UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 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
 | ||
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(843 ) 216-6200
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: | ||
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered |
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.
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).
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.
☑ | 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 ☑
The number of shares of the registrant’s Common Stock outstanding as of October 23, 2019 was 49,186,476 .
TABLE OF CONTENTS
Third 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 | | Third Quarter 2019 Form 10-Q |
| PART I. FINANCIAL INFORMATION | |
ITEM 1. FINANCIAL STATEMENTS
Blackbaud, Inc. Consolidated balance sheets (Unaudited) | ||||||
(dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | $ | ||||
Restricted cash due to customers | ||||||
Accounts receivable, net of allowance of $4,791 and $4,722 at September 30, 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, 60,207,091 and 59,327,633 shares issued at September 30, 2019 and December 31, 2018, respectively | ||||||
Additional paid-in capital | ||||||
Treasury stock, at cost; 11,022,799 and 10,760,574 shares at September 30, 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. | ||||||
Third Quarter 2019 Form 10-Q | | 3 |
Blackbaud, Inc. Consolidated statements of comprehensive income (Unaudited) | |||||||||||||
(dollars in thousands, except per share amounts) | Three months ended September 30, | Nine months ended September 30, | |||||||||||
2019 | 2018 | 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 (expense), net | ( | ) | |||||||||||
Income before provision for income taxes | |||||||||||||
Income tax provision (benefit) | ( | ) | |||||||||||
Net income | $ | $ | $ | $ | |||||||||
Earnings per share | |||||||||||||
Basic | $ | $ | $ | $ | |||||||||
Diluted | $ | $ | $ | $ | |||||||||
Common shares and equivalents outstanding | |||||||||||||
Basic weighted average shares | |||||||||||||
Diluted weighted average shares | |||||||||||||
Other comprehensive (loss) income | |||||||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | |||||||
Unrealized (loss) gain on derivative instruments, net of tax | ( | ) | ( | ) | |||||||||
Total other comprehensive (loss) income | ( | ) | ( | ) | |||||||||
Comprehensive income | $ | $ | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||
4 | | Third Quarter 2019 Form 10-Q |
Blackbaud, Inc. Consolidated statements of cash flows (Unaudited) | ||||||
Nine months ended September 30, | ||||||
(dollars in thousands) | 2019 | 2018 | ||||
Cash flows from operating activities | ||||||
Net income | $ | $ | ||||
Adjustments to reconcile net income to net cash 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 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 | ( | ) | ( | ) | ||
Other investing activities | ||||||
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) | September 30, 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. | ||||||
Third 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 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||
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 17,119 withheld shares upon equity award settlement | — | — | — | ( | ) | — | — | ( | ) | |||||||||||
Stock-based compensation | — | — | — | — | ||||||||||||||||
Restricted stock grants | — | — | — | — | ||||||||||||||||
Restricted stock cancellations | ( | ) | — | — | — | — | — | — | ||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | ( | ) | |||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||
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 5,795 withheld shares upon equity award settlement | — | — | — | ( | ) | — | — | ( | ) | |||||||||||
Stock-based compensation | — | — | — | — | ||||||||||||||||
Restricted stock grants | — | — | — | — | ||||||||||||||||
Restricted stock cancellations | ( | ) | — | — | — | — | — | — | ||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | ( | ) | |||||||||||
Balance at September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||
6 | | Third Quarter 2019 Form 10-Q |
Blackbaud, Inc.
Consolidated statements of stockholders' equity (continued)
(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, 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 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||
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 25,678 withheld shares upon equity award settlement | — | — | — | ( | ) | — | — | ( | ) | |||||||||||
Stock-based compensation | — | — | — | — | ||||||||||||||||
Restricted stock grants | — | — | — | — | ||||||||||||||||
Restricted stock cancellations | ( | ) | — | — | — | — | — | — | ||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | ( | ) | |||||||||||
Balance at June 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||
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 20,736 withheld shares upon equity award settlement | — | — | — | ( | ) | — | — | ( | ) | |||||||||||
Stock-based compensation | — | — | — | — | ||||||||||||||||
Restricted stock grants | — | — | — | — | ||||||||||||||||
Restricted stock cancellations | ( | ) | — | — | — | — | — | — | ||||||||||||
Other comprehensive income | — | — | — | — | — | |||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||
Third Quarter 2019 Form 10-Q | | 7 |
1. Organization |
We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, foundations, companies, education institutions, healthcare organizations and individual change agents—we connect and empower organizations to increase their impact through cloud software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing and analytics. Serving the industry for more than three decades, we are headquartered in Charleston, South Carolina and have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom.
2. Basis of Presentation |
Unaudited interim consolidated financial statements
The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity, for the periods presented in accordance with accounting principles generally accepted in the United States ("U.S.") ("GAAP"). The consolidated balance sheet at December 31, 2018, has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, and other forms filed with the SEC from time to time.
Basis of consolidation
The consolidated financial statements include the accounts of Blackbaud, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reportable segment
We report our operating results and financial information in one operating and reportable segment. Our chief operating decision maker uses consolidated financial information to make operating decisions, assess financial performance and allocate resources. Our chief operating decision maker is our chief executive officer ("CEO").
Recently adopted accounting pronouncements
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 to use the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing
8 | | Third Quarter 2019 Form 10-Q |
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
Except for the accounting policy added for leases below as a result of adopting ASU 2016-02, there have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 20, 2019, that have had a material impact on our consolidated financial statements.
Leases
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 September 30, 2019.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any initial direct costs and lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments related to our operating leases is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. We do not recognize short-term leases (those that, at the commencement date, have a lease term of 12 months or less) on our consolidated balance sheets. Variable lease payments, which are primarily comprised of common-area maintenance, utilities and real estate taxes that are passed on from the lessor in proportion to the space leased by us, are recognized in operating expenses in the period in which the obligation for those payments is incurred.
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, net of closing adjustments. 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 and nine months ended September 30, 2019, we incurred insignificant acquisition-related expenses associated with the acquisition, which were recorded in general and administrative expense.
Third Quarter 2019 Form 10-Q | | 9 |
The fair values assigned to the assets acquired and liabilities assumed in the table below are based on our best estimates and assumptions as of the reporting date and are considered preliminary pending finalization. The estimates and assumptions are subject to change as we obtain additional information during the measurement period, which may be up to one year from the acquisition date. The assets and liabilities, pending finalization, include the valuation of intangible assets as well as the assumed deferred revenue and deferred income tax balances.
(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. During the nine months ended September 30, 2019, we recorded insignificant measurement period adjustments to the estimated fair value of the YourCause assets acquired and liabilities assumed following the receipt of new information. The adjustments resulted in an increase to net working capital, excluding deferred revenue, with the corresponding offset to goodwill.
The YourCause acquisition resulted in the identification of the following identifiable intangible assets:
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.
We determined that the impact of this acquisition was not material to our consolidated financial statements; therefore, separate presentation of revenue and earnings since the acquisition date and pro forma information are not required nor included herein.
10 | | Third Quarter 2019 Form 10-Q |
4. Goodwill and Other Intangible Assets |
The change in goodwill during the nine months ended September 30, 2019, consisted of the following:
(dollars in thousands) | Total | ||
Balance at December 31, 2018 | $ | ||
Additions related to current year business combinations | |||
Effect of foreign currency translation | ( | ) | |
Balance at September 30, 2019 | $ | ||
5. Earnings Per Share |
We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings 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 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.
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands, except per share amounts) | 2019 | 2018 | 2019 | 2018 | |||||||||
Numerator: | |||||||||||||
Net income | $ | $ | $ | $ | |||||||||
Denominator: | |||||||||||||
Weighted average common shares | |||||||||||||
Add effect of dilutive securities: | |||||||||||||
Stock-based awards | |||||||||||||
Weighted average common shares assuming dilution | |||||||||||||
Earnings per share: | |||||||||||||
Basic | $ | $ | $ | $ | |||||||||
Diluted | $ | $ | $ | $ | |||||||||
Anti-dilutive shares excluded from calculations of diluted earnings per share | |||||||||||||
Third Quarter 2019 Form 10-Q | | 11 |
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
Assets and liabilities that are measured at fair value on a recurring basis consisted of the following, as of the dates indicated below:
Fair value measurement using | |||||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Fair value as of September 30, 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 September 30, 2019 and December 31, 2018, due to the immediate or short-term maturity of these instruments.
We believe the carrying amount of our debt approximates its fair value at September 30, 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 nine months ended September 30, 2019. Additionally, we did not hold any Level 3 assets or liabilities during the nine months ended September 30, 2019.
12 | | Third Quarter 2019 Form 10-Q |
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 nine months ended September 30, 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.
There were no non-recurring fair value adjustments to intangible assets and goodwill during the nine months ended September 30, 2019, except for insignificant business combination accounting adjustments to the initial fair value estimates of the YourCause assets acquired and liabilities assumed at the acquisition date from updated information obtained during the measurement period. See Note 3 to these consolidated financial statements for additional details. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.
7. Consolidated Financial Statement Details |
Prepaid expenses and other assets
(dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||
Costs of obtaining contracts(1)(2) | $ | $ | ||||
Prepaid software maintenance and subscriptions | ||||||
Unbilled accounts receivable | ||||||
Taxes, prepaid and receivable | ||||||
Security deposits | ||||||
Other assets | ||||||
Total prepaid expenses and other assets | ||||||
Less: Long-term portion | ||||||
Prepaid expenses and other current assets | $ | $ | ||||
(1) | Amortization expense from costs of obtaining contracts was $ |
(2) | The current portion of costs of obtaining contracts as of September 30, 2019 and December 31, 2018 was $ |
Third Quarter 2019 Form 10-Q | | 13 |
Accrued expenses and other liabilities
(dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||
Operating lease liabilities, current portion (1) | $ | $ | ||||
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 | $ | $ | ||||
(1) | Upon adoption of ASU 2016-02 at January 1, 2019, we recognized lease liabilities for our operating leases. See Note 2 of these consolidated financial statements for details. |
Other income (expense), net
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||
Interest income | $ | $ | $ | $ | |||||||||
Other income (expense), net | ( | ) | ( | ) | |||||||||
Other income (expense), net | $ | $ | ( | ) | $ | $ | |||||||
8. Debt |
The following table summarizes our debt balances and the related weighted average effective interest rates, which includes the effect of interest rate swap agreements.
Debt balance at | Weighted average effective interest rate at | ||||||||||
(dollars in thousands) | September 30, 2019 | December 31, 2018 | September 30, 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 | $ | $ | % | % | |||||||
14 | | Third Quarter 2019 Form 10-Q |
In June 2017, we entered into a five-year $700.0 million senior credit facility (the "2017 Credit Facility"). As of September 30, 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 | $ | ||
Financing for 2019 acquisition
On January 2, 2019, we acquired YourCause for $157.7 million in cash, net of closing adjustments. We financed the acquisition with a revolving credit loan under the 2017 Credit Facility.
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 the 2017 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 the 2017 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.
In June 2019, we entered into an additional interest rate swap agreement (the "June 2019 Swap Agreement"), which effectively converts portions of our variable rate debt under the 2017 Credit Facility to a fixed rate for the term of the June 2019 Swap Agreement. The notional value of the June 2019 Swap Agreement was $75.0 million with an effective date beginning in June 2019 through June 2021. We designated the June 2019 Swap Agreement as a cash flow hedge at the inception of the contract.
The fair values of our derivative instruments were as follows as of:
Asset Derivatives | Liability Derivatives | ||||||||||||||
(dollars in thousands) | Balance sheet location | September 30, 2019 | |||||||||||||