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suspended effective January 1, 2009 and employees cannot contribute to the 1999 Purchase Plan until the suspension is repealed.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.

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

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.

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.