UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-50600
 | ||
Blackbaud, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 11-2617163 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
65 Fairchild Street
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer | ¨ |
Non-accelerated filer ¨ | Smaller reporting company | ¨ |
Emerging growth company | ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
Securities Registered Pursuant to Section 12(b) of the Act: | ||
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered |
Common Stock, $0.001 Par Value | BLKB | The Nasdaq Stock Market LLC (Nasdaq Global Select Market) |
The number of shares of the registrant’s Common Stock outstanding as of April 24, 2019 was 49,186,460 .
TABLE OF CONTENTS
First Quarter 2019 Form 10-Q | | 1 |
 | CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | |
This Quarterly Report on Form 10-Q, including the documents incorporated herein by reference, contains forward-looking statements that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These "forward-looking statements" are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build and grow our business, our operating results, our ability to successfully integrate acquired businesses and technologies, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the impact of expensing stock-based compensation, the sufficiency of our capital resources, our ability to meet our ongoing debt and obligations as they become due, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “could,” “would,” “likely,” “will,” “targets,” “plans,” “anticipates,” “aims,” “projects,” “estimates” or any variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Accordingly, they should not be viewed as assurances of future performance, and actual results may differ materially and adversely from those expressed in any forward-looking statements.
Important factors that could cause actual results to differ materially from our expectations expressed in forward-looking statements include, but are not limited to, those summarized under “Item 1A. Risk factors” and elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, 2018 and in our other SEC filings. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statement, whether as a result of new information, future events or otherwise.
2 | | First Quarter 2019 Form 10-Q |
| PART I. FINANCIAL INFORMATION | |
ITEM 1. FINANCIAL STATEMENTS
Blackbaud, Inc. Consolidated balance sheets (Unaudited) | ||||||
(dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | $ | ||||
Restricted cash due to customers | ||||||
Accounts receivable, net of allowance of $5,128 and $4,722 at March 31, 2019 and December 31, 2018, respectively | ||||||
Customer funds receivable | ||||||
Prepaid expenses and other current assets | ||||||
Total current assets | ||||||
Property and equipment, net | ||||||
Operating lease right-of-use assets | ||||||
Software development costs, net | ||||||
Goodwill | ||||||
Intangible assets, net | ||||||
Other assets | ||||||
Total assets | $ | $ | ||||
Liabilities and stockholders’ equity | ||||||
Current liabilities: | ||||||
Trade accounts payable | $ | $ | ||||
Accrued expenses and other current liabilities | ||||||
Due to customers | ||||||
Debt, current portion | ||||||
Deferred revenue, current portion | ||||||
Total current liabilities | ||||||
Debt, net of current portion | ||||||
Deferred tax liability | ||||||
Deferred revenue, net of current portion | ||||||
Operating lease liabilities, net of current portion | ||||||
Other liabilities | ||||||
Total liabilities | ||||||
Commitments and contingencies (see Note 10) | ||||||
Stockholders’ equity: | ||||||
Preferred stock; 20,000,000 shares authorized, none outstanding | ||||||
Common stock, $0.001 par value; 180,000,000 shares authorized, 60,182,678 and 59,327,633 shares issued at March 31, 2019 and December 31, 2018, respectively | ||||||
Additional paid-in capital | ||||||
Treasury stock, at cost; 10,999,885 and 10,760,574 shares at March 31, 2019 and December 31, 2018, respectively | ( | ) | ( | ) | ||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||
Retained earnings | ||||||
Total stockholders’ equity | ||||||
Total liabilities and stockholders’ equity | $ | $ | ||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||
First Quarter 2019 Form 10-Q | | 3 |
Blackbaud, Inc. Consolidated statements of comprehensive income (Unaudited) | ||||||
(dollars in thousands, except per share amounts) | Three months ended March 31, | |||||
2019 | 2018 | |||||
Revenue | ||||||
Recurring | $ | $ | ||||
One-time services and other | ||||||
Total revenue | ||||||
Cost of revenue | ||||||
Cost of recurring | ||||||
Cost of one-time services and other | ||||||
Total cost of revenue | ||||||
Gross profit | ||||||
Operating expenses | ||||||
Sales, marketing and customer success | ||||||
Research and development | ||||||
General and administrative | ||||||
Amortization | ||||||
Restructuring | ||||||
Total operating expenses | ||||||
Income from operations | ||||||
Interest expense | ( | ) | ( | ) | ||
Other income, net | ||||||
(Loss) income before provision for income taxes | ( | ) | ||||
Income tax benefit | ( | ) | ( | ) | ||
Net (loss) income | $ | ( | ) | $ | ||
(Loss) earnings per share | ||||||
Basic | $ | ( | ) | $ | ||
Diluted | $ | ( | ) | $ | ||
Common shares and equivalents outstanding | ||||||
Basic weighted average shares | ||||||
Diluted weighted average shares | ||||||
Other comprehensive income (loss) | ||||||
Foreign currency translation adjustment | ||||||
Unrealized (loss) gain on derivative instruments, net of tax | ( | ) | ||||
Total other comprehensive income | ||||||
Comprehensive income | $ | $ | ||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||
4 | | First Quarter 2019 Form 10-Q |
Blackbaud, Inc. Consolidated statements of cash flows (Unaudited) | ||||||
Three months ended March 31, | ||||||
(dollars in thousands) | 2019 | 2018 | ||||
Cash flows from operating activities | ||||||
Net (loss) income | $ | ( | ) | $ | ||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||
Depreciation and amortization | ||||||
Provision for doubtful accounts and sales returns | ||||||
Stock-based compensation expense | ||||||
Deferred taxes | ( | ) | ||||
Amortization of deferred financing costs and discount | ||||||
Other non-cash adjustments | ( | ) | ||||
Changes in operating assets and liabilities, net of acquisition and disposal of businesses: | ||||||
Accounts receivable | ( | ) | ||||
Prepaid expenses and other assets | ( | ) | ( | ) | ||
Trade accounts payable | ( | ) | ( | ) | ||
Accrued expenses and other liabilities | ( | ) | ( | ) | ||
Deferred revenue | ( | ) | ( | ) | ||
Net cash (used in) provided by operating activities | ( | ) | ||||
Cash flows from investing activities | ||||||
Purchase of property and equipment | ( | ) | ( | ) | ||
Capitalized software development costs | ( | ) | ( | ) | ||
Purchase of net assets of acquired companies, net of cash and restricted cash acquired | ( | ) | ( | ) | ||
Net cash used in investing activities | ( | ) | ( | ) | ||
Cash flows from financing activities | ||||||
Proceeds from issuance of debt | ||||||
Payments on debt | ( | ) | ( | ) | ||
Employee taxes paid for withheld shares upon equity award settlement | ( | ) | ( | ) | ||
Proceeds from exercise of stock options | ||||||
Change in due to customers | ( | ) | ( | ) | ||
Change in customer funds receivable | ( | ) | ( | ) | ||
Dividend payments to stockholders | ( | ) | ( | ) | ||
Net cash used in financing activities | ( | ) | ( | ) | ||
Effect of exchange rate on cash, cash equivalents, and restricted cash | ||||||
Net decrease in cash, cash equivalents, and restricted cash | ( | ) | ( | ) | ||
Cash, cash equivalents, and restricted cash, beginning of period | ||||||
Cash, cash equivalents, and restricted cash, end of period | $ | $ | ||||
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown above in the consolidated statements of cash flows:
(dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||
Cash and cash equivalents | $ | $ | ||||
Restricted cash due to customers | ||||||
Total cash, cash equivalents and restricted cash in the statement of cash flows | $ | $ | ||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||
First Quarter 2019 Form 10-Q | | 5 |
Blackbaud, Inc.
Consolidated statements of stockholders' equity
(Unaudited)
(dollars in thousands) | Common stock | Additional paid-in capital | Treasury stock | Accumulated other comprehensive Income (loss) | Retained earnings | Total stockholders' equity | ||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance at December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||
Net loss | — | — | — | — | — | ( | ) | ( | ) | |||||||||||
Payment of dividends ($0.12 per share) | — | — | — | — | — | ( | ) | ( | ) | |||||||||||
Exercise of stock options and stock appreciation rights and vesting of restricted stock units | — | — | — | — | ||||||||||||||||
Employee taxes paid for 239,311 withheld shares upon equity award settlement | — | — | — | ( | ) | — | — | ( | ) | |||||||||||
Stock-based compensation | — | — | — | — | ||||||||||||||||
Restricted stock grants | — | — | — | — | ||||||||||||||||
Restricted stock cancellations | ( | ) | — | — | — | — | — | — | ||||||||||||
Other comprehensive income | — | — | — | — | — | |||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||
(dollars in thousands) | Common stock | Additional paid-in capital | Treasury stock | Accumulated other comprehensive Income (loss) | Retained earnings | Total stockholders' equity | ||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance at December 31, 2017 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||
Net income | — | — | — | — | — | |||||||||||||||
Payment of dividends ($0.12 per share) | — | — | — | — | — | ( | ) | ( | ) | |||||||||||
Exercise of stock options and stock appreciation rights and vesting of restricted stock units | — | — | — | — | ||||||||||||||||
Employee taxes paid for 234,454 withheld shares upon equity award settlement | — | — | — | ( | ) | — | — | ( | ) | |||||||||||
Stock-based compensation | — | — | — | — | ||||||||||||||||
Restricted stock grants | — | — | — | — | ||||||||||||||||
Restricted stock cancellations | ( | ) | — | — | — | — | — | — | ||||||||||||
Other comprehensive income | — | — | — | — | — | |||||||||||||||
Reclassification upon early adoption of ASU 2018-02 | ( | ) | ||||||||||||||||||
Balance at March 31, 2018 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||
6 | | First Quarter 2019 Form 10-Q |
1. Organization |
2. Basis of Presentation |
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires lessees to record most leases on their balance sheet but recognize expenses in the income statement in a manner similar to previous guidance. The way in which entities classify leases determines how to recognize lease-related revenue and expense.
We adopted ASU 2016-02 as of January 1, 2019 using the transition method that allowed us to initially apply the guidance at the adoption date of January 1, 2019 without adjusting comparative periods presented. We elected to use the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any existing leases. We did not elect
First Quarter 2019 Form 10-Q | | 7 |
to use the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. Additionally, we elected not to apply the recognition requirements of the new lease accounting standard to short-term leases. Adopting ASU 2016-02 had a material impact on our consolidated balance sheet as of January 1, 2019, as we recognized $121.6 million of lease liabilities and $113.4 million of right-of-use ("ROU") assets for those leases classified as operating leases.
Summary of significant accounting policies
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, accrued expense and other current liabilities, and operating lease liabilities, net of current portion in our consolidated balance sheet as of March 31, 2019.
3. Business Combinations |
YourCause acquisition
On January 2, 2019, we acquired all of the outstanding equity securities, including all voting equity interests, of YourCause Holdings, LLC, a Delaware limited liability company ("YourCause"), pursuant to a purchase agreement and plan of merger. The acquisition expands our footprint in corporate social responsibility and employee engagement and enhances our position as a leader in providing solutions to both nonprofit organizations and for-profit companies committed to addressing social issues. We acquired the equity securities for an aggregate purchase price of $157.7 million in cash, subject to certain adjustments set forth in the agreement and plan of merger. The purchase price and related expenses were funded primarily through borrowings under the 2017 Credit Facility (as defined below). As a result of the acquisition, YourCause has become a wholly-owned subsidiary of ours. The operating results of YourCause have been included in our consolidated financial statements from the date of acquisition. During the three months ended March 31, 2019, we incurred insignificant acquisition-related expenses associated with the acquisition, which were recorded in general and administrative expense.
8 | | First Quarter 2019 Form 10-Q |
(in thousands) | Purchase price allocation | ||
Net working capital, excluding deferred revenue | $ | ||
Other long-term assets | |||
Identifiable intangible assets | |||
Deferred tax liability | ( | ) | |
Deferred revenue | ( | ) | |
Other long-term liabilities | ( | ) | |
Goodwill | |||
Total purchase price | $ | ||
The estimated fair value of accounts receivable acquired approximates the contractual value of $4.1 million and $54.7 million of the goodwill arising in the acquisition is deductible for income tax purposes. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining the operations and assembled workforce of YourCause.
Intangible assets acquired | Weighted average amortization period | |||
YourCause | (in thousands) | (in years) | ||
Acquired technology | $ | |||
Customer relationships | ||||
Marketing assets | ||||
Non-compete agreements | ||||
Total intangible assets | $ | |||
The estimated fair values of the intangible assets were based on variations of the income approach, which estimates fair value based upon the present value of cash flows that the assets are expected to generate, and which included the relief-from-royalty method, incremental cash flow method, including the comparative (with and without) method and multi-period excess earnings method, depending on the intangible asset being valued. The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer relationships and acquired technology assets are being amortized on an accelerated basis. Marketing assets are being amortized on a straight-line basis. The non-compete agreements were fully amortized as of March 31, 2019, based on the insignificance of the acquired assets.
First Quarter 2019 Form 10-Q | | 9 |
4. Goodwill and Other Intangible Assets |
(dollars in thousands) | Total | ||
Balance at December 31, 2018 | $ | ||
Additions related to current year business combinations | |||
Effect of foreign currency translation | |||
Balance at March 31, 2019 | $ | ||
5. (Loss) Earnings Per Share |
We compute basic earnings (loss) per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted earnings (loss) per share reflect the assumed exercise, settlement and vesting of all dilutive securities using the “treasury stock method” except when the effect is anti-dilutive. Potentially dilutive securities consist of shares issuable upon the exercise of stock options, settlement of stock appreciation rights and vesting of restricted stock awards and units. Diluted loss per share for the three months ended March 31, 2019 is the same as basic loss per share as there is a net loss in the period and inclusion of potentially dilutive securities is anti-dilutive.
Three months ended March 31, | ||||||
(dollars in thousands, except per share amounts) | 2019 | 2018 | ||||
Numerator: | ||||||
Net (loss) income | $ | ( | ) | $ | ||
Denominator: | ||||||
Weighted average common shares | ||||||
Add effect of dilutive securities: | ||||||
Stock-based awards | ||||||
Weighted average common shares assuming dilution | ||||||
(Loss) earnings per share: | ||||||
Basic | $ | ( | ) | $ | ||
Diluted | $ | ( | ) | $ | ||
Anti-dilutive shares excluded from calculations of diluted (loss) earnings per share | ||||||
10 | | First Quarter 2019 Form 10-Q |
6. Fair Value Measurements |
We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
• | Level 1 - Quoted prices for identical assets or liabilities in active markets; |
• | Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and |
• | Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
Recurring fair value measurements
Fair value measurement using | |||||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Fair value as of March 31, 2019 | |||||||||||||||
Financial assets: | |||||||||||||||
Derivative instruments | $ | $ | $ | $ | |||||||||||
Total financial assets | $ | $ | $ | $ | |||||||||||
Fair value as of March 31, 2019 | |||||||||||||||
Financial liabilities: | |||||||||||||||
Derivative instruments | $ | $ | $ | $ | |||||||||||
Total financial liabilities | $ | $ | $ | $ | |||||||||||
Fair value as of December 31, 2018 | |||||||||||||||
Financial assets: | |||||||||||||||
Derivative instruments | $ | $ | $ | $ | |||||||||||
Total financial assets | $ | $ | $ | $ | |||||||||||
Fair value as of December 31, 2018 | |||||||||||||||
Financial liabilities: | |||||||||||||||
Derivative instruments | $ | $ | $ | $ | |||||||||||
Total financial liabilities | $ | $ | $ | $ | |||||||||||
Our derivative instruments within the scope of Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, are required to be recorded at fair value. Our derivative instruments that are recorded at fair value include interest rate swaps.
The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy.
We believe the carrying amounts of our cash and cash equivalents, restricted cash due to customers, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at March 31, 2019 and December 31, 2018, due to the immediate or short-term maturity of these instruments.
First Quarter 2019 Form 10-Q | | 11 |
We believe the carrying amount of our debt approximates its fair value at March 31, 2019 and December 31, 2018, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt is classified within Level 2 of the fair value hierarchy.
We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the three months ended March 31, 2019. Additionally, we did not hold any Level 3 assets or liabilities during the three months ended March 31, 2019.
Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets, goodwill and operating lease ROU assets, which are recognized at fair value during the period in which an acquisition is completed or at lease commencement, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for intangible assets acquired and operating lease ROU assets, are based on Level 3 unobservable inputs. In the event of an impairment, we determine the fair value of the intangible assets other than goodwill using a discounted cash flow approach, which contains significant unobservable inputs and, therefore, is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate. For goodwill impairment testing, we estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium.
During the three months ended March 31, 2019, we recorded $1.3 million in impairments of operating lease ROU assets associated with certain leased office spaces we ceased using as part of our facilities optimization restructuring. These impairments were recorded as restructuring expense on our consolidated statements of comprehensive income. See Note 15 to these consolidated financial statements for additional details regarding our facilities optimization restructuring.
7. Consolidated Financial Statement Details |
(dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||
Costs of obtaining contracts(1)(2) | $ | $ | ||||
Prepaid software maintenance and subscriptions | ||||||
Unbilled accounts receivable | ||||||
Taxes, prepaid and receivable | ||||||
Derivative instruments | ||||||
Security deposits | ||||||
Other assets | ||||||
Total prepaid expenses and other assets | ||||||
Less: Long-term portion | ||||||
Prepaid expenses and other current assets | $ | $ | ||||
(1) |
(2) |
12 | | First Quarter 2019 Form 10-Q |
(dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||
Operating lease liabilities, current portion | $ | $ | ||||
Accrued bonuses | ||||||
Accrued commissions and salaries | ||||||
Taxes payable | ||||||
Customer credit balances | ||||||
Unrecognized tax benefit | ||||||
Accrued vacation costs | ||||||
Accrued health care costs | ||||||
Other liabilities | ||||||
Total accrued expenses and other liabilities | ||||||
Less: Long-term portion | ||||||
Accrued expenses and other current liabilities | $ | $ | ||||
8. Debt |
Debt balance at | Weighted average effective interest rate at | ||||||||||
(dollars in thousands) | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | |||||||
Credit facility: | |||||||||||
Revolving credit loans | $ | $ | % | % | |||||||
Term loans | % | % | |||||||||
Total debt | % | % | |||||||||
Less: Unamortized discount and debt issuance costs | |||||||||||
Less: Debt, current portion | % | % | |||||||||
Debt, net of current portion | $ | $ | % | % | |||||||
In June 2017, we entered into a five-year $700.0 million senior credit facility (the "2017 Credit Facility"). As of March 31, 2019, the required annual maturities related to the 2017 Credit Facility were as follows:
Years ending December 31, (dollars in thousands) | Annual maturities | ||
2019 - remaining | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total required maturities | $ | ||
First Quarter 2019 Form 10-Q | | 13 |
Financing for 2019 acquisition
9. Derivative Instruments |
Cash flow hedges
We generally use derivative instruments to manage our variable interest rate risk. In July 2017, we entered into an interest rate swap agreement (the "July 2017 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the July 2017 Swap Agreement. The notional value of the July 2017 Swap Agreement was $150.0 million with an effective date beginning in July 2017 through July 2021. We designated the July 2017 Swap Agreement as a cash flow hedge at the inception of the contract.
In February 2018, we entered into an additional interest rate swap agreement (the "February 2018 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the February 2018 Swap Agreement. The notional value of the February 2018 Swap Agreement was $50.0 million with an effective date beginning in February 2018 through June 2021. We designated the February 2018 Swap Agreement as a cash flow hedge at the inception of the contract.
Asset Derivatives | Liability Derivatives | ||||||||||||||
(dollars in thousands) | Balance sheet location | March 31, 2019 | December 31, 2018 | Balance sheet location | March 31, 2019 | December 31, 2018 | |||||||||
Derivative instruments designated as hedging instruments: | |||||||||||||||
Interest rate swaps, long-term portion | Other assets | Other liabilities | |||||||||||||
Total derivative instruments designated as hedging instruments | $ | $ | $ | $ | |||||||||||
Gain (loss) recognized in accumulated other comprehensive loss as of | Location of gain (loss) reclassified from accumulated other comprehensive loss into income | Gain (loss) reclassified from accumulated other comprehensive loss into income | |||||
(dollars in thousands) | March 31, 2019 | Three months ended March 31, 2019 | |||||
Interest rate swaps | $ | Interest expense | $ | ||||
March 31, 2018 | Three months ended March 31, 2018 | ||||||
Interest rate swaps | $ | Interest expense | $ | ||||
Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accumulated other comprehensive income (loss) includes unrealized gains or losses from the change in fair value measurement of our derivative instruments each reporting period and the related income tax expense or benefit. Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings. The estimated accumulated other comprehensive income as of March 31, 2019 that is expected to be reclassified into earnings within the next twelve months is $0.7 million. There were no ineffective portions of our interest rate swap derivatives during the three months ended March 31, 2019
14 | | First Quarter 2019 Form 10-Q |
10. Commitments and Contingencies |
Leases
We have operating leases for corporate offices, subleased offices and certain equipment and furniture. Our leases have remaining lease terms of less than 1 year to 20 years, some of which include options to extend the leases for up to 5 years. We do not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants.
In May 2016, we entered into a lease agreement for our New Headquarters Facility in Charleston, South Carolina. There are two phases for construction of the New Headquarters Facility. Phase One included a building with approximately 172,000 rentable square feet, which we began using in April 2018. The lease agreement also grants us a Phase Two option to request that the landlord construct and lease to us a second office building and related improvements. The lease agreement expires in April 2038 and provides for four renewal periods of five years each at a base rent equal to the then prevailing market rate for comparable buildings.
We continue to lease our former headquarters facility, now called our Customer Operations Center, in Charleston, South Carolina. The lease expires in October 2023 and has two five-year renewal options. We also have a lease for office space in Austin, Texas which expires in September 2023 and has two five-year renewal options.
For each of the leases discussed above, we have not included the renewal options in the lease terms for calculating the lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time.
As of March 31, 2019, we had additional operating leases, primarily for office space, that have not yet commenced with future rent payments of $9.3 million. These operating leases will commence during fiscal year 2019 with lease terms of two to four years.
Three months ended March 31, | |||
(dollars in thousands) | 2019 | ||
Operating lease cost(1) | $ | ||
Variable lease cost(2) | |||
Sublease income | ( | ) | |
Net lease cost | $ | ||
(1) |
(2) |
During the three months ended March 31, 2019, we recorded $1.3 million in impairments of operating lease ROU assets associated with certain leased office spaces we ceased using as part of our facilities optimization restructuring. These impairments were recorded as restructuring expense on our consolidated statements of comprehensive income. See Note 15 to these consolidated financial statements for additional details regarding our facilities optimization restructuring.
Total rent expense as determined under ASC 840 for the three months ended March 31, 2018 was $4.5 million.
First Quarter 2019 Form 10-Q | | 15 |
Years ending December 31, (dollars in thousands) | Operating leases(1) | ||
2019 – remaining | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total lease payments | |||
Less: Amount representing interest | |||
Present value of future payments | $ | ||
(1) |
Years ending December 31, (dollars in thousands) | Operating leases | ||
2019 | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total minimum lease payments | $ | ||
(dollars in thousands) | March 31, 2019 | ||
Operating leases | |||
Operating lease right-of-use assets | $ | ||
Accrued expenses and other current liabilities | $ | ||
Operating lease liabilities, net of current portion | |||
Total operating lease liabilities | $ | ||
(dollars in thousands) | March 31, 2019 | |
Operating leases | ||
Weighted average remaining lease term (years) | ||
Weighted average discount rate | % | |
16 | | First Quarter 2019 Form 10-Q |
Three months ended March 31, | |||
(dollars in thousands) | 2019 | ||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | ||
Right-of-use assets obtained in exchange for lease obligations (non-cash): | |||
Operating leases | |||
Other commitments
The term loans under the 2017 Credit Facility require periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022.
We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of March 31, 2019, the remaining aggregate minimum purchase commitment under these arrangements was approximately $111.4 million through 2023.
Solution and service indemnifications
In the ordinary course of business, we provide certain indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our solutions or services. If we determine that it is probable that a loss has been incurred related to solution or service indemnifications, any such loss that could be reasonably estimated would be recognized. We have not identified any losses and, accordingly, we have not recorded a liability related to these indemnifications.
First Quarter 2019 Form 10-Q | | 17 |
11. Income Taxes |
Three months ended March 31, | ||||||
(dollars in thousands) | 2019 | 2018 | ||||
Income tax benefit | $ | ( | ) | $ | ( | ) |
Effective income tax rate | % | ( | )% | |||
We compute the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax income or loss and adjusting for discrete tax items in the period. Our effective income tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. The increase in our effective income tax rate during the three months ended March 31, 2019, when compared to the same period in 2018, was partially attributable to the impact of discrete tax benefits on a pre-tax loss for the quarter as compared to pre-tax income for the same period in 2018.
12. Stock-based Compensation |
Stock-based compensation expense is allocated to cost of revenue and operating expenses on the consolidated statements of comprehensive income based on where the associated employee’s compensation is recorded. The following table summarizes stock-based compensation expense:
Three months ended March 31, | ||||||
(dollars in thousands) | 2019 | 2018 | ||||
Included in cost of revenue: | ||||||
Cost of recurring | $ | $ | ||||
Cost of one-time services and other | ||||||
Total included in cost of revenue | ||||||
Included in operating expenses: | ||||||
Sales, marketing and customer success | ||||||
Research and development | ||||||
General and administrative | ||||||
Total included in operating expenses | ||||||
Total stock-based compensation expense | $ | $ | ||||
18 | | First Quarter 2019 Form 10-Q |
13. Stockholders' Equity |
Dividends
Our Board of Directors has adopted a dividend policy, which provides for the distribution to stockholders of a portion of cash generated by us that is in excess of operational needs and capital expenditures. The 2017 Credit Facility limits the amount of dividends payable and certain state laws restrict the amount of dividends distributed.
In February 2019, our Board of Directors approved an annual dividend rate of $0.48 per share to be made in quarterly payments. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare and pay further dividends. The following table provides information with respect to quarterly dividends of $0.12 per share paid on common stock during the three months ended March 31, 2019.
Declaration Date | Dividend per Share | Record Date | Payable Date | |||
February 6, 2019 | $ | February 27 | March 15 | |||
On April 30, 2019, our Board of Directors declared a second quarter dividend of $0.12 per share payable on June 14, 2019 to stockholders of record on May 28, 2019.
Changes in accumulated other comprehensive income (loss) by component
Three months ended March 31, | ||||||
(dollars in thousands) | 2019 | 2018 | ||||
Accumulated other comprehensive loss, beginning of period | $ | ( | ) | $ | ( | ) |
By component: | ||||||
Gains and losses on cash flow hedges: | ||||||
Accumulated other comprehensive income balance, beginning of period | $ | $ | ||||
Other comprehensive (loss) income before reclassifications, net of tax effects of $276 and $(392) | ( | ) | ||||
Amounts reclassified from accumulated other comprehensive loss to interest expense | ( | ) | ( | ) | ||
Tax benefit included in provision for income taxes | ||||||
Total amounts reclassified from accumulated other comprehensive loss | ( | ) | ( | ) | ||
Net current-period other comprehensive (loss) income | ( | ) | ||||
Reclassification upon early adoption of ASU 2018-02 | ||||||
Accumulated other comprehensive income balance, end of period | $ | $ | ||||
Foreign currency translation adjustment: | ||||||
Accumulated other comprehensive loss balance, beginning of period | $ | ( | ) | $ | ( | ) |
Translation adjustments | ||||||
Accumulated other comprehensive (loss) income balance, end of period | ( | ) | ||||
Accumulated other comprehensive (loss) income, end of period | $ | ( | ) | $ | ||
First Quarter 2019 Form 10-Q | | 19 |
14. Revenue Recognition |
Transaction price allocated to the remaining performance obligations
As of March 31, 2019, approximately $739 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 60 % of these remaining performance obligations over the next 12 months, with the remainder recognized thereafter.
We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less (one-time services); and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (payment services and usage).
Contract balances
Our contract assets as of March 31, 2019 and December 31, 2018 were insignificant. Our opening and closing balances of deferred revenue were as follows:
(in thousands) | March 31, 2019 | December 31, 2018 | ||
Total deferred revenue | ||||
The modest decrease in deferred revenue during the three months ended March 31, 2019 was primarily due to less customer contract renewals in our first quarter due to the timing of customer budget cycles. Historically, we have an increase in customer contract renewals near the beginning of our third quarter resulting in lower deferred revenue at the end of our first quarter. The amount of revenue recognized during the three months ended March 31, 2019 that was included in the deferred revenue balance at the beginning of the period was approximately $131 million. The amount of revenue recognized during the three months ended March 31, 2019 from performance obligations satisfied in prior periods was insignificant.
Disaggregation of revenue
We sell our cloud-based solutions and related services in two primary geographical markets: to customers in the United States, and to customers located outside of the United States. The following table presents our revenue by geographic area based on the address of our customers:
Three months ended March 31, | ||||||
(dollars in thousands) | 2019 | 2018 | ||||
United States | $ | $ | ||||
Other countries | ||||||
Total revenue | $ | $ | ||||
The General Markets Group ("GMG"), the Enterprise Markets Group ("EMG"), and the International Markets Group ("IMG") comprise our go-to-market organizations. The following is a description of each market group:
• | The GMG focuses on sales primarily to all K-12 private schools, faith-based and arts and cultural organizations, as well as emerging and mid-sized prospects in the U.S.; |
• | The EMG focuses on sales primarily to all healthcare and higher education institutions, corporations and foundations, as well as large and/or strategic prospects in the U.S.; and |
• | The IMG focuses on sales primarily to all prospects and customers outside of the U.S. |
20 | | First Quarter 2019 Form 10-Q |
Three months ended March 31, | ||||||
(dollars in thousands) | 2019 | 2018(1) | ||||
GMG | $ | $ | ||||
EMG | ||||||
IMG | ||||||
Other | ||||||
Total revenue | $ | $ | ||||
(1) |
15. Restructuring |
During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments. These workspaces are also more centrally located for our employees and closer to our customers and prospects. Restructuring costs incurred prior to our adoption of ASU 2016-02 on January 1, 2019 consisted primarily of costs to terminate lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as insignificant costs to relocate affected employees and write-off facilities-related fixed assets that we would no longer use.
Upon adoption of ASU 2016-02 at January 1, 2019, we reduced our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leased office spaces that we ceased using prior to December 31, 2018. See additional details below.
Restructuring costs incurred during the three months ended March 31, 2019 consisted primarily of operating lease ROU asset impairment costs and, to a lesser extent, write-offs of facilities-related fixed assets that we will no longer use.
We currently expect to incur before-tax restructuring costs associated with these activities of between $8.5 million and $9.5 million, of which $7.3 million has been incurred as of March 31, 2019, with substantially all of the remaining costs expected to be incurred by the end of 2019.
Cumulative costs incurred as of | Costs incurred during the three months ended(1) | Cumulative costs incurred as of | |||||||||
(in thousands) | December 31, 2018 | March 31, 2019 | |||||||||
By component: | |||||||||||
Contract termination costs | $ | $ | $ | ||||||||
Other costs | |||||||||||
Total | $ | $ | $ | ||||||||
(1) |
First Quarter 2019 Form 10-Q | | 21 |
Accrued at | Increases for incurred costs(1) | Written off upon adoption of ASU 2016-02(2) | Costs paid | Accrued at | |||||||||||||||
(in thousands) | December 31, 2018 | March 31, 2019 | |||||||||||||||||
By component: | |||||||||||||||||||
Contract termination costs | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||
Other costs | |||||||||||||||||||