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3M CO_10-Q_2021-10-26 00:00:00_66740-0000066740-21-000013.html

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AFLAC INC_10-Q_2021-10-28 00:00:00_4977-0000004977-21-000145.html

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ALTRIA GROUP, INC._10-Q_2021-10-28 00:00:00_764180-0000764180-21-000127.html

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AMERICAN ELECTRIC POWER CO INC_10-Q_2021-10-28 00:00:00_4904-0000004904-21-000069.html

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AMERICAN EXPRESS CO_10-Q_2021-10-22 00:00:00_4962-0000004962-21-000060.html

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AMERICAN INTERNATIONAL GROUP, INC._10-Q_2021-11-05 00:00:00_5272-0001104659-21-134956.html

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AMERIPRISE FINANCIAL INC_10-Q_2021-11-09 00:00:00_820027-0000820027-21-000099.html

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AMPHENOL CORP -DE-_10-Q_2021-10-29 00:00:00_820313-0001558370-21-013825.html

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ANALOG DEVICES INC_10-K_2021-12-03 00:00:00_6281-0000006281-21-000294.html

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (all tabular amounts in thousands except per share amounts)The following discussion includes a comparison of our Results of Operations and Liquidity and Capital Resources for the fiscal years ended October 30, 2021 (fiscal 2021), the fiscal year ended October 31, 2020 (fiscal 2020) and the fiscal year ended November 2, 2019 (fiscal 2019). Our fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal 2021, fiscal 2020 and fiscal 2019 were 52-week fiscal periods. Impact of COVID-19 on our BusinessThe pandemic caused by the novel strain of the coronavirus (COVID-19) and the numerous measures implemented by government authorities in response, have impacted and likely will continue to impact our workforce and operations, the operations of our customers and those of our respective vendors and suppliers. We have significant operations worldwide, including in the United States, the Philippines, Ireland, Malaysia, Thailand, China and India. Each of these countries has been affected by the pandemic and taken measures to try to contain it, resulting in disruptions at some of our manufacturing operations and facilities.The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, modifying employee work locations and cancelling physical participation in meetings, events and conferences) and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders.While we are confident that our strategy and long-term contingency planning have positioned us well to weather the current uncertainty, we cannot at this time fully quantify or forecast the impact of COVID-19 on our business. The full extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations will depend on future developments, which are highly uncertain such as the continued duration and severity of the pandemic, the spread of more contagious variants of the virus, the adoption rate of vaccines, the actions to contain the virus or treat its impact, or how quickly and to what extent normal economic and operating conditions can resume.Acquisition of Maxim Integrated Products, Inc.On August 26, 2021 (Acquisition Date), we completed the acquisition of Maxim Integrated Products, Inc. (Maxim), an independent manufacturer of innovative analog and mixed-signal products and technologies. Pursuant to the Agreement and Plan of Merger, dated as of July 12, 2020 (the Merger Agreement), Maxim stockholders received, for each outstanding share of Maxim common stock, 0.6300 of a share of the Company’s common stock as of the Acquisition Date, for total consideration of approximately $28.0 billion of our common stock. The acquisition of Maxim is referred to as the Acquisition. The consolidated financial statements included in this Annual Report on Form 10-K include the financial results of Maxim prospectively from the Acquisition Date. See Note 6, Acquisitions, of the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information. Results of OperationsA discussion of changes in our results of operations from fiscal 2019 to fiscal 2020 has been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for fiscal 2020 filed with the Securities and Exchange Commission on November 24, 2020.28Overview Fiscal Year2021 over 20202020 over 2019 202120202019 $ Change% Change $ Change% ChangeRevenue$7,318,286 $5,603,056 $5,991,065 $1,715,230 31 %$(388,009)(6)%Gross margin %61.8 %65.9 %67.0 %Net income$1,390,422 $1,220,761 $1,363,011 $169,661 14 %$(142,250)(10)%Net income as a % of revenue19.0 %21.8 %22.8 %Diluted EPS$3.46 $3.28 $3.65 $0.18 5 %$(0.37)(10)%Revenue Trends by End MarketThe following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the "ship to" customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data and our methodology evolves and improves, the categorization of products by end market can vary over time. When this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within each end market. Fiscal 2021Fiscal 2020Fiscal 2019Revenue% ofTotalProductRevenue (1)Y/Y%Revenue% ofTotalProductRevenue (1)Y/Y%Revenue% ofTotalProductRevenue (1)Industrial$4,011,485 55 %34 %$2,998,259 54 %(1)%$3,014,890 50 %Automotive1,248,635 17 %60 %778,297 14 %(16)%929,671 16 %Communications1,198,461 16 %1 %1,191,169 21 %(8)%1,294,233 22 %Consumer859,705 12 %35 %635,331 11 %(16)%752,271 13 %Total Revenue$7,318,286 100 %31 %$5,603,056 100 %(6)%$5,991,065 100 %_______________________________________(1)The sum of the individual percentages may not equal the total due to rounding.Revenue increased across all end markets in fiscal 2021 as compared to fiscal 2020 primarily as a result of higher broad-based demand for our products sold into the Automotive, Consumer and Industrial end markets. Revenue in the Communications end market was also slightly higher in fiscal 2021 compared to fiscal 2020 as the timing of infrastructure deployment cycles in certain regions offset higher demand. Incremental revenue as a result of the Acquisition also contributed to higher revenue in each end market in fiscal 2021, as compared to fiscal 2020.Revenue by Sales ChannelThe following table summarizes revenue by sales channel. We sell our products globally through a direct sales force, third party distributors, independent sales representatives and via our website. Distributors are customers that buy products with the intention of reselling them. Direct customers are non-distributor customers and consist primarily of original equipment manufacturers (OEMs). Other customers include the U.S. government, government prime contractors and certain commercial customers for which revenue is recorded over time. 29Fiscal 2021Fiscal 2020Fiscal 2019Revenue% ofTotalProductRevenue (1)Revenue% ofTotalProductRevenue (1)Revenue% ofTotalProductRevenue (1)Distributors$4,589,944 63 %$3,216,302 57 %$3,409,161 57 %Direct customers2,600,353 36 %2,300,493 41 %2,506,065 42 %Other127,989 2 %86,261 2 %75,839 1 %Total Revenue$7,318,286 100 %$5,603,056 100 %$5,991,065 100 %_______________________________________(1)The sum of the individual percentages may not equal the total due to rounding.The percentage of total revenue sold via each channel can fluctuate from time to time based on end customer demand. In fiscal 2021, higher demand within our Automotive and Industrial end markets resulted in increased revenue through our distributor channel. Revenue Trends by Geographic RegionRevenue by geographic region, based upon the geographic location of the distributors or OEMs who purchased the Company's products, for fiscal 2021, fiscal 2020 and fiscal 2019 was as follows:ChangeFiscal Year2021 over 20202020 over 2019202120202019 $ Change% Change (1) $ Change% Change (1)United States$2,389,439 $1,887,443 $2,020,886 $501,996 27 %$(133,443)(7)%Rest of North and South America42,830 41,250 55,059 1,580 4 %(13,809)(25)%Europe1,592,989 1,245,695 1,374,673 347,294 28 %(128,978)(9)%Japan787,966 521,720 657,632 266,246 51 %(135,912)(21)%China1,614,396 1,348,011 1,316,275 266,385 20 %31,736 2 %Rest of Asia890,666 558,937 566,540 331,729 59 %(7,603)(1)%Total Revenue$7,318,286 $5,603,056 $5,991,065 $1,715,230 31 %$(388,009)(6)%_______________________________________(1)The sum of the individual percentages may not equal the total due to rounding.In all periods presented, the predominant countries comprising “Rest of North and South America” are Canada and Mexico; the predominant countries comprising “Europe” are Germany, Sweden, and the Netherlands; and the predominant countries comprising “Rest of Asia” are Taiwan, Malaysia, South Korea and Singapore.Total revenue increased in fiscal 2021 as compared to fiscal 2020 due to broad-based, global demand in the semiconductor industry as well as the incremental impact of revenue from the Acquisition. We saw increases across all end markets in territories, with the exception of sales into the Communication end market in China, which was impacted by infrastructure deployment cycles as noted above. 30Gross MarginChange Fiscal Year2021 over 20202020 over 2019 202120202019$ Change% Change$ Change% ChangeGross margin$4,525,012 $3,690,478 $4,013,750 $834,534 23 %$(323,272)(8)%Gross margin %61.8 %65.9 %67.0 %Gross margin percentage in fiscal 2021 decreased by 410 basis points compared to fiscal 2020, primarily as a result of recording additional costs related to the Acquisition, including $331.1 million and $155.4 million of cost of goods sold related to the fair value adjustments recorded to inventory and amortization expense of intangible assets, respectively. These increases in cost of sales as a result of the Acquisition were partially offset by the favorable impact of higher utilization of our factories due to increased customer demand.Research and Development (R&D)Change Fiscal Year2021 over 20202020 over 2019 202120202019$ Change% Change$ Change% ChangeR&D expenses$1,296,126 $1,050,519 $1,130,348 $245,607 23 %$(79,829)(7)%R&D expenses as a % of revenue18 %19 %19 %R&D expenses increased in fiscal 2021 as compared to fiscal 2020 primarily as a result of higher R&D employee-related variable compensation expense, incremental R&D expenses incurred as a result of the Acquisition and higher salary and benefit expenses. R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings. Therefore, we expect to continue to make significant R&D investments in the future.Selling, Marketing, General and Administrative (SMG&A)Change Fiscal Year2021 over 20202020 over 2019 202120202019$ Change% Change$ Change% ChangeSMG&A expenses$915,418 $659,923 $648,094 $255,495 39 %$11,829 2 %SMG&A expenses as a % of revenue13 %12 %11 %SMG&A expenses increased in fiscal 2021 as compared to fiscal 2020, primarily as a result of higher costs due to acquisition-related transaction costs, incremental SMG&A expenses incurred as a result of the Acquisition and higher variable compensation expense and salary and benefit expenses. Amortization of IntangiblesChange Fiscal Year2021 over 20202020 over 2019 202120202019$ Change% Change$ Change% ChangeAmortization expenses$536,811 $429,455 $429,041 $107,356 25 %$414 — %Amortization expenses as a % of revenue7 %8 %7 %Amortization expenses increased in fiscal 2021 as compared to fiscal 2020, primarily as a result of $105.8 million of amortization expense of intangible assets recorded as part of the Acquisition. 31Special Charges, NetWe monitor global macroeconomic conditions on an ongoing basis and continue to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, we have undertaken various restructuring actions over the past several years.Closure of Manufacturing Facilities: We recorded special charges as a result of our decision to consolidate certain wafer and test facility operations acquired as part of the acquisition of Linear. The special charges include severance and fringe benefit costs, in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations and one-time termination benefits for the impacted employees and other exit costs. These one-time termination benefits are being recognized over the future service period required for employees to earn these benefits. In addition, as a result of management's plan to close certain wafer and test facility operations acquired as part of the acquisition of Linear Technology Corporation (Linear), the Company sold its facility in Singapore and ceased production at its Hillview manufacturing facility in Milpitas, California during fiscal 2021. Repositioning Actions: In fiscal 2020, we recorded special charges of $49.4 million as a result of organizational initiatives to better align its global workforce with its long-term strategic plan. The special charges include severance and fringe benefit costs, in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations and the write-off of acquired intellectual property due to the Company's decision to discontinue certain product development strategies. Other: The other special charges of $83.4 million recognized during fiscal 2021 include severance and benefit costs as well as charges recorded from acceleration of equity awards in connection with the termination of a limited number of employees as part of the integration of the Acquisition. Operating IncomeChange Fiscal Year2021 over 20202020 over 2019 202120202019$ Change% Change$ Change% ChangeOperating income$1,692,201 $1,498,244 $1,710,608 $193,957 13 %$(212,364)(12)%Operating income as a % of revenue23.1 %26.7 %28.6 %The increase in operating income in fiscal 2021 as compared to fiscal 2020 was primarily the result of a $834.5 million increase in gross margin, partially offset by a $255.5 million increase in SMG&A expenses, a $245.6 million increase in R&D expenses, a $107.4 million increase in amortization expenses and a $32.1 million increase in special charges, net as more fully described above under the headings Gross Margin, Selling, Marketing, General and Administrative (SMG&A), Research and Development (R&D), Amortization of Intangibles and Special Charges, Net.Nonoperating (Income) ExpenseChange Fiscal Year2021 over 20202020 over 2019 202120202019$ Change$ ChangeTotal Nonoperating expense$363,487 $186,627 $224,880 $176,860 $(38,253)The year-over-year increase in nonoperating expense in fiscal 2021 as compared to fiscal 2020 was primarily the result of a loss on the extinguishment of debt related to debt transactions in the fourth quarter of fiscal 2021, partially offset by gains recorded on other investments and a decrease in interest expense related to our debt obligations in the period.(Benefit From) Provision for Income TaxesChange Fiscal Year2021 over 20202020 over 2019 202120202019$ Change% Change$ Change% Change(Benefit from) provision for income taxes$(61,708)$90,856 $122,717 $(152,564)(168)%$(31,861)(26)%Effective income tax rate(4.6)%6.9 %8.3 %Our effective tax rates for fiscal 2021 and fiscal 2020 were below the U.S. statutory rate of 21% due to lower statutory tax rates applicable to our operations in the foreign jurisdictions in which we earn income. Our provision for income taxes was 32impacted by incremental profit related to the Acquisition. Additionally, in fiscal 2021, we recorded a net deferred tax benefit of $188.8 million from deferred tax assets related to an intra-entity transfer of intangible assets. For fiscal 2021 and fiscal 2020, our pretax income was primarily generated in Ireland at a tax rate of 12.5%. Our tax rate for fiscal 2020 was also impacted by discrete items, primarily related to $25.9 million of income tax benefits resulting from the resolution of the Internal Revenue Service audit of Linear’s pre-acquisition federal income tax returns for fiscal 2015 through fiscal 2017, as well as other income tax benefits recorded upon the filing of our fiscal 2019 federal income tax return and excess tax benefits from stock-based compensation payments of $16.2 million. See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion. Net IncomeChange Fiscal Year2021 over 20202020 over 2019 202120202019$ Change% Change$ Change% ChangeNet income$1,390,422 $1,220,761 $1,363,011 $169,661 14 %$(142,250)(10)%Net income, as a % of revenue19.0 %21.8 %22.8 %Diluted EPS$3.46 $3.28 $3.65 $0.18 5 %$(0.37)(10)%The increase in net income in fiscal 2021 as compared to fiscal 2020 was a result of a $194.0 million increase in operating income and a $152.6 million decrease in provision for income taxes resulting in a net income tax benefit, partially offset by a $176.9 million increase in nonoperating expense, as more fully described above under the headings Operating Income, (Benefit From) Provision for Income Taxes and Nonoperating (Income) Expense.Liquidity and Capital ResourcesAt October 30, 2021, our principal source of liquidity was $1,978.0 million of cash and cash equivalents, of which approximately $876.6 million was held in the United States and the balance of our cash and cash equivalents was held outside the United States in various foreign subsidiaries. We manage our worldwide cash requirements by, among other things, reviewing available funds held by our foreign subsidiaries and the cost effectiveness by which those funds can be accessed in the United States. We do not expect current regulatory restrictions or taxes on repatriation to have a material adverse effect on our overall liquidity, financial condition or results of operations. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less, including money market funds. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts and dividend payments (if any) in the immediate future and for at least the next twelve months. Fiscal Year 202120202019Net cash provided by operating activities$2,735,069 $2,008,487 $2,253,100 Net cash provided by operating activities as a % of revenue37 %36 %38 %Net cash provided by (used for) investing activities$2,143,525 $(180,523)$(293,186)Net cash used for financing activities$(3,959,664)$(1,420,608)$(2,126,794)A discussion of changes in our liquidity and capital resources from fiscal 2019 to fiscal 2020 has been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for fiscal 2020 filed with the Securities and Exchange Commission on November 24, 2020. The following changes contributed to the net change in cash and cash equivalents from fiscal 2020 to fiscal 2021. Operating ActivitiesCash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The increase in cash provided by operating activities during fiscal 2021 as compared to fiscal 2020 was primarily a result of higher net income and an increase from changes in working capital. Net income in fiscal 2021 also included larger non-cash expenses from the Acquisition that were not included in fiscal 2020.33Investing ActivitiesInvesting cash flows generally consist of capital expenditures, cash used for acquisitions and proceeds from or purchases of investments. The increase in cash provided by (used for) investing activities during fiscal 2021 as compared to fiscal 2020 was primarily the result of cash received from the Acquisition, partially offset by an increase in cash used for capital expenditures.Financing ActivitiesFinancing cash flows consist primarily of payments of dividends to stockholders, repurchases of common stock, issuance and repayment of debt, and proceeds from the sale of shares of common stock pursuant to employee equity incentive plans. The increase in cash used for financing activities during fiscal 2021 as compared to fiscal 2020 was primarily the result of an increase in common stock repurchases in connection with our accelerated share repurchase program and higher dividend payments, partially offset by a net increase in debt in fiscal 2021 as we terminated some debt and raised additional proceeds from debt compared to the net decrease in debt in 2020. Working Capital Fiscal Year 20212020$ Change% ChangeAccounts receivable, net$1,459,056 $737,536 $721,520 98 %Days sales outstanding (1)55 45 Inventory$1,200,610 $608,260 $592,350 97 %Days cost of sales in inventory (1)118 116 _______________________________________(1)We use the average of the current year and prior year ending net accounts receivable and ending inventory balance in our calculation of days sales outstanding and days cost of sales in inventory, respectively. Cost of sales amounts used in the calculation of days cost of sales in inventory for fiscal 2021 include Acquisition accounting adjustments related to the sale of acquired inventory written up to fair value, amortization of developed technology intangible assets acquired and depreciation related to the write-up of fixed assets to fair value. The calculations above include the financial results of Maxim prospectively from the Acquisition Date. The increase in accounts receivable for fiscal 2021 compared to fiscal 2020 was primarily the result of the Acquisition as well as normal variations in the timing of collections and billings.Inventory in dollars increased in fiscal 2021 as compared to fiscal 2020, primarily as a result of the Acquisition as well as our efforts to balance manufacturing production, demand and inventory levels. Our inventory levels are impacted by our need to support forecasted sales demand and variations between those forecasts and actual demand. During the fourth quarter of fiscal 2021, the inventory values on the Consolidated Balance Sheet were also impacted by additional costs related to the Acquisition and the requirement to account for acquired inventory at fair-value. Current liabilities increased to $2,770.3 million at October 30, 2021 from $1,365.0 million recorded at the end of fiscal 2020. The increase was primarily due to the Acquisition, including $516.7 million of Maxim debt obligations classified as current and $584.9 million of accrued liabilities.Revolving Credit Facility Our Third Amended and Restated Revolving Credit Agreement, dated as of June 23, 2021, with Bank of America N.A. as administrative agent and the other banks identified therein as lenders (Revolving Credit Agreement) amended and restated our Second Amended and Restated Credit Agreement dated as of June 28, 2019 and provides for a five year unsecured revolving credit facility in an aggregate principal amount not to exceed $2.5 billion (subject to certain terms and conditions). In March 2020, we borrowed $350.0 million under this revolving credit facility and utilized the proceeds for the repayment of existing indebtedness and working capital requirements. We repaid the $350.0 million plus interest in April 2020. In September 2021, we borrowed $400.0 million under this revolving credit facility and utilized the proceeds for the repayment of existing indebtedness and working capital requirements. We repaid the $400.0 million plus interest in October 2021. We may borrow under this revolving credit facility in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. The terms of the Revolving Credit Agreement impose restrictions on our ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Revolving Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.5 to 1.0. As of October 30, 2021, we were in compliance with these covenants. See Note 13, Revolving Credit Facility, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our revolving credit facility.34DebtAs of October 30, 2021, we had $6.8 billion of carrying value outstanding on our debt. On November 4, 2021, we redeemed Maxim's 3.375% Senior Notes due 2023 in the aggregate principal amount of $500.0 million. The difference in the carrying value of the debt and the principal is due to the unamortized discount and issuance fees and other adjustments on these instruments. The indentures governing certain of our debt instruments contain covenants that may limit our ability to: incur, create, assume or guarantee any debt or borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party. As of October 30, 2021, we were compliant with these covenants. See Note 14, Debt, and Note 15, Subsequent Events, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our outstanding debt.Stock Repurchase ProgramIn September 2021, we entered into accelerated share repurchase agreements (ASR) with third party financial institutions to repurchase $2.5 billion of our common stock. We paid $2.5 billion and received an initial delivery of 12.3 million shares of common stock, which represented approximately 80% of the notional amount of the ASR. The final settlement of the transaction under the ASR is expected to occur in the first half of fiscal 2022.Our common stock repurchase program has been in place since August 2004. Since inception, our Board of Directors has authorized us to repurchase $16.7 billion of our common stock under the program, which includes the $8.5 billion authorization approved by the Board of Directors on August 25, 2021. Under the program, we may repurchase outstanding shares of our common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized under the program. As of October 30, 2021, $7.4 billion remained available for repurchase under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. We also repurchase shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options. Future repurchases of common stock will be dependent upon our financial position, results of operations, outlook, liquidity, and other factors we deem relevant. Capital ExpendituresNet additions to property, plant and equipment were $343.7 million in fiscal 2021 and were funded with a combination of cash on hand and cash generated from operations. We expect capital expenditures for fiscal 2022 to be between 6% and 8% of revenue, which is above our historical levels primarily due to our plans to expand internal manufacturing capacity. These capital expenditures will be funded with a combination of cash on hand and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing. Analog Devices FoundationDuring the first quarter of fiscal 2020, we contributed 335,654 shares of our common stock to the Analog Devices Foundation. As of the date of the contribution, the shares had a fair value of approximately $40.0 million. This expense was recorded in SMG&A in the Consolidated Statement of Income. DividendsOn November 22, 2021, our Board of Directors declared a cash dividend of $0.69 per outstanding share of common stock. The dividend will be paid on December 14, 2021 to all shareholders of record at the close of business on December 3, 2021 and is expected to total approximately $362.5 million. We currently expect quarterly dividends to continue in future periods, although they remain subject to determination and declaration by our Board of Directors. The payment of future dividends, if any, will be based on several factors, including our financial performance, outlook and liquidity.35Contractual ObligationsThe table below summarizes our material contractual obligations in specified periods as of October 30, 2021: Payment due by period Less than More than(thousands)Total1 Year1-3 Years3-5 Years5 YearsContractual obligations: Debt obligations (1)$6,776,865 $500,000 $500,000 $400,000 $5,376,865 Interest payments associated with debt obligations2,460,541 171,718 340,784 320,139 1,627,900 Transition tax (2)793,176 137,106 320,315 335,755 — Operating leases (3)393,002 61,855 103,418 84,059 143,670 Inventory-related purchase commitments (4)291,200 52,800 91,733 63,333 83,334 Total$10,714,784 $923,479 $1,356,250 $1,203,286 $7,231,769 _______________________________________(1)Debt obligations are assumed to be held to maturity. (2)Tax obligation relates to the one-time tax on deemed repatriated earnings under the Tax Cuts and Jobs Act of 2017 enacted in fiscal 2018. See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion. This amount includes transition tax payable attributable to the Acquisition of $266.1 million.(3)Certain of our operating lease obligations include escalation clauses. These escalating payment requirements are reflected in the table.(4)In connection with the Acquisition, we acquired a supplier commitment for the purchase of materials and supplies in advance or with minimum purchase quantities. As of October 30, 2021, our total liabilities associated with uncertain tax positions was $170.5 million, which are included in non-current income taxes payable in our Consolidated Balance Sheets contained in Item 8 of this Annual Report on Form 10-K. Due to the complexity associated with our tax uncertainties, we cannot make a reasonably reliable estimate of the period in which we expect to settle the non-current liabilities associated with these uncertain tax positions. Therefore, we have not included these uncertain tax positions in the above contractual obligations table.The expected timing of payments and the amounts of the obligations discussed above are estimated based on current information available as of October 30, 2021.New Accounting PronouncementsFrom time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) and are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards will not have a material impact on our future financial condition and results of operations. See Note 2s, New Accounting Pronouncements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and impact on our historical financial condition and results of operations.Critical Accounting Policies and EstimatesManagement’s discussion and analysis of the financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future based on available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. We also have other policies that we consider key accounting policies; however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.Revenue RecognitionRecognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration that we expect to receive in exchange for those products or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the 36contract, and (5) the performance obligations have been satisfied. The majority of our shipping terms permit us to recognize revenue at point of shipment or delivery. Certain shipping terms require the goods to be through customs or be received by the customer before title passes. In those instances, we defer the revenue recognized until title has passed. Shipping costs are charged to selling, marketing, general and administrative expense as incurred. Sales taxes are excluded from revenue.Revenue from contracts with the United States government, government prime contractors and certain commercial customers is recorded over time using either units delivered or costs incurred as the measurement basis for progress toward completion. These measures are used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.Performance Obligations: Substantially all of our contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. Such sales represent a single performance obligation because the sale is one type of good or includes multiple goods that are neither capable of being distinct nor separable from the other promises in the contract. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of one year or less. We generally warrant that our products will meet their published specifications, and that we will repair or replace defective products, for one year from the date title passes from us to the customer. Specific accruals are recorded for known product warranty issues. Transaction Price: The transaction price reflects our expectations about the consideration we will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to direct customers and sales to distributors in which both the sale to the distributor and the sale to the end customer occur within the same reporting period. Variable consideration includes sales in which the amount of consideration that we will receive is unknown as of the end of a reporting period. Such consideration primarily includes credits issued to the distributor due to price protection and sales made to distributors under agreements that allow certain rights of return, referred to as stock rotation. Price protection represents price discounts granted to certain distributors to allow the distributor to earn an appropriate margin on sales negotiated with certain customers and in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Stock rotation allows distributors limited levels of returns in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. A liability for distributor credits covering variable consideration is made based on management's estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions we have made based on our historical estimates.Contract Balances: Accounts receivable represents our unconditional right to receive consideration from our customers. Payments are typically due within 30 to 45 days of invoicing and do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the Consolidated Balance Sheets in any of the periods presented.Inventory ValuationWe value inventories at the lower of cost (first-in, first-out method) or market. Because of the cyclical nature of the semiconductor industry, changes in inventory levels, obsolescence of technology, and product life cycles, we write down inventories to net realizable value. We employ a variety of methodologies to determine the net realizable value of inventory. While a portion of the calculation is determined via reference to the age of inventory and lower of cost or market calculations, an element of the calculation is subject to significant judgments made by us about future demand for our inventory. If actual demand for our products is less than our estimates, additional adjustments to existing inventories may need to be recorded in future periods. To date, our actual results have not been materially different than our estimates, and we do not expect them to be materially different in the future.Long-Lived AssetsWe review property, plant, and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is determined by comparison of their carrying value to the estimated future undiscounted cash flows that the assets are expected to generate over their remaining estimated lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. Although we have recognized no material impairment 37adjustments related to our property, plant, and equipment and identified intangible assets during the past three fiscal years, except those made in conjunction with restructuring actions, deterioration in our business in the future could lead to such impairment adjustments in future periods. Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets. These differences could result in impairment charges, which could have a material adverse impact on our results of operations. In addition, in certain instances, assets may not be impaired but their estimated useful lives may have decreased. In these situations, we amortize the remaining net book values over the revised useful lives. GoodwillGoodwill is subject to impairment tests annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method. We test goodwill for impairment at the reporting unit level, which we determined is consistent with our identified operating segments, on an annual basis on the first day of the fourth quarter (on or about August 1) or more frequently if we believe indicators of impairment exist or we reorganize our operating segments or reporting units. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value. When using the qualitative method, we consider several factors, including the following:–the amount by which the fair values of each reporting unit exceeded their carrying values as of the date of the most recent quantitative impairment analysis, which indicated there would need to be substantial negative developments in the markets in which these reporting units operate in order for there to be potential impairment;–the carrying values of these reporting units as of the assessment date compared to their previously calculated fair values as of the date of the most recent quantitative impairment analysis;–the current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis;–public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses;–changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting units;–changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be an indication that the valuation of our reporting units had significantly decreased; and–whether there had been any significant increases to the weighted-average cost of capital rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.If we elect not to use this option, or we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the quantitative goodwill impairment test. The quantitative goodwill impairment test requires an entity to compare the fair value of a reporting unit with its carrying amount. If fair value is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, we consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We determine the fair value of our reporting units using a weighting of the income and market approaches. Under the income approach, we use a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, we use the guideline public company method. Under this method we utilize information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, we reconcile the aggregate fair values of our reporting units determined, as described above, to our total company market capitalization, allowing for a reasonable control premium. During fiscal 2021 and fiscal 2020, we elected to use the quantitative method of assessing goodwill for all of our reporting units. In all periods presented, we concluded the reporting units' fair values exceeded their carrying amounts as of the assessment dates and no risk of impairment existed. 38Business CombinationsUnder the acquisition method of accounting, we recognize tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of the fair value of the purchase consideration over the value of the net assets acquired as goodwill. The accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets and the fair value of contingent payment obligations. Critical estimates in valuing purchased technology, customer lists and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges which could be material. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.We record contingent consideration resulting from a business combination at its fair value on the acquisition date. We generally determine the fair value of the contingent consideration using the income approach methodology of valuation. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to operating expenses within the Consolidated Statements of Income. Changes in the fair value of the contingent consideration can result from changes in assumed discount periods and rates, and from changes pertaining to the achievement of the defined milestones. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period.Accounting for Income TaxesWe make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of income tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of certain expenses for tax and financial statement purposes. We assess the likelihood of the realization of deferred tax assets and record a corresponding valuation allowance as necessary if we determine those deferred tax assets may not be realized due to the uncertainty of the timing and amount to be realized of certain state and international tax credit carryovers. In reaching our conclusion, we evaluate certain relevant criteria including the existence of deferred tax liabilities that can be used to realize deferred tax assets, the taxable income in prior carryback years in the impacted state and international jurisdictions that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, which may result in an increase or decrease to our income tax provision in future periods.We account for uncertain tax positions by first determining if it is “more likely than not” that a tax position will be sustained by the appropriate taxing authorities prior to recording any benefit in the financial statements. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. For those tax positions where it is more likely than not that a tax position will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We classify interest and penalties related to uncertain tax positions within the (benefit from) provision for income taxes line of the Consolidated Statements of Income. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in known facts or circumstances, changes in tax law, effectively settled issues under audit, and new guidance on legislative interpretations. A change in these factors could result in the recognition of an increase or decrease to our income tax provision, which could materially impact our consolidated financial position and results of operations.In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement and royalty arrangements among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and income tax liabilities. In the event our assumptions are incorrect, the differences could have a material impact on our income tax provision and operating results in the period in which such determination is made. In addition to the factors described above, our current and expected effective tax rate is based on then-current tax law. Significant changes during the year in enacted tax law could affect these estimates.See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion.39Stock-Based CompensationStock-based compensation expense associated with stock options and related awards is recognized in the Consolidated Statements of Income. Determining the amount of stock-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of stock options and market-based restricted stock units. We calculate the grant-date fair values of stock options using the Black-Scholes valuation model. The grant-date fair value of restricted stock units with a service condition and restricted stock units with both service and performance conditions are calculated using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting. For restricted stock units with both service and performance conditions, this grant-date fair value is also impacted by the number of units that are expected to vest during the performance period and is adjusted through the related stock-based compensation expense at each reporting period based on the probability of achievement of that performance condition. If we determine that an award is unlikely to vest, any previously recorded stock-based compensation expense is reversed in the period of that determination. The grant date fair value of restricted stock units or performance-based stock options with both service and market conditions are calculated using the Monte Carlo simulation model to estimate the probability of satisfying the performance condition stipulated in the award grant, including the possibility that the market condition may not be satisfied.The use of valuation models requires us to make estimates of key assumptions such as expected option term and stock price volatility to determine the fair value of a stock option. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. We recognize the expense related to equity awards on a straight-line basis over the vesting period. See Note 2r, Stock-based Compensation, and Note 3, Stock-Based Compensation and Shareholders' Equity, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for more information related to stock-based compensation.ContingenciesFrom time to time, in the ordinary course of business, various claims, charges and litigation are asserted or commenced against us arising from, or related to, among other things, contractual matters, patents, trademarks, personal injury, environmental matters, product liability, insurance coverage, employment or employment benefits. We periodically assess each matter to determine if a contingent liability should be recorded. In making this determination, we may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. If a loss is probable and reasonably estimable, we record a contingent loss. In determining the amount of a contingent loss, we consider advice received from experts in the specific matter, current status of legal proceedings, settlement negotiations that may be ongoing, prior case history and other factors. If the judgments and estimates made by us are incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations.40 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate ExposureOur interest income and expense are sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest earned or paid on our marketable securities and debt, as well as the fair value of our investments and debt.Based on the $500.0 million of our floating rate debt outstanding as of October 30, 2021, our annual interest expense would change by approximately $5.0 million for each 100 basis point increase in interest rates. In certain instances, we utilize interest rate derivatives to manage interest rate exposure on both outstanding debt as well as future issuances. As of October 30, 2021, we had no outstanding interest rate derivative instruments. As of October 31, 2020, for each 100 basis point decrease in the ten-year U.S. Treasury rate, the fair value of our outstanding derivative instruments would have changed by approximately $102.0 million.Based on our marketable securities outstanding as of October 30, 2021 and October 31, 2020, our annual interest income would change by approximately $19.7 million and $10.6 million, respectively, for each 100 basis point increase in interest rates.To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of October 30, 2021 and October 31, 2020, a hypothetical 100 basis point increase in interest rates across all maturities would not materially impact the fair market value of the portfolio in either period. If significant, such losses would only be realized if we sold the investments prior to maturity.As of October 30, 2021, we had $6.8 billion in principal amount of senior unsecured notes outstanding, with a fair value of $7.1 billion. The fair value of our notes is subject to interest rate risk, market risk, and other factors. Generally, the fair value of our notes will increase as interest rates fall and decrease as interest rates rise. The fair values of our notes as of October 30, 2021 and October 31, 2020, assuming a hypothetical 100 basis point increase in market interest rates, are as follows:October 30, 2021October 31, 2020(thousands)Principal Amount OutstandingFair Value Fair Value given an increase in interest rates of 100 basis pointsPrincipal Amount OutstandingFair Value Fair Value given an increase in interest rates of 100 basis points2021 Notes, due December 2021$— $— $— $400,000 $408,565$404,170 2023 Notes, due March 2023500,000 520,236 513,273 — — — Maxim 2023 Notes, due June 2023— — — 500,000 526,855 513,874 2023 Notes, due December 2023— — — 550,000 590,177 572,965 2024 Notes, due October 2024500,000 500,482 486,201 — — — 2025 Notes, due April 2025400,000 423,265 409,725 400,000 434,919 417,225 2025 Notes, due December 2025— — — 850,000 969,033 924,695 2026 Notes, due December 2026900,000 986,243 941,160 900,000 1,017,505 962,821 Maxim 2027 Notes, due June 2027500,000 542,942 515,866 — — — 2028 Notes, due October 2028750,000 743,109 696,554 — — — 2031 Notes, due October 20311,000,000 996,702 912,196 — — — 2036 Notes, due December 2036144,278 176,960 158,110 250,000 298,153 265,210 2041 Notes, due October 2041750,000 758,246 652,754 — — — 2045 Notes, due December 2045332,587 469,592 404,287 400,000 538,788 463,425 2051 Notes, due October 20511,000,000 1,029,830 848,513 — — — 41Foreign Currency ExposureAs more fully described in Note 2i, Derivative and Hedging Agreements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K, we regularly hedge our non-U.S. dollar-based exposures by entering into forward foreign currency exchange contracts. The terms of these contracts are for periods matching the duration of the underlying exposure and generally range from one to twelve months. Currently, our largest foreign currency exposure is the Euro, primarily because our European operations have the highest proportion of our local currency denominated expenses. Relative to foreign currency exposures existing at October 30, 2021 and October 31, 2020, a 10% unfavorable movement in foreign currency exchange rates over the course of the year would result in approximately $39.5 million of losses and $18.5 million of losses, respectively, in changes in earnings or cash flows.The market risk associated with our derivative instruments results from currency exchange rates that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to our foreign exchange instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of our counterparties as of October 30, 2021, we do not believe that there is significant risk of nonperformance by them. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of our exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed our obligations to the counterparties.The following table illustrates the effect that a 10% unfavorable or favorable movement in foreign currency exchange rates, relative to the U.S. dollar, would have on the fair value of our forward exchange contracts as of October 30, 2021 and October 31, 2020:October 30, 2021October 31, 2020Fair value of forward exchange contracts$(8,085)$5,427 Fair value of forward exchange contracts after a 10% unfavorable movement in foreign currency exchange rates asset$26,673 $21,859 Fair value of forward exchange contracts after a 10% favorable movement in foreign currency exchange rates liability$(41,034)$(20,276)The calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices.42REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders Analog Devices, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Analog Devices, Inc. (the Company) as of October 30, 2021 and October 31, 2020, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended October 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 30, 2021 and October 31, 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 30, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated December 3, 2021 expressed an unqualified opinion thereon.Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that 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. We believe that our audits provide a reasonable basis for our opinion.Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.Revenue Recognition – Measuring Variable ConsiderationDescription of the MatterAs described in Note 2 to the consolidated financial statements, the Company's sales contracts provide certain distributors with credits for price protection and rights of return, which results in variable consideration. During 2021, sales to distributors were $4.6 billion net of expected price protection discounts and rights of return for which the liability balance as of October 30, 2021 was $664.2 million.Auditing the Company's measurement of variable consideration under distributor contracts involved especially challenging judgment because the calculation involves subjective management assumptions about estimates of expected price protection discounts and returns. For example, estimated variable consideration included in the transaction price reflects management's evaluation of contractual terms, historical experience and assumptions about future economic conditions. Changes in those assumptions can have a material effect on the amount of variable consideration recognized.43How We Addressed the Matter in Our AuditWe obtained an understanding over the Company's process to calculate the variable consideration. With the exception of the portion of the balance that related to Maxim Integrated Products, Inc., we also evaluated the design and tested the operating effectiveness of the relevant controls. For example, we tested controls over the appropriateness of assumptions management used as well as controls over the completeness and accuracy of the data underlying estimates of expected price protection discounts and returns.Our audit procedures included, among others, inspecting contractual terms in distributor agreements and testing the underlying data used in management’s calculation for completeness and accuracy as well as evaluating the significant assumptions used in the estimation of variable consideration. We evaluated the Company’s methods and assumptions used in the estimates, which included comparing the assumptions to historical trends. We inspected and tested the results of the Company's retrospective review analysis of actual returns and price protection discounts claimed by distributors, evaluated the estimates made based on historical experience and performed sensitivity analyses of the Company’s significant assumptions to assess the impact on the variable consideration. We also evaluated whether the Company appropriately considered new information that could significantly change the estimated future price protection discounts or returns.Accounting for Acquisitions – Valuation of Identified Intangibles Description of the MatterDuring 2021, the Company completed its acquisition of Maxim Integrated Products, Inc. (Maxim) for total consideration of $27.9 billion, as disclosed in Note 6 to the consolidated financial statements. The transaction was accounted for as a business combination.Auditing the Company's accounting for its acquisition of Maxim was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of identifiable intangible assets of $12.4 billion, which principally consisted of developed technology and customer relationships. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The Company used discounted cash flow models to measure the developed technology and customer relationship intangible assets. The significant assumptions used to estimate the fair value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g., annual revenue growth rates, developed technology obsolescence rates and customer attrition rates). These significant assumptions are forward looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's accounting for acquisitions process. For example, we tested controls over the appropriateness of the valuation model, assumptions management used as well as controls over the completeness and accuracy of the data underlying the valuation of the developed technology and customer relationship intangible assets.To test the estimated fair value of the developed technology and customer relationship intangible assets, our audit procedures included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data supporting the significant assumptions and estimates used by the Company in the valuation. We tested significant assumptions through a combination of procedures, as applicable for each assumption, including comparing them to current and forecasted industry and economic trends, as well as to the historical results of the acquired business and other guideline companies within the same industry. With the assistance of our valuation specialists, we evaluated the methodology used by the Company and significant assumptions included in the fair value estimates. /s/ Ernst & Young LLPWe have served as the Company’s auditor since 1967. Boston, MassachusettsDecember 3, 2021 44

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+ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.INTRODUCTIONThis section provides management’s discussion of the financial condition, changes in financial condition and results of operations of Atmos Energy Corporation and its consolidated subsidiaries with specific information on results of operations and liquidity and capital resources. It includes management’s interpretation of our financial results, the factors affecting these results, the major factors expected to affect future operating results and future investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto.Several factors exist that could influence our future financial performance, some of which are described in Item 1A above, “Risk Factors”. They should be considered in connection with evaluating forward-looking statements contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements.Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995The statements contained in this Annual Report on Form 10-K may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: federal, state and local regulatory and political trends and decisions, including the impact of rate proceedings before 21Table of Contentsvarious state regulatory commissions; increased federal regulatory oversight and potential penalties; possible increased federal, state and local regulation of the safety of our operations; the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; possible significant costs and liabilities resulting from pipeline integrity and other similar programs and related repairs; the inherent hazards and risks involved in distributing, transporting and storing natural gas; the availability and accessibility of contracted gas supplies, interstate pipeline and/or storage services; increased competition from energy suppliers and alternative forms of energy; adverse weather conditions; the impact of climate change; the inability to continue to hire, train and retain operational, technical and managerial personnel; increased dependence on technology that may hinder the Company's business if such technologies fail; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information; natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control; the capital-intensive nature of our business; our ability to continue to access the credit and capital markets to execute our business strategy; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty performance or creditworthiness and interest rate risk; the concentration of our operations in Texas; the impact of adverse economic conditions on our customers; changes in the availability and price of natural gas; increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements; and the outbreak of COVID-19 and its impact on business and economic conditions. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.CRITICAL ACCOUNTING POLICIESOur consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from estimates.Our significant accounting policies are discussed in Note 2 to our consolidated financial statements. The accounting policies discussed below are both important to the presentation of our financial condition and results of operations and require management to make difficult, subjective or complex accounting estimates. Accordingly, these critical accounting policies are reviewed periodically by the Audit Committee of the Board of Directors.Critical Accounting PolicySummary of PolicyFactors Influencing Application of the PolicyRegulationOur distribution and pipeline operations meet the criteria of a cost-based, rate-regulated entity under accounting principles generally accepted in the United States. Accordingly, the financial results for these operations reflect the effects of the ratemaking and accounting practices and policies of the various regulatory commissions to which we are subject.As a result, certain costs that would normally be expensed under accounting principles generally accepted in the United States are permitted to be capitalized or deferred on the balance sheet because it is probable they can be recovered through rates. Further, regulation may impact the period in which revenues or expenses are recognized. The amounts expected to be recovered or recognized are based upon historical experience and our understanding of the regulations.Discontinuing the application of this method of accounting for regulatory assets and liabilities or changes in the accounting for our various regulatory mechanisms could significantly increase our operating expenses as fewer costs would likely be capitalized or deferred on the balance sheet, which could reduce our net income.Decisions of regulatory authoritiesIssuance of new regulations or regulatory mechanismsAssessing the probability of the recoverability of deferred costsContinuing to meet the criteria of a cost-based, rate regulated entity for accounting purposes22Table of ContentsCritical Accounting PolicySummary of PolicyFactors Influencing Application of the PolicyUnbilled RevenueWe follow the revenue accrual method of accounting for distribution segment revenues whereby revenues attributable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense.When permitted, we implement rates that have not been formally approved by our regulatory authorities, subject to refund.We recognize this revenue and establish a reserve for amounts that could be refunded based on our experience for the jurisdiction in which the rates were implemented.Estimates of delivered sales volumes based on actual tariff information and weather information and estimates of customer consumption and/or behavior Estimates of purchased gas costs related to estimated deliveriesEstimates of amounts billed subject to refund23Table of ContentsCritical Accounting PolicySummary of PolicyFactors Influencing Application of the PolicyPension and other postretirement plansPension and other postretirement plan costs and liabilities are determined on an actuarial basis using a September 30 measurement date and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and current demographic and actuarial mortality data. The assumed discount rate and the expected return are the assumptions that generally have the most significant impact on our pension costs and liabilities. The assumed discount rate, the assumed health care cost trend rate and assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.The discount rate is utilized principally in calculating the actuarial present value of our pension and postretirement obligations and net periodic pension and postretirement benefit plan costs. When establishing our discount rate, we consider high quality corporate bond rates based on bonds available in the marketplace that are suitable for settling the obligations, changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit disbursements with currently available high quality corporate bonds.The expected long-term rate of return on assets is utilized in calculating the expected return on plan assets component of our annual pension and postretirement plan costs. We estimate the expected return on plan assets by evaluating expected bond returns, equity risk premiums, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical performance. We also consider the guidance from our investment advisors in making a final determination of our expected rate of return on assets. To the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate, that year’s annual pension or postretirement plan costs are not affected. Rather, this gain or loss reduces or increases future pension or postretirement plan costs over a period of approximately ten to twelve years.The market-related value of our plan assets represents the fair market value of the plan assets, adjusted to smooth out short-term market fluctuations over a five-year period. The use of this methodology will delay the impact of current market fluctuations on the pension expense for the period.We estimate the assumed health care cost trend rate used in determining our postretirement net expense based upon our actual health care cost experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated based upon our annual review of our participant census information as of the measurement date.General economic and market conditionsAssumed investment returns by asset classAssumed future salary increasesAssumed discount rateProjected timing of future cash disbursementsHealth care cost experience trendsParticipant demographic informationActuarial mortality assumptionsImpact of legislationImpact of regulationImpairment assessmentsWe review the carrying value of our long-lived assets, including goodwill and identifiable intangibles, whenever events or changes in circumstance indicate that such carrying values may not be recoverable, and at least annually for goodwill, as required by U.S. accounting standards.The evaluation of our goodwill balances and other long-lived assets or identifiable assets for which uncertainty exists regarding the recoverability of the carrying value of such assets involves the assessment of future cash flows and external market conditions and other subjective factors that could impact the estimation of future cash flows including, but not limited to the commodity prices, the amount and timing of future cash flows, future growth rates and the discount rate. Unforeseen events and changes in circumstances or market conditions could adversely affect these estimates, which could result in an impairment charge.General economic and market conditionsProjected timing and amount of future discounted cash flowsJudgment in the evaluation of relevant data24Table of ContentsNon-GAAP Financial MeasuresAs described further in Note 14 to the consolidated financial statements, due to the passage of Kansas House Bill 2585, we remeasured our deferred tax liability and updated our state deferred tax rate. As a result, we recorded a non-cash income tax benefit of $21.0 million for the fiscal year ended September 30, 2020. Due to the non-recurring nature of this benefit, we believe that net income and diluted net income per share before the non-cash income tax benefit provide a more relevant measure to analyze our financial performance than net income and diluted net income per share in order to allow investors to better analyze our core results and allow the information to be presented on a comparative basis. Accordingly, the following discussion and analysis of our financial performance will reference adjusted net income and adjusted diluted earnings per share, non-GAAP measures, which are calculated as follows: For the Fiscal Year Ended September 30 2021202020192021 vs. 20202020 vs. 2019 (In thousands, except per share data)Net income$665,563 $601,443 $511,406 $64,120 $90,037 Non-cash income tax benefits— (20,962)— 20,962 (20,962)Adjusted net income$665,563 $580,481 $511,406 $85,082 $69,075 Diluted net income per share$5.12 $4.89 $4.35 $0.23 $0.54 Diluted EPS from non-cash income tax benefits— (0.17)— 0.17 (0.17)Adjusted diluted net income per share$5.12 $4.72 $4.35 $0.40 $0.37 RESULTS OF OPERATIONSOverviewAtmos Energy strives to operate its businesses safely and reliably while delivering superior shareholder value. Our commitment to modernizing our natural gas distribution and transmission systems requires a significant level of capital spending. We have the ability to begin recovering a significant portion of these investments timely through rate designs and mechanisms that reduce or eliminate regulatory lag and separate the recovery of our approved rate from customer usage patterns. The execution of our capital spending program, the ability to recover these investments timely and our ability to access the capital markets to satisfy our financing needs are the primary drivers that affect our financial performance.The following table details our consolidated net income by segment during the last three fiscal years: For the Fiscal Year Ended September 30 202120202019 (In thousands)Distribution segment$445,862 $395,664 $328,814 Pipeline and storage segment219,701 205,779 182,592 Net income$665,563 $601,443 $511,406 During fiscal 2021, we recorded net income of $665.6 million, or $5.12 per diluted share, compared to net income of $601.4 million, or $4.89 per diluted share in the prior year. After adjusting for a nonrecurring income tax benefit recognized during fiscal 2020, adjusted net income was $580.5 million, or $4.72 per diluted share in the prior year. The year-over-year increase in adjusted net income of $85.1 million largely reflects positive rate outcomes driven by safety and reliability spending and distribution customer growth, partially offset by lower service order revenues and higher bad debt expense in our distribution segment due to the temporary suspension of collection activities during the pandemic and increased spending on system maintenance activities.During the year ended September 30, 2021, we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of $185.7 million. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total fiscal 2021 rate outcomes were $226.2 million. Additionally, we had ratemaking efforts in progress at September 30, 2021, seeking a total increase in annual operating income of $56.5 million. As of the date of this report, we have received approval to implement $25.0 million of this amount in the first quarter of fiscal 2022. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, we have received approval to implement $68.5 million during the first quarter of fiscal 2022.25Table of ContentsDuring fiscal year 2021, we refunded $55.9 million in excess deferred tax liabilities to customers. The refunds reduced operating income and reduced our annual effective income tax rate to 18.8% in fiscal 2021 compared with 19.5% in fiscal 2020.Capital expenditures for fiscal 2021 increased 2 percent period-over-period, to $2.0 billion. Over 85 percent was invested to improve the safety and reliability of our distribution and transportation systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce regulatory lag to six months or less. During fiscal 2021, we completed over $3.4 billion of long-term debt and equity financing, including $2.2 billion of incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri. As of September 30, 2021, our equity capitalization was 51.9 percent. Excluding the $2.2 billion of incremental financing, our equity capitalization was 60.6 percent. As of September 30, 2021, we had approximately $2.9 billion in total liquidity, including cash and cash equivalents and funds available through equity forward sales agreements.As a result of the continued stability of our earnings, cash flows and capital structure, our Board of Directors increased the quarterly dividend by 8.8% percent for fiscal 2022.Distribution SegmentThe distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. The primary factors that impact the results of our distribution operations are our ability to earn our authorized rates of return, competitive factors in the energy industry and economic conditions in our service areas.Our ability to earn our authorized rates is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions to minimize regulatory lag and, ultimately, separate the recovery of our approved rates from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions. The “Ratemaking Activity” section of this Form 10-K describes our current rate strategy, progress towards implementing that strategy and recent ratemaking initiatives in more detail. During fiscal 2021, we completed regulatory proceedings in our distribution segment resulting in a $141.8 million increase in annual operating income. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total fiscal 2021 annualized rate outcomes in our distribution segment were $182.3 million.Our distribution operations are also affected by the cost of natural gas. We are generally able to pass the cost of gas through to our customers without markup under purchased gas cost adjustment mechanisms; therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Revenues in our Texas and Mississippi service areas include franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income.The cost of gas typically does not have a direct impact on our operating income because these costs are recovered through our purchased gas cost adjustment mechanisms. However, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us to collect from our customers the gas cost portion of our bad debt expense on approximately 79 percent of our residential and commercial revenues. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources. 26Table of ContentsReview of Financial and Operating ResultsFinancial and operational highlights for our distribution segment for the fiscal years ended September 30, 2021, 2020 and 2019 are presented below. For the Fiscal Year Ended September 30 2021202020192021 vs. 20202020 vs. 2019 (In thousands, unless otherwise noted)Operating revenues$3,241,973 $2,626,993 $2,745,461 $614,980 $(118,468)Purchased gas cost1,501,695 1,071,227 1,268,591 430,468 (197,364)Operating expenses1,121,764 1,027,523 1,006,098 94,241 21,425 Operating income618,514 528,243 470,772 90,271 57,471 Other non-operating income (expense)(20,694)(1,265)6,241 (19,429)(7,506)Interest charges36,629 39,634 60,031 (3,005)(20,397)Income before income taxes561,191 487,344 416,982 73,847 70,362 Income tax expense115,329 105,147 88,168 10,182 16,979 Non-cash income tax benefit (1)— (13,467)— 13,467 (13,467)Net income$445,862 $395,664 $328,814 $50,198 $66,850 Consolidated distribution sales volumes — MMcf308,833 291,650 315,476 17,183 (23,826)Consolidated distribution transportation volumes — MMcf152,513 147,387 155,078 5,126 (7,691)Total consolidated distribution throughput — MMcf461,346 439,037 470,554 22,309 (31,517)Consolidated distribution average cost of gas per Mcf sold$4.86 $3.67 $4.02 $1.19 $(0.35)(1)See Note 14 to the consolidated financial statements for further information.Fiscal year ended September 30, 2021 compared with fiscal year ended September 30, 2020 Operating income for our distribution segment increased 17 percent, which primarily reflects:•a $150.6 million increase in rate adjustments, primarily in our Mid-Tex, Mississippi, Louisiana and West Texas Divisions.•a $19.2 million increase from customer growth primarily in our Mid-Tex Division.•a $3.8 million decrease in employee related costs.•a $5.0 million decrease in travel and entertainment expense.Partially offset by:•a $43.6 million increase in depreciation expense and property taxes associated with increased capital investments.•an $18.2 million increase in bad debt expense primarily due to the temporary suspension of collection activities.•a $12.8 million increase in pipeline maintenance and related activities.•a $5.1 million increase in insurance expense.•an $8.4 million decrease in service order revenues primarily due to the temporary suspension of collection activities.The year-over- year change in other non-operating expense and interest charges of $22.4 million primarily reflects increased amortization of prior service cost associated with our Retiree Medical Plan, as presented in Note 12 to the consolidated financial statements.During fiscal 2021, we refunded $29.4 million in excess deferred taxes in the distribution segment, which reduced operating income year over year and reduced the annual effective income tax rate for this segment to 20.6% compared with 21.6% in the prior year.The fiscal year ended September 30, 2020 compared with fiscal year ended September 30, 2019 for our distribution segment is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.27Table of ContentsThe following table shows our operating income by distribution division, in order of total rate base, for the fiscal years ended September 30, 2021, 2020 and 2019. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes. For the Fiscal Year Ended September 30 2021202020192021 vs. 20202020 vs. 2019 (In thousands)Mid-Tex$310,293 $236,066 $202,050 $74,227 $34,016 Kentucky/Mid-States73,259 76,745 73,965 (3,486)2,780 Louisiana72,388 71,892 70,440 496 1,452 West Texas51,104 52,493 44,902 (1,389)7,591 Mississippi65,337 55,938 46,229 9,399 9,709 Colorado-Kansas32,778 34,039 34,362 (1,261)(323)Other13,355 1,070 (1,176)12,285 2,246 Total$618,514 $528,243 $470,772 $90,271 $57,471 Pipeline and Storage SegmentOur pipeline and storage segment consists of the pipeline and storage operations of our Atmos Pipeline–Texas Division (APT) and our natural gas transmission operations in Louisiana. APT is one of the largest intrastate pipeline operations in Texas with a heavy concentration in the established natural gas producing areas of central, northern and eastern Texas, extending into or near the major producing areas of the Barnett Shale, the Texas Gulf Coast and the Permian Basin of West Texas. APT provides transportation and storage services to our Mid-Tex Division, other third-party local distribution companies, industrial and electric generation customers, as well as marketers and producers. Over 80 percent of this segment's revenues are derived from these services. As part of its pipeline operations, APT owns and operates five underground storage facilities in Texas.Our natural gas transmission operations in Louisiana are comprised of a 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and, on a more limited basis, to third parties. The demand fee charged to our Louisiana distribution division for these services is subject to regulatory approval by the Louisiana Public Service Commission. We also manage two asset management plans, which have been approved by applicable state regulatory commissions. Generally, these asset management plans require us to share with our distribution customers a significant portion of the cost savings earned from these arrangements.Our pipeline and storage segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our Texas and Louisiana service areas. Natural gas prices do not directly impact the results of this segment as revenues are derived from the transportation and storage of natural gas. However, natural gas prices and demand for natural gas could influence the level of drilling activity in the supply areas that we serve, which may influence the level of throughput we may be able to transport on our pipelines. Further, natural gas price differences between the various hubs that we serve in Texas could influence the volumes of gas transported for shippers through our Texas pipeline system and rates for such transportation.The results of APT are also significantly impacted by the natural gas requirements of its local distribution company customers. Additionally, its operations may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs. APT annually uses GRIP to recover capital costs incurred in the prior calendar year. On February 12, 2021, APT made a GRIP filing that covered changes in net property, plant and equipment investment from January 1, 2020 through December 31, 2020 with a requested increase in operating income of $44.0 million. On May 11, 2021, the Texas Railroad Commission approved an increase in operating income of $43.9 million. In February 2021, the RRC approved a reduction in revenue of $106.6 million to refund excess deferred tax liabilities to customers over 35 months. On December 21, 2016, the Louisiana Public Service Commission approved an annual increase of five percent to the demand fee charged by our natural gas transmission pipeline for each of the next 10 years, effective October 1, 2017.28Table of ContentsReview of Financial and Operating ResultsFinancial and operational highlights for our pipeline and storage segment for the fiscal years ended September 30, 2021, 2020 and 2019 are presented below. For the Fiscal Year Ended September 30 2021202020192021 vs. 20202020 vs. 2019 (In thousands, unless otherwise noted)Mid-Tex / Affiliate transportation revenue$497,730 $474,077 $428,586 $23,653 $45,491 Third-party transportation revenue127,874 127,444 129,930 430 (2,486)Other revenue11,743 7,818 8,508 3,925 (690)Total operating revenues637,347 609,339 567,024 28,008 42,315 Total purchased gas cost1,582 1,548 (360)34 1,908 Operating expenses349,281 311,935 292,098 37,346 19,837 Operating income286,484 295,856 275,286 (9,372)20,570 Other non-operating income18,549 8,436 1,163 10,113 7,273 Interest charges46,925 44,840 43,122 2,085 1,718 Income before income taxes258,108 259,452 233,327 (1,344)26,125 Income tax expense38,407 61,168 50,735 (22,761)10,433 Non-cash income tax benefit (1)— (7,495)— 7,495 (7,495)Net income$219,701 $205,779 $182,592 $13,922 $23,187 Gross pipeline transportation volumes — MMcf799,724 822,499 939,376 (22,775)(116,877)Consolidated pipeline transportation volumes — MMcf585,857 621,371 721,998 (35,514)(100,627)(1)See Note 14 to the consolidated financial statements for further information.Fiscal year ended September 30, 2021 compared with fiscal year ended September 30, 2020Operating income for our pipeline and storage segment decreased three percent, which primarily reflects:•an $8.2 million net decrease in APT's thru-system activities primarily associated with the tightening of regional spreads driven by increased competing takeaway capacity in the Permian Basin.•a $17.1 million increase in system maintenance expense primarily due to spending on hydro testing and in-line inspections.•a $17.0 million increase in depreciation expense and property taxes associated with increased capital investments.Partially offset by:•a $56.2 million increase due to rate adjustments from the GRIP filings approved in May 2020 and 2021. The increase in rates was driven by increased safety and reliability spending.The year-over- year change in other non-operating income and interest charges of $8.0 million reflects increased allowance for funds used during construction (AFUDC) primarily due to increased capital spending, partially offset by an increase in interest expense due to the issuance of long-term debt during fiscal 2021. During fiscal 2021 we refunded $26.5 million in excess deferred taxes in our pipeline and storage segment, which reduced operating income year over year and reduced the annual effective tax rate for this segment to 14.9% compared with 23.6% in the prior year. The fiscal year ended September 30, 2020 compared with fiscal year ended September 30, 2019 for our pipeline and storage segment is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.LIQUIDITY AND CAPITAL RESOURCESThe liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. Additionally, we have a $1.5 billion commercial paper program and four committed revolving credit facilities with $2.5 billion in total availability from third-party 29Table of Contentslenders. The commercial paper program and credit facilities provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company's desired capital structure with an equity-to-total-capitalization ratio between 50% and 60%, inclusive of long-term and short-term debt. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we utilize to purchase natural gas on a monthly basis. We have a shelf registration statement on file with the Securities and Exchange Commission (SEC) that allows us to issue up to $5.0 billion in common stock and/or debt securities. As of the date of this report, approximately $3.4 billion of securities remained available for issuance under the shelf registration statement, which expires June 29, 2024.We also have an at-the-market (ATM) equity sales program that allows us to issue and sell shares of our common stock up to an aggregate offering price of $1.0 billion (including shares of common stock that may be sold pursuant to forward sale agreements entered into in connection with the ATM equity sales program), which expires June 29, 2024. At September 30, 2021, approximately $760 million of equity is available for issuance under this ATM equity sales program. Additionally, as of September 30, 2021, we had $302.0 million in available proceeds from outstanding forward sale agreements that must be settled during fiscal 2022.During fiscal 2021, we entered into forward starting interest rate swaps to effectively fix the Treasury yield component associated with $1.4 billion of planned issuances of unsecured senior notes. During fiscal 2021, we settled swaps of $600 million with a net receipt of $62.2 million. On October 1, 2021, the notes were issued as planned.The following table summarizes our existing forward starting interest rate swaps as of September 30, 2021.Planned Debt Issuance DateAmount HedgedEffective Interest Rate(In thousands)Fiscal 2023500,000 1.66 %Fiscal 2024450,000 1.80 %Fiscal 2025600,000 1.75 %Fiscal 2026300,000 2.16 %$1,850,000 The liquidity provided by these sources is expected to be sufficient to fund the Company's working capital needs and capital expenditures program. Additionally, we expect to continue to be able to obtain financing upon reasonable terms as necessary.The following table presents our capitalization as of September 30, 2021 and 2020: September 30 20212020 (In thousands, except percentages)Short-term debt$— — %$— — %Long-term debt (1)7,330,657 48.1 %4,531,944 40.0 %Shareholders’ equity (2)7,906,889 51.9 %6,791,203 60.0 %Total capitalization, including short-term debt$15,237,546 100.0 %$11,323,147 100.0 %(1)Inclusive of our finance leases.(2)Excluding the $2.2 billion of incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri, our equity capitalization ratio would have been 60.6%.Cash FlowsOur internally generated funds may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for our services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors.Cash flows from operating, investing and financing activities for the years ended September 30, 2021, 2020 and 2019 are presented below.30Table of Contents For the Fiscal Year Ended September 30 2021202020192021 vs. 20202020 vs. 2019 (In thousands)Total cash provided by (used in)Operating activities$(1,084,251)$1,037,999 $968,769 $(2,122,250)$69,230 Investing activities(1,963,655)(1,925,518)(1,683,660)(38,137)(241,858)Financing activities3,143,821 883,777 725,670 2,260,044 158,107 Change in cash and cash equivalents95,915 (3,742)10,779 99,657 (14,521)Cash and cash equivalents at beginning of period20,808 24,550 13,771 (3,742)10,779 Cash and cash equivalents at end of period$116,723 $20,808 $24,550 $95,915 $(3,742)Cash flows for the fiscal year ended September 30, 2020 compared with fiscal year ended September 30, 2019 is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.Cash flows from operating activitiesFor the fiscal year ended September 30, 2021, cash flow used from operating activities was $1.1 billion compared with cash flows generated from operating activities of $1.0 billion in the prior year. The year-over-year decrease in operating cash flows reflects gas costs incurred during Winter Storm Uri and the timing of customer collections partially offset by the positive effects of successful rate case outcomes achieved in fiscal 2020 and 2021.Cash flows from investing activitiesOur capital expenditures are primarily used to improve the safety and reliability of our distribution and transmission system through pipeline replacement and system modernization and to enhance and expand our system to meet customer needs. Over the last three fiscal years, approximately 88 percent of our capital spending has been committed to improving the safety and reliability of our system. For the fiscal year ended September 30, 2021, we had $1.97 billion in capital expenditures compared with $1.94 billion for the fiscal year ended September 30, 2020. Capital spending increased by $33.8 million, or two percent, as a result of planned increases to modernize our system.Cash flows from financing activitiesOur financing activities provided $3.1 billion and $883.8 million in cash for fiscal years 2021 and 2020.During the fiscal year ended September 30, 2021, we received $3.4 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $600 million of 1.50% senior notes due 2031, $1.1 billion of 0.625% senior notes due 2023 and $1.1 billion floating rate senior notes due 2023. Net proceeds from the latter two notes were used to pay for gas costs incurred during Winter Storm Uri. Additionally, during the year ended September 30, 2021, we settled 6,130,875 shares that had been sold on a forward basis for net proceeds of $606.7 million. The net proceeds were used primarily to support capital spending and for other general corporate purposes, including the payment of natural gas purchases. Additionally, cash dividends increased due to an 8.7 percent increase in our dividend rate and an increase in shares outstanding.During the fiscal year ended September 30, 2020, we received $1.6 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $300 million of 2.625% senior notes due 2029 and $500 million of 3.375% senior notes due 2049 and entered into a two year $200 million term loan. We received net proceeds from these offerings, after the underwriting discount and offering expenses, of $791.7 million. Additionally, we settled 6,101,916 shares that had been sold on a forward basis for net proceeds of approximately $624 million. The net proceeds were used primarily to support capital spending, reduce short-term debt and other general corporate purposes. Cash dividends increased due to a 9.5 percent increase in our dividend rate and an increase in shares outstanding.31Table of ContentsThe following table shows the number of shares issued for the fiscal years ended September 30, 2021, 2020 and 2019: For the Fiscal Year Ended September 30 202120202019Shares issued:Direct Stock Purchase Plan79,921 107,989 110,063 Retirement Savings Plan and Trust84,265 78,941 81,456 1998 Long-Term Incentive Plan (LTIP)242,216 254,706 299,612 Equity Issuance (1)6,130,875 6,101,916 7,574,111 Total shares issued6,537,277 6,543,552 8,065,242 (1)Share amounts do not include shares issued under forward sale agreements until the shares have been settled.Credit RatingsOur credit ratings directly affect our ability to obtain short-term and long-term financing, in addition to the cost of such financing. In determining our credit ratings, the rating agencies consider a number of quantitative factors, including but not limited to, debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and operating cash flow less dividends to debt. In addition, the rating agencies consider qualitative factors such as consistency of our earnings over time, the risks associated with our business and the regulatory structures that govern our rates in the states where we operate.Our debt is rated by two rating agencies: Standard & Poor’s Corporation (S&P) and Moody’s Investors Service (Moody’s). As a result of the impacts of Winter Storm Uri, during the second quarter of fiscal 2021, S&P lowered our long-term and short-term credit ratings by one notch and placed our ratings under negative outlook and Moody's reaffirmed its long-term and short-term credit ratings and placed our ratings under negative outlook.As of September 30, 2021, our outlook and current debt ratings, which are all considered investment grade are as follows: S&P Moody’s Senior unsecured long-term debt A- A1 Short-term debt A-2 P-1 OutlookNegativeNegative A significant degradation in our operating performance or a significant reduction in our liquidity caused by more limited access to the private and public credit markets as a result of deteriorating global or national financial and credit conditions could trigger a negative change in our ratings outlook or even a reduction in our credit ratings by the two credit rating agencies. This would mean more limited access to the private and public credit markets and an increase in the costs of such borrowings.A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating is AAA for S&P and Aaa for Moody’s. The lowest investment grade credit rating is BBB- for S&P and Baa3 for Moody’s. Our credit ratings may be revised or withdrawn at any time by the rating agencies, and each rating should be evaluated independently of any other rating. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered, or withdrawn entirely, by a rating agency if, in its judgment, circumstances so warrant.Debt CovenantsWe were in compliance with all of our debt covenants as of September 30, 2021. Our debt covenants are described in Note 7 to the consolidated financial statements.32Table of ContentsContractual Obligations and Commercial CommitmentsThe following table provides information about contractual obligations and commercial commitments at September 30, 2021. Payments Due by PeriodTotalLess than 1year1-3 years 3-5 yearsMore than 5years (In thousands) Contractual ObligationsLong-term debt (1)$7,360,000 $200,000 $2,200,000 $10,000 $4,950,000 Interest charges (2)4,268,559 221,325 418,664 412,654 3,215,916 Finance leases (3)29,809 1,342 2,753 2,846 22,868 Operating leases (4)271,074 41,822 68,043 39,359 121,850 Financial instrument obligations (5)5,269 5,269 — — — Pension and postretirement benefit plan contributions (6)315,298 26,126 59,252 90,829 139,091 Uncertain tax positions (7)32,792 — 32,792 — — Total contractual obligations $12,282,801 $495,884 $2,781,504 $555,688 $8,449,725 (1)Long-term debt excludes our finance lease obligations, which are separately reported within this table. The $1.1 billion of 0.625% senior notes and $1.1 billion floating rate senior notes that were issued in March 2021 contractually mature in 2023; however, we intend to repay these after the receipt of securitization funds, which we expect will occur in the next twelve months. As such, we have classified the senior notes as current maturities of long-term debt as of September 30, 2021. See Notes 7 and 9 to the consolidated financial statements for further details. (2)Interest charges were calculated using the effective rate for each debt issuance through the contractual maturity date.(3)Finance lease payments shown above include interest totaling $11.1 million. See Note 6 to the consolidated financial statements.(4)Operating lease payments shown above include interest totaling $38.6 million. See Note 6 to the consolidated financial statements.(5)Represents liabilities for natural gas commodity financial instruments that were valued as of September 30, 2021. The ultimate settlement amounts of these remaining liabilities are unknown because they are subject to continuing market risk until the financial instruments are settled.(6)Represents expected contributions to our defined benefit and postretirement benefit plans, which are discussed in Note 10 to the consolidated financial statements.(7)Represents liabilities associated with uncertain tax positions claimed or expected to be claimed on tax returns. The amount does not include interest and penalties that may be applied to these positions.We maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of individual contracts. Our Mid-Tex Division also maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at market and fixed prices. At September 30, 2021, we were committed to purchase 32.4 Bcf within one year and 12.9 Bcf within two to three years under indexed contracts. At September 30, 2021, we were committed to purchase 11.9 Bcf within one year under fixed price contracts ranging from $1.86 to $7.03 per Mcf.Risk Management ActivitiesIn our distribution and pipeline and storage segments, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. Additionally, we manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings. We record our financial instruments as a component of risk management assets and liabilities, which are classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instrument. Substantially all of our financial instruments are valued using external market quotes and indices.33Table of ContentsThe following table shows the components of the change in fair value of our financial instruments for the fiscal year ended September 30, 2021 (in thousands):Fair value of contracts at September 30, 2020$78,663 Contracts realized/settled(64,205)Fair value of new contracts13,136 Other changes in value197,823 Fair value of contracts at September 30, 2021225,417 Netting of cash collateral— Cash collateral and fair value of contracts at September 30, 2021$225,417 The fair value of our financial instruments at September 30, 2021, is presented below by time period and fair value source: Fair Value of Contracts at September 30, 2021 Maturity in years Source of Fair ValueLessthan 11-34-5Greaterthan 5TotalFairValue (In thousands)Prices actively quoted$49,804 $94,522 $81,091 $— $225,417 Prices based on models and other valuation methods— — — — — Total Fair Value$49,804 $94,522 $81,091 $— $225,417 RECENT ACCOUNTING DEVELOPMENTSRecent accounting developments and their impact on our financial position, results of operations and cash flows are described in Note 2 to the consolidated financial statements. ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk.We are exposed to risks associated with commodity prices and interest rates. Commodity price risk is the potential loss that we may incur as a result of changes in the fair value of a particular instrument or commodity. Interest-rate risk is the potential increased cost we could incur when we issue debt instruments or to provide financing and liquidity for our business activities. Additionally, interest-rate risk could affect our ability to issue cost effective equity instruments.We conduct risk management activities in our distribution and pipeline and storage segments. In our distribution segment, we use a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season. Our risk management activities and related accounting treatment are described in further detail in Note 15 to the consolidated financial statements. Additionally, our earnings are affected by changes in short-term interest rates as a result of our issuance of short-term commercial paper and our other short-term borrowings.Commodity Price RiskWe purchase natural gas for our distribution operations. Substantially all of the costs of gas purchased for distribution operations are recovered from our customers through purchased gas cost adjustment mechanisms. Therefore, our distribution operations have limited commodity price risk exposure.Interest Rate RiskOur earnings are exposed to changes in short-term interest rates associated with our short-term commercial paper program and other short-term borrowings. We use a sensitivity analysis to estimate our short-term interest rate risk. For purposes of this analysis, we estimate our short-term interest rate risk as the difference between our actual interest expense for the period and estimated interest expense for the period assuming a hypothetical average one percent increase in the interest rates associated with our short-term borrowings. Had interest rates associated with our short-term borrowings increased by an average of one percent, our interest expense would not have materially increased during 2021.34Table of Contents

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsWe are the leading retailer, and a leading distributor, of automotive replacement parts and accessories in the Americas. We began operations in 1979 and at August 28, 2021, operated 6,051 stores in the U.S., 664 stores in Mexico and 52 stores in Brazil. Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. At August 28, 2021, in 5,179 of our domestic stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. We also have commercial programs in all stores in Mexico and Brazil. We also sell the ALLDATA brand automotive diagnostic, repair and shop management software through www.alldata.com. Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and our commercial customers can make purchases through www.autozonepro.com. We also provide product information on our Duralast branded products through www.duralastparts.com. We do not derive revenue from automotive repair or installation services.COVID-19 Impact​COVID-19 continues to impact numerous aspects of our business. Our sales remain at record levels as we have experienced unprecedented customer demand for our products during the COVID-19 pandemic, as we believe that many of our customers have benefitted from pandemic-related government stimulus and benefits. Our main priority continues to be the health, safety and well-being of our customers and AutoZoners. We continue to invest in supplies for the protection of our employees and customers and increased the frequency of cleaning and disinfecting our stores. For fiscal 2021, we incurred approximately $43.0 million in pandemic related expenses, including Emergency Time-Off benefit enhancements for both full-time and part-time employees as compared to approximately $83.9 million in the comparable prior year period.​The long-term impact to our business remains unknown as we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the likelihood of additional variants and resurgences of the outbreak, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy and public acceptance of vaccines, and unintended consequences of the foregoing. Furthermore, the continuing pandemic and related economic uncertainty may result in prolonged disruption and volatility to our business and magnify certain risks, including risks associated with sourcing quality merchandise domestically and outside the U.S.; our ability to promptly adjust inventory levels to meet fluctuations in customer demand; our ability to comply with complex and evolving laws and regulations related to customers’ and AutoZoners’ health and safety; our ability to open new store locations and expand or remodel existing stores; and our ability to hire and train qualified employees to address temporary or sustained labor shortages. ​Executive SummaryFor fiscal 2021, we achieved record net income of $2.170 billion, a 25.2% increase over the prior year, and sales growth of $1.998 billion, a 15.8% increase over the prior year. Domestic commercial sales increased 22.6%, which represents approximately 23% of our total sales. Both our retail sales and commercial sales grew this past year as we continue to experience unprecedented demand for our products during the COVID-19 pandemic and make progress on our initiatives aimed at improving our ability to say “Yes” to our customers more frequently, drive traffic to our stores and accelerate our commercial growth.​Our business is impacted by various factors within the economy that affect both our consumer and our industry, including but not limited to fuel costs, wage rates, supply chain disruptions, hiring and other economic conditions, including for fiscal 2021 and 2020, the effects of, and responses to, COVID-19. Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.​26 Table of ContentsOne macroeconomic factor affecting our customers and our industry during fiscal 2021 was gas prices. During fiscal 2021, the average price per gallon of unleaded gasoline in the U.S. was $2.62, compared to $2.32 during fiscal 2020. We believe fluctuations in gas prices impact our customers’ level of disposable income. With approximately 10 billion gallons of unleaded gas consumption each month across the U.S., each $1 decrease at the pump contributes approximately $10 billion of additional spending capacity to consumers each month. Given the unpredictability of gas prices, we cannot predict whether gas prices will increase or decrease, nor can we predict how any future changes in gas prices will impact our sales in future periods.​We have also experienced continued accelerated pressure on wages in the U.S. during fiscal 2021. Some of this is attributed to regulatory changes in certain states and municipalities, while the larger portion is being driven by general market pressures and some specific actions taken recently by other retailers. The regulatory changes are expected to continue, as evidenced by the areas that have passed legislation to increase employees’ wages substantially over the next few years, but we are still assessing to what degree these changes will impact our earnings growth in future periods.During fiscal 2021, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 83% of total sales, with failure related categories continuing to comprise our largest set of categories. While we have not experienced any fundamental shifts in our category sales mix as compared to previous years, in our domestic stores we continue to see a slight increase in mix of sales of the discretionary category as compared to last year. We believe the improvement in this sales category resulted from the pandemic as many of our customers continue to have more time to work on discretionary projects. The two statistics we believe have the closest correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road.Miles DrivenWe believe as the number of miles driven increases, consumers’ vehicles are more likely to need service and maintenance, resulting in an increase in the need for automotive hard parts and maintenance items. While over the long-term we have seen a close correlation between our net sales and the number of miles driven, we have also seen certain time frames of minimal correlation in sales performance and miles driven. During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road. Since the beginning of the fiscal year and through July 2021 (latest publicly available information), miles driven in the U.S. decreased by 5.2% compared to the same period in the prior year. We believe this decrease is a result of the pandemic, but we are unable to predict if this decline will continue and are uncertain of the impact it will have to our business.Seven Year Old or Older VehiclesAccording to the latest data provided by the U.S. Bureau of Economic Analysis, new light vehicle sales for the year ended August 2021 increased 11.5% as compared to the comparable prior year period. We estimate vehicles are driven an average of approximately 12,500 miles each year. In seven years, the average miles driven equates to approximately 87,500 miles. Our experience is that at this point in a vehicle’s life, most vehicles are not covered by warranties and increased maintenance is needed to keep the vehicle operating.According to the latest data provided by the Auto Care Association, as of January 1, 2021, the average age of light vehicles on the road was 12.1 years. The average age of light vehicles has exceeded 11 years since 2012.We expect the aging vehicle population to continue to increase as consumers keep their cars longer in an effort to save money. Additionally, there is increased demand for used vehicles as a result of new vehicle inventory shortages during the COVID-19 pandemic. As the number of seven year old or older vehicles on the road increases, we expect an increase in demand for the products we sell.​27 Table of ContentsResults of OperationsThe following table highlights selected financial information over the last 5 years:​​​​​​​​​​​​​​​​​​​Fiscal Year Ended August (in thousands, except per share data, same store sales and selected operating data) 2021(1) 2020(1) 2019(2) 2018(3) 2017 ​​​​​​​​​​​​​​​​​Income Statement Data ​ ​ ​ ​ ​ Net sales​$ 14,629,585​$ 12,631,967​$ 11,863,743​$ 11,221,077​$ 10,888,676​Cost of sales, including warehouse and delivery expenses​ 6,911,800​ 5,861,214​ 5,498,742​ 5,247,331​ 5,149,056​Gross profit​ 7,717,785​ 6,770,753​ 6,365,001​ 5,973,746​ 5,739,620​Operating, selling, general and administrative expenses​ 4,773,258​ 4,353,074​ 4,148,864​ 4,162,890​ 3,659,551​Operating profit​ 2,944,527​ 2,417,679​ 2,216,137​ 1,810,856​ 2,080,069​Interest expense, net​ 195,337​ 201,165​ 184,804​ 174,527​ 154,580​Income before income taxes​ 2,749,190​ 2,216,514​ 2,031,333​ 1,636,329​ 1,925,489​Income tax expense(4)​ 578,876​ 483,542​ 414,112​ 298,793​ 644,620​Net income(4)​$ 2,170,314​$ 1,732,972​$ 1,617,221​$ 1,337,536​$ 1,280,869​Diluted earnings per share(4)​$ 95.19​$ 71.93​$ 63.43​$ 48.77​$ 44.07​Weighted average shares for diluted earnings per share(4)​ 22,799​ 24,093​ 25,498​ 27,424​ 29,065​Same Store Sales​ ​ ​ ​ ​ ​Increase in domestic comparable store net sales(5)​ 13.6% 7.4% 3.0% 1.8% 0.5% Balance Sheet Data​ ​ ​ ​ ​ ​Current assets​$ 6,415,303​$ 6,811,872​$ 5,028,685​$ 4,635,869​$ 4,611,255​Operating lease right-of-use assets(6)​​ 2,718,712​​ 2,581,677​​ —​​ —​​ —​Working capital (deficit)​ (954,451)​ 528,781​ (483,456)​ (392,812)​ (155,046)​Total assets​ 14,516,199​ 14,423,872​ 9,895,913​ 9,346,980​ 9,259,781​Current liabilities​ 7,369,754​ 6,283,091​ 5,512,141​ 5,028,681​ 4,766,301​Debt​ 5,269,820​ 5,513,371​ 5,206,344​ 5,005,930​ 5,081,238​Finance lease liabilities, less current portion(6)​ 186,122​ 155,855​ 123,659​ 102,013​ 102,322​Operating lease liabilities, less current portion(6)​​ 2,632,842​​ 2,501,560​​ —​​ —​​ —​Stockholders’ deficit​ (1,797,536)​ (877,977)​ (1,713,851)​ (1,520,355)​ (1,428,377)​Selected Operating Data​ ​ ​ ​ ​ ​Number of locations at beginning of year​ 6,549​ 6,411​ 6,202​ 6,029​ 5,814​Sold locations(7)​ —​ —​ —​ 26​ —​New locations​ 219​ 138​ 209​ 201​ 215​Closed locations​ 1​ —​ —​ 2​ —​Net new locations​ 218​ 138​ 209​ 199​ 215​Relocated locations​ 12​ 5​ 2​ 7​ 5​Number of locations at end of year​ 6,767​ 6,549​ 6,411​ 6,202​ 6,029​AutoZone domestic commercial programs​ 5,179​ 5,007​ 4,893​ 4,741​ 4,592​Inventory per location (in thousands)​$ 686​$ 683​$ 674​$ 636​$ 644​Total AutoZone store square footage (in thousands)​ 45,057​ 43,502​ 42,526​ 41,066​ 39,684​Average square footage per AutoZone store​ 6,658​ 6,643​ 6,633​ 6,621​ 6,611​Increase in AutoZone store square footage​ 3.6% 2.3% 3.6% 3.5% 3.9% Average net sales per AutoZone store (in thousands)​$ 2,160​$ 1,914​$ 1,847​$ 1,778​$ 1,756​Net sales per AutoZone store average square foot​$ 325​$ 288​$ 279​$ 269​$ 266​Total employees at end of year (in thousands)​ 105​ 100​ 96​ 89​ 87​Inventory turnover(8)​ 1.5x​ 1.3x​ 1.3x​ 1.3x​ 1.4x​Accounts payable to inventory ratio​ 129.6% 115.3% 112.6% 111.8% 107.4% After-tax return on invested capital(9)​ 41.0% 35.7% 35.7% 32.1% 29.9% Adjusted debt to EBITDAR(10)​ 2.0​ 2.4​ 2.5​ 2.5​ 2.6​Net cash provided by operating activities (in thousands)(4)​$ 3,518,543​$ 2,720,108​$ 2,128,513​$ 2,080,292​$ 1,570,612​Cash flow before share repurchases and changes in debt (in thousands)(11)​$ 3,048,841​$ 2,185,418​$ 1,758,672​$ 1,596,367​$ 1,017,585​Share repurchases (in thousands)(12)​$ 3,378,321​$ 930,903​$ 2,004,896​$ 1,592,013​$ 1,071,649​Number of shares repurchased (in thousands)(12)​ 2,592​ 826​ 2,182​ 2,398​ 1,495​28 Table of Contents(1) The 52 weeks ended August 28, 2021 and August 29, 2020 were negatively impacted by pandemic related expenses, including Emergency Time-Off of approximately $43.0 million (pre-tax) and $83.9 million (pre-tax), respectively.(2) The fiscal year ended August 31, 2019 consisted of 53 weeks.(3) Fiscal 2018 was negatively impacted by pension termination charges of $130.3 million (pre-tax) recognized in the fourth quarter and asset impairments of $193.2 million (pre-tax) recognized in the second quarter of fiscal 2018. Fiscal 2019 and 2018 also includes a benefit to net income related to the Tax Cuts and Jobs Act of $6.3 million and $132.1 million, net of repatriation tax, respectively. (4) Fiscal 2021, 2020, 2019, 2018 and 2017 include excess tax benefits from stock option exercises of $56.4 million, $20.9 million, $46.0 million, $31.3 million and $31.2 million, respectively.(5) The domestic comparable sales increases are based on sales for all AutoZone domestic stores open at least one year. Same store sales are computed on a 52-week basis. Relocated stores are included in the same store sales computation based on the year the original store was opened. Closed store sales are included in the same store sales computation up to the week it closes, and excluded from the computation for all periods subsequent to closing. All sales through our www.autozone.com website, including consumer direct ship-to-home sales, are also included in the computation.(6) The Company adopted ASU 2016-02, Leases (Topic 842), beginning with its first quarter ended November 23, 2019 which resulted in the Company recognizing a right-of-use asset (“ROU asset”) and a corresponding lease liability on the balance sheet. (7) 26 IMC branches were sold on April 4, 2018. (8) Inventory turnover is calculated as cost of sales divided by the average merchandise inventory balance over the trailing 5 quarters.(9) After-tax return on invested capital is defined as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize leases). For fiscal 2019, after-tax operating profit was adjusted for the impact of the average revaluation of deferred tax liabilities, net of repatriation tax. For fiscal 2018, after-tax operating profit was adjusted for impairment charges, pension termination charges and the impact of the revaluation of deferred tax liabilities, net of repatriation tax. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.(10) Adjusted debt to EBITDAR is defined as the sum of total debt, finance lease obligations and annual rents times six; divided by net income plus interest, taxes, depreciation, amortization, rent and share-based compensation expense. For fiscal 2018, net income was adjusted for impairment charges and pension termination charges before tax impact. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.(11) Cash flow before share repurchases and changes in debt is defined as the change in cash and cash equivalents less the change in debt plus treasury stock purchases. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.(12) During the third quarter of fiscal 2020, the Company temporarily suspended share repurchases under the share repurchase program in response to COVID-19 which was restarted beginning in the first quarter of fiscal 2021. ​29 Table of ContentsFiscal 2021 Compared with Fiscal 2020For the fiscal year ended August 28, 2021, we reported net sales of $14.630 billion compared with $12.632 billion for the year ended August 29, 2020, a 15.8% increase from fiscal 2020. This growth was driven primarily by a domestic same store sales increase of 13.6% and net sales of $215.8 million from new stores. Domestic commercial sales increased $617.7 million, or 22.6%, over domestic commercial sales for fiscal 2020.At August 28, 2021, we operated 6,051 domestic stores, 664 in Mexico and 52 in Brazil, compared with 5,885 domestic stores, 621 in Mexico and 43 in Brazil at August 29, 2020. We reported a total auto parts segment (domestic, Mexico and Brazil) sales increase of 15.9% for fiscal 2021.Gross profit for fiscal 2021 was $7.718 billion, or 52.8% of net sales, an 85 basis point decrease compared with $6.771 billion, or 53.6% of net sales for fiscal 2020. The decrease in gross margin was primarily driven by the initiatives to accelerate growth in our commercial business.Operating, selling, general and administrative expenses for fiscal 2021 increased to $4.773 billion, or 32.6% of net sales, from $4.353 billion, or 34.5% of net sales for fiscal 2020. The reduction in operating expenses as a percentage of sales was driven by strong sales growth and a decrease in pandemic related expenses.Interest expense, net for fiscal 2021 was $195.3 million compared with $201.2 million during fiscal 2020. Average borrowings for fiscal 2021 were $5.401 billion, compared with $5.393 billion for fiscal 2020. Weighted average borrowing rates were 3.28% and 3.26% for fiscal 2021 and 2020, respectively.Our effective income tax rate was 21.1% of pre-tax income for fiscal 2021 compared to 21.8% for fiscal 2020. The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during fiscal 2021 compared to fiscal 2020. The benefit of stock options exercised for fiscal 2021 was $56.4 million compared to $20.9 million for fiscal 2020 (see “Note D – Income Taxes” in the Notes to Consolidated Financial Statements). Net income for fiscal 2021 increased by 25.2% to $2.170 billion, and diluted earnings per share increased 32.3% to $95.19 from $71.93 in fiscal 2020. The impact on the fiscal 2021 diluted earnings per share from stock repurchases was an increase of $5.13.Fiscal 2020 Compared with Fiscal 2019A discussion of changes in our results of operations from fiscal 2019 to fiscal 2020 has been omitted from this Annual Report on Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended August 29, 2020, filed with the SEC on October 26, 2020, which is available free of charge on the SECs website at www.sec.gov and at www.autozone.com, by clicking “Investor Relations” located at the bottom of the page.Quarterly PeriodsEach of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consisted of 16 weeks in 2021 and 2020 and 17 weeks in 2019. Because the fourth quarter contains seasonally high sales volume and consists of 16 or 17 weeks, compared with 12 weeks for each of the first three quarters, our fourth quarter represents a disproportionate share of our annual net sales and net income. The fourth quarter of fiscal year 2021 represented 33.6% of annual sales and 36.2% of net income; the fourth quarter of fiscal year 2020 represented 36.0% of annual sales and 42.7% of net income; and the fourth quarter of fiscal year 2019 represented 33.6% of annual sales and 35.0% of net income.30 Table of ContentsLiquidity and Capital ResourcesThe primary source of our liquidity is our cash flows realized through the sale of automotive parts, products, and accessories. Unprecedented customer demand from the impact of the COVID-19 pandemic and continued progress on our initiatives improved our operating performance for the fiscal year, which drove a substantial increase in cash flows from operations. We believe that our cash generated from operating activities, available cash reserves and available credit, supplemented with our long-term borrowings will provide ample liquidity to fund our operations while allowing us to make strategic investments to support long-term growth initiatives and return excess cash to shareholders in the form of share repurchases. As of August 28, 2021, we held $1.171 billion of cash and cash equivalents, as well as $1.998 billion in undrawn capacity on our revolving credit facility. We believe our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due and fund our share repurchases over the short-term and long-term. In addition, we believe we have the ability to obtain alternative sources of financing, if necessary. Net cash provided by operating activities was $3.519 billion in 2021, $2.720 billion in 2020 and $2.129 billion in 2019. Cash flows from operations are favorable compared to last year primarily due to favorable changes in accounts payable, driven by higher sustained inventory purchase volume in fiscal 2021 as compared to fiscal 2020, and growth in net income due to accelerated sales growth as a result of the pandemic.Our net cash flows used in investing activities were $601.8 million in fiscal 2021, $497.9 million in fiscal 2020 and $491.8 million in fiscal 2019. The increase in net cash used in investing activities in fiscal 2021, compared to fiscal 2020, was due to an increase in capital expenditures. We invested $621.8 million in capital assets in fiscal 2021, $457.7 million in fiscal 2020 and $496.1 million in fiscal 2019. The increase in capital expenditures from fiscal 2020 to fiscal 2021 was primarily driven by increased store openings. We had 218 net new store openings for fiscal 2021, 138 for fiscal 2020 and 209 for fiscal 2019. We invest a portion of our assets held by our wholly owned insurance captive in marketable debt securities. We purchased $63.7 million in marketable debt securities in fiscal 2021, $90.9 million in fiscal 2020 and $55.5 million in fiscal 2019. We had proceeds from the sale of marketable debt securities of $95.4 million in fiscal 2021, $84.2 million in fiscal 2020 and $53.1 million in fiscal 2019.Net cash used in financing activities was $3.5 billion in fiscal 2021, $643.6 million in fiscal 2020 and $1.674 billion in fiscal 2019. The net cash used in financing activities reflected purchases of treasury stock, which totaled $3.378 billion for fiscal 2021, $930.9 million for fiscal 2020 and $2.005 billion for fiscal 2019. The increase in purchases of treasury stock for fiscal 2021 in comparison to fiscal 2020 was due to resuming our share repurchase program which was temporarily suspended in fiscal 2020 due to the COVID-19 pandemic. The treasury stock purchases in fiscal 2021, 2020 and 2019 were primarily funded by cash flows from operations. During the year ended August 28, 2021, we repaid our $250 million 2.500% Senior Notes due April 2021, which were callable at par in March 2021. We did not issue any new debt in fiscal 2021, and issued $1.850 billion and $750 million in fiscal 2020 and 2019, respectively. In fiscal 2020, the proceeds from the issuance of debt were used for general corporate purposes, repayment of our outstanding commercial paper and repayment of our $500 million Senior Notes due in November 2020 which were callable at par in August 2020. In fiscal 2019, the proceeds from the issuance of debt were used to repay a portion of our outstanding commercial paper borrowings, our $250 million Senior Notes due in April 2019 and for general corporate purposes. We did not have any commercial paper or short term borrowing activity during fiscal 2021. Net repayments of commercial paper and short term borrowings were $1.030 billion and $295.3 million for 2020 and 2019, respectively.During fiscal 2022, we expect to increase the investment in our business as compared to fiscal 2021. Our investments are expected to be directed primarily to expansion of our store base and supply chain to fuel the growth of our domestic and Mexico businesses, which includes new stores, including mega hubs, as well as distribution center expansions and remodels. The amount of investments in our new stores is impacted by different factors, including whether the building and land are purchased (requiring higher investment) or leased (generally lower investment) and whether such buildings are located in the U.S., Mexico or Brazil, or located in urban or rural areas. 31 Table of ContentsDuring fiscal 2021 our capital expenditures increased by approximately 36%, compared to a decrease of 8% and 5%, for fiscal 2020 and 2019 respectively. Fiscal 2021 capital expenditures increased significantly due to delays in capital spending for the third and fourth quarter of fiscal 2020 related to COVID-19.In addition to building and land costs, our new stores require working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required and resulting in a high accounts payable to inventory ratio. We plan to continue leveraging our inventory purchases; however, our ability to do so may be limited by our vendors’ capacity to factor their receivables from us. Certain vendors participate in arrangements with financial institutions whereby they factor their AutoZone receivables, allowing them to receive early payment from the financial institution on our invoices at a discounted rate. The terms of these agreements are between the vendor and the financial institution. Upon request from the vendor, we confirm to the vendor’s financial institution the balances owed to the vendor, the due date and agree to waive any right of offset to the confirmed balances. A downgrade in our credit or changes in the financial markets may limit the financial institutions’ willingness to participate in these arrangements, which may result in the vendor wanting to renegotiate payment terms. A reduction in payment terms would increase the working capital required to fund future inventory investments. Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio. We had an accounts payable to inventory ratio of 129.6% at August 28, 2021 and 115.3% at August 29, 2020. The increase from fiscal 2020 was primarily due to increased accounts payable purchases with favorable vendor terms and higher inventory turns.Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance may be funded through new borrowings. We anticipate we will be able to obtain such financing in view of our credit ratings and favorable experiences in the debt markets in the past.Our cash balances are held in various locations around the world. As of August 28, 2021, and August 29, 2020, cash and cash equivalents of $80.4 million and $62.4 million, respectively, were held outside of the U.S. and were generally utilized to support the liquidity needs in our foreign operations.For the fiscal year ended August 28, 2021, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 41.0% as compared to 35.7% for the comparable prior year period. Adjusted ROIC is calculated as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize operating leases). We use adjusted ROIC to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance. Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.Debt FacilitiesWe entered into a Master Extension, New Commitment and Amendment Agreement dated as of November 18, 2017 (the “Extension Amendment”) to the Third Amended and Restated Credit Agreement dated as of November 18, 2016, as amended, modified, extended or restated from time to time (the “Revolving Credit Agreement”). Under the Extension Amendment: (i) our borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion; (ii) the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from $2.0 billion to $2.4 billion; (iii) the termination date of the Revolving Credit Agreement was extended from November 18, 2021 until November 18, 2022; and (iv) we have the option to make one additional written request of the lenders to extend the termination date then in effect for an additional year. Under the Revolving Credit Agreement, we may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the Revolving Credit Agreement, depending upon our senior, unsecured, (non-credit enhanced) long-term debt ratings. Interest accrues on base rate loans as defined in the Revolving Credit Agreement. 32 Table of ContentsAs of August 28, 2021, we had no outstanding borrowings and $1.7 million of outstanding letters of credit under the Revolving Credit Agreement. We intend to amend and restate our Revolving Credit Agreement and anticipate closing the agreement during the first quarter of fiscal year 2022. Under our Revolving Credit Agreement, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances.The Revolving Credit Agreement requires that our consolidated interest coverage ratio as of the last day of each quarter shall be no less than 2.5:1. This ratio is defined as the ratio of (i) consolidated earnings before interest, taxes and rents to (ii) consolidated interest expense plus consolidated rents. Our consolidated interest coverage ratio as of August 28, 2021 was 6.9:1.On April 3, 2020, we entered into a 364-Day Credit Agreement (the “364-Day Credit Agreement”) to supplement our existing Revolving Credit Agreement. The 364-Day Credit Agreement provided for loans in the aggregate principal amount of up to $750 million. The 364-Day Credit Agreement had a termination date of, and any amounts borrowed under the 364-Day Credit Agreement were due and payable on April 2, 2021. Revolving loans under the 364-Day Credit Agreement could be base rate loans, Eurodollar loans, or a combination of both at our election. Effective February 2021, we terminated the 364-Day Credit Agreement. There were no borrowings outstanding under the 364-Day Credit Agreement. We entered into the 364-Day Agreement to augment our access to liquidity due to the macroeconomic conditions existing at the time, and we determined the additional access to liquidity was no longer necessary. As of August 28, 2021, the $500 million 3.700% Senior Notes due April 2022 were classified as long-term in the Consolidated Balance Sheets as we had the ability and intent to refinance them on a long-term basis through available capacity in our revolving credit facility. As of August 28, 2021, we had $1.998 billion of availability under our $2.0 billion Revolving Credit Agreement, which would allow us to replace these short-term obligations with a long-term financing facility. On March 15, 2021, we repaid the $250 million 2.500% Senior Notes due April 2021 which were callable at par in March 2021.On August 14, 2020, we issued $600 million in 1.650% Senior Notes due January 2031 under our automatic shelf registration statement on Form S-3, filed with the SEC on April 4, 2019 (File No. 333-230719) (the “2019 Shelf Registration Statement”). The 2019 Shelf Registration Statement allows us to sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. Proceeds from the debt issuance were used for general corporate purposes, including the repayment of the $500 million in 4.000% Senior Notes due in November 2020 that were callable at par in August 2020.On March 30, 2020, we issued $500 million in 3.625% Senior Notes due April 2025 and $750 million in 4.000% Senior Notes due April 2030 under the 2019 Shelf Registration Statement. Proceeds from the debt issuance were used to repay a portion of the outstanding commercial paper borrowings and for other general corporate purposes.On April 18, 2019, we issued $300 million in 3.125% Senior Notes due April 2024 and $450 million in 3.750% Senior Notes due April 2029 under the 2019 Shelf Registration Statement. Proceeds from the debt issuance were used to repay a portion of our outstanding commercial paper borrowings, the $250 million in 1.625% Senior Notes due in April 2019 and for other general corporate purposes.33 Table of ContentsAll Senior Notes are subject to an interest rate adjustment if the debt ratings assigned are downgraded (as defined in the agreements). Further, the Senior Notes contain a provision that repayment may be accelerated if we experience a change in control (as defined in the agreements). Our borrowings under our Senior Notes contain minimal covenants, primarily restrictions on liens, sale and leaseback transactions and consolidations, mergers and the sale of assets. All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the applicable scheduled payment date if covenants are breached or an event of default occurs. Interest is paid on a semi-annual basis. As of August 28, 2021, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.We also maintain a letter of credit facility that allows us to request the participating bank to issue letters of credit on our behalf up to an aggregate amount of $25 million. The letter of credit facility is in addition to the letters of credit that may be issued under the Revolving Credit Agreement. As of August 28, 2021, we had $23.9 million in letters of credit outstanding under the letter of credit facility which expires in June 2022.In addition to the outstanding letters of credit issued under the committed facility discussed above, we had $136.8 million in letters of credit outstanding as of August 28, 2021. These letters of credit have various maturity dates and were issued on an uncommitted basis.For the fiscal year ended August 28, 2021, our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio was 2.0:1 as compared to 2.4:1 as of the comparable prior year end. We calculate adjusted debt as the sum of total debt, finance lease liabilities and rent times six; and we calculate adjusted EBITDAR by adding interest, taxes, depreciation, amortization, rent and share-based compensation expense to net income. We target our debt levels to a specified ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings and believe this is important information for the management of our debt levels.Management expects the ratio of adjusted debt to EBITDAR to return to pre-pandemic levels in the future, increasing debt levels. Once the target ratio is achieved, to the extent adjusted EBITDAR increases, we expect our debt levels to increase; conversely, if adjusted EBITDAR decreases, we would expect our debt levels to decrease. Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.Stock RepurchasesDuring 1998, we announced a program permitting us to repurchase a portion of our outstanding shares not to exceed a dollar maximum established by our Board of Directors (the “Board”). On December 15, 2020, the Board voted to increase the authorization by $1.5 billion. On March 23, 2021, the Board voted to increase the repurchase authorization by an additional $1.5 billion, which raised the total value of shares authorized to be repurchased to $26.15 billion. From January 1998 to August 28, 2021, we have repurchased a total of 150.3 million shares at an aggregate cost of $25.732 billion. We repurchased 2.6 million shares of common stock at an aggregate cost of $3.378 billion during fiscal 2021, 826 thousand shares of common stock at an aggregate cost of $930.9 million during fiscal 2020 and 2.2 million shares of common stock at an aggregate cost of $2.005 billion during fiscal 2019. The increase in purchases of treasury stock for fiscal 2021 compared to fiscal 2020 was due to the temporary suspension of the share repurchase program during fiscal 2020 in order to preserve cash as a result of the uncertainty related to the pandemic. Purchases under the program resumed beginning in the first quarter of fiscal 2021. Considering cumulative repurchases as of August 28, 2021, we had $417.6 million remaining under the Board’s authorization to repurchase our common stock. We will continue to evaluate current and expected business conditions and adjust the level of share repurchases under our share repurchase program as we deem appropriate.34 Table of ContentsFor the fiscal year ended August 28, 2021, cash flow before share repurchases and changes in debt was $3.049 billion as compared to $2.185 billion during the comparable prior year period. Cash flow before share repurchases and changes in debt is calculated as the net increase or decrease in cash and cash equivalents less net increases or decreases in debt (excluding deferred financing costs) plus share repurchases. We use cash flow before share repurchases and changes in debt to calculate the cash flows remaining and available. We believe this is important information regarding our allocation of available capital where we prioritize investments in the business and utilize the remaining funds to repurchase shares, while maintaining debt levels that support our investment grade credit ratings. Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.On October 5, 2021, the Board voted to authorize the repurchase of an additional $1.5 billion of our common stock in connection with our ongoing share repurchase program. Since the inception of the repurchase program in 1998, the Board has authorized $27.65 billion in share repurchases. Subsequent to August 28, 2021 and through October 18, 2021, we have repurchased 220,022 shares of common stock at an aggregate cost of $362.8 million. Considering the cumulative repurchases and the increase in authorization subsequent to August 28, 2021 and through October 18, 2021, we have $1.555 billion remaining under the Board’s authorization to repurchase its common stock.Financial CommitmentsThe following table shows our significant contractual obligations as of August 28, 2021:​​​​​​​​​​​​​​​​​​Total​Payment Due by Period​​Contractual​Less than​Between​Between​Over(in thousands)​Obligations 1 year 1‑3 years 3‑5 years 5 years​​​​​​​​​​​​​​​​Debt(1) $ 5,300,000​$ 500,000​$ 1,100,000​$ 1,300,000​$ 2,400,000Interest payments(2)​ 911,863​​ 175,025​​ 284,488​​ 214,675​​ 237,675Operating leases(3)��� 3,682,998​​ 323,245​​ 672,142​​ 573,073​​ 2,114,538Finance leases(3)​ 304,499​​ 91,228​​ 106,969​​ 57,922​​ 48,380Self-insurance reserves(4)​ 259,585​​ 95,263​​ 87,953​​ 37,188​​ 39,181Construction commitments​ 48,217​ 48,217​ —​ —​ —​​$ 10,507,162​$ 1,232,978​$ 2,251,552​$ 2,182,858​$ 4,839,774​(1)Debt balances represent principal maturities, excluding interest, discounts, and debt issuance costs.(2)Represents obligations for interest payments on long-term debt.(3)Operating and finance lease obligations include related interest in accordance with ASU 2016-02, Leases (Topic 842).(4)Self-insurance reserves reflect estimates based on actuarial calculations and are presented net of insurance receivables. Although these obligations do not have scheduled maturities, the timing of future payments are predictable based upon historical patterns. Accordingly, we reflect the net present value of these obligations in our Consolidated Balance Sheets.Our tax liability for uncertain tax positions, including interest and penalties, was $31.8 million at August 28, 2021. Approximately $3.0 million is classified as current liabilities and $28.8 million is classified as long-term liabilities. We did not reflect these obligations in the table above as we are unable to make an estimate of the timing of payments of the long-term liabilities due to uncertainties in the timing and amounts of the settlement of these tax positions.​35 Table of ContentsOff-Balance Sheet ArrangementsThe following table reflects outstanding letters of credit and surety bonds as of August 28, 2021:​​​​​ Total ​​Other (in thousands)​Commitments​​​​Standby letters of credit​$ 162,393Surety bonds​​ 35,362​​$ 197,755​A substantial portion of the outstanding standby letters of credit (which are primarily renewed on an annual basis) and surety bonds are used to cover reimbursement obligations to our workers’ compensation carriers.There are no additional contingent liabilities associated with these instruments as the underlying liabilities are already reflected in our Consolidated Balance Sheets. The standby letters of credit and surety bond arrangements expire within one year but have automatic renewal clauses.Reconciliation of Non-GAAP Financial Measures “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with generally accepted accounting principles (“GAAP”). These non-GAAP financial measures provide additional information for determining our optimum capital structure and are used to assist management in evaluating performance and in making appropriate business decisions to maximize stockholders’ value.Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented the non-GAAP financial measures, as we believe they provide additional information that is useful to investors as it indicates more clearly our comparative year-to-year operating results. Furthermore, our management and Compensation Committee of the Board use the above-mentioned non-GAAP financial measures to analyze and compare our underlying operating results and use select measurements to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the following reconciliation tables.36 Table of ContentsReconciliation of Non-GAAP Financial Measure: Cash Flow Before Share Repurchases and Changes in DebtThe following table reconciles net increase (decrease) in cash and cash equivalents to cash flow before share repurchases and changes in debt, which is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:​​​​​​​​​​​​​​​​​ Fiscal Year Ended August(in thousands)​2021 2020 2019 2018 2017​​​​​​​​​​​​​​​​Net cash provided by/(used in): ​ ​ ​ ​ ​ Operating activities​$ 3,518,543​$ 2,720,108​$ 2,128,513​$ 2,080,292​$ 1,570,612Investing activities​ (601,778)​ (497,875)​ (491,846)​ (521,860)​ (553,599)Financing activities​ (3,500,417)​ (643,636)​ (1,674,088)​ (1,632,154)​ (914,329)Effect of exchange rate changes on cash​​ 4,172​ (4,082)​ (4,103)​ (1,724)​ 852Net increase/(decrease) in cash and cash equivalents​​ (579,480)​ 1,574,515​ (41,524)​ (75,446)​ 103,536Less: increase/(decrease) in debt, excluding deferred financing costs​​ (250,000)​ 320,000​ 204,700​ (79,800)​ 157,600Plus: Share repurchases​ 3,378,321​ 930,903(1)​ 2,004,896​ 1,592,013​ 1,071,649Cash flow before share repurchases and changes in debt​$ 3,048,841​$ 2,185,418​$ 1,758,672​$ 1,596,367​$ 1,017,585​(1)During the third quarter of fiscal 2020, the Company temporarily suspended share repurchases under the share repurchase program in response to COVID-19.​​​​​​37 Table of ContentsReconciliation of Non-GAAP Financial Measure: Adjusted After-tax ROICThe following table calculates the percentage of ROIC. ROIC is calculated as after-tax operating profit (excluding rent) divided by invested capital (which includes a factor to capitalize operating leases). The ROIC percentages are presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”: ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​​​​​​Fiscal Year Ended August​(in thousands, except percentage)​2021 2020 2019(1) 2018(2) 2017 ​​​​​​​​​​​​​​​​​Net income $ 2,170,314 $ 1,732,972 $ 1,617,221 $ 1,337,536 $ 1,280,869​Adjustments:​ ​ ​ ​ ​ ​Impairment before tax​ —​ —​ —​ 193,162​ —​Pension termination charges before tax​ —​ —​ —​ 130,263​ —​ Interest expense​ 195,337​ 201,165​ 184,804​ 174,527​ 154,580​ Rent expense(3)​ 345,380​ 329,783​ 332,726​ 315,580​ 302,928​ Tax effect(4)​ (114,091)​ (115,747)​ (105,576)​ (211,806)​ (153,265)​Deferred tax liabilities, net of repatriation tax(5)​ —​ —​ (6,340)​ (132,113)​ —​Adjusted after-tax return​$ 2,596,940​$ 2,148,173​$ 2,022,835​$ 1,807,149​$ 1,585,112​​​​​​​​​​​​​​​​​​Average debt(6)​$ 5,416,471​$ 5,375,356​$ 5,126,286​$ 5,013,678​$ 5,061,502​Average stockholders’ deficit(6)​ (1,397,892)​ (1,542,355)​ (1,615,339)​ (1,433,196)​ (1,730,559)​Add: Rent x 6(3)(7)​ 2,072,280​ 1,978,696​ 1,996,358​ 1,893,480​ 1,817,568​Average finance lease liabilities(6)​ 237,267​ 203,998​ 162,591​ 156,198​ 150,066​Invested capital​$ 6,328,126​$ 6,015,695​$ 5,669,896​$ 5,630,160​$ 5,298,577​​​​​​​​​​​​​​​​​​Adjusted after-tax ROIC​ 41.0% 35.7% 35.7% 32.1% 29.9%​Reconciliation of Non-GAAP Financial Measure: Adjusted Debt to EBITDARThe following table calculates the ratio of adjusted debt to EBITDAR. Adjusted debt to EBITDAR is calculated as the sum of total debt, financing lease liabilities and annual rents times six; divided by net income plus interest, taxes, depreciation, amortization, rent and share-based compensation expense. The adjusted debt to EBITDAR ratios are presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​Fiscal Year Ended August(in thousands, except ratio)​2021 2020 2019(1) 2018(2) 2017​​​​​​​​​​​​​​​​Net income $ 2,170,314 $ 1,732,972 $ 1,617,221 $ 1,337,536 $ 1,280,869Add: Impairment before tax​ —​ —​ —​ 193,162​ —Pension termination charges before tax​ —​ —​ —​ 130,263​ —Add: Interest expense​ 195,337​ 201,165​ 184,804​ 174,527​ 154,580Income tax expense​​ 578,876​​ 483,542​​ 414,112​​ 298,793​​ 644,620Adjusted EBIT​ 2,944,527​ 2,417,679​ 2,216,137​ 2,134,281​ 2,080,069Add: Depreciation and amortization expense​ 407,683​ 397,466​ 369,957​ 345,084​ 323,051Rent expense(3)​ 345,380​ 329,783​ 332,726​ 315,580​ 302,928Share-based expense​ 56,112​ 44,835​ 43,255​ 43,674​ 38,244Adjusted EBITDAR​$ 3,753,702​$ 3,189,763​$ 2,962,075​$ 2,838,619​$ 2,744,292​​​​​​​​​​​​​​​​Debt​$ 5,269,820​$ 5,513,371​$ 5,206,344​$ 5,005,930​$ 5,081,238Financing lease liabilities​ 276,054​ 223,353​ 179,905​ 154,303​ 150,456Add: Rent x 6(3)(7)​ 2,072,280​ 1,978,696​ 1,996,358​ 1,893,480​ 1,817,568Adjusted debt​$ 7,618,154​$ 7,715,420​$ 7,382,607​$ 7,053,713​$ 7,049,262Adjusted debt to EBITDAR​ 2.0​ 2.4​ 2.5​ 2.5​ 2.6​​38 Table of Contents(1)The fiscal year ended August 31, 2019 consisted of 53 weeks.(2)For fiscal 2018, after-tax operating profit was adjusted for impairment charges and pension settlement charges.(3)Effective September 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), the new lease accounting standard that required the Company to recognize operating lease assets and liabilities in the balance sheet. The table below outlines the calculation of rent expense and reconciles rent expense to total lease cost, per ASC 842, the most directly comparable GAAP financial measure, for the 52 weeks ended, August 28, 2021 and August 29, 2020. ​​​​​​​​​For the year ended(in thousands)​August 28,2021​August 29,2020​​​​​​​Total lease cost, per ASC 842, for the trailing four quarters​$ 427,443​$ 415,505Less: Finance lease interest and amortization​ (56,334)​​ (60,275)Less: Variable operating lease components, related to insurance and common area maintenance ​ (25,729)​​ (25,447)Rent expense for the trailing four quarters​$ 345,380​$ 329,783​(4)For fiscal 2021, 2020, and 2019, the effective tax rate was 21.1%, 21.8%, and 20.4%, respectively. The effective tax rate during fiscal 2018 was 24.2% for impairment, 28.1% for pension termination and 26.2% for interest and rent expense. For fiscal 2017, the effective tax rate was 33.5%. (5)For fiscal 2019 and fiscal 2018 after-tax operating profit was adjusted for the impact of the revaluation of deferred tax liabilities, net of repatriation tax.(6)All averages are computed based on trailing five quarters.(7)Rent is multiplied by a factor of six to capitalize operating leases in the determination of pre-tax invested capital.​Recent Accounting PronouncementsSee Note A of the Notes to Consolidated Financial Statements for a discussion on recent accounting pronouncements.Critical Accounting Policies and EstimatesPreparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent liabilities. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our senior management has identified the critical accounting policies for the areas that are materially impacted by estimates and assumptions and have discussed such policies with the Audit Committee of our Board. The following items in our Consolidated Financial Statements represent our critical accounting policies that require significant estimation or judgment by management:Self-Insurance ReservesWe retain a significant portion of the risks associated with workers’ compensation, general, product liability, property and vehicle liability; and we obtain third party insurance to limit the exposure related to certain of these risks. Our self-insurance reserve estimates totaled $284.0 million at August 28, 2021, and $288.6 million at August 29, 2020. Where estimates are possible, losses covered by insurance are recognized on a gross basis with a corresponding insurance receivable.​39 Table of ContentsThe assumptions made by management in estimating our self-insurance reserves include consideration of historical cost experience, judgments about the present and expected levels of cost per claim and retention levels. We utilize various methods, including analyses of historical trends and use of a specialist, to estimate the cost to settle reported claims and claims incurred but not yet reported. The actuarial methods develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet date. When estimating these liabilities, we consider factors, such as the severity, duration and frequency of claims, legal costs associated with claims, healthcare trends and projected inflation of related factors. In recent history, our methods for determining our exposure have remained consistent, and our historical trends have been appropriately factored into our reserve estimates. As we obtain additional information and refine our methods regarding the assumptions and estimates we use to recognize liabilities incurred, we will adjust our reserves accordingly.Management believes that the various assumptions developed and actuarial methods used to determine our self- insurance reserves are reasonable and provide meaningful data and information that management uses to make its best estimate of our exposure to these risks. Arriving at these estimates, however, requires a significant amount of subjective judgment by management, and as a result these estimates are uncertain and our actual exposure may be different from our estimates. For example, changes in our assumptions about healthcare costs, the severity of accidents and the incidence of illness, the average size of claims and other factors could cause actual claim costs to vary materially from our assumptions and estimates, causing our reserves to be overstated or understated. For instance, a 10% change in our self-insurance liability would have affected net income by approximately $19.1 million for fiscal 2021. Our liabilities for workers’ compensation, general and product liability, property and vehicle claims do not have scheduled maturities; however, the timing of future payments is predictable based on historical patterns and is relied upon in determining the current portion of these liabilities. Accordingly, we reflect the net present value of the obligations we determine to be long-term using the risk-free interest rate as of the balance sheet date.If the discount rate used to calculate the present value of these reserves changed by 25 basis points, net income would have been affected by approximately $1.4 million for fiscal 2021. Income TaxesOur income tax returns are audited by state, federal and foreign tax authorities, and we are typically engaged in various tax examinations at any given time. Tax contingencies often arise due to uncertainty or differing interpretations of the application of tax rules throughout the various jurisdictions in which we operate. The contingencies are influenced by items such as tax audits, changes in tax laws, litigation, appeals and prior experience with similar tax positions.We regularly review our tax reserves for these items and assess the adequacy of the amount we have recorded. As of August 28, 2021, we had approximately $31.8 million reserved for uncertain tax positions.We evaluate exposures associated with our various tax filings by estimating a liability for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.We believe our estimates to be reasonable and have not experienced material adjustments to our reserves in the previous three years; however, actual results could differ from our estimates, and we may be exposed to gains or losses that could be material. Specifically, management has used judgment and made assumptions to estimate the likely outcome of uncertain tax positions. Additionally, to the extent we prevail in matters for which a liability has been established, or must pay in excess of recognized reserves, our effective tax rate in any particular period could be materially affected.40 Table of ContentsVendor AllowancesWe receive various payments and allowances from our vendors through a variety of programs and arrangements, including allowances for warranties, advertising and general promotion of vendor products. Vendor allowances are treated as a reduction of the cost of inventory, unless they are provided as a reimbursement of specific, incremental, identifiable costs incurred by the Company in selling the vendor’s products. Approximately 85% of the vendor funds received during fiscal 2021 were recorded as a reduction of the cost of inventories and recognized as a reduction to cost of sales as these inventories are sold.Based on our vendor agreements, a significant portion of vendor funding we receive is earned as we purchase inventory. Therefore, we record receivables for funding earned but not yet received as we purchase inventory. During the year, we regularly review the receivables from vendors to ensure vendors are able to meet their obligations. We generally have not recorded a reserve against these receivables as we have not experienced significant losses and typically have a legal right of offset with our vendors for payments owed them. Historically, we have had write-offs less than $1 million in each of the last three years.Item 7A. Quantitative and Qualitative Disclosures about Market RiskWe are exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, we use various derivative instruments to reduce interest rate and fuel price risks. To date, based upon our current level of foreign operations, no derivative instruments have been utilized to reduce foreign exchange rate risk. All of our hedging activities are governed by guidelines that are authorized by the Board. Further, we do not buy or sell derivative instruments for trading purposes.Interest Rate RiskOur financial market risk results primarily from changes in interest rates. At times, we reduce our exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements and forward-starting interest rate swaps.We have historically utilized interest rate swaps to convert variable rate debt to fixed rate debt and to lock in fixed rates on future debt issuances. We reflect the current fair value of all interest rate hedge instruments as a component of either other current assets or accrued expenses and other. Our interest rate hedge instruments are designated as cash flow hedges. As of August 28, 2021 and August 29, 2020 no such interest rate swaps were outstanding. Unrealized gains and losses on interest rate hedges are deferred in stockholders’ deficit as a component of Accumulated Other Comprehensive Loss. These deferred gains and losses are recognized in income as a decrease or increase to interest expense in the period in which the related cash flows being hedged are recognized in expense. However, to the extent that the change in value of an interest rate hedge instrument does not perfectly offset the change in the value of the cash flow being hedged, that ineffective portion is immediately recognized in earnings.The fair value of our debt was estimated at $5.683 billion as of August 28, 2021, and $6.081 billion as of August 29, 2020, based on the quoted market prices for the same or similar debt issues or on the current rates available to us for debt having the same remaining maturities. Such fair value is greater than the carrying value of debt by $413.1 million and $567.5 million at August 28, 2021 and August 29, 2020, respectively, which reflects its face amount, adjusted for any unamortized debt issuance costs and discounts. We had no variable rate debt outstanding at August 28, 2021 and August 29, 2020. We had outstanding fixed rate debt of $5.270 billion, net of unamortized debt issuance costs of $30.2 million, at August 28, 2021, and $5.513 billion, net of unamortized debt issuance costs of $36.6 million, at August 29, 2020. A one percentage point increase in interest rates would have reduced the fair value of our fixed rate debt by approximately $258.3 million at August 28, 2021.41 Table of ContentsForeign Currency RiskForeign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than our entities’ functional currencies. To minimize our risk, we generally enter into transactions denominated in the respective functional currencies. We are exposed to Brazilian reals, Canadian dollars, euros, Chinese yuan renminbi and British pounds, but our primary foreign currency exposure arises from Mexican peso-denominated revenues and profits and their translation into U.S. dollars. Foreign currency exposures arising from transactions denominated in currencies other than the functional currency are not material.We view our investments in Mexican subsidiaries as long-term. As a result, we generally do not hedge these net investments. The net asset exposure in the Mexican subsidiaries translated into U.S. dollars using the year-end exchange rates was $310.1 million at August 28, 2021 and $293.1 million at August 29, 2020. The year-end exchange rates with respect to the Mexican peso increased by approximately 10% with respect to the U.S. dollar during fiscal 2021 and decreased by approximately 10% with respect to the U.S. dollar during fiscal 2020. The potential loss in value of our net assets in the Mexican subsidiaries resulting from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates at August 28, 2021 and August 29, 2020, would have been approximately $28.2 million and approximately $26.6 million, respectively. Any changes in our net assets in the Mexican subsidiaries relating to foreign currency exchange rates would be reflected in the foreign currency translation component of Accumulated Other Comprehensive Loss, unless the Mexican subsidiaries are sold or otherwise disposed. A hypothetical 10 percent adverse change in average exchange rates would not have a material impact on our results of operations.​42 Table of Contents

AUTOZONE INC_10-Q_2021-12-17 00:00:00_866787-0001558370-21-016915.html

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Archer-Daniels-Midland Co_10-Q_2021-10-26 00:00:00_7084-0000007084-21-000039.html

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Autodesk, Inc._10-Q_2021-12-03 00:00:00_769397-0000769397-21-000094.html

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BANK OF AMERICA CORP -DE-_10-Q_2021-10-29 00:00:00_70858-0000070858-21-000107.html

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BEST BUY CO INC_10-Q_2021-12-03 00:00:00_764478-0000764478-21-000068.html

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BIO-TECHNE Corp_10-Q_2021-11-08 00:00:00_842023-0001437749-21-025721.html

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BOSTON SCIENTIFIC CORP_10-Q_2021-11-04 00:00:00_885725-0000885725-21-000052.html

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BROWN & BROWN, INC._10-Q_2021-10-26 00:00:00_79282-0000950170-21-002321.html

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CADENCE DESIGN SYSTEMS INC_10-Q_2021-10-25 00:00:00_813672-0000813672-21-000037.html

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CARDINAL HEALTH INC_10-Q_2021-11-09 00:00:00_721371-0000721371-21-000116.html

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CINTAS CORP_10-Q_2021-10-07 00:00:00_723254-0000723254-21-000032.html

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CISCO SYSTEMS, INC._10-Q_2021-11-23 00:00:00_858877-0000858877-21-000018.html

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CITIGROUP INC_10-Q_2021-11-08 00:00:00_831001-0000831001-21-000167.html

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CITIZENS FINANCIAL GROUP INC-RI_10-Q_2021-11-03 00:00:00_759944-0000759944-21-000147.html

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CMS ENERGY CORP_10-Q_2021-10-28 00:00:00_811156-0000811156-21-000077.html

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COOPER COMPANIES, INC._10-K_2021-12-10 00:00:00_711404-0000711404-21-000038.html

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+Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.Note numbers refer to “Notes to Consolidated Financial Statements” in

CVS HEALTH Corp_10-Q_2021-11-03 00:00:00_64803-0000064803-21-000034.html

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Coterra Energy Inc._10-Q_2021-11-03 00:00:00_858470-0000858470-21-000060.html

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DOMINION ENERGY, INC_10-Q_2021-11-05 00:00:00_715957-0001564590-21-054856.html

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EDISON INTERNATIONAL_10-Q_2021-11-02 00:00:00_827052-0000827052-21-000063.html

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ELECTRONIC ARTS INC._10-Q_2021-11-09 00:00:00_712515-0000712515-21-000148.html

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ELI LILLY & Co_10-Q_2021-10-27 00:00:00_59478-0000059478-21-000216.html

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ENTERGY CORP -DE-_10-Q_2021-11-05 00:00:00_65984-0000065984-21-000291.html

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EOG RESOURCES INC_10-Q_2021-11-04 00:00:00_821189-0000821189-21-000089.html

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EVERSOURCE ENERGY_10-Q_2021-11-05 00:00:00_72741-0000072741-21-000025.html

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EXPEDITORS INTERNATIONAL OF WASHINGTON INC_10-Q_2021-11-04 00:00:00_746515-0001564590-21-054396.html

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FAIR ISAAC CORP_10-K_2021-11-10 00:00:00_814547-0000814547-21-000019.html

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOur Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following: a business overview that provides a high-level summary of our strategies and initiatives, highlights from fiscal year 2021 and key performance metrics for our Software segment; a more detailed analysis of our results of operations; our capital resources and liquidity, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments; and a summary of our critical accounting policies and estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Our MD&A should be read in conjunction with Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ from those referred to herein due to a number of factors, including but not limited to risks described in Item 1A, Risk Factors, in this Annual Report on Form 10-K.BUSINESS OVERVIEWStrategies and InitiativesIn fiscal 2021, our B2B scoring solutions, including the flagship FICO® Score, continued to be the standard measure of consumer credit risk in the U.S. In January 2020 we introduced our most predictive scores, FICO® Score 10 and 10T. We also created the FICO® Resilience Index, a complement to FICO Scores that identifies consumers who are more resilient to economic stress relative to other consumers within the same FICO Score bands. We continued to develop scores that use alternative data to enhance conventional credit bureau data and generate scores for otherwise un-scorable consumers. During fiscal 2021, we continued to advance our platform-first, cloud delivered strategy in our Software segment. This led us to exit less strategic areas of our business in order to facilitate incremental investment in higher value, more strategic areas. As part of this process, we divested the non-platform-based Collections and Recovery (“C&R”) business, sold all assets related to our cyber risk score operations, and sold certain assets related to our Software operations to an affiliated joint venture in China. During fiscal 2020, we changed our business practice of selling term software licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled. This transition was substantially completed by the end of the first quarter of our fiscal 2021. The timing of our revenue recognition on these subscription sales changed, resulting in less revenue recognized upfront and more revenue recognized over the term of these subscriptions. This change led to a negative impact of our revenue recognized from term software licenses in our fiscal 2021 but does not affect total revenue recognized over the life of a contract. In addition, this change does not negatively impact our cash flows.We also continue to enhance stockholder value by returning cash to stockholders through our stock repurchase programs. In June 2021, following the divestiture of our C&R business, we entered into an accelerated share repurchase agreement (“ASR Agreement”) to repurchase $200.0 million of our common stock. In August 2021, we entered into a stock repurchase agreement with an institutional shareholder pursuant to which we repurchased $225.0 million of our common stock. We also repurchased shares in other open market transactions under our stock repurchase programs. During fiscal 2021, we repurchased 1.9 million shares at a total repurchase price of $882.2 million. As of September 30, 2021, we had $173.2 million remaining under our current stock repurchase program.Due to the COVID-19 pandemic, we continue to conduct business with substantial modifications to employee travel and work locations and also the virtualization of sales and marketing events. We expect these modifications to remain in place throughout calendar year 2021, along with substantially modified interactions with customers and suppliers, among other adjustments. As certain offices reopened due to the lifting of local government restrictions and a small number of employees started returning to work locations on a limited basis during fiscal 2021, we have maintained a “Voluntary Work-From-Home Policy” providing our people with valued flexibility. While we have not experienced material disruptions to our operations from the COVID-19 pandemic, we are unable to predict the full impact that the COVID-19 pandemic will have on our operations and future financial performance, including demand for our offerings, impact to our customers and partners, actions that may be taken by governmental authorities, and other factors identified in “Risk Factors” in Part I, Item 1A of this Report.Highlights from Fiscal Year 2021•Total GAAP revenue was $1.32 billion during fiscal year 2021, a 2% increase from fiscal year 2020.•Total revenue for our Scores segment was $654.1 million during fiscal year 2021, a 24% increase from fiscal year 2020.•Annual Recurring Revenue for our Software segment as of September 30, 2021 was $524.0 million, a 6% increase from September 30, 2020, excluding divestitures.•Dollar-Based Net Retention Rate for our Software segment during the fourth quarter of fiscal 2021 was 106%, excluding divestitures.32Table of Contents•Cash and cash equivalents was $195.4 million as of September 30, 2021, compared with $157.4 million as of September 30, 2020.•Operating income, which included $100.1 million gains on product line asset sales and business divestiture, was $505.5 million during fiscal year 2021, a 71% increase from fiscal 2020.•Net income was $392.1 million during fiscal year 2021, a 66% increase from fiscal 2020.•Cash flow from operations was $423.8 during fiscal year 2021, compared with $364.9 million generated during the prior year.•Total debt balance was $1.268 billion as of September 30, 2021, compared with $845 million as of September 30, 2020.•$882.2 million was spent on share repurchases, compared with $235.2 million spent during the prior year.Key performance metrics for Software segmentAnnual Contract Value Bookings (“ACV Bookings”)Management regards ACV Bookings as an important indicator of future revenues, but they are not comparable to, nor are they a substitute for, an analysis of, our revenues. We define ACV Bookings as the average annualized value of software contracts signed in the current reporting period that generate current and future on-premises and SaaS software revenue. We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other revenues that are non-recurring in nature. For renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACV Bookings.ACV Bookings is calculated by dividing the total expected contract value by the contract term in years. The expected contract value equals the fixed amount — including guaranteed minimums — stated in the contract, plus estimates of future usage-based fees. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimates and actual results occur due to variability in the estimated usage. This variability is primarily caused by the economic trends in our customers’ industries; individual performance of our customers relative to their competitors; and regulatory and other factors that affect the business environment in which our customers operate.We disclose estimated revenue expected to be recognized in the future related to remaining performance obligations in Note 12 to the accompanying consolidated financial statements. However, we believe ACV Bookings is a more meaningful measure of our business as it includes estimated revenues and future billings excluded from Note 12, such as usage-based fees and guaranteed minimums derived from our on-premises software licenses, among others.The following table summarizes our ACV Bookings during the periods indicated:Quarter Ended September 30,Year Ended September 30,2021202020212020(In millions)Total on-premises and SaaS software *$25.8 $28.9 $62.8 $58.3 (*) During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our C&R business. The amounts above exclude these divested product lines and businesses for all periods presented.Annual Recurring Revenue (“ARR”)Accounting Standards Codification 606 requires us to recognize a significant portion of revenue from our on-premises software subscriptions at the point in time when the software is first made available to the customer, or at the beginning of the subscription term, despite the fact that our contracts typically call for billing these amounts ratably over the life of the subscription. The remaining portion of our on-premises software subscription revenue including maintenance and usage-based fees are recognized over the life of the contract. This point-in-time recognition of a portion of our on-premises software subscription revenue creates significant variability in the revenue recognized period to period based on the timing of the subscription start date and the subscription term. Furthermore, this point-in-time revenue recognition can create a significant difference between the timing of our revenue recognition and the actual customer billing under the contract. We use ARR to measure the underlying performance of our subscription-based contracts and mitigate the impact of this variability. ARR is defined as the annualized revenue run-rate of on-premises and SaaS software agreements within a quarterly reporting period, and as such, is different from the timing and amount of revenue recognized. All components of our software licensing and subscription arrangements that are not expected to recur (primarily perpetual licenses) are excluded. We calculate ARR as the quarterly recurring revenue run-rate multiplied by four.33Table of ContentsThe following table summarizes our ARR at each of the dates presented:December 31, 2019March 31, 2020June 30, 2020September 30, 2020December 31, 2020March 31, 2021June 30, 2021September 30, 2021ARR (*)(In millions)Platform (**)$40.0$41.1$43.8$47.7$55.1$60.2$67.7$75.2Non-Platform446.9450.3438.5443.6439.9437.1445.9448.8Total on-premises and SaaS software$486.9$491.4$482.3$491.3$495.0$497.3$513.6$524.0PercentagePlatform8 %8 %9 %10 %11 %12 %13 %14 %Non-Platform92 %92 %91 %90 %89 %88 %87 %86 %Total on-premises and SaaS software100 %100 %100 %100 %100 %100 %100 %100 %YoY ChangePlatform45 %48 %44 %45 %38 %47 %54 %58 %Non-Platform2 %5 %(3)%(2)%(2)%(3)%2 %1 %Total on-premises and SaaS software5 %7 %— %1 %2 %1 %7 %7 %(*) During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our C&R business. The amounts above exclude these divested product lines and businesses for all periods presented.(**) The FICO platform software is a set of interoperable services which use software assets owned and/or governed by FICO for building solutions and which conform to FICO architectural standards based on key elements of Cloud Native Computing design principles. These standards encompass shared security context and pre-integration using FICO standard application programming interfaces for all services.Dollar-Based Net Retention Rate (“DBNRR”)We consider DBNRR to be an important measure of our success in retaining and growing revenue from our existing customers. To calculate DBNRR for any period, we compare the ARR at the end of the prior comparable quarter (base ARR) to the ARR from that same cohort of customers at the end of the current quarter (retained ARR); we then divide the retained ARR by the base ARR to arrive at the DBNRR. Our calculation includes the positive impact among this cohort of customers of selling additional products, price increases and increases in usage-based fees, and the negative impact of customer attrition, price decreases and decreases in usage-based fees during the period. However, the calculation does not include the positive impact from sales to any customers acquired during the period. Our DBNRR may increase or decrease from period to period as a result of various factors, including the timing of new sales and customer renewal rates.The following table summarizes our DBNRR for each of the periods presented:Quarter EndedDecember 31, 2019March 31, 2020June 30, 2020September 30, 2020December 31, 2020March 31, 2021June 30, 2021September 30, 2021DBNRR (*)Platform110 %112 %108 %116 %123 %130 %137 %143 %Non-Platform101 %103 %95 %96 %97 %96 %100 %100 %Total on-premises and SaaS software103 %105 %98 %99 %100 %100 %105 %106 %(*) During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our C&R business. The amounts above exclude these divested product lines and businesses for all periods presented.34Table of ContentsRESULTS OF OPERATIONSWe are organized into the following two reportable segments: Software and Scores. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. During the fourth quarter of fiscal 2021, we reevaluated our operating segments to better align with how our chief operating decision maker (“CODM”) evaluates performance and allocates resources, which resulted in a change from three operating segments, Applications, Decision Management Software and Scores, to two operating segments, Software and Scores, by merging Applications and Decision Management Software segments into the new Software segment. As a result, we modified the presentation of our segment financial information with retrospective application to all prior periods presented. In addition, effective beginning in the fourth quarter of fiscal 2021, we changed the classification of revenue from transactional and maintenance, professional services, and license to on-premises and SaaS software, professional services and scores on our consolidated statements of income and comprehensive income, as well as our disclosures on disaggregation of revenue, to better align with our business strategy. Previously reported amounts have been adjusted to conform to the current presentation.Segment revenues, operating income, and related financial information, including disaggregation of revenue, for the years ended September 30, 2021, 2020 and 2019 are set forth in Note 12 and Note 18 to the accompanying consolidated financial statements.RevenuesThe following tables set forth certain summary information on a segment basis related to our revenues for fiscal 2021, 2020 and 2019: RevenuesYear Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage ChangeSegment2021202020192021 to 20202020 to 20192021 to 20202020 to 2019 (In thousands)(In thousands) Scores$654,147 $528,547 $421,177 $125,600 $107,370 24 %25 %Software662,389 766,015 738,906 (103,626)27,109 (14)%4 % Total $1,316,536 $1,294,562 $1,160,083 21,974 134,479 2 %12 % Percentage of RevenuesYear Ended September 30,Segment202120202019Scores50 %41 %36 %Software50 %59 %64 % Total100 %100 %100 %Scores Scores segment revenues increased $125.6 million in fiscal 2021 from 2020 due to an increase of $64.6 million in our business-to-business scores revenue and $61.0 million in our business-to-consumer revenue. The increase in business-to-business scores revenue was primarily attributable to a higher unit price across several business-to-business offerings, as well as higher volumes. The increase in business-to-consumer revenue was attributable to an increase in both royalties derived from scores sold indirectly to consumers through consumer reporting agencies and direct sales generated from the myFICO.com website.35Table of ContentsScores segment revenues increased $107.4 million in fiscal 2020 from 2019 due to an increase of $79.8 million in our business-to-business scores revenue and $27.6 million in our business-to-consumer revenue. The increase in business-to-business scores was primarily attributable to an increase in mortgage volumes, a higher unit price across several business-to-business offerings, a large royalty true-up as well as a large annual license deal recognized during fiscal 2020. The increase was partially offset by a decrease in unsecured originations volume. The increase in business-to-consumer revenue was attributable to an increase in both royalties derived from scores sold indirectly to consumers through consumer reporting agencies and direct sales generated from the myFICO.com website.Revenues collectively generated by agreements with the three major consumer reporting agencies, TransUnion, Equifax and Experian, accounted for 38%, 33% and 29% of our total revenues in fiscal 2021, 2020 and 2019, respectively, with all three consumer reporting agencies contributing more than 10% of our total revenues in fiscal 2021, and Experian contributing more than 10% of our total revenues in fiscal 2020 and 2019. Revenues from these customers included amounts recorded in our Software segment.Software Year Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage Change 2021202020192021 to 20202020 to 20192021 to 20202020 to 2019 (In thousands)(In thousands) On-premises and SaaS software$517,888 $584,576 $556,968 $(66,688)$27,608 (11)%5 %Professional services144,501 181,439 181,938 (36,938)(499)(20)%— %Total$662,389 $766,015 $738,906 (103,626)27,109 (14)%4 %Year Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage Change2021202020192021 to 20202020 to 20192021 to 20202020 to 2019(In thousands)(In thousands)Software recognized at a point time (1)$59,024 $127,666 $111,308 $(68,642)$16,358 (54)%15 %Software recognized over contract term (2)458,864 456,910 445,660 1,954 11,250 — %3 % Total$517,888 $584,576 $556,968 $(66,688)27,608 (11)%5 %(1)Includes license portion of our on-premises subscription software and perpetual license, both of which are recognized when the software is made available to the customer, or at the start of the subscription. (2)Includes maintenance portion and usage-based fees of our on-premises subscription software, maintenance revenue on perpetual licenses, as well as SaaS revenue.Software segment revenues decreased $103.6 million in fiscal 2021 from 2020 due to a $66.7 million decrease in on-premises and SaaS software revenue and a $36.9 million decrease in services revenue. The decrease in on-premises and SaaS software revenue was attributable to a $68.6 million decrease in revenue recognized at a point in time, partially offset by a $1.9 million increase in revenue recognized over time. The decrease in point-in-time recognition was primarily attributable to the shift in the timing of revenue recognition on our term license subscription sales as a result of changing our business practice of selling term licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled, as well as a decrease in the number and size of term license deals signed or renewed during fiscal 2021. The increase in over-time recognition was primarily attributable to an increase in SaaS subscription revenue, partially offset by the divestiture of our C&R business in June 2021. The decrease in services revenue was primarily due to our recent strategic shift to emphasize software over services, as well as the divestiture of our C&R business. In total, $21.7 million of the year-over-year decrease in our Software segment revenue was attributable to the divestiture of our C&R business. Software segment revenues increased $27.1 million in fiscal 2020 from 2019 primarily attributable to a $27.6 million increase in on-premises and SaaS software revenue, comprised of a $16.4 million increase in license portion of our on-premises subscription software and perpetual license revenue recognized at a point in time, and a $11.3 million increase in revenue recognized over time, primarily attributable to an increase in SaaS subscription revenue.36Table of ContentsOperating Expenses and Other Income, NetThe following tables set forth certain summary information related to our consolidated statements of income and comprehensive income for fiscal 2021, 2020 and 2019: Year Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage Change 2021202020192021 to 20202020 to 20192021 to 20202020 to 2019 (In thousands, except employees)(In thousands, exceptemployees) Revenues$1,316,536 $1,294,562 $1,160,083 $21,974 $134,479 2 %12 %Operating expenses:Cost of revenues332,462 361,142 336,845 (28,680)24,297 (8)%7 %Research and development171,231 166,499 149,478 4,732 17,021 3 %11 %Selling, general and administrative396,281 420,930 414,086 (24,649)6,844 (6)%2 %Amortization of intangible assets3,255 4,993 6,126 (1,738)(1,133)(35)%(18)%Restructuring and impairment charges7,957 45,029 — (37,072)45,029 (82)%— %Gains on product line asset sales and business divestiture(100,139)— — (100,139)— — %— %Total operating expenses811,047 998,593 906,535 (87,407)92,058 (9)%10 %Operating income505,489 295,969 253,548 209,520 42,421 71 %17 %Interest expense, net(40,092)(42,177)(39,752)2,085 (2,425)(5)%6 %Other income, net7,745 3,208 2,276 4,537 932 141 %41 %Income before income taxes473,142 257,000 216,072 216,142 40,928 84 %19 %Provision for income taxes81,058 20,589 23,948 60,469 (3,359)294 %(14)%Net income$392,084 $236,411 $192,124 155,673 44,287 66 %23 %Number of employees at fiscal year-end3,650 4,003 4,009 (353)(6)(9)%— % 37Table of Contents Percentage of RevenuesYear Ended September 30, 202120202019Revenues100 %100 %100 %Operating expenses:Cost of revenues25 %28 %29 %Research and development13 %13 %13 %Selling, general and administrative30 %33 %35 %Amortization of intangible assets— %— %1 % Restructuring and impairment charges1 %3 %— %Gains on product line asset sales and business divestiture(7)%— %— %Total operating expenses62 %77 %78 %Operating income38 %23 %22 %Interest expense, net(3)%(3)%(3)%Other income, net1 %— %— %Income before income taxes36 %20 %19 %Provision for income taxes6 %2 %2 %Net income30 %18 %17 %Cost of RevenuesCost of revenues consists primarily of employee salaries, incentives, and benefits for personnel directly involved in delivering software products, operating SaaS infrastructure, and providing support, implementation and consulting services; allocated overhead, facilities and data center costs; software royalty fees; credit bureau data and processing services; third-party hosting fees related to our SaaS services; travel costs; and outside services.The fiscal 2021 from 2020 decrease of $28.7 million in cost of revenues was primarily attributable to an $18.8 million decrease in personnel and labor costs, a $9.2 million decrease in allocated facilities and infrastructure costs and a $3.7 million decrease in travel costs, partially offset by an increase in direct materials costs. The decreases in personnel and labor costs, and in allocated facilities and infrastructure costs were both largely driven by our strategic cost initiative implemented in September 2020, in which we reduced our workforce, consolidated office space and abandoned certain property and equipment; as well as the divestiture of our C&R business in June 2021. The decrease in travel costs was primarily attributable to the COVID-19 pandemic. The increase in direct materials costs was primarily attributable to increased third-party data costs related to increased Scores revenue. Cost of revenues as a percentage of revenues decreased to 25% during fiscal 2021 from 28% during fiscal 2020, primarily due to increased sales of our higher-margin Scores products.The fiscal 2020 over 2019 increase of $24.3 million in cost of revenues was primarily attributable to an $11.1 million increase in allocated facilities and infrastructure costs, a $10.3 million increase in personnel and labor costs and a $7.6 million increase in direct materials cost, partially offset by a $4.9 million decrease in travel costs. The increase in facilities and infrastructure costs was primarily attributable to increased resource requirements due to expansion in our cloud infrastructure operations. The increase in personnel and labor costs was primarily attributable to an increase in our average headcount. The increase in direct materials cost was primarily attributable to an increase in license and Scores revenues that incur third-party royalties and data costs, as well as an increase in telecommunication cost. The decrease in travel costs was primarily attributable to the COVID-19 pandemic. Cost of revenues as a percentage of revenues was 28% during fiscal 2020, materially consistent with that incurred during fiscal 2019.Research and DevelopmentResearch and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of software products.The fiscal 2021 over 2020 increase of $4.7 million in research and development expenses was primarily attributable to an increase in personnel and labor costs, driven by increased average headcount and our continued investments in new product development. Research and development expenses as a percentage of revenues was 13% during fiscal 2021, consistent with that during fiscal 2020.38Table of ContentsThe fiscal 2020 over 2019 increase of $17.0 million in research and development expenses was primarily attributable to an increase in personnel and labor costs and an increase in allocated facilities and infrastructure costs, both driven by increased average headcount and our continued investments in new product development. Research and development expenses as a percentage of revenues was 13% during fiscal 2020, consistent with that incurred during fiscal 2019.Selling, General and AdministrativeSelling, general and administrative expenses consist principally of employee salaries, incentives, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; and business development expenses. The fiscal 2021 from 2020 decrease in selling, general and administrative expenses of $24.6 million was primarily attributable to a $7.4 million decrease in travel costs, a $6.8 million decrease in marketing costs, a $5.0 million decrease in outside services, and a $4.6 million decrease in allocated facilities and infrastructure costs. The decrease in travel costs was a result of a decrease in travel activity due to COVID-19. The decrease in marketing costs was primarily driven by a company-wide marketing event during fiscal 2020. The decrease in outside services was attributable to a decrease in legal and consulting fees associated with several company initiatives during fiscal 2020. The decrease in allocated facilities and infrastructure costs was largely driven by our strategic cost initiative implemented in September 2020, in which we consolidated office space and abandoned certain property and equipment. Selling, general and administrative expenses as a percentage of revenues decreased to 30% during fiscal 2021 from 33% during fiscal 2020 primarily due to increased sales of our high-margin Scores products.The fiscal 2020 over 2019 increase of $6.8 million was primarily attributable to an increase in personnel and labor costs as a result of increased average headcount, higher share-based compensation and higher non-capitalizable commission cost. The increase was partially offset by a decrease in marketing and travel costs as a result of a decrease in travel activity due to COVID-19. Selling, general and administrative expenses as a percentage of revenues decreased to 33% during fiscal 2020 from 35% during fiscal 2019 primarily due to increased sales of our high-margin Scores and software products.Amortization of Intangible AssetsAmortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions. Our finite-lived intangible assets consist primarily of completed technology and customer contracts and relationships, which are being amortized using the straight-line method over periods ranging from four to fifteen years.Amortization expense was $3.3 million, $5.0 million and $6.1 million for fiscal 2021, 2020 and 2019, respectively. Restructuring and Impairment ChargesDuring the fourth quarter of fiscal 2021, we incurred charges of $8.0 million in employee separation costs due to the elimination of 160 positions throughout the Company. Cash payments for all the employee separation costs will be paid by the end of our fiscal 2022. There were no impairment charges incurred during fiscal 2021.During fiscal 2020, we incurred net charges totaling $45.0 million consisting of $28.0 million in impairment loss on operating lease assets, $5.2 million in impairment loss on abandonment of property and equipment and $11.8 million in restructuring charges. The impairment losses were associated with closing certain non-core offices and reducing office space in other locations to better align with anticipated needs in light of post-pandemic workforce patterns. The restructuring charges related to employee separation costs as a result of eliminating 209 positions throughout the Company. Cash payments for all the employee separation costs were fully paid before the end of our fiscal 2021.There were no restructuring and impairment charges incurred during fiscal 2019.Gains on Product Line Asset Sales and Business DivestitureThe $100.1 million gain on product line asset sales and business divestiture during fiscal 2021 was attributable to a $92.8 million gain on the sale of the C&R business in June 2021, a $7.3 million gain on the sale of all assets related to our cyber risk score operations in October 2020, and the sale of certain assets related to our Software operations to an affiliated joint venture in China in December 2020.39Table of ContentsInterest Expense, NetInterest expense includes primarily interest on the senior notes issued in December 2019, May 2018, and July 2010 (which July 2010 senior notes were paid in full at maturity in July 2020), as well as interest and credit facility fees on the revolving line of credit. On our consolidated statements of income and comprehensive income, interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.The fiscal 2021 from 2020 decrease in net interest expense of $2.1 million was primarily attributable to a lower average outstanding debt balance during fiscal 2021.The fiscal 2020 over 2019 increase in net interest expense of $2.4 million was primarily attributable to a higher average outstanding debt balance during fiscal 2020.Other Income, NetOther income, net consists primarily of realized investment gains/losses and unrealized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from re-measurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.The fiscal 2021 over 2020 increase in other income, net of $4.5 million was primarily attributable to an increase in net unrealized gains on our supplemental retirement and savings plan, as well as a decrease in foreign currency exchange losses.The fiscal 2020 over 2019 increase in other income, net of $0.9 million was primarily attributable to an increase in net unrealized gains on our supplemental retirement and savings plan, partially offset by an increase in foreign currency exchange losses.Provision for Income TaxesOur effective tax rates were 17.1%, 8.0% and 11.1% in fiscal 2021, 2020 and 2019, respectively.The increase in our income tax provision in fiscal 2021 compared to fiscal 2020 was due to an increase in pretax book income, of which a large amount was due to the gain on divestiture of C&R business, as well as a decrease in excess tax benefits related to share-based compensation. The decrease in our income tax provision in fiscal 2020 compared to fiscal 2019 was due to the excess tax benefits related to share-based compensation.As of September 30, 2021, we had approximately $141.5 million of unremitted earnings of non-U.S. subsidiaries. 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. In the event these earnings are later remitted to the U.S., any estimated withholding tax and state income tax due upon remittance of those earnings is expected to be immaterial to the income tax provision.40Table of ContentsOperating IncomeThe following tables set forth certain summary information on a segment basis related to our operating income for fiscal 2021, 2020 and 2019: Year Ended September 30,Period-to-PeriodChangePeriod-to-PeriodPercentage ChangeSegment2021202020192021 to 20202020 to 20192021 to 20202020 to 2019 (In thousands)(In thousands) Scores$560,684 $454,310 $361,356 $106,374 $92,954 23 %26 %Software105,147 130,066 126,046 (24,919)4,020 (19)%3 %Unallocated corporate expenses(136,812)(144,704)(144,755)7,892 51 (5)%— %Total segment operating income529,019 439,672 342,647 89,347 97,025 20 %28 %Unallocated share-based compensation(112,457)(93,681)(82,973)(18,776)(10,708)20 %13 %Unallocated amortization expense(3,255)(4,993)(6,126)1,738 1,133 (35)%(18)%Unallocated restructuring and impairment charges(7,957)(45,029)— 37,072 (45,029)— %— %Gains on product line asset sales and business divestiture100,139 — — 100,139 — — %— %Operating income$505,489 $295,969 $253,548 209,520 42,421 71 %17 %Scores Year Ended September 30,Percentage of Revenues 202120202019202120202019 (In thousands) Segment revenues$654,147 $528,547 $421,177 100 %100 %100 %Segment operating expenses(93,463)(74,237)(59,821)(14)%(14)%(14)%Segment operating income$560,684 $454,310 $361,356 86 %86 %86 %Software Year Ended September 30,Percentage of Revenues 202120202019202120202019 (In thousands) Segment revenues$662,389 $766,015 $738,906 100 %100 %100 %Segment operating expenses(557,242)(635,949)(612,860)(84)%(83)%(83)%Segment operating income$105,147 $130,066 $126,046 16 %17 %17 %The fiscal 2021 over 2020 increase in operating income of $209.5 million was primarily attributable to a $100.1 million gain on product line asset sales and business divestiture during fiscal 2021, a $59.5 million decrease in segment operating expenses, a $37.1 million decrease in restructuring and impairment charges, a $22.0 million increase in segment revenues and a $7.8 million decrease in corporate expenses, partially offset by an $18.8 million increase in share-based compensation expense.At the segment level, the $89.3 million increase in segment operating income was the result of a $106.4 million increase in our Scores segment operating income and a $7.8 million decrease in corporate expenses, partially offset by a $24.9 million decrease in our Software segment operating income.41Table of ContentsThe $106.4 million increase in our Scores segment operating income was attributable to a $125.6 million increase in segment revenue, partially offset by a $19.2 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 86%, consistent with fiscal 2020.The $24.9 million decrease in our Software segment operating income was attributable to a $103.6 million decrease in segment revenue, partially offset by a $78.7 million decrease in segment operating expenses. Segment operating income as a percentage of segment revenue for Software was 16%, materially consistent with fiscal 2020.The fiscal 2020 over 2019 increase in operating income of $42.4 million was attributable to a $134.5 million increase in segment revenues and a $1.1 million decrease in amortization expense, partially offset by a $45.0 million increase in restructuring and impairment charges, a $37.5 million increase in segment operating expenses, and a $10.7 million increase in share-based compensation expense.At the segment level, the $97.0 million increase in segment operating income was the result of a $93.0 million increase in our Scores segment operating income and a $4.0 million increase in our Software segment operating income.The $93.0 million increase in our Scores segment operating income was attributable to a $107.4 million increase in segment revenue, partially offset by a $14.4 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 86%, consistent with fiscal 2019.The $4.0 million increase in our Software segment operating income was attributable to a $27.1 million increase in segment revenue, partially offset by a $23.1 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Software was 17%, consistent with fiscal 2019.CAPITAL RESOURCES AND LIQUIDITYOutlookAs of September 30, 2021, we had $195.4 million in cash and cash equivalents, which included $158.8 million held by our foreign subsidiaries. Our cash position could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part I, Item 1A titled “Risk Factors” of this Annual Report on Form 10-K. However, based on our current business plan and revenue prospects, we believe our cash and cash equivalents balances, as well as available borrowings from our $600 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future. Under our current financing arrangements, we have no significant debt obligations maturing over the next twelve months. Our undistributed earnings outside the U.S. are deemed to be permanently reinvested in foreign jurisdictions. We currently do not foresee a need to repatriate cash and cash equivalents held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue for state income or foreign withholding taxes on the distributed foreign earnings, which we expect to be immaterial.In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.42Table of ContentsSummary of Cash Flows Year Ended September 30, 202120202019 (In thousands)Cash provided by (used in):Operating activities$423,817 $364,916 $260,350 Investing activities137,850 (24,583)(42,760)Financing activities(523,571)(289,424)(200,047)Effect of exchange rate changes on cash(136)59 (1,140)Increase in cash and cash equivalents$37,960 $50,968 $16,403 Cash Flows from Operating ActivitiesOur primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities totaled $423.8 million in fiscal 2021 compared to $364.9 million in fiscal 2020. The $58.9 million increase was primarily attributable to a $155.7 million increase in net income and a $28.6 million increase that resulted from timing of receipts and payments in our ordinary course of business, partially offset by a $125.4 million decrease in non-cash items, including a $100.1 million gain on product line asset sales and a business divestiture in fiscal 2021.Net cash provided by operating activities totaled $364.9 million in fiscal 2020 compared to $260.4 million in fiscal 2019. The $104.5 million increase was attributable to a $44.3 million increase in net income, a $46.1 million increase in non-cash items, including a $28.0 million increase in impairment loss on operating lease assets as well as a $20.0 million increase in operating lease costs, and a $14.2 million increase that resulted from timing of receipts and payments in our ordinary course of business.Cash Flows from Investing ActivitiesNet cash provided by investing activities totaled $137.9 million in fiscal 2021 compared to net cash used of $24.6 million in fiscal 2020. The $162.5 million change was primarily attributable to $147.4 million in cash proceeds from the product line asset sales and a business divestiture during fiscal 2021 and a $14.4 million decrease in purchases of property and equipment.Net cash used in investing activities totaled $24.6 million in fiscal 2020 compared to $42.8 million in fiscal 2019. The $18.2 million decrease was primarily attributable to a $15.9 million decrease in net cash used for acquisitions and a $2.0 million decrease in net cash used for purchases of property and equipment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled $523.6 million in fiscal 2021 compared to $289.4 million in fiscal 2020. The $234.2 million increase was primarily attributable to a $639.0 million increase in repurchases of common stock and a $350.0 million decrease in proceeds from issuance of senior notes, partially offset by a $419.0 million increase in proceeds from our revolving line of credit, a $254.0 million decrease in payments on our revolving line of credit, and an $85.0 million decrease in payments on senior notes.Net cash used in financing activities totaled $289.4 million in fiscal 2020 compared to $200.0 million in fiscal 2019. The $89.4 million increase was primarily due to a $338.0 million increase in payments, net of proceeds, on our revolving line of credit and a $49.9 million increase in taxes paid related to net share settlement of equity awards, partially offset by a $293.0 million increase in proceeds, net of payments, from our senior notes.43Table of ContentsRepurchases of Common StockIn July 2020, our Board of Directors approved a stock repurchase program following the completion of the previously authorized program. This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions. In March 2021, our Board of Directors approved another stock repurchase program following the completion of the July 2020 program. This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. As part of the broader share repurchase program, we entered into an accelerated share repurchase agreement (“ASR Agreement”) with a financial institution in June 2021 to repurchase $200.0 million of our common stock. Pursuant to the ASR Agreement, we paid $200.0 million to the financial institution and received an initial delivery of 319,400 shares of common stock, which approximated 80% of the total number of expected shares to be repurchased under the ASR Agreement. In August 2021, we settled the ASR Agreement and received 70,127 additional shares. In total, 389,527 shares were repurchased under the ASR Agreement. In August 2021, our Board of Directors approved a new stock repurchase program following the termination of the March 2021 program. This new program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. In August 2021, we entered into a stock repurchase agreement with an institutional shareholder, pursuant to which we repurchased 515,293 shares of our common stock for $225.0 million. As of September 30, 2021, we had $173.2 million remaining under our current stock repurchase program. During fiscal 2021, 2020 and 2019, we expended $882.2 million, $235.2 million and $228.9 million, respectively, under these and previously authorized stock repurchase programs. Revolving Line of CreditOn August 19, 2021, we amended our credit agreement with a syndicate of banks, increasing our borrowing capacity under the unsecured revolving line of credit to $600 million, and extended its maturity to August 19, 2026. Borrowings under 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) an adjusted base rate, which is the greatest 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 0.750% and for LIBOR borrowings ranges from 1.000% to 1.750% 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 3.50, subject to a step up to 4.00 following certain permitted acquisitions; and a minimum interest coverage ratio of 3.00. The credit agreement also contains other covenants typical of unsecured facilities. As of September 30, 2021, we had $518.0 million in borrowings outstanding at a weighted-average interest rate of 1.212% and we were in compliance with all financial covenants under this credit facility.On October 20, 2021, we entered into an amendment to our credit agreement that provides for an unsecured term loan that will mature on August 19, 2026 in the aggregate principal amount of $300 million, with an option for us to request additional incremental term loans from time to time, in each case subject to the terms and conditions of the credit agreement. The term loan is in addition to the $600 million revolving loan facility. The term loan is subject to the same pricing and covenants as the revolving line of credit. We are obligated to repay the term loan in consecutive quarterly installments equal to $3.75 million commencing March 31, 2022, subject to certain adjustments under the credit agreement. Senior NotesOn May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25% per annum and will mature on May 15, 2026. On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” and with the 2018 Senior Notes, the “Senior Notes”). The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028. The indentures for the 2018 Senior Notes and the 2019 Senior Notes contain certain covenants typical of unsecured obligations. As of September 30, 2021, the carrying value of the Senior Notes was $750.0 million and we were in compliance with all financial covenants under these obligations, and we do not believe we are at material risk of not meeting these covenants due to COVID-19.44Table of ContentsContractual ObligationsThe following table presents a summary of our contractual obligations at September 30, 2021: Year Ending September 30,ThereafterTotal 20222023202420252026 (In thousands)Senior notes (1)$— $— $— $— $400,000 $350,000 $750,000 Revolving line of credit— — — — 518,000 — 518,000 Interest due on debt obligations (2)35,000 35,000 35,000 35,000 35,000 28,000 203,000 Operating lease obligations24,441 19,621 14,025 8,639 7,602 7,522 81,850 Unrecognized tax benefits (3)— — — — — — 10,897 Total commitments$59,441 $54,621 $49,025 $43,639 $960,602 $385,522 $1,563,747 (1)Represents the unpaid principal amount of the Senior Notes.(2)Represents interest payments on the Senior Notes.(3)Represents unrecognized tax benefits related to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the section of the table showing payment by fiscal year.CRITICAL ACCOUNTING POLICIES AND ESTIMATESWe prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, goodwill and other intangible assets resulting from business acquisitions, share-based compensation, income taxes and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements:Revenue RecognitionContracts with CustomersOur revenue is primarily derived from on-premises software and SaaS subscriptions, professional services and scoring services. For contracts with customers that contain various combinations of products and services, we evaluate whether the products or services are distinct — distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. Revenue is recognized when control of the promised goods or services is transferred to our customers.45Table of ContentsOur on-premises software is primarily sold on a subscription basis, which includes a term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately. The transaction price is either a fixed fee, or a usage-based fee — sometimes subject to a guaranteed minimum. When the amount is fixed, including the guaranteed minimum in a usage-based fee, license revenue is recognized at the point in time when the software is made available to the customer. Maintenance revenue is recognized ratably over the contract period as customers simultaneously consume and receive benefits. Any usage-based fees not subject to a guaranteed minimum or earned in excess of the minimum amount are recognized when the subsequent usage occurs. We occasionally sell software arrangements consisting of on-premises perpetual licenses and maintenance. License revenue is recognized at a point in time when the software is made available to the customer and maintenance revenue is recognized ratably over the contract term.Our SaaS products provide customers with access to and standard support for our software on a subscription basis, delivered through our own infrastructure or third-party cloud services. The SaaS transaction contracts typically include a guaranteed minimum fee per period that allows up to a certain level of usage and a consumption-based variable amount in excess of the minimum threshold; or a consumption-based variable fee not subject to a minimum threshold. The nature of our SaaS arrangements is to provide continuous access to our hosted solutions in the cloud, i.e., a stand-ready obligation that comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). We estimate the total variable consideration at contract inception — subject to any constraints that may apply — and update the estimates as new information becomes available and recognize the amount ratably over the SaaS service period, unless we determine it is appropriate to allocate the variable amount to each distinct service period and recognize revenue as each distinct service period is performed.Our professional services include software implementation, consulting, model development and training. They are sold either standalone, or together with other products or services and generally represent distinct performance obligations. The transaction price can be a fixed amount or a variable amount based upon the time and materials expended. Revenue on fixed-price services is recognized using an input method based on labor hours expended which we believe provides a faithful depiction of the transfer of services. Revenue on services provided on a time and materials basis is recognized by applying the “right-to-invoice” practical expedient as the amount to which we have a right to invoice the customer corresponds directly with the value of our performance to the customer. Our scoring services include both business-to-business and business-to-consumer offerings. Our business-to-business scoring services typically include a license that grants consumer reporting agencies the right to use our scoring solutions in exchange for a usage-based royalty. Revenue is generally recognized when the usage occurs. Business-to-consumer offerings provide consumers with access to their FICO® Scores and credit reports, as well as other value-add services. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. The nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring, and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). Revenue from one-time or monthly subscription services is recognized during the period when service is performed. Revenue from annual subscription services is recognized ratably over the subscription period.Significant JudgmentsOur contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct and should be accounted for separately may require significant judgment. Specifically, when implementation service is included in the original software or SaaS offerings, judgment is required to determine if the implementation service significantly modifies or customizes the software or SaaS service in such a way that the risks of providing it and the customization service are inseparable. In rare instances, contracts may include significant modification or customization of the software of SaaS service and will result in the combination of software or SaaS service and implementation service as one performance obligation.We determine the SSPs using data from our historical standalone sales, or, in instances where such information is not available (such as when we do not sell the product or service separately), we consider factors such as the stated contract prices, our overall pricing practices and objectives, go-to-market strategy, size and type of the transactions, and effects of the geographic area on pricing, among others. When the selling price of a product or service is highly variable, we may use the residual approach to determine the SSP of that product or service. Significant judgment may be required to determine the SSP for each distinct performance obligation when it involves the consideration of many market conditions and entity-specific factors discussed above.46Table of ContentsSignificant judgment may be required to determine the timing of satisfaction of a performance obligation in certain professional services contracts with a fixed consideration, in which we measure progress using an input method based on labor hours expended. In order to estimate the total hours of the project, we make assumptions about labor utilization, efficiency of processes, the customer’s specification and IT environment, among others. For certain complex projects, due to the risks and uncertainties inherent with the estimation process and factors relating to the assumptions, actual progress may differ due to the change in estimated total hours. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues are subject to revisions as the contract progresses to completion.Capitalized Commission CostsWe capitalize incremental commission fees paid as a result of obtaining customer contracts. Capitalized commission costs are amortized on a straight-line basis over ten years — determined using a portfolio approach — based on the transfer of goods or services to which the assets relate, taking into consideration both the initial and future contracts as we do not typically pay a commission on a contract renewal. The amortization costs are included in selling, general, and administrative expenses of our consolidated statements of income and comprehensive income.We apply a practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are recorded within selling, general, and administrative expenses.Business CombinationsAccounting 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 over 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.Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i) future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and (iii) the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Historically, there have been no significant changes in our estimates or assumptions. To the extent a significant acquisition is made during a fiscal year, as appropriate we will expand the discussion to include specific assumptions and inputs used to determine the fair value of our acquired intangible assets.47Table of ContentsIn 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. Historically, there have been no significant changes in our valuation allowances or uncertain tax positions as it relates to business combinations. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.Goodwill, Acquisition Intangibles and Other Long-Lived Assets - Impairment AssessmentGoodwill 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 our fourth fiscal quarter using a July 1 measurement date unless circumstances require a more frequent measurement. During the fourth quarter of fiscal 2021, we reevaluated our operating segments to better align with how our CODM evaluates performance and allocates resources, which resulted in a change from three operating segments, Applications, Decision Management Software and Scores, to two operating segments, Software and Scores. As part of this reevaluation, we determined our operating segments continue to represent our reporting units. 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 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.We performed a step one quantitative impairment test on the Software and Scores reporting units before and immediately following the change in reporting units. There was a substantial excess of fair value over carrying value for the reporting units and we determined goodwill was not impaired for any of our reporting units before or after the change for fiscal 2021. For fiscal 2019 and 2020, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment. After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not that the fair value of any of our reporting units was less their carrying amounts. Consequently, we did not perform a step one quantitative analysis and determined goodwill was not impaired for any of our reporting units for fiscal 2019 and 2020.48Table of ContentsOur intangible assets that have finite useful lives and other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of our intangible assets or other long-lived assets could occur. We review the estimated remaining useful lives of our acquired intangible assets at each reporting period. A reduction in our estimate of remaining useful lives, if any, could result in increased annual amortization expense in future periods. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2021, 2020 and 2019. As discussed above, while we believe that the assumptions and estimates utilized were appropriate based on the information available to management, different assumptions, judgments and estimates could materially affect our impairment assessments for our goodwill, acquired intangibles with finite lives and other long-lived assets. Historically, there have been no significant changes in our estimates or assumptions that would have had a material impact for our goodwill or intangible assets impairment assessment. We believe our projected operating results and cash flows would need to be significantly less favorable to have a material impact on our impairment assessment. However, based upon our historical experience with operations, we do not believe there is a reasonable likelihood of a significant change in our projections.Share-Based CompensationWe measure share-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years). We use the Black-Scholes valuation model to determine the fair value of our stock options and a Monte Carlo valuation model to determine the fair value of our market share units. Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, expected dividend yield, employee turnover rates and employee stock option exercise behaviors. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions. See Note 16 to the accompanying consolidated financial statements for further discussion of our share-based employee benefit plans.Income TaxesWe estimate our income taxes based on the various jurisdictions where we conduct business, which involves significant judgment in determining our income tax provision. We estimate our current tax liability using currently enacted tax rates and laws and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities recorded on our balance sheet using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled. We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not more likely than not, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding income tax expense in our consolidated statements of income and comprehensive income. In assessing the need for the valuation allowance, we consider future taxable income in the jurisdictions we operate; our ability to carry back tax attributes to prior years; an analysis of our deferred tax assets and the periods over which they will be realizable; and ongoing prudent and feasible tax planning strategies. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we record the increase.We 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.49Table of ContentsContingencies and LitigationWe are subject to various proceedings, lawsuits and claims relating to products and services, technology, labor, stockholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. If the potential loss is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. If the potential loss is considered less than probable or the amount cannot be reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies. Due to uncertainties related to these matters, accruals or disclosures are based on the best information available at the time. Significant judgment is required in both the assessment of likelihood and in the determination of a range of potential losses. Revisions in the estimates of the potential liabilities could have a material impact on our consolidated financial position or consolidated results of operations. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.New Accounting PronouncementsRecently Adopted Accounting PronouncementsIn August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles—Goodwill and Other (Topic 350): Internal-Use Software (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted ASU 2018-15 in the first quarter of our fiscal 2021 and the adoption did not have a significant impact on our consolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. We adopted Topic 326 in the first quarter of our fiscal 2021 and the adoption did not have a significant impact on our consolidated financial statements.Recent Accounting Pronouncements Not Yet AdoptedWe do not expect that any recently issued accounting pronouncements will have a significant effect on our financial statements.Item 7A. Quantitative and Qualitative Disclosures about Market RiskMarket Risk DisclosuresWe are exposed to market risk related to changes in interest rates and foreign exchange rates. We do not use derivative financial instruments for speculative or trading purposes.Interest Rate We maintain an investment portfolio consisting of bank deposits and money market funds. The funds provide daily liquidity and may be subject to interest rate risk and fall in value if market interest rates increase. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. The following table presents the principal amounts and related weighted-average yields for our investments with interest rate risk at September 30, 2021 and 2020: September 30, 2021September 30, 2020 Cost BasisCarryingAmountAverageYieldCost BasisCarryingAmountAverageYield (Dollars in thousands)Cash and cash equivalents$195,354 $195,354 0.04 %$157,394 $157,394 0.05 %50Table of ContentsOn May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” and with the 2018 Senior Notes, the “Senior Notes”). The fair value of the Senior Notes may increase or decrease due to various factors, including fluctuations in market interest rates and fluctuations in general economic conditions. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity for additional information on the Senior Notes. The following table presents the carrying amounts and fair values for the Senior Notes at September 30, 2021 and 2020: September 30, 2021September 30, 2020 Face Value (*)Fair ValueFace Value (*)Fair Value (In thousands)The 2018 Senior Notes400,000 453,000 400,000 442,000 The 2019 Senior Notes350,000 357,000 350,000 358,750 Total$750,000 $810,000 $750,000 $800,750 (*) The carrying value of the Senior Notes was the face value reduced by the net debt issuance costs of $9.0 million and $10.6 million at September 30, 2021 and 2020, respectively. We have interest rate risk with respect to our $600 million unsecured revolving line of credit. 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 0.750% and for LIBOR borrowings ranges from 1.000% to 1.750% and is determined based on our consolidated leverage ratio. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows, but does not impact the fair value of the instrument. We had $518.0 million in borrowings outstanding at a weighted-average interest of 1.212% under the credit facility as of September 30, 2021.Foreign Currency Forward ContractsWe 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, net. The forward contracts are not designated as hedges and are marked to market through other income, 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, 2021 and 2020: September 30, 2021 Contract AmountFair Value ForeignCurrencyUSDUSD (In thousands)Sell foreign currency:Euro (EUR)EUR17,100 $19,829 — Buy foreign currency:British pound (GBP)GBP11,467 $15,400 — Singapore dollar (SGD)SGD6,650 $4,900 — 51Table of Contents September 30, 2020 Contract AmountFair Value ForeignCurrencyUSDUSD (In thousands)Sell foreign currency:Euro (EUR)EUR15,000 $17,656 — Buy foreign currency:British pound (GBP)GBP16,555 $21,300 — Singapore dollar (SGD)SGD7,815 $5,700 — The foreign currency forward contracts were entered into on September 30 of each fiscal year; therefore, the fair value was $0 on September 30, 2021 and 2020.52Table of Contents

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