine months ended June 30, 2011, compared to net cash used in financing activities of $187.2 million in the nine months ended June 30, 2010. The change in cash flows from financing activities was primarily due to $53.8 million of common stock repurchased in the nine months ended June 30, 2011 versus $137.5 million of common stock repurchased in the nine months ended June 30, 2010 and payments of $8.0 million on our Senior Notes during the nine months ended June 30, 2011 versus $50.0 million of payments on our revolving line of credit during the nine months ended June 30, 2010. Repurchases of Common Stock In June 2010, our Board of Directors approved a common stock repurchase program that allows us to purchase shares of our common stock up to an aggregate cost of $250.0 million. From time to time, we repurchase our common stock in the open market pursuant to this program. During the three and nine months ended June 30, 2011, we repurchased 1,220,672 shares of our common stock for $35.2 million and 1,862,972 shares of our common stock for $52.7 million, respectively. As of June 30, 2011, we had $122.1 million remaining under this authorization. Dividends During the quarter ended June 30, 2011, we paid a quarterly dividend of two cents per common share, which is representative of the eight cents per year dividend we have paid in recent years. Our dividend rate is set by the Board of Directors on a quarterly basis taking into account a variety of factors, including among others, our operating results and cash flows, general economic and industry conditions, our obligations, changes in applicable tax laws and other factors deemed relevant by the Board. Although we expect to continue to pay dividends at the current rate, our dividend rate is subject to change from time to time based on the Board's business judgment with respect to these and other relevant factors. 26 -------------------------------------------------------------------------------- Table of Contents Revolving Line of Credit We have a $200 million unsecured revolving line of credit with a syndicate of banks that expires in October 2011. Proceeds from the revolving line of credit 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 the Company's common stock. Interest on amounts borrowed under the revolving line of credit is based on (i) a base rate, which is the greater of (a) the prime rate and (b) the Federal Funds rate plus 0.50% or (ii) LIBOR plus an applicable margin. The margin on LIBOR borrowings ranges from 0.30% to 0.55% and is determined based on our consolidated leverage ratio. In addition, we must pay utilization fees if borrowings and commitments under the revolving line of credit exceed 50% of the total commitment, as well as facility fees. The revolving line of credit contains certain restrictive covenants, including maintenance of consolidated leverage and fixed charge coverage ratios. The revolving line of credit also contains covenants typical of unsecured facilities. As of June 30, 2011 we were in compliance with all covenants under the revolving line of credit and we had no borrowings outstanding under the credit facility. Senior Notes In May 2008, we issued $275 million of Senior Notes in a private placement to a group of institutional investors. These Senior Notes' weighted average interest rate is 6.8% and the weighted average maturity is 7.9 years. On July 14, 2010, we issued $245 million of Senior Notes in a private placement to a group of institutional investors. These Senior Notes have a weighted average interest rate of 5.20% and a weighted average maturity of 8 years. All of the Senior Notes are subject to certain restrictive covenants that are substantially similar to those in the credit agreement for the revolving credit facility, including maintenance of consolidated leverage and fixed charge coverage ratios. The purchase agreements for the Senior Notes also includes covenants typical of unsecured facilities. As of June 30, 2011 we were in compliance with all covenants under these facilities. Capital Resources and Liquidity Outlook As of June 30, 2011, we had $263.4 million in cash, cash equivalents and marketable security investments. We believe that these balances, as well as available borrowings from our $200 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements and any scheduled repayments of existing debt over the course of the next twelve months. Under our current financing arrangements we have no significant debt obligations maturing until May 2013. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents and marketable security investments to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, the allowance for doubtful accounts, goodwill and other intangible assets resulting from business acquisitions, share-based compensation, income taxes and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. 27 -------------------------------------------------------------------------------- Table of Contents We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition Software Licenses Software license fee revenue is recognized when persuasive evidence of an arrangement exists, software is made available to our customers, the fee is fixed or determinable and collection is probable. The determination of whether fees are fixed or determinable and collection is probable involves the use of 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. We use the residual method to recognize revenue when a software arrangement includes one or more elements to be delivered at a future date and vendor-specific objective evidence ("VSOE") of the fair value of all undelivered elements exists. 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. When software licenses are sold together with implementation or consulting services, license fees are recognized upon delivery provided that the above criteria are met, payment of the license fees is not dependent upon the performance of the services, and the services do not provide significant customization or modification of the software products and are not essential to the functionality of the software that was delivered. For arrangements with services that are essential to the functionality of the software, the license and related service revenues are recognized using contract accounting as described below. 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 reasonably assured. Revenues from our credit scoring, data processing, data management and internet delivery services are recognized as these services are performed. Revenues from transactional or unit-based license fees under software license arrangements, network service and internally-hosted software agreements are recognized based on minimum contractual amounts or on system usage that exceeds minimum contractual amounts. Certain of our transactional-based revenues are based on transaction or active account volumes as reported by our clients. In instances where volumes are reported to us in arrears, we estimate volumes based on preliminary customer transaction information or average actual reported volumes for an immediate trailing period. Differences between our estimates and actual final volumes reported are recorded in the period in which actual volumes are reported. We have not experienced significant variances between our estimates and actual reported volumes in the past and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we were unable to reasonably estimate transaction volumes in the future, revenue may be deferred until actual customer data is received, and this could have a material impact on our consolidated results of operations. Consulting Services We provide consulting, training, model development and software integration services under both hourly-based time and materials and fixed-priced contracts. Revenues from these services are generally recognized as the services are performed. For fixed-price service contracts, we apply the percentage-of-completion method of contract accounting to determine progress towards completion, which requires the use of estimates. In such instances, management is required to estimate the input measures, generally based on hours incurred to date compared to total estimated hours of the project, with consideration also given to output measures, such as contract milestones, when applicable. 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 apply the completed contract method of accounting and defer the associated revenue until the contract is completed. If we are unable to accurately estimate the input measures used for percentage-of-completion accounting, revenue would be deferred until the contract is complete, and this could have a material impact on our consolidated results of operations. 28-------------------------------------------------------------------------------- Table of Contents Hosting Services We are an application service provider ("ASP"), where we provide hosting services that allow customers access to software that resides on our servers. The ASP model typically includes an up-front fee and a monthly commitment from the customer that commences upon completion of the implementation through the remainder of the contractual term. The up-front fee is the initial setup fee, or the implementation fee. The monthly commitment includes, but is not limited to, a fixed monthly fee or a transactional fee based on system usage that exceeds monthly minimums. Revenue is recognized from ASP when there is persuasive evidence of an arrangement, the service has been provided to the customer, the amount of fees is fixed or determinable and the collection of the Company's fees is probable. We do not view the activities of signing the contract or providing initial setup services as discrete earnings events. Revenue is typically deferred until the date the customer commences use of our services at which point the up-front fees are recognized ratably over the contractual term of the customer arrangement. ASP transactional fees are recorded monthly as earned. Non-Software Multiple-Deliverable Arrangements Each deliverable within a multiple-deliverable revenue arrangement 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. 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 its 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 and customer segment pricing strategies and the product lifecycle. We analyze selling prices used in our allocation of arrangement consideration on an annual basis, or more frequently if necessary. Selling prices will be analyzed more frequently if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices. 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. Allowance for Doubtful Accounts We make estimates regarding the collectability of our accounts receivable. When we evaluate the adequacy of our allowance for doubtful accounts, we analyze specific accounts receivable balances, historical bad debts, customer creditworthiness, current economic trends and changes in our customer payment cycles. Material differences may result in the amount and timing of expense for any period if we were to make different judgments or utilize different estimates. If the financial condition of our customers deteriorates resulting in an impairment of their ability to make payments, additional allowances might be required. Business Acquisitions; Valuation of Goodwill and Other Intangible Assets Our business acquisitions typically result in the recognition of goodwill and other intangible assets, which affect the amount of current and future period charges and amortization expense. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including identified intangible assets, in connection with our business combinations accounted for by the purchase method of accounting. We amortize our definite-lived intangible assets based on forecasted cash flows associated with the assets over the estimated useful lives. Goodwill is not amortized, but is assessed at least annually for impairment. 29 -------------------------------------------------------------------------------- Table of Contents The determination of the value of these components of a business combination, as well as associated asset useful lives, requires management to make various estimates and assumptions. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from product sales and services, maintenance agreements, consulting contracts, customer contracts, and acquired developed technologies and patents or trademarks; the acquired company's brand awareness and market position, as well as assumptions about the period of time the acquired products and services will continue to be used in our product portfolio; and discount rates. Management's estimates of fair value and useful lives are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur and assumptions may change. Estimates using different assumptions could also produce significantly different results. We continually review the events and circumstances related to our financial performance and economic environment for factors that would provide evidence of the impairment of our intangible assets. When impairment indicators are identified with respect to our previously recorded intangible assets with finite useful lives, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure the impairment as the difference between the carrying value of the asset and the fair value of the asset, which is measured using discounted cash flows. Indefinite-lived intangible assets are assessed annually for impairment by comparing the fair value of such intangible assets, measured using discounted cash flows, to the respective carrying value. To the extent the fair value is less than the associated carrying value, impairment is recorded. Significant management judgment is required in forecasting future operating results, which are used in the preparation of the projected discounted cash flows and should different conditions prevail, material write downs of net intangible assets and other long-lived assets could occur. We periodically review the estimated remaining useful lives of our acquired intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods. We test goodwill for impairment at the reporting unit level at least annually during the fourth quarter of each fiscal year and more frequently if impairment indicators are identified. We have determined that our reporting units are the same as our reportable segments. The first step of the goodwill impairment test is a comparison of the fair value of a reporting unit to its carrying value. We estimate the fair values of our reporting units using the discounted cash flow valuation model and by comparing our reporting units to guideline publicly-traded companies. The two valuation methodologies are generally weighted equally in our final fair value calculation. These methods require estimates of our future revenues, profits, capital expenditures, working capital, costs of capital and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. In addition, we compare the aggregate reporting unit fair values to our market capitalization. The estimated fair value of each of our reporting units exceeded its respective carrying value in fiscal 2010, indicating the underlying goodwill of each reporting unit was not impaired as of our most recent testing date. Accordingly, we were not required to complete the second step of the goodwill impairment test. As of July 1, 2010, the estimated fair value of our Applications reporting unit was 110% of carrying value. Total goodwill allocated to the reporting unit was $448.0 million as of July 1, 2010. In a discounted cash flow valuation analysis, key assumptions that require significant management judgment include revenue growth rates and weighted average cost of capital. In our analysis, revenue growth rates were primarily based on third party studies of industry growth rates for each of our reporting units. Within each reporting unit, management refined these estimates based on their knowledge of the product, the needs of our customers and expected market opportunity. The key uncertainty for revenue growth in the Applications reporting unit is the recovery of the consumer credit industry over the next several years. The weighted average cost of capital was determined based on publicly available data such as the long-term yield on U.S. treasury bonds, the expected rate of return on high quality bonds and the returns and betas of various equity instruments. As it relates to the market approach, there is less management judgment in determining the fair value of our reporting units other than selecting which guideline publicly-traded companies are included in our peer group. For the fiscal 2010 impairment assessment our Applications reporting unit revenue terminal growth rate was 3% and our weighted average cost of capital was 11%. A decline in cash flow of 13.5% due to a reduction in revenues, or margins achieved, as compared to our forecast would have caused the Applications reporting unit to fail step one of our annual impairment test. In addition, a 1.3 percentage point increase in our weighted average cost of capital would have caused the Applications reporting unit to fail step one of our annual impairment test. The timing and frequency of our goodwill impairment test is based on an ongoing assessment of events and circumstances that would be an indicator of potential impairment of a reporting unit below its carrying value. There are various assumptions and estimates underlying the determination of an impairment loss, and estimates using different but, in each case, reasonable assumptions 30-------------------------------------------------------------------------------- Table of Contents could produce significantly different results and materially affect the determination of fair value and/or goodwill impairment for each reporting unit. For example, if the expected recovery of the economy is delayed significantly beyond what we have anticipated in our forecasts, it could cause the fair value of our Applications reporting unit to fall below its respective carrying value. We believe that the assumptions and estimates utilized were appropriate based on the information available to management. The timing and recognition of impairment losses by us in the future, if any, may be highly dependent upon our estimates and assumptions. Share-Based Compensation We account for share-based compensation using the fair value recognition provisions as required in the accounting literature. We estimate the fair value of options granted using the Black-Scholes option valuation model. 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. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We estimate the expected term of options granted based on historical exercise patterns. The dividend yield assumption is based on historical dividend payouts. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our employee options. 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. For options granted, we amortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. If factors change we may decide to use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our share-based compensation expense, net income and earnings per share. Income Taxes We use the asset and liability approach to account for income taxes. This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax base of assets and liabilities and operating loss and tax credit carryforwards. We then record a valuation allowance to reduce deferred tax assets to an amount that more likely than not will be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, which requires the use of estimates. If we determine during any period that we could realize a larger net deferred tax asset than the recorded amount, we would adjust the deferred tax asset to increase income for the period or reduce goodwill if such deferred tax asset relates to an acquisition. Conversely, if we determine that we would be unable to realize a portion of our recorded deferred tax asset, we would adjust the deferred tax asset to record a charge to income. To the extent an adjustment in our deferred tax assets relates to a business combination the adjustment is recorded either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. Although we believe that our estimates are reasonable, there is no assurance that our valuation allowance will not need to be increased to cover additional deferred tax assets that may not be realizable, and such an increase could have a material adverse impact on our income tax provision and results of operations in the period in which such determination is made. In addition, the calculation of tax liabilities also involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management's expectations could also have a material impact on our income tax provision and consolidated results of operations in the period in which such determination is made. Contingencies and Litigation We are subject to various proceedings, lawsuits and claims relating to products and services, technology, labor, shareholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. If the potential loss is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. If the potential loss is considered less than probable or the amount cannot be reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies. Due to uncertainties related to these matters, accruals or disclosures are based on the best information available at the time. Significant judgment is required in both the assessment of likelihood and in the determination of a range of potential losses. Revisions in the estimates of the potential liabilities could have a material impact on our consolidated financial position or consolidated results of operations. |