Blackbaud, Inc.
Consolidated balance sheets
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31,
2018
|
|
December 31,
2017
|
|
Assets
|
|
|
Current assets:
|
|
|
Cash and cash equivalents
|
$
|
30,866
|
|
$
|
29,830
|
|
Restricted cash due to customers
|
418,980
|
|
610,344
|
|
Accounts receivable, net of allowance of $4,722 and $5,141 at December 31, 2018 and December 31, 2017, respectively
|
86,595
|
|
95,679
|
|
Customer funds receivable
|
1,753
|
|
1,536
|
|
Prepaid expenses and other current assets
|
59,788
|
|
61,978
|
|
Total current assets
|
597,982
|
|
799,367
|
|
Property and equipment, net
|
40,031
|
|
42,243
|
|
Software development costs, net
|
75,099
|
|
54,098
|
|
Goodwill
|
545,213
|
|
530,249
|
|
Intangible assets, net
|
291,617
|
|
314,651
|
|
Other assets
|
65,363
|
|
57,238
|
|
Total assets
|
$
|
1,615,305
|
|
$
|
1,797,846
|
|
Liabilities and stockholders’ equity
|
|
|
Current liabilities:
|
|
|
Trade accounts payable
|
$
|
34,538
|
|
$
|
24,693
|
|
Accrued expenses and other current liabilities
|
46,893
|
|
54,399
|
|
Due to customers
|
420,733
|
|
611,880
|
|
Debt, current portion
|
7,500
|
|
8,576
|
|
Deferred revenue, current portion
|
295,991
|
|
275,063
|
|
Total current liabilities
|
805,655
|
|
974,611
|
|
Debt, net of current portion
|
379,624
|
|
429,648
|
|
Deferred tax liability
|
44,291
|
|
48,023
|
|
Deferred revenue, net of current portion
|
2,564
|
|
3,643
|
|
Other liabilities
|
9,388
|
|
5,632
|
|
Total liabilities
|
1,241,522
|
|
1,461,557
|
|
Commitments and contingencies (see Note 11)
|
|
|
Stockholders’ equity:
|
|
|
Preferred stock; 20,000,000 shares authorized, none outstanding
|
—
|
|
—
|
|
Common stock, $0.001 par value; 180,000,000 shares authorized, 59,327,633 and 58,551,761 shares issued at December 31, 2018 and December 31, 2017, respectively
|
59
|
|
59
|
|
Additional paid-in capital
|
399,241
|
|
351,042
|
|
Treasury stock, at cost; 10,760,574 and 10,475,794 shares at December 31, 2018 and December 31, 2017, respectively
|
(266,884
|
)
|
(239,199
|
)
|
Accumulated other comprehensive loss
|
(5,110
|
)
|
(642
|
)
|
Retained earnings
|
246,477
|
|
225,029
|
|
Total stockholders’ equity
|
373,783
|
|
336,289
|
|
Total liabilities and stockholders’ equity
|
$
|
1,615,305
|
|
$
|
1,797,846
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
Blackbaud, Inc.
Consolidated statements of comprehensive income
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts)
|
Years ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue
|
|
|
|
Recurring
|
$
|
762,181
|
|
$
|
684,583
|
|
$
|
609,063
|
|
One-time services and other
|
86,425
|
|
103,904
|
|
122,579
|
|
Total revenue
|
848,606
|
|
788,487
|
|
731,642
|
|
Cost of revenue
|
|
|
|
Cost of recurring
|
305,481
|
|
277,639
|
|
246,669
|
|
Cost of one-time services and other
|
76,261
|
|
84,265
|
|
92,551
|
|
Total cost of revenue
|
381,742
|
|
361,904
|
|
339,220
|
|
Gross profit
|
466,864
|
|
426,583
|
|
392,422
|
|
Operating expenses
|
|
|
|
Sales, marketing and customer success
|
192,848
|
|
169,559
|
|
150,157
|
|
Research and development
|
98,811
|
|
89,911
|
|
89,870
|
|
General and administrative
|
106,354
|
|
94,870
|
|
81,331
|
|
Amortization
|
4,844
|
|
3,271
|
|
2,840
|
|
Restructuring
|
4,590
|
|
794
|
|
—
|
|
Total operating expenses
|
407,447
|
|
358,405
|
|
324,198
|
|
Income from operations
|
59,417
|
|
68,178
|
|
68,224
|
|
Interest expense
|
(15,898
|
)
|
(12,097
|
)
|
(10,583
|
)
|
Other income (expense), net
|
1,103
|
|
2,260
|
|
(291
|
)
|
Income before provision for income taxes
|
44,622
|
|
58,341
|
|
57,350
|
|
Income tax (benefit) provision
|
(219
|
)
|
(15,292
|
)
|
11,946
|
|
Net income
|
$
|
44,841
|
|
$
|
73,633
|
|
$
|
45,404
|
|
Earnings per share
|
|
|
|
Basic
|
$
|
0.95
|
|
$
|
1.58
|
|
$
|
0.98
|
|
Diluted
|
$
|
0.93
|
|
$
|
1.54
|
|
$
|
0.96
|
|
Common shares and equivalents outstanding
|
|
|
|
Basic weighted average shares
|
47,206,669
|
|
46,669,440
|
|
46,132,389
|
|
Diluted weighted average shares
|
48,045,084
|
|
47,775,702
|
|
47,316,538
|
|
Other comprehensive (loss) income
|
|
|
|
Foreign currency translation adjustment
|
(5,218
|
)
|
(789
|
)
|
205
|
|
Unrealized gain on derivative instruments, net of tax
|
583
|
|
751
|
|
44
|
|
Total other comprehensive (loss) income
|
(4,635
|
)
|
(38
|
)
|
249
|
|
Comprehensive income
|
$
|
40,206
|
|
$
|
73,595
|
|
$
|
45,653
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
Blackbaud, Inc.
Consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
44,841
|
|
$
|
73,633
|
|
$
|
45,404
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
79,566
|
|
73,948
|
|
70,491
|
|
Provision for doubtful accounts and sales returns
|
6,890
|
|
11,686
|
|
3,730
|
|
Stock-based compensation expense
|
48,274
|
|
40,631
|
|
32,638
|
|
Deferred taxes
|
(619
|
)
|
(17,814
|
)
|
5,415
|
|
Amortization of deferred financing costs and discount
|
752
|
|
838
|
|
958
|
|
Other non-cash adjustments
|
(1,912
|
)
|
504
|
|
(864
|
)
|
Changes in operating assets and liabilities, net of acquisition and disposal of businesses:
|
|
|
|
Accounts receivable
|
2,166
|
|
(15,821
|
)
|
(13,007
|
)
|
Prepaid expenses and other assets
|
(5,217
|
)
|
(9,550
|
)
|
(8,495
|
)
|
Trade accounts payable
|
9,487
|
|
1,024
|
|
3,689
|
|
Accrued expenses and other liabilities
|
(2,027
|
)
|
(4,973
|
)
|
(751
|
)
|
Deferred revenue
|
19,184
|
|
22,184
|
|
14,420
|
|
Net cash provided by operating activities
|
201,385
|
|
176,290
|
|
153,628
|
|
Cash flows from investing activities
|
|
|
|
Purchase of property and equipment
|
(14,719
|
)
|
(10,208
|
)
|
(17,694
|
)
|
Capitalized software development costs
|
(37,629
|
)
|
(28,345
|
)
|
(26,359
|
)
|
Purchase of net assets of acquired companies, net of cash and restricted cash acquired
|
(44,943
|
)
|
(146,789
|
)
|
(3,377
|
)
|
Purchase of derivative instruments
|
—
|
|
(568
|
)
|
—
|
|
Proceeds from settlement of derivative instruments
|
—
|
|
1,030
|
|
—
|
|
Other investing activities
|
(500
|
)
|
—
|
|
—
|
|
Net cash used in investing activities
|
(97,791
|
)
|
(184,880
|
)
|
(47,430
|
)
|
Cash flows from financing activities
|
|
|
|
Proceeds from issuance of debt
|
270,900
|
|
774,500
|
|
227,200
|
|
Payments on debt
|
(322,476
|
)
|
(679,119
|
)
|
(293,575
|
)
|
Debt issuance costs
|
—
|
|
(3,085
|
)
|
—
|
|
Employee taxes paid for withheld shares upon equity award settlement
|
(27,685
|
)
|
(23,962
|
)
|
(15,376
|
)
|
Proceeds from exercise of stock options
|
11
|
|
15
|
|
16
|
|
Change in due to customers
|
(188,502
|
)
|
226,717
|
|
96,000
|
|
Change in customer funds receivable
|
(844
|
)
|
6,644
|
|
—
|
|
Dividend payments to stockholders
|
(23,312
|
)
|
(23,069
|
)
|
(22,811
|
)
|
Net cash (used in) provided by financing activities
|
(291,908
|
)
|
278,641
|
|
(8,546
|
)
|
Effect of exchange rate on cash, cash equivalents, and restricted cash
|
(2,014
|
)
|
(550
|
)
|
2,622
|
|
Net (decrease) increase in cash, cash equivalents, and restricted cash
|
(190,328
|
)
|
269,501
|
|
100,274
|
|
Cash, cash equivalents, and restricted cash, beginning of year
|
640,174
|
|
370,673
|
|
270,399
|
|
Cash, cash equivalents, and restricted cash, end of year
|
$
|
449,846
|
|
$
|
640,174
|
|
$
|
370,673
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
Cash (paid) received during the year for:
|
|
|
|
Interest
|
(15,261
|
)
|
(10,614
|
)
|
(9,608
|
)
|
Taxes, net of refunds
|
7,138
|
|
(5,613
|
)
|
(1,340
|
)
|
Non-cash investing and financing activities:
|
|
|
|
Purchase of equipment and other assets included in accounts payable
|
(882
|
)
|
(1,546
|
)
|
(3,155
|
)
|
Acquired restricted cash liabilities due to customers
|
—
|
|
31,644
|
|
—
|
|
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)
|
December 31,
2018
|
|
December 31,
2017
|
|
Cash and cash equivalents
|
$
|
30,866
|
|
$
|
29,830
|
|
Restricted cash due to customers
|
418,980
|
|
610,344
|
|
Total cash, cash equivalents and restricted cash in the statement of cash flows
|
$
|
449,846
|
|
$
|
640,174
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
Blackbaud, Inc.
Consolidated statements of stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Common stock
|
|
Additional
paid-in
capital
|
|
Treasury
stock
|
|
Accumulated
other
comprehensive
loss
|
|
Retained
earnings
|
|
Total stockholders' equity
|
|
Shares
|
|
Amount
|
|
Balance at December 31, 2015
|
56,873,817
|
|
$
|
57
|
|
$
|
276,340
|
|
$
|
(199,861
|
)
|
$
|
(825
|
)
|
$
|
134,877
|
|
$
|
210,588
|
|
Cumulative effect of adoption of ASU 2014-09
(1)
|
—
|
|
—
|
|
—
|
|
—
|
|
(28
|
)
|
17,791
|
|
17,763
|
|
Cumulative effect upon early adoption of ASU 2016-09
(1)
|
—
|
|
—
|
|
1,540
|
|
—
|
|
—
|
|
(934
|
)
|
606
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
45,404
|
|
45,404
|
|
Payment of dividends ($0.48 per share)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(22,811
|
)
|
(22,811
|
)
|
Exercise of stock options and stock appreciation rights and vesting of restricted stock units
|
341,418
|
|
—
|
|
16
|
|
—
|
|
—
|
|
—
|
|
16
|
|
Employee taxes paid for 263,730 withheld shares upon equity award settlement
|
—
|
|
—
|
|
—
|
|
(15,376
|
)
|
—
|
|
—
|
|
(15,376
|
)
|
Stock-based compensation
|
—
|
|
—
|
|
32,556
|
|
—
|
|
—
|
|
82
|
|
32,638
|
|
Restricted stock grants
|
574,309
|
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
Restricted stock cancellations
|
(117,143
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
249
|
|
—
|
|
249
|
|
Balance at December 31, 2016
|
57,672,401
|
|
$
|
58
|
|
$
|
310,452
|
|
$
|
(215,237
|
)
|
$
|
(604
|
)
|
$
|
174,409
|
|
$
|
269,078
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
73,633
|
|
73,633
|
|
Payment of dividends ($0.48 per share)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(23,069
|
)
|
(23,069
|
)
|
Exercise of stock options and stock appreciation rights and vesting of restricted stock units
|
390,291
|
|
—
|
|
15
|
|
—
|
|
—
|
|
—
|
|
15
|
|
Employee taxes paid for 308,993 withheld shares upon equity award settlement
|
—
|
|
—
|
|
—
|
|
(23,962
|
)
|
—
|
|
—
|
|
(23,962
|
)
|
Stock-based compensation
|
—
|
|
—
|
|
40,575
|
|
—
|
|
—
|
|
56
|
|
40,631
|
|
Restricted stock grants
|
570,208
|
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
Restricted stock cancellations
|
(81,139
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(38
|
)
|
—
|
|
(38
|
)
|
Balance at December 31, 2017
|
58,551,761
|
|
$
|
59
|
|
$
|
351,042
|
|
$
|
(239,199
|
)
|
$
|
(642
|
)
|
$
|
225,029
|
|
$
|
336,289
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
44,841
|
|
44,841
|
|
Payment of dividends ($0.48 per share)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(23,312
|
)
|
(23,312
|
)
|
Exercise of stock options and stock appreciation rights and vesting of restricted stock units
|
349,248
|
|
—
|
|
11
|
|
—
|
|
—
|
|
—
|
|
11
|
|
Employee taxes paid for 284,780 withheld shares upon equity award settlement
|
—
|
|
—
|
|
—
|
|
(27,685
|
)
|
—
|
|
—
|
|
(27,685
|
)
|
Stock-based compensation
|
—
|
|
—
|
|
48,188
|
|
—
|
|
—
|
|
86
|
|
48,274
|
|
Restricted stock grants
|
541,786
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Restricted stock cancellations
|
(115,162
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,635
|
)
|
—
|
|
(4,635
|
)
|
Reclassification upon early adoption of ASU 2018-02
(1)
|
—
|
|
—
|
|
—
|
|
—
|
|
167
|
|
(167
|
)
|
—
|
|
Balance at December 31, 2018
|
59,327,633
|
|
$
|
59
|
|
$
|
399,241
|
|
$
|
(266,884
|
)
|
$
|
(5,110
|
)
|
$
|
246,477
|
|
$
|
373,783
|
|
(1) Refer to the discussion of recently adopted accounting pronouncements in Note 2 to these consolidated financial statements for additional details.
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
Blackbaud, Inc.
Notes to consolidated financial statements
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.
As of
December 31, 2018
, we had
over
45,000
customers.
Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
Reclassifications
Our revenue from "subscriptions" and "maintenance" and a portion of our "services and other" revenue have been combined within "recurring" revenue beginning in 2018. In order to provide comparability between periods presented, those amounts of revenue have been combined within "recurring" revenue in the previously reported consolidated statements of comprehensive income to conform to the presentation of the current period. Similarly, "cost of subscriptions" and "cost of maintenance" and a portion of "cost of services and other" have been combined within "cost of recurring" in the previously reported consolidated statements of comprehensive income to conform to the presentation of the current period. "Services and other" revenue has been renamed as "one-time services and other" revenue and consists of revenue that did not meet the description of "recurring" revenue in the consolidated statements of comprehensive income. "Cost of services and other" has been renamed as "cost of one-time services and other" and consists of costs that did not meet the description of those related to "recurring" revenue in the consolidated statements of comprehensive income.
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.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets including goodwill, income taxes, business combinations, stock-based compensation, capitalization of software development costs, our allowances for sales returns and doubtful accounts, costs of obtaining contracts, valuation of derivative instruments and loss contingencies, among others. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Recently adopted accounting pronouncements
As previously disclosed, during the three months ended September 30, 2016 we early adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-09,
Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09")
, which addresses, among other items, the accounting for income taxes and forfeitures, and cash flow presentation of share-based compensation. Our adoption of ASU 2016-09 required us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. Upon adoption, we elected to account for forfeitures as they occur using a modified retrospective transition method, which resulted in a cumulative-effect adjustment of
$0.9 million
to reduce our January 1, 2016 opening retained earnings balance. Adoption of the new standard also resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital of
$7.7 million
for the year ended December 31, 2016.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 replaces most previous revenue recognition guidance in GAAP and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts.
We adopted ASU 2014-09 as of January 1, 2018 utilizing the full retrospective method of transition, which requires that the standard be applied to all periods presented. The impact of adopting ASU 2014-09 on our total revenues for 2017 and 2016 was not material. The primary impacts of adopting ASU 2014-09 relate to the deferral of incremental commission and other costs of obtaining contracts with customers and the increase to the amortization period for those costs. Previously, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs over the contract term, generally three years, as the revenue was recognized. Under the new standard, we defer all incremental commission and related fringe benefit costs to obtain a contract and amortize these costs in a manner that aligns with the expected period of benefit. We utilized the 'portfolio approach' practical expedient in ASC 606-10-10-4, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics because the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. Using the 'portfolio approach' and taking into consideration our customer contracts, our technology and other factors, we determined the expected period of benefit to be
five
years. We do not generally pay commissions for contract renewals.
Select adjusted financial statement information, which reflects our adoption of ASU 2014-09 is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheets:
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2017
|
(dollars in thousands)
|
As Reported
|
Adjustments
|
As Adjusted
|
|
As Reported
|
Adjustments
|
As Adjusted
|
Accounts receivable, net of allowance
|
$
|
88,932
|
|
$
|
(671
|
)
|
$
|
88,261
|
|
|
$
|
96,293
|
|
$
|
(614
|
)
|
$
|
95,679
|
|
Prepaid expenses and other current assets
|
$
|
48,314
|
|
$
|
5,897
|
|
$
|
54,211
|
|
|
$
|
56,099
|
|
$
|
5,879
|
|
$
|
61,978
|
|
Other assets
|
$
|
22,524
|
|
$
|
29,573
|
|
$
|
52,097
|
|
|
$
|
24,083
|
|
$
|
33,155
|
|
$
|
57,238
|
|
Deferred revenue, current portion
|
$
|
244,500
|
|
$
|
(651
|
)
|
$
|
243,849
|
|
|
$
|
276,456
|
|
$
|
(1,393
|
)
|
$
|
275,063
|
|
Deferred tax liability
|
$
|
29,558
|
|
$
|
13,917
|
|
$
|
43,475
|
|
|
$
|
37,597
|
|
$
|
10,426
|
|
$
|
48,023
|
|
Retained earnings
|
$
|
152,729
|
|
$
|
21,680
|
|
$
|
174,409
|
|
|
$
|
195,649
|
|
$
|
29,380
|
|
$
|
225,029
|
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of comprehensive income:
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Year ended December 31, 2017
|
(dollars in thousands, except per share amounts)
|
As Reported
(1)
|
Adjustments
|
As Adjusted
|
|
As Reported
(1)
|
Adjustments
|
As Adjusted
|
Revenue
|
|
|
|
|
|
|
|
Recurring
|
$
|
575,933
|
|
$
|
33,130
|
|
$
|
609,063
|
|
|
$
|
651,031
|
|
$
|
33,552
|
|
$
|
684,583
|
|
One-time services and other
|
154,882
|
|
(32,303
|
)
|
122,579
|
|
|
137,275
|
|
(33,371
|
)
|
103,904
|
|
Total revenue
|
$
|
730,815
|
|
$
|
827
|
|
$
|
731,642
|
|
|
$
|
788,306
|
|
$
|
181
|
|
$
|
788,487
|
|
Cost of revenue
|
|
|
|
|
|
|
|
Recurring
|
$
|
235,977
|
|
$
|
10,692
|
|
$
|
246,669
|
|
|
$
|
265,713
|
|
$
|
11,926
|
|
$
|
277,639
|
|
One-time services and other
|
103,243
|
|
(10,692
|
)
|
92,551
|
|
|
96,191
|
|
(11,926
|
)
|
84,265
|
|
Total cost of revenue
|
$
|
339,220
|
|
$
|
—
|
|
$
|
339,220
|
|
|
$
|
361,904
|
|
$
|
—
|
|
$
|
361,904
|
|
Operating expenses
|
|
|
|
|
|
|
|
Sales, marketing and customer success
|
$
|
155,754
|
|
$
|
(5,597
|
)
|
$
|
150,157
|
|
|
$
|
173,525
|
|
$
|
(3,966
|
)
|
$
|
169,559
|
|
Net income
|
$
|
41,515
|
|
$
|
3,889
|
|
$
|
45,404
|
|
|
$
|
65,933
|
|
$
|
7,700
|
|
$
|
73,633
|
|
Basic earnings per share
|
$
|
0.90
|
|
$
|
0.08
|
|
$
|
0.98
|
|
|
$
|
1.41
|
|
$
|
0.17
|
|
$
|
1.58
|
|
Diluted earnings per share
|
$
|
0.88
|
|
$
|
0.08
|
|
$
|
0.96
|
|
|
$
|
1.38
|
|
$
|
0.16
|
|
$
|
1.54
|
|
|
|
(1)
|
See the discussion of our reclassifications of previously reported revenue and costs of revenue above.
|
Our adoption of ASU 2014-09 had no impact on our net cash provided by or used in operating, investing or financing activities for any of the periods reported.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “Tax Act”) signed into law in December 2017. We early adopted ASU 2018-02 effective January 1, 2018 and recorded an insignificant reclassification for the stranded tax effects resulting from the Tax Act from accumulated other comprehensive loss to retained earnings.
Recently issued accounting pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
("ASU 2016-02"). ASU 2016-02 will require lessees to record most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current guidance. The updated guidance also eliminates certain real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. All entities will classify leases to determine how to recognize lease-related revenue and expense. Upon adoption, entities will be required to use a modified retrospective approach with an option to use certain practical expedients. We expect to adopt ASU 2016-02 when effective, using the transition method that allows us to initially apply the guidance at the adoption date of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We expect to use the package of practical expedients that allows 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 expired or existing leases. We expect ASU 2016-02 will impact our consolidated financial statements and related disclosures. We are currently evaluating the extent of the impact and expect that most of our lease commitments will be subject to the updated guidance and recognized as lease liabilities and right-of-use assets on our consolidated balance sheets upon adoption. Based on our portfolio of leases as of December 31, 2018, and our evaluation to date, we expect to recognize aggregate lease liabilities of between
$105 million
and
$135 million
, primarily relating to real estate.
Summary of significant accounting policies
Revenue recognition
Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud-based and hosted environments; (ii) providing payment and transaction services; (iii) providing software maintenance and
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
support services; and (iv) providing professional services, including implementation, consulting, training, analytic and other services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
•
Identification of the contract, or contracts, with a customer;
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price;
•
Allocation of the transaction price to the performance obligations in the contract; and
•
Recognition of revenue when, or as, we satisfy a performance obligation.
Recurring
Recurring revenue represents stand-ready performance obligations in which we are making our solutions or services available to our customers continuously over time or the value of the contract renews. Therefore, recurring revenue is generally recognized over time on a ratable basis over the contract term, beginning on the date that the solution or service is made available to the customer. Our recurring revenue contracts are generally for a term of
three
years at contract inception with
one
to
three
-year renewals thereafter, billed annually in advance and non-cancelable.
Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud-based solutions, hosting services, online training programs, subscription-based analytic services, such as donor acquisitions and data enrichment, and payment services. Recurring revenue also includes fees from maintenance services for our on-premises solutions, services included in our renewable subscription contracts, subscription-based contracts for professional services and variable transaction revenue associated with the use of our solutions.
Our payment services are offered with the assistance of third-party vendors. In general, when we are the principal in a transaction based on the factors identified in ASC 606-10-55-36 through 55-40, we record the revenue and related costs on a gross basis. Otherwise, we net the cost of revenue associated with the service against the gross revenue (amount billed to the customer) and record the net amount as revenue. For payment and transaction services, we have the right to invoice the customer in an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18.
One-time services and other
One-time services and other revenue primarily consists of fees for one-time consulting, analytic and onsite training services.
We generally bill consulting services based on hourly rates plus reimbursable travel-related expenses. Fixed price consulting engagements are generally billed as milestones towards completion are reached. Revenue for all consulting services is recognized over time as the services are performed.
We generally recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, data enrichment engagements and benchmarking studies at a point in time (upon delivery).
In certain cases, we sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the customer attending and completing training.
Contracts with multiple performance obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of our solutions and services are typically estimated based on observable transactions when the solutions or services are sold on a standalone basis.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Costs of obtaining contracts, contract assets and deferred revenue
We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract. Sales commissions and related fringe benefits earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized in a manner that aligns with the expected period of benefit, which we have determined to be
five
years. We determined the period of benefit by taking into consideration our customer contracts, including renewals, retention, our technology and other factors. We do not generally pay commissions for contract renewals. The related amortization expense is included in sales, marketing and customer success expense in our consolidated statements of comprehensive income.
A contract asset is recorded when revenue is recognized in advance of our right to receive consideration (i.e., we must satisfy additional performance obligations in order to receive consideration). Amounts are recorded as receivables when our right to consideration is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Our contract assets are recorded within prepaid expenses and other current assets on our consolidated balance sheets. To the extent that our customers are billed for our solutions and services in advance of us satisfying the related performance obligations, we record such amounts in deferred revenue.
Fair value measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including derivative instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. An active market is defined as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. 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.
|
Our financial assets and liabilities are classified in their entirety within the hierarchy based on the lowest level of input that is significant to fair value measurement. Changes to a financial asset's or liability's level within the fair value hierarchy are determined as of the end of a reporting period. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Derivative instruments
We generally use derivative instruments to manage interest rate risk. We view derivative instruments as risk management tools and do not use them for trading or speculative purposes. 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. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
We record all derivative instruments on our consolidated balance sheets at fair value. If the derivative is designated as a cash flow hedge, the effective portions of the changes in fair value of the derivative are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. Ineffective portions of the changes in the fair value of cash flow hedges are recognized currently in earnings. See
Note 10
of these consolidated financial statements for further discussion of our derivative instruments.
Sales taxes
We present sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, exclude them from revenues.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Cash and cash equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less and cash items in transit to be cash equivalents.
Restricted cash due to customers; Customer funds receivable; Due to customers
Restricted cash due to customers consists of monies collected by us and payable to our customers, net of the associated transaction fees earned. Monies associated with amounts due to customers are segregated in separate bank accounts and used exclusively for the payment of amounts due to customers. This usage restriction is either legally or internally imposed and reflects our intention with regard to such deposits. Customer funds receivable consists of monies we expect to collect and remit to our customers.
Concentration of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, restricted cash due to customers and accounts receivable. Our cash and cash equivalents and restricted cash due to customers are placed with high credit-quality financial institutions. Our accounts receivable is derived from sales to customers who primarily operate in the nonprofit sector. With respect to accounts receivable, we perform ongoing evaluations of our customers and maintain an allowance for doubtful accounts based on historical experience and our expectations of future losses. As of and for the years ended
December 31, 2018
,
2017
and
2016
, there were no significant concentrations with respect to our consolidated revenues or accounts receivable.
Property and equipment
We record property and equipment assets at cost and depreciate them over their estimated useful lives using the straight-line method. Leasehold improvements are depreciated over the lesser of the term of the lease or the estimated useful life of the asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to earnings. Repair and maintenance costs are expensed as incurred.
Construction-in-progress represents purchases of computer software and hardware associated with new internal system implementation projects which had not been placed in service at the respective balance sheet dates. We transferred these assets to the applicable property category on the date they are placed in service. There was no capitalized interest applicable to construction-in-progress for the years ended
December 31, 2018
,
2017
and
2016
.
Business combinations
We include the operating results of acquired companies as well as the net assets acquired and liabilities assumed in our consolidated financial statements from the date of acquisition. We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired and liabilities assumed. This allocation and valuation require management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.
Critical estimates in valuing intangible assets include, but are not limited to, estimates about: future expected cash flows from customer contracts, proprietary technology and non-compete agreements; the acquired company's brand awareness and market position, assumptions about the period of time the brand will continue to be valuable; as well as expected costs to develop any in-process research and development into commercially viable solutions and estimated cash flows from the projects when completed, and discount rates. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable, and unanticipated events and changes in circumstances may occur.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Goodwill
Goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by us in a business combination. Goodwill is not amortized, but tested annually for impairment on the first day of our fourth quarter, or more frequently if indicators of potential impairment arise.
Accounting guidance permits entities 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 carrying amount as a basis to determine whether it is necessary to perform the quantitative impairment test. Significant judgment is required in the assessment of qualitative factors, including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of identified reporting units and future opportunities in the markets in which we operate.
The quantitative impairment test compares the fair values of identified reporting units with their respective carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Based on our current internal reporting structure, we currently have one operating segment, one reportable segment, and one reporting unit. In each of
2018
,
2017
and
2016
, we performed the quantitative impairment test which indicated that the estimated fair values of the identified reporting units significantly exceeded their respective carrying values.
There was no impairment of goodwill during 2018, 2017 or 2016.
Intangible assets other than goodwill
We amortize finite-lived intangible assets over their estimated useful lives as follows.
|
|
|
|
|
Basis of amortization
|
Amortization
period
(in years)
|
Customer relationships
|
Straight-line and accelerated
(1)
|
4-17
|
Marketing assets
|
Straight-line
|
1-1
5
|
Acquired software and technology
|
Straight-line and accelerated
(1)
|
1-11
|
Non-compete agreements
|
Straight-line
|
1-5
|
Database
|
Straight-line
|
8
|
|
|
(1)
|
Certain of the customer relationships and acquired software and technology assets are amortized on an accelerated basis.
|
Indefinite-lived intangible assets consist of trade names. We evaluate the estimated useful lives and the potential for impairment of finite and indefinite-lived intangible assets on an annual basis or more frequently if events or circumstances indicate revised estimates of useful lives may be appropriate or that the carrying amount may be impaired. If the carrying amount of a finite-lived intangible asset is no longer recoverable based upon the undiscounted cash flows of the asset, the amount of impairment is the difference between the carrying amount and the fair value of the asset. Substantially all of our intangible assets were acquired in business combinations.
There was no impairment of acquired intangible assets during 2018, 2017 or 2016.
Deferred financing costs
Deferred financing costs included in other assets represent the direct third-party costs of entering into the revolving (line-of-credit) portion of our credit facility in June 2017 and portions of the unamortized deferred financing costs from prior facilities. These costs are amortized ratably over the term of the credit facility as interest expense.
Stock-based compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the requisite service period, which is the vesting period. We determine the fair value of stock options and stock appreciation rights using a Black-Scholes option pricing model, which requires us to use significant judgment to make estimates regarding the life of the award, volatility of our stock price, the risk-free interest rate and the dividend yield of
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
our stock over the life of the award. We determine the fair value of awards that contain market conditions using a Monte Carlo simulation model. Changes to these estimates would result in different fair values of awards.
We recognize the effect of awards for which the requisite service period is not rendered when the award is forfeited (that is, we recognize the effect of forfeitures in compensation cost when they occur). Previously recognized compensation cost for an award is reversed in the period that the award is forfeited. Income tax benefits resulting from the vesting and exercise of stock-based compensation awards are recognized in the period the unit or award is vested or option or right is exercised.
Income taxes
We make estimates and judgments in accounting for income taxes. The calculation of the income tax provision requires estimates due to transactions, credits and calculations where the ultimate tax determination is uncertain. Uncertainties arise as a consequence of the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. To the extent actual results differ from estimated amounts recorded, such differences will impact the income tax provision in the period in which the determination is made.
We make estimates in determining tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and prudent and feasible tax planning strategies. If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to increase income tax expense, thereby reducing net income in the period such determination was made.
We measure and recognize uncertain tax positions. To recognize such positions, we must first determine if it is more likely than not that the position will be sustained upon audit. We must then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Significant judgment is required in the identification and measurement of uncertain tax positions.
Foreign currency
Net assets recorded in a foreign currency are translated at the exchange rate on the balance sheet date. Revenue and expense items are translated using an average of monthly exchange rates. The resulting translation adjustments are recorded in accumulated other comprehensive income.
Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are recorded at the approximate rate of exchange at the transaction date in other expense, net. For the years ended
December 31, 2018
and
2016
, we recorded net foreign currency losses of
$0.9 million
each year. For the year ended
December 31, 2017
, we recorded a net foreign currency gain of
$1.1 million
.
Research and development
Research and development costs are expensed as incurred. These costs include compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to researching and developing new solutions, upgrading and enhancing existing solutions, and allocated depreciation, facilities and IT support costs.
Software development costs
We incur certain costs associated with the development of internal-use software, which are primarily related to activities performed to develop our cloud-based solutions. Internal and external costs incurred in the preliminary project stage of internal-use software development are expensed as incurred. Once the software being developed has reached the application development stage, qualifying internal costs including payroll and payroll-related costs of employees who are directly associated with and devote time to the software project as well as external direct costs of materials and services
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
are capitalized. Capitalization ceases at the point at which the developed software is substantially complete and ready for its intended use, which is typically upon completion of all substantial testing. Qualifying costs capitalized during the application development stage include those related to specific upgrades and enhancements when it is probable that those costs incurred will result in additional functionality. Overhead costs, including general and administrative costs, as well as maintenance, training and all other costs associated with post-implementation stage activities are expensed as incurred. In addition, internal costs that cannot be reasonably separated between maintenance and relatively minor upgrades and enhancements are expensed as incurred. Historically, we have also incurred and capitalized costs in connection with the development of certain of our software solutions licensed to customers on a perpetual basis, which are accounted for as costs of software to be sold, leased or otherwise marketed; however, there were no costs capitalized related to those solutions as of
December 31, 2018
and
2017
.
Qualifying capitalized software development costs are amortized on a straight-line basis over the software asset's estimated useful life, which is generally
three
to
seven
years. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairment charges during the years ended
December 31, 2018
,
2017
, and
2016
.
Sales returns and allowance for doubtful accounts
We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and the nature of service level commitments. A considerable amount of judgment is required in assessing these factors. Provisions for sales returns and credits are charged against the related revenue items.
Accounts receivable are recorded at original invoice amounts less an allowance for doubtful accounts, an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment and the aging of our receivables. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for doubtful accounts could be required. Accounts are written off after all means of collection are exhausted and recovery is considered remote. Provisions for doubtful accounts are recorded in general and administrative expense.
Below is a summary of the changes in our allowance for sales returns.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
(in thousands)
|
Balance at
beginning of year
|
|
Provision/
adjustment
|
|
Write-off
|
|
Balance at
end of year
|
|
2018
|
$
|
4,400
|
|
$
|
4,952
|
|
$
|
(5,975
|
)
|
$
|
3,377
|
|
2017
|
2,704
|
|
10,511
|
|
(8,815
|
)
|
4,400
|
|
2016
|
4,431
|
|
3,060
|
|
(4,787
|
)
|
2,704
|
|
Below is a summary of the changes in our allowance for doubtful accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
(in thousands)
|
Balance at
beginning of year
|
|
Provision/
adjustment
|
|
Write-off
|
|
Balance at
end of year
|
|
2018
|
$
|
741
|
|
$
|
2,446
|
|
$
|
(1,842
|
)
|
$
|
1,345
|
|
2017
|
587
|
|
1,148
|
|
(994
|
)
|
741
|
|
2016
|
512
|
|
499
|
|
(424
|
)
|
587
|
|
Advertising costs
We expense advertising costs as incurred, which was
$4.0 million
,
$2.4 million
and
$2.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Restructuring costs
Restructuring costs include charges for the costs of exit or disposal activities. The liability for costs associated with exit or disposal activities is measured initially at fair value and only recognized when the liability is incurred. For details of our restructuring activities, see
Note 19
of these consolidated financial statements.
Impairment of long-lived assets
We review long-lived assets for impairment when events change or circumstances indicate the carrying amount may not be recoverable. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used or significant adverse change in the business climate. If such events or changes in circumstances are present, the undiscounted cash flow method is used to determine whether the asset is impaired. No impairment of long-lived assets occurred in
2018
,
2017
or
2016
.
Contingencies
We are subject to the possibility of various loss contingencies in the normal course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and the estimation of damages are difficult to ascertain. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by us. Although we believe we have substantial defenses in these matters, we could incur judgments or enter into settlements of claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows in any particular period.
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 and stock appreciation rights and vesting of restricted stock awards and units.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
2018 Acquisitions
Reeher
On
April 30, 2018
, we acquired all of the outstanding equity securities, including all voting equity interests, of Reeher LLC, a Minnesota limited liability company (“Reeher”), pursuant to a securities purchase agreement. The acquisition expands our fundraising performance management capabilities and is intended to drive more effective fundraising and greater social good outcomes for our customers. We acquired the equity securities for an aggregate purchase price of
$41.2 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 in
Note 9
of these consolidated financial statements). As a result of the acquisition, Reeher has become a wholly-owned subsidiary of ours. The operating results of Reeher have been included in our consolidated financial statements from the date of acquisition. During
2018
, we incurred
insignificant
acquisition-related expenses associated with the acquisition, which were recorded in general and administrative expense.
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
|
$
|
1,683
|
|
Property and equipment
|
755
|
|
Identifiable intangible assets
|
27,055
|
|
Deferred tax asset
|
713
|
|
Deferred revenue
|
(2,700
|
)
|
Goodwill
|
13,681
|
|
Total purchase price
|
$
|
41,187
|
|
The estimated fair value of accounts receivable acquired approximates the contractual value of
$1.1 million
and
$11.7 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 Reeher.
The Reeher acquisition resulted in the identification of the following identifiable intangible assets:
|
|
|
|
|
|
|
Intangible assets acquired
|
|
Weighted average amortization period
|
Reeher
|
(in thousands)
|
|
(in years)
|
Acquired technology
|
$
|
19,500
|
|
11
|
Customer relationships
|
7,000
|
|
10
|
Marketing assets
|
480
|
|
3
|
Non-compete agreements
|
75
|
|
2
|
Total intangible assets
|
$
|
27,055
|
|
11
|
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
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
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 are being amortized on an accelerated basis. Marketing assets and non-compete agreements are being amortized on a straight-line basis.
We determined that the impact of this acquisition was not material to our consolidated financial statements; therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.
2017 Acquisitions
JustGiving
On
October 2, 2017
, Blackbaud Global Limited (“Blackbaud Global”), a United Kingdom limited liability company and wholly-owned subsidiary of ours, acquired the entire issued share capital, including all voting equity interests, of Giving Limited, a United Kingdom private limited company doing business as “JustGiving” for an aggregate purchase price, including certain post-closing adjustments set forth in the related stock purchase agreement, of
£102.4 million
, or approximately
$137.2 million
, in cash. JustGiving is a market leading social platform for giving, and the acquisition is expected to enhance our capabilities to serve both individual donors and nonprofits, expanding the peer-to-peer fundraising capabilities we offer today. As a result of the acquisition, JustGiving has become a wholly-owned subsidiary of ours. We financed the acquisition of JustGiving through cash on hand and borrowings of
$138.7 million
under the 2017 Credit Facility. We finalized the purchase price allocation of JustGiving, including the valuation of assets acquired and liabilities assumed, during the fourth quarter of 2018. All measurement period adjustments were insignificant. We determined that the impact of this acquisition was not material to our consolidated financial statements; therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.
AcademicWorks
On
April 3, 2017
, we acquired all of the outstanding shares of capital stock, including all voting equity interests, of AcademicWorks, Inc., a Texas corporation ("AcademicWorks"), pursuant to a stock purchase agreement. AcademicWorks is the market leader in scholarship management for higher education and K-12 institutions, foundations, and grant-making institutions. The acquisition extends our offerings for our higher education, K-12, and corporate and foundation customers. We acquired AcademicWorks for
$52.1 million
in cash, net of closing adjustments. We financed the acquisition through a draw down of a revolving credit loan under our then-existing credit facility. As a result of the acquisition, AcademicWorks has become a wholly-owned subsidiary of ours. We finalized the purchase price allocation of AcademicWorks, including the valuation of assets acquired and liabilities assumed, during the first quarter of 2018. All measurement period adjustments were insignificant. We determined that the impact of this acquisition was not material to our consolidated financial statements; therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
|
|
4. Goodwill and Other Intangible Assets
|
The change in our goodwill during
2018
consisted of the following:
|
|
|
|
|
(dollars in thousands)
|
Total
|
|
Balance at December 31, 2017
|
$
|
530,249
|
|
Additions related to current year business combinations
|
18,271
|
|
Adjustments related to prior year business combinations
|
(333
|
)
|
Effect of foreign currency translation
|
(2,974
|
)
|
Balance at December 31, 2018
|
$
|
545,213
|
|
We have recorded intangible assets acquired in various business combinations based on their fair values at the date of acquisition. The table below sets forth the balances of each class of intangible asset and related amortization as of:
|
|
|
|
|
|
|
|
|
December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
Finite-lived gross carrying amount
|
|
|
Customer relationships
|
$
|
280,309
|
|
$
|
274,458
|
|
Marketing assets
|
48,484
|
|
49,661
|
|
Acquired software and technology
|
211,654
|
|
193,010
|
|
Non-compete agreements
|
2,499
|
|
2,603
|
|
Database
|
4,275
|
|
4,275
|
|
Total finite-lived gross carrying amount
|
547,221
|
|
524,007
|
|
Accumulated amortization
|
|
|
Customer relationships
|
(116,648
|
)
|
(96,662
|
)
|
Marketing assets
|
(16,395
|
)
|
(12,444
|
)
|
Acquired software and technology
|
(118,268
|
)
|
(96,528
|
)
|
Non-compete agreements
|
(1,618
|
)
|
(1,125
|
)
|
Database
|
(4,275
|
)
|
(4,197
|
)
|
Total accumulated amortization
|
(257,204
|
)
|
(210,956
|
)
|
Indefinite-lived gross carrying amount
|
|
|
Marketing assets
|
1,600
|
|
1,600
|
|
Intangible assets, net
|
$
|
291,617
|
|
$
|
314,651
|
|
Changes to the gross carrying amounts of intangible asset classes during
2018
were primarily related to our business acquisitions as described in
Note 3
of these financial statements and the effect of foreign currency translation.
Amortization expense
Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue on the consolidated statements of comprehensive income based on the revenue stream to which the asset contributes, except for marketing assets and non-compete agreements, for which the associated amortization expense is included in operating expenses.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table summarizes amortization expense of our finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Included in cost of revenue:
|
|
|
|
Cost of recurring
|
$
|
39,877
|
|
$
|
37,557
|
|
$
|
36,597
|
|
Cost of one-time services and other
|
2,356
|
|
2,542
|
|
2,961
|
|
Total included in cost of revenue
|
42,233
|
|
40,099
|
|
39,558
|
|
Included in operating expenses
|
4,844
|
|
3,271
|
|
2,840
|
|
Total amortization of intangibles from business combinations
|
$
|
47,077
|
|
$
|
43,370
|
|
$
|
42,398
|
|
The following table outlines the estimated future amortization expense for each of the next five years for our finite-lived intangible assets as of
December 31, 2018
:
|
|
|
|
|
Years ending December 31,
(dollars in thousands)
|
Amortization
expense
|
|
2019
|
$
|
45,266
|
|
2020
|
36,995
|
|
2021
|
31,453
|
|
2022
|
27,969
|
|
2023
|
26,213
|
|
Total
|
$
|
167,896
|
|
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(dollars in thousands, except per share amounts)
|
2018
|
|
2017
|
|
2016
|
|
Numerator:
|
|
|
|
Net income
|
$
|
44,841
|
|
$
|
73,633
|
|
$
|
45,404
|
|
Denominator:
|
|
|
|
Weighted average common shares
|
47,206,669
|
|
46,669,440
|
|
46,132,389
|
|
Add effect of dilutive securities:
|
|
|
|
Stock-based awards
|
838,415
|
|
1,106,262
|
|
1,184,149
|
|
Weighted average common shares assuming dilution
|
48,045,084
|
|
47,775,702
|
|
47,316,538
|
|
Earnings per share:
|
|
|
|
Basic
|
$
|
0.95
|
|
$
|
1.58
|
|
$
|
0.98
|
|
Diluted
|
$
|
0.93
|
|
$
|
1.54
|
|
$
|
0.96
|
|
|
|
|
|
Anti-dilutive shares excluded from calculations of diluted earnings per share
|
48,881
|
|
4,634
|
|
7,339
|
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
|
|
6. Fair Value Measurements
|
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 December 31, 2018
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
2,260
|
|
|
$
|
—
|
|
|
$
|
2,260
|
|
Total financial assets
|
$
|
—
|
|
|
$
|
2,260
|
|
|
$
|
—
|
|
|
$
|
2,260
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2018
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
186
|
|
|
$
|
—
|
|
|
$
|
186
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
186
|
|
|
$
|
—
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2017
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
1,283
|
|
|
$
|
—
|
|
|
$
|
1,283
|
|
Total financial assets
|
$
|
—
|
|
|
$
|
1,283
|
|
|
$
|
—
|
|
|
$
|
1,283
|
|
Our derivative instruments within the scope of 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
December 31, 2018
and
December 31, 2017
, due to the immediate or short-term maturity of these instruments.
We believe the carrying amount of our debt approximates its fair value at
December 31, 2018
and
December 31, 2017
, 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 years ended
December 31, 2018
,
2017
and
2016
. Additionally, we did not hold any Level 3 assets or liabilities during the years ended
December 31, 2018
,
2017
and
2016
.
Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill, which are recognized at fair value during the period in which an acquisition is completed, 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, 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
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium.
There were no non-recurring fair value adjustments to intangible assets and goodwill during
2018
,
2017
and
2016
except for certain business combination accounting adjustments to the initial fair value estimates of the assets acquired and liabilities assumed at the acquisition date from updated estimates and assumptions during the measurement period. See
Note 3
and
Note 4
to these consolidated financial statements for additional details. The measurement period may be up to one year from the acquisition date. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.
|
|
7. Property and Equipment and Software Development Costs
|
Property and equipment
Property and equipment consisted of the following, as of:
|
|
|
|
|
|
|
|
|
|
|
Estimated
useful life
(years)
|
|
December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
Equipment
|
2 - 5
|
|
$
|
4,243
|
|
$
|
2,728
|
|
Computer hardware
|
2 - 5
|
|
75,060
|
|
76,331
|
|
Computer software
|
2 - 5
|
|
34,294
|
|
34,058
|
|
Construction in progress
|
—
|
|
233
|
|
3,102
|
|
Furniture and fixtures
|
3 - 1
0
|
|
7,004
|
|
7,265
|
|
Leasehold improvements
|
Lesser of lea
se term or 10 years
|
|
26,795
|
|
22,359
|
|
Total property and equipment
|
|
147,629
|
|
145,843
|
|
Less: accumulated depreciation
|
|
(107,598
|
)
|
(103,600
|
)
|
Property and equipment, net
|
|
$
|
40,031
|
|
$
|
42,243
|
|
Depreciation expense was
$15.9 million
,
$17.8 million
and
$19.8 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Property and equipment, net of depreciation, under capital leases at
December 31, 2018
and
2017
was
insignificant
.
Software development costs
Software development costs consisted of the following, as of:
|
|
|
|
|
|
|
|
|
|
Estimated
useful life
(years)
|
December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
Software development costs
|
3 - 7
|
$
|
121,983
|
|
$
|
84,404
|
|
Less: accumulated amortization
|
|
(46,884
|
)
|
(30,306
|
)
|
Software development costs, net
|
|
$
|
75,099
|
|
$
|
54,098
|
|
Amortization expense related to software development costs was
$16.6 million
,
$12.8 million
and
$8.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively, and is included primarily in cost of recurring.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
|
|
8. Consolidated Financial Statement Details
|
Prepaid expenses and other assets
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31,
2018
|
|
December 31,
2017
|
|
Costs of obtaining contracts
(1)(2)
|
$
|
85,590
|
|
$
|
77,312
|
|
Prepaid software maintenance and subscriptions
|
21,134
|
|
17,402
|
|
Taxes, prepaid and receivable
|
2,055
|
|
10,548
|
|
Derivative instruments
|
2,260
|
|
1,283
|
|
Unbilled accounts receivable
(3)
|
4,161
|
|
3,136
|
|
Security deposits
|
1,020
|
|
2,305
|
|
Other assets
|
8,931
|
|
7,230
|
|
Total prepaid expenses and other assets
|
125,151
|
|
119,216
|
|
Less: Long-term portion
|
65,363
|
|
57,238
|
|
Prepaid expenses and other current assets
|
$
|
59,788
|
|
$
|
61,978
|
|
|
|
(1)
|
Amortization expense from costs of obtaining contracts was
$35.7 million
for the year ended
December 31, 2018
.
|
|
|
(2)
|
The current portion of costs of obtaining contracts as of
December 31, 2018
and
2017
was
$31.7 million
and
$28.0 million
, respectively.
|
|
|
(3)
|
Amounts previously presented as contract assets are now presented as unbilled accounts receivable as they meet the definition of a receivable.
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31,
2018
|
|
December 31,
2017
|
|
Accrued bonuses
|
$
|
14,868
|
|
$
|
16,743
|
|
Accrued commissions and salaries
|
9,934
|
|
6,943
|
|
Taxes payable
|
6,204
|
|
5,517
|
|
Deferred rent liabilities
|
4,332
|
|
4,548
|
|
Customer credit balances
|
4,076
|
|
4,652
|
|
Lease incentive obligations
|
3,514
|
|
4,635
|
|
Unrecognized tax benefit
|
2,719
|
|
1,972
|
|
Accrued vacation costs
|
2,352
|
|
2,458
|
|
Accrued health care costs
|
1,497
|
|
2,615
|
|
Other liabilities
|
6,785
|
|
9,948
|
|
Total accrued expenses and other liabilities
|
56,281
|
|
60,031
|
|
Less: Long-term portion
|
9,388
|
|
5,632
|
|
Accrued expenses and other current liabilities
|
$
|
46,893
|
|
$
|
54,399
|
|
Deferred revenue
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31,
2018
|
|
December 31,
2017
|
|
Recurring
|
$
|
286,960
|
|
$
|
265,513
|
|
One-time services and other
|
11,595
|
|
13,193
|
|
Total deferred revenue
|
298,555
|
|
278,706
|
|
Less: Long-term portion
|
2,564
|
|
3,643
|
|
Deferred revenue, current portion
|
$
|
295,991
|
|
$
|
275,063
|
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Interest income
|
$
|
2,008
|
|
$
|
993
|
|
$
|
581
|
|
Gain on derivative instrument
|
—
|
|
462
|
|
—
|
|
Loss on debt extinguishment
|
—
|
|
(299
|
)
|
—
|
|
Other (expense) income, net
|
(905
|
)
|
1,104
|
|
(872
|
)
|
Other income (expense), net
|
$
|
1,103
|
|
$
|
2,260
|
|
$
|
(291
|
)
|
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)
|
December 31,
2018
|
|
December 31,
2017
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
Credit facility:
|
|
|
|
|
|
Revolving credit loans
|
$
|
100,000
|
|
$
|
143,000
|
|
|
4.13
|
%
|
2.84
|
%
|
Term loans
|
288,750
|
|
296,250
|
|
|
3.44
|
%
|
2.64
|
%
|
Other debt
|
—
|
|
1,076
|
|
|
—
|
%
|
4.50
|
%
|
Total debt
|
388,750
|
|
440,326
|
|
|
3.61
|
%
|
2.71
|
%
|
Less: Unamortized discount and debt issuance costs
|
1,626
|
|
2,102
|
|
|
|
|
Less: Debt, current portion
|
7,500
|
|
8,576
|
|
|
3.77
|
%
|
3.03
|
%
|
Debt, net of current portion
|
$
|
379,624
|
|
$
|
429,648
|
|
|
3.61
|
%
|
2.71
|
%
|
2017 refinancing
We were previously party to a
$325.0 million
five
-year credit facility entered into during
February 2014
. The credit facility included: a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans (the “
2014 Revolving Facility
”) and a delayed draw term loan (the “
2014 Term Loan
”) together, (the “
2014 Credit Facility
”).
In
June 2017
, we entered into a
five
-year
$700.0 million
senior credit facility (the “
2017 Credit Facility
”). The
2017 Credit Facility
includes a
$400.0 million
revolving credit facility (the “
2017 Revolving Facility
”) and a
$300.0 million
term loan facility (the “
2017 Term Loan
”). Upon closing we drew
$300.0 million
on a term loan and
$110.0 million
in revolving credit loans, which was used to repay all amounts outstanding under the
2014 Credit Facility
, fees and expenses incurred in connection with the
2017 Credit Facility
, and for other general corporate purposes.
Certain lenders of the
2014 Term Loan
participated in the
2017 Term Loan
and the change in the present value of our future cash flows to these lenders under the
2014 Term Loan
and under the
2017 Term Loan
was less than
10%
. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the
2014 Term Loan
did not participate in the
2017 Term Loan
. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Certain lenders of the
2014 Revolving Facility
participated in the
2017 Revolving Facility
and provided increased borrowing capacities. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the
2014 Revolving Facility
did not participate in the
2017 Revolving Facility
. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment.
In 2017, we recorded an insignificant loss on debt extinguishment related to the write-off of debt discount and deferred financing costs for the portions of the
2014 Credit Facility
considered to be extinguished. This loss was recognized in the consolidated statements of comprehensive income within other income (expense), net.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
In connection with our entry into the
2017 Credit Facility
, we paid
$3.1 million
in financing costs, of which
$1.0 million
were capitalized in other assets and, together with a portion of the unamortized deferred financing costs from the
2014 Credit Facility
and prior facilities, are being amortized into interest expense ratably over the term of the new facility. As of
December 31, 2018
and
2017
, deferred financing costs totaling
$0.9 million
and
$1.2 million
, respectively, were included in other assets on our consolidated balance sheets. We recorded aggregate financing costs of
$1.8 million
as a direct deduction from the carrying amount of our debt liability, which related to debt discount (fees paid to lenders) and debt issuance costs for the
2017 Term Loan
.
Summary of the
2017 Credit Facility
The
2017 Revolving Facility
includes (i) a
$50.0 million
sublimit available for the issuance of standby letters of credit, (ii) a
$50.0 million
sublimit available for swingline loans, and (iii) a
$100.0 million
sublimit available for multicurrency borrowings.
The
2017 Credit Facility
is secured by the stock and limited liability company interests of certain of our subsidiaries and any of our material domestic subsidiaries.
Amounts borrowed under the dollar tranche revolving credit loans and term loan under the
2017 Credit Facility
bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the highest of (i) the prime rate announced by Bank of America, N.A., (ii) the Federal Funds Rate plus
0.50%
and (iii) the Eurocurrency Rate (which varies depending on the currency in which the loan is denominated) plus
1.00%
(the “Base Rate”), in addition to a margin of
0.00%
to
0.75%
, or (b) Eurocurrency Rate plus a margin of
1.00%
to
1.75%
.
We also pay a quarterly commitment fee on the unused portion of the
2017 Revolving Facility
from
0.15%
to
0.25%
per annum, depending on our net leverage ratio. At
December 31, 2018
, the commitment fee was
0.20%
.
The term loan under the
2017 Credit Facility
requires periodic principal payments. The balance of the term loan and any amounts drawn on the revolving credit loans are due upon maturity of the
2017 Credit Facility
in
June 2022
. We evaluate the classification of our debt as current or non-current based on the required annual maturities of the
2017 Credit Facility
.
The
2017 Credit Facility
includes financial covenants related to the net leverage ratio and interest coverage ratio, as well as restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock.
At December 31, 2018, we were in compliance with our debt covenants under the 2017 Credit Facility.
The
2017 Credit Facility
also includes an option to request increases in the revolving commitments and/or request additional term loans in an aggregate principal amount of up to
$200.0 million
plus an amount, if any, such that the Net Leverage Ratio shall be no greater than
3.00
to
1.00
. At
December 31, 2018
, our available borrowing capacity under the
2017 Credit Facility
was
$296.2 million
.
Other debt
In September 2017, we entered into a
two
-year
$2.2 million
agreement to finance our purchase of software licenses and related services. The agreement was a non-interest-bearing note requiring annual payments, where the first payment was due in November 2017. Interest associated with the note was imputed at the rate we would incur for amounts borrowed under the
2017 Credit Facility
. In October 2018, we repaid all amounts outstanding under the agreement.
Financing for 2018 acquisition
On
April 30, 2018
, we acquired Reeher for
$41.2 million
in cash, net of closing adjustments. We financed the acquisition with a revolving credit loan under the
2017 Credit Facility
.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
As of
December 31, 2018
, the required annual maturities related to the
2017 Credit Facility
were as follows:
|
|
|
|
|
Years ending December 31,
(dollars in thousands)
|
Annual
maturities
|
|
2019
|
$
|
7,500
|
|
2020
|
7,500
|
|
2021
|
7,500
|
|
2022
|
366,250
|
|
2023
|
—
|
|
Thereafter
|
—
|
|
Total required maturities
|
$
|
388,750
|
|
|
|
10. 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.
Undesignated contracts
In
June 2017
, we entered into a foreign currency option contract to hedge our exposure to currency fluctuations in connection with our acquisition of JustGiving because the purchase price was denominated in British Pounds. The notional value of the instrument was
£100.0 million
with an effective date beginning in
June 2017
and maturing in
September 2017
. We settled the foreign currency option contract in September 2017. We did not designate the foreign currency option contract as a cash flow hedge for accounting purposes since it involved a business combination. As such, changes in the fair value of this derivative were recognized in earnings. The insignificant premium paid for this option and the
$1.0 million
in proceeds from the settlement are shown within cash flows from investing activities in our consolidated statements of cash flows.
As the closing date of our acquisition of JustGiving extended beyond the settlement date of the foreign currency option contract, we entered into a foreign currency forward contract in
September 2017
with settlement in
October 2017
. The notional value of the instrument was
£103.5 million
. We did not designate the foreign currency forward contract as a cash flow hedge for accounting purposes since it involved a business combination. As such, changes in the fair value of this derivative were recognized in earnings. The insignificant premium paid for this forward contract is shown within cash flows from investing activities in our consolidated statements of cash flows.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The fair values of our derivative instruments were as follows as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
(dollars in thousands)
|
Balance sheet location
|
December 31,
2018
|
|
December 31,
2017
|
|
|
Balance sheet location
|
December 31,
2018
|
|
December 31,
2017
|
|
Derivative instruments designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swaps, current portion
|
Prepaid expenses
and other current assets
|
$
|
—
|
|
$
|
145
|
|
|
Accrued expenses
and other current liabilities
|
$
|
—
|
|
$
|
—
|
|
Interest rate swaps, long-term portion
|
Other assets
|
2,260
|
|
1,138
|
|
|
Other liabilities
|
186
|
|
—
|
|
Total derivative instruments designated as hedging instruments
|
|
$
|
2,260
|
|
$
|
1,283
|
|
|
|
$
|
186
|
|
$
|
—
|
|
We did not have any undesignated derivative instruments as of
December 31, 2018
and
2017
.
The effects of derivative instruments in cash flow hedging relationships were as follows:
|
|
|
|
|
|
|
|
|
|
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)
|
December 31,
2018
|
|
Year ended
December 31, 2018
|
|
Interest rate swaps
|
$
|
2,074
|
|
Interest expense
|
$
|
118
|
|
|
|
|
|
|
December 31,
2017
|
|
|
Year ended
December 31, 2017
|
|
Interest rate swaps
|
$
|
1,283
|
|
Interest expense
|
$
|
(293
|
)
|
|
|
|
|
|
December 31,
2016
|
|
|
Year ended
December 31, 2016
|
|
Interest rate swaps
|
$
|
42
|
|
Interest expense
|
$
|
(1,106
|
)
|
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
December 31, 2018
that is expected to be reclassified into earnings within the next twelve months is
$1.0 million
. There were no ineffective portions of our interest rate swap derivatives during the years ended
December 31, 2018
,
2017
and
2016
. See
Note 14
to these consolidated financial statements for a summary of the changes in accumulated other comprehensive income (loss) by component.
We did not have any undesignated derivative instruments during
2018
and
2016
. The effects of undesignated derivative instruments during
2017
were as follows:
|
|
|
|
|
|
|
Location of gain (loss)
recognized in income on derivative
|
Gain (loss) recognized in income
|
|
(dollars in thousands)
|
Year ended
December 31, 2017
|
|
Foreign currency option contracts
|
Other income (expense), net
|
$
|
513
|
|
Foreign currency forward contracts
|
Other income (expense), net
|
$
|
(51
|
)
|
Total gain
(1)
|
|
$
|
462
|
|
|
|
(1)
|
The individual amounts may not sum to total gain due to rounding.
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
|
|
11. Commitments and Contingencies
|
Lease for New Headquarters Facility
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 current annual base rent for Phase One is
$4.4 million
, payable in equal monthly installments. The base rent escalates annually by approximately
2%
based on the terms of the agreement. 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.
Other leases
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. The current annual base rent of the lease is
$4.3 million
, payable in equal monthly installments. The base rent escalates annually at a rate equal to the change in the consumer price index, as defined in the agreement, but not to exceed
5.5%
in any year.
We have a lease for office space in Austin, Texas which expires in September 2023 and has
two
five
-year renewal options. The current annual base rent of the lease is
$2.4 million
. The base rent escalates annually between
2%
and
4%
based on the terms of the agreement. At
December 31, 2018
, we had a standby letter of credit of
$1.0 million
for a security deposit for this lease.
We have provisions in our leases that entitle us to aggregate remaining leasehold improvement allowances of
$3.8 million
as of
December 31, 2018
. These amounts are being recorded as a reduction to rent expense ratably over the terms of the leases. The leasehold improvement allowances have been included in the table of operating lease commitments below as a reduction in our lease commitments ratably over the then remaining terms of the leases. The timing of the reimbursements for the actual leasehold improvements may vary from the amounts reflected in the table below.
Additionally, we have subleased a portion of our facilities under various agreements through
2023
. As of
December 31, 2018
, our total minimum rentals to be received in the future under noncancelable subleases was
$7.2 million
. These amounts are also being recorded as a reduction to rent expense.
Total rent expense was
$22.2 million
,
$16.1 million
and
$11.7 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The quarterly South Carolina state incentive payments we received as a result of locating our former headquarters facility in Berkeley County, South Carolina, ended in the fourth quarter of 2016. These amounts were recorded as a reduction of rent expense upon receipt and were
$2.9 million
for the year ended
December 31, 2016
. We expect to receive quarterly South Carolina state incentive payments as a result of locating our New Headquarters Facility in Berkeley County, South Carolina, which will be recorded as a reduction of rent expense upon receipt.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
As of
December 31, 2018
, the future minimum lease payments related to lease agreements with a remaining noncancelable term in excess of one year, net of related sublease commitments and lease incentives, were as follows:
|
|
|
|
|
Years ending December 31,
(dollars in thousands)
|
Operating
leases
(1)
|
|
2019
|
$
|
20,808
|
|
2020
|
20,274
|
|
2021
|
16,924
|
|
2022
|
14,391
|
|
2023
|
12,923
|
|
Thereafter
|
81,755
|
|
Total minimum lease payments
|
$
|
167,075
|
|
|
|
(1)
|
Our future minimum lease commitments related to operating leases do not include payments related to Phase Two of our New Headquarters Facility, as that option had not been exercised as of
December 31, 2018
.
|
Other commitments
As discussed in
Note 9
to these consolidated financial statements, 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
December 31, 2018
, the remaining aggregate minimum purchase commitment under these arrangements was approximately
$109.9 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.
Guarantees and indemnification obligations
We enter into agreements in the ordinary course of business with, among others, customers, creditors, vendors and service providers. Pursuant to certain of these agreements we have agreed to indemnify the other party for certain matters, such as property damage, personal injury, acts or omissions of ours, or our employees, agents or representatives, or third-party claims alleging that the activities of its contractual partner pursuant to the contract infringe a patent, trademark or copyright of such third party.
Legal proceedings
We are subject to legal proceedings and claims that arise in the ordinary course of business. We make a provision for a loss contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed in this note, we have determined as of
December 31, 2018
, that no provision for liability nor disclosure is required related to any claim against us because (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
consolidated financial position, results of operations or cash flows could be negatively affected in any particular period by an unfavorable resolution of one or more of such proceedings, claims or investigations.
We file income tax returns in the U.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, the United Kingdom, Australia, Ireland and Costa Rica. We are generally subject to U.S. federal income tax examination for calendar tax years
2015
through
2018
as well as state and foreign income tax examinations for various years depending on statutes of limitations of those jurisdictions. We are currently under U.S. federal income tax examination for the calendar year 2016.
In December 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time U.S. Federal transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. During the third quarter of 2018, the Company finalized its calculation of the transition tax as of December 31, 2017, and the impact to our effective income tax rate was insignificant.
The Tax Act eliminates the exceptions for performance-based compensation and CFO compensation from the calculation under Section 162(m) of the Internal Revenue Code. A transition rule allows for the grandfathering of performance-based compensation pursuant to a written binding contract in effect as of November 2, 2017. On August 21, 2018, the Internal Revenue Service issued Notice 2018-68 providing guidance regarding amendments to Section 162(m) contained in the Tax Act, including application of the transition rule. As a result of this guidance, the Company finalized its calculations of the Section 162(m) deduction and the ending estimated deferred tax assets for the performance-based stock compensation and the bonus accrual, which resulted in an insignificant impact due to tax reform on our effective income tax rate.
In accordance with the closing of the measurement period under SAB 118, we finalized our provisional estimates as noted above. As additional regulations or guidance in relation to the Tax Act continue to be issued, we will analyze and record the necessary impacts in the quarter in which guidance is received.
The following summarizes the components of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Current taxes:
|
|
|
|
U.S. Federal
|
$
|
(1,088
|
)
|
$
|
2,565
|
|
$
|
4,808
|
|
U.S. State and local
|
1,182
|
|
(144
|
)
|
1,670
|
|
International
|
306
|
|
101
|
|
53
|
|
Total current taxes
|
400
|
|
2,522
|
|
6,531
|
|
Deferred taxes:
|
|
|
|
U.S. Federal
|
659
|
|
(17,128
|
)
|
4,782
|
|
U.S. State and local
|
45
|
|
398
|
|
304
|
|
International
|
(1,323
|
)
|
(1,084
|
)
|
329
|
|
Total deferred taxes
|
(619
|
)
|
(17,814
|
)
|
5,415
|
|
Total income tax provision
|
$
|
(219
|
)
|
$
|
(15,292
|
)
|
$
|
11,946
|
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following summarizes the components of income before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
U.S.
|
$
|
47,532
|
|
$
|
58,547
|
|
$
|
55,381
|
|
International
|
(2,910
|
)
|
(206
|
)
|
1,969
|
|
Income before provision for income taxes
|
$
|
44,622
|
|
$
|
58,341
|
|
$
|
57,350
|
|
A reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate our income tax provision is as follows:
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Federal statutory rate
|
21.0
|
%
|
35.0
|
%
|
35.0
|
%
|
Effect of:
|
|
|
|
State income taxes, net of federal benefit
|
4.1
|
|
1.8
|
|
4.2
|
|
Change in federal income tax rate applied to deferred tax balances
|
—
|
|
(43.1
|
)
|
—
|
|
Change in state income tax rate applied to deferred tax balances
|
(0.4
|
)
|
—
|
|
0.2
|
|
Unrecognized tax benefit
|
(2.6
|
)
|
1.5
|
|
0.1
|
|
State credits, net of federal benefit
|
(1.9
|
)
|
(1.4
|
)
|
(0.1
|
)
|
Change in valuation reserve (primarily state credit reserves)
|
0.4
|
|
(1.0
|
)
|
(1.4
|
)
|
Federal credits generated
|
(10.4
|
)
|
(5.8
|
)
|
(5.5
|
)
|
Foreign tax rate
|
0.2
|
|
0.2
|
|
(0.4
|
)
|
Acquisition costs
|
—
|
|
2.2
|
|
0.1
|
|
Section 162(m) limitation
|
4.2
|
|
2.5
|
|
1.5
|
|
Domestic production activities deduction
|
—
|
|
—
|
|
(1.1
|
)
|
Stock-based compensation
|
(17.4
|
)
|
(18.9
|
)
|
(12.1
|
)
|
FDII benefit
|
(0.7
|
)
|
—
|
|
—
|
|
Nondeductible meals, entertainment, and transportation
|
2.6
|
|
0.8
|
|
0.9
|
|
Other
|
0.4
|
|
—
|
|
(0.6
|
)
|
Income tax provision effective rate
|
(0.5
|
)%
|
(26.2
|
)%
|
20.8
|
%
|
The increase in our effective income tax rate in 2018, when compared to 2017, was primarily due to the impact of U.S. tax reform legislation enacted in December 2017. Our effective income tax rate in 2017 included the benefit attributable to the revaluation of our U.S. deferred tax assets and liabilities as of December 31, 2017, resulting from the reduced U.S. corporate federal income tax rate effective for tax years beginning after that date.
The increase in our effective income tax rate was partially offset by the impact of the benefit to income tax expense relating to stock-based compensation items, calculated prior to the impact of the U.S. federal corporate tax rate change as a result of the Tax Act. This favorable impact was attributable to an increase in the market price for shares of our common stock, as reported by Nasdaq, as well as an increase in the number of stock awards that vested and were exercised. The benefit to income tax expense relating to stock-based compensation during 2018 was reduced as a result of a decrease in the U.S. corporate tax rate.
The increase in our effective income tax rate was also partially offset by the impact of the lower U.S. federal corporate tax rate on pre-tax income and the release of our tax reserve due to the expiration of the federal statute of limitations for 2014.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The significant components of our deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
Deferred tax assets relating to:
|
|
|
Federal and state and foreign net operating loss carryforwards
|
$
|
11,021
|
|
$
|
13,597
|
|
Federal, state and foreign tax credits
|
18,936
|
|
14,389
|
|
Intangible assets
|
1,041
|
|
693
|
|
Stock-based compensation
|
11,462
|
|
9,611
|
|
Accrued bonuses
|
973
|
|
1,001
|
|
Deferred revenue
|
854
|
|
505
|
|
Allowance for doubtful accounts
|
1,242
|
|
1,379
|
|
Other
|
5,607
|
|
4,770
|
|
Total deferred tax assets
|
51,136
|
|
45,945
|
|
Deferred tax liabilities relating to:
|
|
|
Intangible assets
|
(43,700
|
)
|
(47,997
|
)
|
Fixed assets
|
(4,444
|
)
|
(4,552
|
)
|
Costs of obtaining contracts
|
(19,573
|
)
|
(18,756
|
)
|
Capitalized software development costs
|
(19,469
|
)
|
(14,012
|
)
|
Other
|
(926
|
)
|
(995
|
)
|
Total deferred tax liabilities
|
(88,112
|
)
|
(86,312
|
)
|
Valuation allowance
|
(6,855
|
)
|
(7,205
|
)
|
Net deferred tax liability
|
$
|
(43,831
|
)
|
$
|
(47,572
|
)
|
As of
December 31, 2018
, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately
$24.3 million
,
$24.5 million
and
$25.1 million
, respectively. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. If not utilized, the federal net operating loss carryforwards will begin to expire in 2028 and the state net operating loss carryforwards will expire over various periods beginning in 2019. Our foreign net operating loss carryforwards have an unlimited carryforward period. As of
December 31, 2018
, our foreign tax credit carryforwards for income tax purposes were insignificant. Our federal tax credit carryforwards for income tax purposes were approximately
$6.5 million
. Our state tax credit carryforwards for income tax purposes were approximately
$14.1 million
, net of federal benefit. If not utilized, the federal tax credit carryforwards will begin to expire in 2036 and the state tax credit carryforwards will begin to expire in 2019. A portion of the foreign and state net operating loss carryforwards and state credit carryforwards have a valuation reserve due to management's uncertainty regarding the future ability to use such carryforwards.
The following table illustrates the change in our deferred tax asset valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Balance
at beginning
of year
|
|
Acquisition-
related
change
|
|
Charges to
expense
|
|
Balance at
end of
year
|
|
(dollars in thousands)
|
2018
|
$
|
7,205
|
|
$
|
16
|
|
$
|
(366
|
)
|
$
|
6,855
|
|
2017
|
6,994
|
|
—
|
|
211
|
|
7,205
|
|
2016
|
7,911
|
|
—
|
|
(917
|
)
|
6,994
|
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table sets forth the change to our unrecognized tax benefit for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Balance at December 31, 2017
|
$
|
5,160
|
|
$
|
3,145
|
|
$
|
3,024
|
|
Increases from prior period positions
|
104
|
|
1,860
|
|
23
|
|
Decreases in prior year positions
|
(413
|
)
|
(238
|
)
|
(17
|
)
|
Increases from current period positions
|
58
|
|
404
|
|
358
|
|
Lapse of statute of limitations
|
(1,205
|
)
|
(11
|
)
|
(243
|
)
|
Balance at December 31, 2018
|
$
|
3,704
|
|
$
|
5,160
|
|
$
|
3,145
|
|
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate was
$3.3 million
at
December 31, 2018
. Certain prior period amounts relating to our 2014 acquisitions are covered under indemnification agreements and, therefore, we have recorded a corresponding indemnification asset. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. The total amount of accrued interest and penalties included in the consolidated balance sheet as of
December 31, 2018
was
$0.7 million
. The total amount of accrued interest and penalties included in the consolidated balance sheet as of
December 31, 2017
was
$0.8 million
. The total amount of interest and penalties included in the consolidated statements of comprehensive income as an increase or decrease in income tax expense for
2018
,
2017
and
2016
was
insignificant
.
We have taken federal and state tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits might decrease within the next twelve months. This possible decrease could result from the expiration of statutes of limitations. The reasonably possible decrease at
December 31, 2018
was
$1.4 million
.
For our undistributed earnings of foreign subsidiaries, which we do not consider to be significant, we concluded that these earnings would be permanently reinvested in the local jurisdictions and not repatriated to the United States. Accordingly, we have not provided for U.S. state income taxes and foreign withholding taxes on those undistributed earnings of our foreign subsidiaries. If some or all of such earnings were to be remitted, the amount of taxes payable would be insignificant.
|
|
13. Stock-based Compensation
|
Employee stock-based compensation plans
Under the 2016 Equity and Incentive Compensation Plan (the "2016 Equity Plan"), we may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards and cash incentive awards to employees, directors and consultants. We maintain other stock-based compensation plans including the 2008 Equity Incentive Plan (the “2008 Equity Plan”), under which no additional grants may be made, and the 2009 Equity Compensation Plan for Employees from Acquired Companies, under which we may grant shares of common stock to employees pursuant to employment contracts or other arrangements entered into in connection with past and future acquisitions.
In connection with the acquisition of Convio in May 2012, we maintain the Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended (the “Convio 1999 Plan”) and Convio, Inc. 2009 Stock Incentive Plan, as amended (the “Convio 2009 Plan”), which we assumed upon the acquisition of Convio. Our Compensation Committee of the Board of Directors administers all of these plans and the stock-based awards are granted under terms determined by them.
The total number of authorized stock-based awards available under our plans was
4,347,224
as of
December 31, 2018
. We issue common stock from our pool of authorized stock upon exercise of stock options and stock appreciation rights, vesting of restricted stock units or upon granting of restricted stock.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Historically, we have issued four types of awards under these plans: restricted stock awards, restricted stock units, stock appreciation rights and stock options. The following table sets forth the number of awards outstanding for each award type as of:
|
|
|
|
|
|
|
Outstanding at December 31,
|
|
Award type
|
2018
|
|
2017
|
|
Restricted stock awards
|
1,263,510
|
|
1,257,574
|
|
Restricted stock units
|
459,673
|
|
493,248
|
|
Stock appreciation rights
|
60,871
|
|
212,506
|
|
Stock options
|
836
|
|
2,050
|
|
The majority of the stock-based awards granted under these plans have a
10
-year contractual term. Stock appreciation rights (“SARs”) have contractual lives of
7
years. Awards granted to our executive officers and certain members of management are subject to accelerated vesting upon a change in control as defined in the employees’ retention agreement.
Expense recognition
We recognize compensation expense associated with stock options and awards with performance or market based vesting conditions on an accelerated basis over the requisite service period of the individual grantees, which generally equals the vesting period. We recognize compensation expense associated with restricted stock awards and SARs on a straight-line basis over the requisite service period of the individual grantees, which generally equals the vesting period. We recognize the effect of awards for which the requisite service period is not rendered when the award is forfeited (that is, we recognize the effect of forfeitures in compensation cost when they occur). Previously recognized compensation cost for an award is reversed in the period that the award is forfeited.
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:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Included in cost of revenue:
|
|
|
|
Cost of recurring
|
$
|
2,464
|
|
$
|
1,627
|
|
$
|
1,676
|
|
Cost of one-time services and other
|
2,778
|
|
1,843
|
|
1,621
|
|
Total included in cost of revenue
|
5,242
|
|
3,470
|
|
3,297
|
|
Included in operating expenses:
|
|
|
|
Sales, marketing and customer success
|
9,285
|
|
6,381
|
|
3,844
|
|
Research and development
|
9,048
|
|
7,765
|
|
6,467
|
|
General and administrative
|
24,699
|
|
23,015
|
|
19,030
|
|
Total included in operating expenses
|
43,032
|
|
37,161
|
|
29,341
|
|
Total stock-based compensation expense
|
$
|
48,274
|
|
$
|
40,631
|
|
$
|
32,638
|
|
The total amount of compensation cost related to unvested awards not recognized was
$74.1 million
at
December 31, 2018
. It is expected that this amount will be recognized over a weighted average period of
1.7 years
.
Restricted stock awards
We have granted shares of common stock subject to certain restrictions under the 2016 Equity Plan and the 2008 Equity Plan. Restricted stock awards granted to employees vest in equal annual installments generally over
four
years from the grant date subject to the recipient’s continued employment with us. Restricted stock awards granted to non-employee
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
directors vest after one year from the date of grant or, if earlier, immediately prior to the next annual election of directors, provided the non-employee director is serving as a director at that time. The fair market value of the stock at the time of the grant is amortized on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards have the right to vote such shares and receive dividends.
The following table summarizes our unvested restricted stock awards as of
December 31, 2018
, and changes during the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
Restricted
stock awards
|
|
Weighted
average
grant-date
fair value
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
Aggregate
intrinsic value
(1)
(in thousands)
|
|
Unvested at January 1, 2018
|
1,257,574
|
|
$
|
61.00
|
|
|
|
|
Granted
|
541,786
|
|
94.51
|
|
|
|
|
Vested
|
(420,688
|
)
|
57.56
|
|
|
|
|
Forfeited
|
(115,162
|
)
|
72.93
|
|
|
|
|
Unvested at December 31, 2018
|
1,263,510
|
|
75.46
|
|
|
8.1
|
$
|
79,475
|
|
|
|
(1)
|
The intrinsic value is calculated as the market value as of the end of the fiscal period.
|
The total fair value of restricted stock awards that vested during the years ended
December 31, 2018
,
2017
and
2016
was
$24.2 million
,
$19.4 million
and
$14.5 million
, respectively. The weighted average grant-date fair value of restricted stock awards granted during the years ended
December 31, 2017
and
2016
was
$74.08
and
$53.59
, respectively.
Restricted stock units
We have also granted restricted stock units subject to certain restrictions under the 2016 Equity Plan and the 2008 Equity Plan. Restricted stock units granted to employees vest in equal annual installments generally over
three
years from the grant date subject to the recipient’s continued employment with us. We have also granted restricted stock units for which vesting is subject to meeting certain performance and/or market conditions. Restricted stock units granted with a market condition had a fair market value assigned at the grant date based on the use of a Monte Carlo simulation model. The fair market value of the stock at the time of the grant is amortized to expense on a straight-line basis over the period of vesting except for awards with market or performance conditions, which are amortized on an accelerated basis over the period of vesting.
The following table summarizes our unvested restricted stock units as of
December 31, 2018
, and changes during the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
Restricted
stock units
|
|
Weighted
average
grant-date
fair value
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
Aggregate
intrinsic value
(1)
(in thousands)
|
|
Unvested at January 1, 2018
|
493,248
|
|
$
|
61.05
|
|
|
|
|
Granted
|
231,491
|
|
95.59
|
|
|
|
|
Forfeited
|
(24,507
|
)
|
79.85
|
|
|
|
|
Vested
|
(240,559
|
)
|
56.77
|
|
|
|
|
Unvested at December 31, 2018
|
459,673
|
|
79.78
|
|
|
8.4
|
$
|
28,913
|
|
|
|
(1)
|
The intrinsic value is calculated as the market value as of the end of the fiscal period.
|
The total fair value of restricted stock units that vested during the years ended
December 31, 2018
,
2017
and
2016
was
$13.7 million
,
$9.4 million
, and
$6.7 million
, respectively. The weighted average grant date fair value of restricted stock units granted for the years ended
December 31, 2017
and
2016
was
$72.19
and
$51.98
, respectively.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Stock appreciation rights
We have granted SARs under the 2008 Equity Plan to certain members of management. The SARs will be settled in stock at the time of exercise and vest in equal annual installments generally over
four
years from the date of grant subject to the recipient’s continued employment with us. The number of shares issued upon the exercise of the SARs is calculated as the difference between the share price of our stock on the date of exercise and the date of grant multiplied by the number of SARs divided by the share price on the exercise date.
The following table summarizes our outstanding SARs as of
December 31, 2018
, and changes during the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
|
Stock
appreciation
rights
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
Aggregate
intrinsic value
(1)
(in thousands)
|
|
Outstanding at January 1, 2018
|
212,506
|
|
$
|
23.01
|
|
|
|
|
Exercised
|
(151,635
|
)
|
23.31
|
|
|
|
|
Outstanding at December 31, 2018
|
60,871
|
|
22.24
|
|
|
0.8
|
$
|
2,475
|
|
Vested and exercisable at December 31, 2018
|
60,871
|
|
22.24
|
|
|
0.8
|
2,475
|
|
|
|
(1)
|
The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares.
|
There have been no new SARs granted since 2013 and all outstanding SARs were fully vested as of December 31, 2017. The total intrinsic value of SARs exercised during the years ended
December 31, 2018
,
2017
and
2016
was
$12.4 million
,
$14.2 million
, and
$10.7 million
, respectively. The total fair value of SARs that vested during the year ended
December 31, 2017
was insignificant. The total fair value of SARs that vested during the year ended
December 31, 2016
was
$1.0 million
. SARs granted with a market condition had a fair market value assigned at the grant date based on the use of a Monte Carlo simulation model. All other SARs granted had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model.
Stock options
The following table summarizes our outstanding stock options as of
December 31, 2018
, and changes during the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
Stock
options
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
Aggregate
intrinsic value
(1)
(in thousands)
|
|
Outstanding at January 1, 2018
|
2,050
|
|
$
|
11.44
|
|
|
|
|
Exercised
|
(1,032
|
)
|
10.53
|
|
|
|
|
Expired
|
(182
|
)
|
10.59
|
|
|
|
|
Outstanding at December 31, 2018
|
836
|
|
12.75
|
|
|
0.7
|
$
|
42
|
|
Vested and exercisable at December 31, 2018
|
836
|
|
12.75
|
|
|
0.7
|
42
|
|
|
|
(1)
|
The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares.
|
There have been no new stock option awards granted since 2005 and all outstanding stock options were fully vested as of December 31, 2010. The total intrinsic value of stock options exercised during the years ended
December 31, 2018
,
2017
and
2016
was insignificant. All outstanding stock options granted had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Preferred stock
Our Board of Directors may fix the relative rights and preferences of each series of preferred stock in a resolution of the Board of Directors.
Dividends
Our Board of Directors has adopted a dividend policy, which provides for the distribution to stockholders 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.
The following table provides information with respect to quarterly dividends paid on common stock during the year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
Declaration Date
|
Dividend
per Share
|
|
Record Date
|
|
Payable Date
|
February 6, 2018
|
$
|
0.12
|
|
February 28
|
|
March 15
|
April 30, 2018
|
0.12
|
|
May 25
|
|
June 15
|
July 30, 2018
|
0.12
|
|
August 28
|
|
September 14
|
October 29, 2018
|
0.12
|
|
November 28
|
|
December 14
|
On
February 6, 2019
, our Board of Directors declared a
first
quarter
2019
dividend of
$0.12
per share payable on
March 15, 2019
to stockholders of record on
February 27, 2019
.
Stock repurchase program
In
August 2010
, our Board of Directors approved a stock repurchase program that authorized us to purchase up to
$50.0 million
of our outstanding shares of common stock. The program does not have an expiration date. The shares can be purchased from time to time on the open market or in privately negotiated transactions depending upon market conditions and other factors. Under the
2017 Credit Facility
, we also have restrictions on our ability to repurchase shares of our common stock.
We account for purchases of treasury stock under the cost method. The remaining amount available to purchase stock under the stock repurchase program was
$50.0 million
as of
December 31, 2018
.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Changes in accumulated other comprehensive loss by component
The changes in accumulated other comprehensive loss by component, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Accumulated other comprehensive loss, beginning of period
|
$
|
(642
|
)
|
$
|
(604
|
)
|
$
|
(825
|
)
|
By component:
|
|
|
|
Gains and losses on cash flow hedges:
|
|
|
|
Accumulated other comprehensive income (loss) balance, beginning of period
|
$
|
748
|
|
$
|
(3
|
)
|
$
|
(19
|
)
|
Other comprehensive income (loss) before reclassifications, net of tax effects of $(239), $(374) and $406
|
670
|
|
574
|
|
(626
|
)
|
Amounts reclassified from accumulated other comprehensive loss to interest expense
|
(118
|
)
|
293
|
|
1,106
|
|
Tax benefit included in provision for income taxes
|
31
|
|
(116
|
)
|
(436
|
)
|
Total amounts reclassified from accumulated other comprehensive loss
|
(87
|
)
|
177
|
|
670
|
|
Net current-period other comprehensive income
|
583
|
|
751
|
|
44
|
|
Cumulative effect of adoption of ASU 2014-09
|
—
|
|
—
|
|
(28
|
)
|
Reclassification upon early adoption of ASU 2018-02
|
167
|
|
—
|
|
—
|
|
Accumulated other comprehensive income (loss) balance, end of period
|
$
|
1,498
|
|
$
|
748
|
|
$
|
(3
|
)
|
Foreign currency translation adjustment:
|
|
|
|
Accumulated other comprehensive loss balance, beginning of period
|
$
|
(1,390
|
)
|
$
|
(601
|
)
|
$
|
(806
|
)
|
Translation adjustments
|
(5,218
|
)
|
(789
|
)
|
205
|
|
Accumulated other comprehensive loss balance, end of period
|
(6,608
|
)
|
(1,390
|
)
|
(601
|
)
|
Accumulated other comprehensive loss, end of period
|
$
|
(5,110
|
)
|
$
|
(642
|
)
|
$
|
(604
|
)
|
|
|
15. Defined Contribution Plan
|
We have a defined contribution 401(k) plan (the "401K Plan") covering substantially all employees. Employees were able to contribute between
1%
and
75%
of their salaries in
2018
,
2017
and
2016
. We match
50%
of qualified employees’ contributions up to
6%
of their salary. The 401K Plan also provides for additional employer contributions to be made at our discretion. Total matching contributions to the 401K Plan for the years ended
December 31, 2018
,
2017
and
2016
were
$8.1 million
,
$7.1 million
and
$7.6 million
, respectively. There were no discretionary contributions by us to the 401K Plan in
2018
,
2017
and
2016
.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Our chief operating decision maker is our chief executive officer ("CEO"). Our chief operating decision maker uses consolidated financial information to make operating decisions, assess financial performance and allocate resources. We have one operating segment and one reportable segment.
The following table presents long-lived assets by geographic region based on the location of the assets.
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
United States
|
$
|
37,015
|
|
$
|
39,071
|
|
Other countries
|
3,016
|
|
3,172
|
|
Total property and equipment
|
$
|
40,031
|
|
$
|
42,243
|
|
See
Note 17
to these consolidated financial statements for information about our revenues by geographic region.
The prior period financial information presented below has been adjusted to reflect our adoption of ASU 2014-09.
Transaction price allocated to the remaining performance obligations
As of
December 31, 2018
, approximately
$738 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).
We also applied the practical expedient in ASC 606-10-65-1-(f)(3), whereby the transaction price allocated to the remaining performance obligations, or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application, is not disclosed.
Contract balances
Our opening and closing balances of contract assets and deferred revenue were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
December 31,
2018
|
|
December 31,
2017
|
|
Contract assets
(1)
|
$
|
308
|
|
$
|
—
|
|
Total deferred revenue
|
298,555
|
|
278,706
|
|
|
|
(1)
|
Amounts previously presented as contract assets are now presented as unbilled accounts receivable as they meet the definition of a receivable. See
Note 8
to these consolidated financial statements for additional details.
|
Contract assets increased during the
year ended
December 31, 2018
primarily as a result of incremental revenue recognized in excess of amounts billed. The increase in deferred revenue during the
year ended
December 31, 2018
was primarily due to new subscription sales of our cloud-based solutions, and to a much lesser extent, the inclusion of Reeher. We also sold more subscription-based contracts for professional services and services embedded in our renewable cloud-based solution contracts.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The amount of revenue recognized during the
year ended
December 31, 2018
that was included in the deferred revenue balance at the beginning of the period was approximately
$270 million
. The amount of revenue recognized during the
year ended
December 31, 2018
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:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
United States
|
$
|
727,366
|
|
$
|
706,904
|
|
$
|
661,143
|
|
Other countries
|
121,240
|
|
81,583
|
|
70,499
|
|
Total revenue
|
$
|
848,606
|
|
$
|
788,487
|
|
$
|
731,642
|
|
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 as of
December 31, 2018
:
|
|
•
|
The GMG focuses on sales to all K-12 private schools, faith communities and arts and cultural organizations, as well as emerging and mid-sized prospects in North America;
|
|
|
•
|
The EMG focuses on sales to all healthcare and higher education institutions, corporations and foundations, as well as large and/or strategic prospects in North America; and
|
|
|
•
|
The IMG focuses on sales to all prospects and customers outside of North America.
|
Beginning in the first quarter of 2019, all of our Canadian operations will be included in the IMG.
The following table presents our revenue by market group:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
(dollars in thousands)
|
2018
|
|
2017
|
|
2016
|
|
GMG
|
$
|
387,630
|
|
$
|
373,108
|
|
$
|
340,644
|
|
EMG
|
375,861
|
|
367,203
|
|
346,781
|
|
IMG
|
81,160
|
|
45,682
|
|
42,291
|
|
Other
|
3,955
|
|
2,494
|
|
1,926
|
|
Total revenue
|
$
|
848,606
|
|
$
|
788,487
|
|
$
|
731,642
|
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
|
|
18. Quarterly Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data)
|
December 31,
2018
|
|
September 30,
2018
|
|
June 30,
2018
|
|
March 31,
2018
|
|
Total revenue
|
$
|
221,218
|
|
$
|
209,532
|
|
$
|
213,672
|
|
$
|
204,184
|
|
Gross profit
|
117,922
|
|
114,295
|
|
118,500
|
|
116,147
|
|
Income from operations
|
14,679
|
|
15,783
|
|
11,374
|
|
17,581
|
|
Income before provision for income taxes
|
11,485
|
|
11,496
|
|
7,417
|
|
14,224
|
|
Net income
|
9,334
|
|
11,164
|
|
6,592
|
|
17,751
|
|
Earnings per share
|
|
|
|
|
Basic
|
$
|
0.20
|
|
$
|
0.24
|
|
$
|
0.14
|
|
$
|
0.38
|
|
Diluted
|
0.19
|
|
0.23
|
|
0.14
|
|
0.37
|
|
|
|
|
|
|
(dollars in thousands, except per share data)
|
December 31,
2017
|
|
September 30,
2017
|
|
June 30,
2017
|
|
March 31,
2017
|
|
Total revenue
|
$
|
217,402
|
|
$
|
194,424
|
|
$
|
191,589
|
|
$
|
185,072
|
|
Gross profit
|
114,980
|
|
107,419
|
|
104,594
|
|
99,590
|
|
Income from operations
|
19,959
|
|
18,423
|
|
16,523
|
|
13,273
|
|
Income before provision for income taxes
|
17,226
|
|
15,799
|
|
14,134
|
|
11,182
|
|
Net income
|
36,638
|
|
12,824
|
|
11,029
|
|
13,142
|
|
Earnings per share
|
|
|
|
|
Basic
|
$
|
0.78
|
|
$
|
0.27
|
|
$
|
0.24
|
|
$
|
0.28
|
|
Diluted
|
0.76
|
|
0.27
|
|
0.23
|
|
0.28
|
|
Note: The individual amounts for each quarter may not sum to full year totals due to rounding.
The results of operations of acquired companies are included in the consolidated results of operations from the date of their respective acquisition. See
Note 3
of these consolidated financial statements for details related to our business acquisitions.
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 to date and expected to be incurred consist primarily of costs to terminate existing lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as costs to relocate affected employees and write-off leasehold improvement 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
$5.4 million
have been incurred through 2018. We expect that a significant portion of the remaining costs expected will be incurred in
2019
. Our updated estimates reflect the more aggressive actions taken to relocate and consolidate some of our offices than we had originally anticipated. We also expect to incur employee severance costs related to the plan; however, these costs cannot be reasonably estimated at this time.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table summarizes our facilities optimization restructuring costs as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
Costs incurred during the year ended
|
|
|
Cumulative costs incurred as of
|
|
(in thousands)
|
December 31, 2018
|
|
By component:
|
|
|
|
Contract termination costs
|
$
|
3,581
|
|
|
$
|
4,176
|
|
Other costs
|
1,009
|
|
|
1,208
|
|
Total
|
$
|
4,590
|
|
|
$
|
5,384
|
|
The change in our liability related to our facilities optimization restructuring during the
twelve months ended
December 31, 2018
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued at
|
|
|
Increases for incurred costs
|
|
|
Costs paid
|
|
|
Accrued at
|
|
(in thousands)
|
December 31, 2017
|
|
|
|
|
December 31, 2018
|
|
By component:
|
|
|
|
|
|
|
|
Contract termination costs
|
$
|
691
|
|
|
$
|
3,581
|
|
|
$
|
(2,407
|
)
|
|
$
|
1,865
|
|
Other costs
|
—
|
|
|
1,009
|
|
|
(959
|
)
|
|
50
|
|
Total
|
$
|
691
|
|
|
$
|
4,590
|
|
|
$
|
(3,366
|
)
|
|
$
|
1,915
|
|
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
$157.0 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 a result of the acquisition, YourCause has become a wholly-owned subsidiary of ours. We will include the operating results of YourCause, as well as the assets acquired, liabilities assumed and any goodwill arising from the acquisition, in our consolidated financial statements from the date of the acquisition. During the three months ended December 31, 2018, we incurred insignificant acquisition-related expenses associated with the acquisition, which were recorded in general and administrative expense. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the
January 2, 2019
acquisition date.