PROGRESS SOFTWARE CORP /MA Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of
Progress Software Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended November 30, 2021compared to the year ended November 30, 2020. For a discussion of the year ended November 30, 2020compared to the year ended November 30, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended November 30, 2020, as amended. Forward-Looking Statements Certain statements below about anticipated results and our products and markets are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Part I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K.
Use of constant currency
Revenue from our international operations has historically represented a substantial portion of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated in
U.S.dollars are positively impacted. As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Impact of COVID-19 In March 2020, the World Health Organizationdeclared the outbreak of COVID-19 as a pandemic, which continues to impact the U.S.and the world. We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part I, Item 1A "Risk Factors" in this Form 10-K. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.
Progress Software Corporation("Progress," the "Company," "we," "us," or "our") provides the best products to develop, deploy and manage high-impact applications. Our comprehensive product solutions are designed to make technology teams more productive and we have a deep commitment to the developer community, both open source and commercial alike. Beginning in the second quarter of fiscal year 2021, we operate as one operating segment.
The key principles of our strategic plan and operating model are:
Trusted Provider of the Best Products to Develop, Deploy and Manage High Impact Applications. A key element of our strategy is centered on providing the platform and tools enterprises need to build, deploy, and manage modern, strategic business applications. We offer these products and tools to both new customers and partners as well as our existing partner and customer ecosystems. This strategy builds on our vast experience in application development that we've acquired over the past 40 years.
Focus on retaining customers and partners to drive recurring revenue and profitability. Our organizational philosophy and operating principles focus primarily on customer and partner retention and success and a streamlined operational approach to more effectively generate predictable and stable recurring revenue and high levels of profitability.
Total Growth Strategy Driven by Accretive M&A. We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the software infrastructure space, with products that appeal to both IT organizations and individual developers. These acquisitions must meet strict financial and other criteria, with the goal of driving significant stockholder returns by providing scale and increased cash flows. In
April 2019, we acquired Ipswitch, Inc.and in October 2020, we acquired Chef Software. These 22 -------------------------------------------------------------------------------- acquisitions met our strict financial criteria. As described below, in November 2021, we acquired Kemp Technologies. This acquisition is expected to meet our strict financial criteria. Kemp is the always-on application experience company that helps enterprises deliver, optimize and secure applications and networks across any cloud or hybrid environment. The purchase price for Kemp was $258 millionand we funded the purchase price with existing cash balances. With this acquisition, we extended our portfolio of market-leading products in DevOps, Application Development, Data Connectivity and Digital Experience, adding Application Experience Management (AX). Kemp Loadmaster and Flowmon Network Visibility products monitor application performance, and distribute and balance traffic and workloads across servers, in the cloud or on premise, ensuring high performance and availability. Multi-Faceted Capital Allocation Strategy. Our capital allocation policy emphasizes accretive M&A, which allows us to expand our business and drive significant stockholder returns, and utilizes dividends and share repurchases to return capital to stockholders. We intend to repurchase our shares in sufficient quantities to offset dilution from our equity plans. Lastly, we return a significant portion of our annual cash flows from operations to stockholders in the form of dividends. In fiscal year 2021, we repurchased and retired 0.8 million shares of our common stock for $35.0 million. As of November 30, 2021, there was $155.0 millionremaining under share repurchase authorization. The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand or discontinue the repurchase program at any time. We began paying quarterly cash dividends of $0.125per share of common stock to Progress stockholders in December 2016and increased the quarterly cash dividend annually in fiscal years 2017, 2018 and 2019. On September 22, 2020, our Board of Directors approved an additional increase of 6% to our quarterly cash dividend from $0.165to $0.175and declared a quarterly dividend of $0.175per share of common stock. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors. We will continue to pursue acquisitions meeting our financial criteria and designed to expand our business and drive significant stockholder returns. As a result, our expected uses of cash could change, our cash position could be reduced, and we may incur additional debt obligations to the extent we complete additional acquisitions. However, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash dividends and stock repurchases to Progress stockholders, as applicable, through at least the next twelve months. We also believe that our financial resources have allowed, and will continue to allow us to manage the impact of COVID-19 on our business operations for the foreseeable future. The challenges posed by COVID-19 on our business continue to evolve. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S.dollar have significantly impacted our results of operations and may impact our future results of operations. Since approximately one-third of our revenue is denominated in foreign currency, and given the volatility in the global economy created by COVID-19, our revenue results in fiscal year 2021 were impacted by fluctuations in foreign currency exchange rates.
Fiscal 2021 vs. Fiscal 2020
Revenue Fiscal Year Ended Percentage Change Constant (In thousands) November 30, 2021 November 30, 2020 As Reported Currency Revenue $ 531,313 $ 442,150 20 % 19 % The increase in revenue in fiscal year 2021 was driven by the acquisition of Chef which closed during the fourth quarter of fiscal year 2020, increased demand for our OpenEdge and Ipswitch product offerings and to a lesser extent, the acquisition of Kemp which contributed
$5.9 millionof revenue during the fourth quarter of fiscal year 2021. Changes in prices from fiscal year 2020 to 2021 did not have a significant impact on our revenue. 23 -------------------------------------------------------------------------------- Software License Revenue Fiscal Year Ended Percentage Change November 30, November 30, Constant (In thousands) 2021 2020 As Reported Currency License $ 156,590 $ 115,24936 % 34 % As a percentage of total revenue 29 %
Software licensing revenue increased in fiscal 2021, primarily due to the acquisitions of Chef and Kemp, as well as increased demand for our OpenEdge,
Maintenance and Services revenue
Fiscal Year Ended Percentage Change November 30, November 30, Constant (In thousands) 2021 2020 As Reported Currency Maintenance
$ 325,863 $ 288,88713 % 11 % As a percentage of total revenue 61 % 65 % Professional services $ 48,860 $ 38,01429 % 27 % As a percentage of total revenue 10 % 9 % Total maintenance and services revenue $ 374,723 $ 326,90115 % 13 % As a percentage of total revenue 71 %
Maintenance revenue increased in fiscal year 2021 primarily due to the acquisitions of Chef and Kemp, as well as an increase in maintenance revenue from our Ipswitch and OpenEdge product offerings. Professional services revenue increased primarily due to the acquisition of Chef, as well as an increase in professional services revenue from our OpenEdge product offerings. Revenue by Region Fiscal Year Ended Percentage Change November 30, November 30, Constant (In thousands) 2021 2020 As Reported Currency North America
$ 317,814 $ 260,99822 % 22 % As a percentage of total revenue 60 % 59 % EMEA $ 169,335 $ 143,75418 % 14 % As a percentage of total revenue 32 % 33 % Latin America $ 17,036 $ 14,57417 % 20 % As a percentage of total revenue 3 % 3 % Asia Pacific $ 27,128 $ 22,82419 % 16 % As a percentage of total revenue 5 %
Total revenue generated in
North Americaincreased $56.8 million, and total revenue generated outside North Americaincreased $32.3 million, in fiscal year 2021. The increases in North Americaand EMEA were primarily due to the acquisitions of Chef and Kemp and increases in license and maintenance revenues from our OpenEdge and Ipswitch product offerings. Revenue from Latin Americaincreased due to an increase in OpenEdge license sales. Revenue from Asia Pacificincreased slightly, which was primarily due to the acquisition of Chef. Total revenue generated in markets outside North Americarepresented 40% of total revenue in fiscal year 2021 compared to 41% of total revenue in the same period last year. If exchange rates had remained constant in fiscal year 2021 as compared to the exchange rates in effect in fiscal year 2020, total revenue generated in markets outside North Americawould have been 39% of total revenue. 24 --------------------------------------------------------------------------------
Cost of Software Licenses Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 Change Cost of software licenses $ 5,271 $ 4,473
$ 79818 % As a percentage of software license revenue 3 % 4 % As a percentage of total revenue 1 %
Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication, and packaging. The increase in cost of software licenses was the result of higher payments of royalties to third parties as compared to the prior fiscal year. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.
Cost of maintenance and services
Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 Change Cost of maintenance and services $ 58,242 $ 49,744
$ 8,49817 % As a percentage of maintenance and services revenue 16 % 15 % As a percentage of total revenue 11 % 11 % Components of cost of maintenance and services: Personnel Related Costs $ 40,015 $ 35,156 $ 4,85914 % Contractors and Outside Services 13,087 11,317 1,770 16 % Hosting and Other 5,140 3,271 1,869 57 %
Total cost of maintenance and services $58,242
$ 8,49817 % Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. Cost of maintenance and services increased primarily due to higher personnel, contractor, and hosting related costs resulting from the acquisitions of Chef and Kemp.
Amortization of acquired intangible assets
Fiscal Year Ended (In thousands) November 30, 2021 November 30,
2020 % change Amortization of acquired intangible assets $14,936 $7,897
89 % As a percentage of total revenue 3 %
Amortization of acquired intangible assets included in cost of sales primarily represents the amortization of the value assigned to technology-related intangible assets obtained through business combinations. The year-over-year increase is attributable to the addition of intangible assets acquired by Chef and Kemp.
Gross Profit Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Gross profit
$ 452,864 $ 380,03619 % As a percentage of total revenue 85 % 86 %
Our gross profit increased primarily due to increased revenue, offset by increased maintenance and service costs and amortization of intangible assets, each as described above.
Sales and Marketing Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 Change Sales and marketing
$ 125,890 $ 100,113 $ 25,77726 % As a percentage of total revenue 24 % 23 % Components of sales and marketing: Personnel related costs $ 107,335$ 85,167 $ 22,16826 % Contractors and outside services 3,079 2,122 957 45 % Marketing programs and other 15,476 12,824 2,652 21 % Total sales and marketing $ 125,890 $ 100,113 $ 25,77726 %
Sales and marketing expenses increased in fiscal 2021 primarily due to increased personnel costs resulting from the Chef and Kemp acquisitions, increased variable compensation due to performance company-wide and increased marketing programs.
Product Development Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 Change Product development
$ 103,338$ 88,599 $ 14,73917 % As a percentage of total revenue 19 % 20 % Components of product development costs: Personnel related costs $ 98,747 $ 85,624 $ 13,12315 % Contractors and outside services 3,504 2,351 1,153 49 % Other product development costs 1,087 624 463 74 % Total product developments costs $ 103,338$ 88,599 $ 14,73917 %
Product development expenses increased in fiscal 2021 due to increased personnel, contractor and external services costs resulting from the Chef and Kemp acquisitions.
General and Administrative Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 Change General and administrative $ 65,128 $ 54,004
$ 11,12421 % As a percentage of total revenue 12 % 12 % Components of general and administrative: Personnel Related Costs $ 51,601 $ 43,025 $ 8,57620 % Contractors and Outside Services 9,299 8,338 961 12 % Other general and administrative costs 4,228 2,641 1,587 60 %
Total cost of general and administrative expenses $65,128 $54,004
21 % General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased in fiscal year 2021 primarily due to higher personnel related costs associated with our acquisitions of Chef and Kemp, as well as increases in contractors and outside services and other general and administrative costs. Amortization of Intangibles Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Amortization of intangibles $ 31,996 $ 20,049 60 % As a percentage of total revenue 6 % 5 % 26
-------------------------------------------------------------------------------- Amortization of intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology. Amortization of acquired intangibles increased in fiscal year 2021 due to the additions of Chef and Kemp acquired intangibles. Restructuring Expenses Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Restructuring expenses $ 6,308 $ 5,906 7 % As a percentage of total revenue 1 % 1 % Restructuring expenses recorded in fiscal year 2021 primarily relate to the restructuring activities that occurred in fiscal years 2021 and 2020. See Note 16: Restructuring to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional details, including types of expenses incurred and the timing of future expenses and cash payments.
Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Acquisition-related expenses $ 4,102 $ 3,637 13 % As a percentage of total revenue 1 % 1 % Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination. These costs primarily consist of professional services fees, including third-party legal and valuation-related fees, as well as retention fees. Acquisition-related expenses in fiscal year 2021 were primarily related to the acquisition of Kemp, as well as our pursuit of other acquisition opportunities. Acquisition-related expenses in fiscal year 2020 were primarily related to the acquisitions of Chef and Ipswitch. Income from Operations Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Income from operations
$ 116,102 $ 107,7288 % As a percentage of total revenue 22 % 24 % Income from operations increased year over year due to an increase in revenue, offset by increases in costs of revenue and operating expenses as shown above. Other (Expense) Income Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Interest expense $ (20,045) $ (10,170)(97) % Interest income and other, net 777 1,495 (48) % Foreign currency loss, net (1,300) (2,418) 46 % Total other expense, net $ (20,568) $ (11,093)(85) % As a percentage of total revenue (4) % (3) % Total other expense, net, increased in fiscal year 2021 as a result of increased interest expense over the period, offset by lower foreign currency loss due to lower costs of forward points on our outstanding forward contracts. The increase in interest expense is due to our convertible senior notes, which we issued in April 2021. See the Liquidity and Capital Resources section of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations for a description of the convertible senior notes. 27 --------------------------------------------------------------------------------
Provision for Income Taxes Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Provision for income taxes $ 17,114 $ 16,913 1 % As a percentage of total revenue 3 % 4 % Our effective income tax rate was 18% for both fiscal years 2021 and 2020. Our jurisdictional mix of profits remained consistent which resulted in a relatively flat tax provision and effective tax rate year-over-year. Net Income Fiscal Year Ended (In thousands) November 30, 2021 November 30, 2020 % Change Net income $ 78,420 $ 79,722 (2) % As a percentage of total revenue 15 % 18 % Select Performance Metrics:
Management assesses our financial performance using a number of financial and operational measures. These measures are periodically reviewed and revised to reflect changes in our business.
Recurring Annual Income (ARR)
We are providing an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years. ARR represents the annualized contract value for all active and contractually binding term-based contracts at the end of a period. ARR includes maintenance, software upgrade rights, public cloud and on-premises subscription-based transactions and managed services. ARR mitigates fluctuations due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS. ARR is not calculated in accordance with GAAP. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those items. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. We define ARR as the annual recurring revenue of term-based contracts from all customers at a point in time. We calculate ARR by taking monthly recurring revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage and monthly subscriptions. The calculation is done at constant currency using the current year budgeted exchange rates for all periods presented. Our ARR was
$486.0 millionand $434.0 millionas of November 30, 2021and 2020, respectively, which is an increase of 12% year-over-year. The growth in our ARR is primarily driven by the acquisition of Kemp.
Net retention rate in dollars
We calculate net dollar retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end ("Prior Period ARR"). We then calculate the ARR from these same customers as of the current period end ("Current Period ARR"). Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the net dollar retention rate. Net dollar retention rate is not calculated in accordance with GAAP.
Our net dollar retention rates have generally fluctuated between 98% and 101% for all periods presented. Our high retention rates in net dollars illustrate our predictable and sustainable revenue performance.
Cash and capital resources
Cash, Cash Equivalents and Short-Term Investments (In thousands) November 30, 2021 November 30, 2020 Cash and cash equivalents $ 155,406 $ 97,990 Short-term investments 1,967 8,005
Total cash, cash equivalents and short-term investments $157,373 $105,995
The increase in cash, cash equivalents and short-term investments of
$51.4 millionfrom the end of fiscal year 2020 was primarily due to cash inflow from the issuance of the convertible senior notes of $349.2 million, cash inflows from operations of $178.5 million, $9.8 millionin cash received from the issuance of common stock, and a decrease in escrow receivable of $2.1 million. These cash inflows were offset by payments for acquisitions, net of cash acquired, of $254.0 million, payments of debt obligations in the amount of $117.3 million, cash paid for the purchase of capped calls of $43.1 millionin connection with the convertible note offering, dividend payments of $31.6 million, repurchases of common stock of $35.0 million, purchases of property and equipment of $4.7 million, and the effect of exchange rates on cash of $2.9 million. Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments. Cash, cash equivalents and short-term investments held by our foreign subsidiaries were $36.8 millionand $24.7 millionat November 30, 2021and 2020, respectively. Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of the U.S.As such, they are not available to fund our domestic operations. If we were to repatriate these earnings, we may be subject to income tax withholding in certain tax jurisdictions and a portion of the repatriated earnings may be subject to U.S.income tax. However, we do not anticipate that the repatriation of earnings would have a material adverse impact on our liquidity.
January 2020, our Board of Directors increased the total share repurchase authorization from $75.0 millionto $250.0 million. In fiscal years 2021 and 2020, we repurchased and retired 0.8 million shares of our common stock for $35.0 millionand 1.4 million shares of our common stock for $60.0 million, respectively, under this current authorization. In fiscal year 2019, we repurchased and retired 0.7 million shares of our common stock for $25.0 million. As of November 30, 2021, there was $155.0 millionremaining under the current share repurchase authorization.
We began paying quarterly cash dividends of
$0.125per share of common stock to Progress stockholders in December 2016and have paid quarterly dividends since that time. On September 21, 2021, our Board of Directors declared a quarterly dividend of $0.175per share of common stock that was paid on December 15, 2021to stockholders of record as of the close of business on December 1, 2021. We have paid aggregate cash dividends totaling $31.6 million, $29.9 millionand $27.8 millionfor the years ended November 30, 2021, November 30, 2020and November 30, 2019, respectively. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.
During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef. For the fiscal years ended
November 30, 2021and 2020, we incurred expenses of $4.1 millionand $3.9 million, respectively, relating to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations. We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2022, but we do not expect these costs to be material. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2022. Accordingly, the balance of the restructuring reserve of $4.5 millionis included in other accrued liabilities on the consolidated balance sheet at November 30, 2021. During the fourth quarter of fiscal year 2021, we restructured our operations in connection with the acquisition of Kemp. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Kemp. For the fiscal year ended November 30, 2021, we incurred expenses of $2.0 millionrelating to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations. We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2022, but we do not expect these costs to be material. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2022. Accordingly, the balance of the restructuring reserve of $1.9 millionis included in other accrued liabilities on the consolidated balance sheet at November 30, 2021. 29 --------------------------------------------------------------------------------
January 25, 2022, we entered into an amended credit agreement providing for a $275.0 millionsecured term loan and a $300.0 millionsecured revolving credit facility. The revolving credit facility may be increased, and new term loan commitments may be entered into, by up to an additional amount up to the sum of (A) the greater of (x) $260.0 millionand (y) 100% of our consolidated EBITDA and (B) an unlimited additional amount subject to pro forma compliance with a consolidated senior secured net leverage ratio of no greater than 3.75 to 1.00 if the existing or additional lenders are willing to make such increased commitments. This new credit facility replaces our existing secured credit facility dated April 30, 2019.
The term loan amount outstanding under our existing secured credit facility has been incorporated into the amended and restated credit facility.
The revolving credit facility has sublimits for swing line loans up to
$25.0 millionand for the issuance of standby letters of credit in a face amount up to $25.0 million. We expect to use the revolving credit facility for general corporate purposes, which may include the acquisitions of other businesses, and may also use it for working capital. Interest rates for the term loan and revolving credit facility are determined by reference to a term benchmark rate or a base rate at our option and would range from 1.00% to 2.00% above the term benchmark rate or would range from 0.00% to 1.00% above the defined base rate for base rate borrowings, in each case based upon our leverage ratio. Additionally, we may borrow certain foreign currencies at rates set in the same range above the respective term benchmark rates for those currencies, based on our leverage ratio. We will incur a quarterly commitment fee on the undrawn portion of the revolving credit facility, ranging from 0.125% to 0.275% per annum, based upon our leverage ratio. At closing of the revolving credit facility, the applicable interest rate and commitment fee are at the third lowest rate in each range. The credit facility matures on the earlier of (i) January 25, 2027and (ii) the date that is 181 days prior to the maturity date of our Convertible Senior Notes subject to certain conditions as set forth in the amended credit agreement, including the repayment of the Convertible Senior Notes, the refinancing of the Convertible Senior Notes including a maturity date that is at least 181 days after January 25, 2027and compliance with a liquidity test when all amounts outstanding will be due and payable in full. The revolving credit facility does not require amortization of principal. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ending February 28, 2022. The first eight payments are in the principal amount of $1,718,750each, the following four payments are in the principal amount of $3,437,500each, the following eight payments are in the principal amount of $5,156,250each and the last payment is of the remaining principal amount. Any amounts outstanding under the term loan thereafter would be due on the maturity date. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. We are the sole borrower under the credit facility. Our obligations under the amended credit agreement are guaranteed by each of our material domestic subsidiaries and are secured by substantially all of our assets and such material domestic subsidiaries, as well as 100% of the capital stock of our domestic subsidiaries and 65% of the capital stock of our first-tier foreign subsidiaries, in each case, subject to certain exceptions as described in the amended credit agreement. Future material domestic subsidiaries will be required to guaranty our obligations under the amended credit agreement, and to grant security interests in substantially all of their assets to secure such obligations. The amended credit agreement generally prohibits, with certain exceptions, any other liens on our assets and the assets of our subsidiaries, subject to certain exceptions as described in the amended credit agreement. The amended credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries' ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of its business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a consolidated interest charge coverage ratio and a consolidated total net leverage ratio. The amended credit agreement includes customary events of default that include, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the amended credit agreement. 30 --------------------------------------------------------------------------------
Senior Convertible Bonds
April 2021, we issued, in a private placement, Convertible Senior Notes with an aggregate principal amount of $325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted. There are no required principal payments prior to the maturity of the Notes. In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 millionaggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including, April 13, 2021, of which $35 millionof additional Notes were purchased for total proceeds of $360 million. The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears on April 15and October 15of each year, beginning on October 15, 2021. See Note 9: Debt for further discussion.
Cash flow from operating activities
Fiscal Year Ended November 30, November 30, November 30, (In thousands) 2021 2020 2019 Net income
$ 78,420 $ 79,722 $ 26,400Non-cash reconciling items included in net income 100,666 64,534 90,139 Changes in operating assets and liabilities (556) 591 11,945 Net cash flows from operating activities $ 178,530
The increase in cash generated from operations in fiscal year 2021 as compared to fiscal year 2020 was primarily due to increased collections resulting from the acquisitions of Chef and Kemp, as well as particularly strong collections generated from the rest of the business, partially offset by increased personnel related expenditures. The increase in non-cash reconciling items included in net income primarily relates to the increase in amortization of intangibles due to the recent acquisitions of Chef and Kemp. Our gross accounts receivable as of
November 30, 2021increased by $15.1 millionfrom the end of fiscal year 2020, which is primarily due to the acquisition of Kemp and the timing of billings. Days sales outstanding ("DSO") in accounts receivable increased to 60 days at the end of fiscal year 2021 compared to 54 days at the end of fiscal year 2020, with the increase also due to the timing of billings. In addition, our total deferred revenue as of November 30, 2021increased by $59.1 millionfrom the end of fiscal year 2020. The significant changes in operating assets and liabilities in fiscal year 2020 as compared to fiscal year 2019 were primarily due to a decrease in accounts receivable and unbilled receivables. There weren't any significant non-cash reconciling items included in net income in fiscal year 2020. In fiscal year 2019 there was a $22.7 millionintangible asset impairment charge, which was the most significant non-cash reconciling item included in net income. See Note 4: Fair Value Measurements for further discussion. In addition, our gross accounts receivable as of November 30, 2020increased by $11.7 millionfrom the end of fiscal year 2019, which was primarily due to the acquisition of Chef. DSO in accounts receivable decreased to 54 days at the end of fiscal year 2020 compared to 56 days at the end of fiscal year 2019.
Cash flow (used) from investing activities
Fiscal Year Ended November 30, November 30, November 30, (In thousands) 2021 2020 2019 Net investment activity
$ 5,950 $ 11,392 $ 14,770Purchases of property and equipment (4,654) (6,517) (3,998) Proceeds from sale of long-lived assets, net - 889 6,146 Decrease in escrow receivable and other 2,330 - - Payments for acquisitions, net of cash acquired (253,961) (213,057) (225,298) Net cash flows (used in) from investing activities $ (250,335)
Net cash outflows and inflows of our net investment activity are generally a result of the timing of our purchases and maturities of securities, which are classified as cash equivalents or short-term securities, as well as the timing of acquisitions and divestitures. Cash used in investing activities was impacted by the acquisition of Kemp for a net cash amount of
$254.0 million, and Chef for a net cash amount of $213.1 million, in fiscal years 2021 and 2020, respectively. In fiscal year 2019 we acquired Ipswitch for a net cash amount of $225.3 million. In addition, we purchased $4.7 millionof property and equipment in fiscal year 2021, as compared to $6.5 millionin fiscal year 2020 and $4.0 millionin fiscal year 2019. We also sold $0.9 millionof intangible assets in the fourth quarter of fiscal year 2020 and $6.1 millionof certain corporate land and building assets in the second quarter of fiscal year 2019. 31 --------------------------------------------------------------------------------
Cash flows from (used in) financing activities
Fiscal Year Ended November 30, November 30, November 30, (In thousands) 2021 2020 2019 Proceeds from stock-based compensation plans
$ 15,033 $ 11,099 $ 9,265Repurchases of common stock (35,000) (60,000) (25,000) Dividend payment to stockholders (31,561) (29,900) (27,760)
Proceeds from the issuance of senior convertible bonds, net of issuance costs of
350,100 - - Purchase of capped calls (43,056) - -
Proceeds from debt issuance, net of principal repayments and debt issuance costs
(118,217) 87,212 178,065 Other financing activities (5,186) (5,331) (4,278) Net cash flows from (used in) financing activities
During fiscal year 2021, we received
$15.0 millionfrom the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $11.1 millionin fiscal year 2020 and $9.3 millionin fiscal year 2019. In addition, we made dividend payments of $31.6 millionto our stockholders in fiscal year 2021, as compared to dividend payments of $29.9 millionand $27.8 millionin fiscal years 2020 and 2019, respectively. Most significantly, in the second quarter of fiscal year 2021, we received $349.2 millionin net proceeds from the issuance of convertible senior notes and paid $43.1 millionto purchase capped calls in connection with the convertible note offering. We received proceeds from the issuance of debt of $98.5 millionin fiscal year 2020 and $185.0 millionin fiscal year 2019 in connection with the acquisitions of Chef and Ipswitch, respectively. In addition, we repurchased $35.0 millionof our common stock under our share repurchase plan in fiscal year 2021, compared to $60.0 millionin fiscal year 2020 and $25.0 millionin fiscal year 2019. We also made principal payments on our debt of $117.3 million(including a $98.5 millionrepayment on the revolving line of credit) during fiscal year 2021, as compared to $11.3 millionin fiscal year 2020 and $5.3 millionin fiscal year 2019.
We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial.
Cash from operations in fiscal year 2022 could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in Part I, Item 1A titled "Risk Factors." While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets generally which could adversely affect our liquidity and capital resources in the future. However, based on our current business plan, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months. We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of the
U.S.Our foreseeable cash needs include capital expenditures, acquisitions, debt repayments, quarterly cash dividends, share repurchases, lease commitments, restructuring obligations and other long-term obligations. 32 --------------------------------------------------------------------------------
Critical accounting estimates
Management's discussion and analysis of financial condition and results of operations are based on our consolidated financial statements which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of filing of this Annual Report on Form 10-K with the
SEC. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
We have identified the following critical accounting estimates that require the use of significant judgments and estimates in the preparation of our consolidated financial statements.
Our contracts with customers typically include promises to license one or more products and services to a customer. Determining whether products and services are distinct performance obligations that should be accounted for separately requires significant judgment. Significant judgment is also required to determine the stand-alone selling price ("SSP") of each distinct performance obligation. Our licenses are sold as perpetual or term licenses, and the arrangements typically contain various combinations of maintenance and services, which are generally accounted for as separate performance obligations. We use the residual approach to allocate the transaction price to our software license performance obligations because, due to the pricing of our licenses being highly variable, they do not have an observable SSP. Maintenance revenue is recognized ratably over the contract period. The SSP of maintenance services is a percentage of the net selling price of the related software license. Professional services revenue is generally recognized as the services are delivered to the customer. We apply the practical expedient of recognizing revenue upon invoicing for time and materials-based arrangements. The SSP of services is based upon observable prices in similar transactions using the hourly rates sold in stand-alone services transactions. Services are either sold on a time and materials basis or prepaid upfront. Revenue related to software-as-a-service ("SaaS") offerings is recognized ratably over the contract period. The SSP of SaaS performance obligations is determined based upon observable prices in stand-alone SaaS transactions. We also consider whether an arrangement has any discounts, material rights, or specified future upgrades that may represent additional performance obligations, although we do not have a history of offering these elements.
We had goodwill and net intangible assets of
$958.3 millionat November 30, 2021. We evaluate goodwill and other intangible assets with indefinite useful lives for impairment annually or on an interim basis when events and circumstances arise that indicate impairment may have occurred. We perform our annual goodwill impairment as of October 31stof each fiscal year. Application of the goodwill impairment test requires judgment, including the identification of reporting units. We periodically reevaluate our business and have determined during fiscal year 2021 that we have one operating segment and one reporting unit. As such, our goodwill is tested at the entity-level. During fiscal years 2020 and 2019, we operated as three distinct segments. If our assumptions change in the future, we may be required to record impairment charges to reduce our goodwill's carrying value. Changes in the valuation of goodwill could materially impact our operating results and financial position. When we evaluate potential impairments outside of our annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets. Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in our stock price for a sustained period of time. 33 --------------------------------------------------------------------------------
Income Tax Accounting
We had a net deferred tax liability of
$12.7 millionat November 30, 2021. We consider scheduled reversals of temporary differences, projected future taxable income, tax planning strategies and other matters in assessing the need for and the amount of a valuation allowance. If we were to change our assumptions or otherwise determine that we were unable to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period that such change or determination was made. Management judgment is also required in evaluating whether a tax position taken or expected to be taken in a tax return, based on the weight of available evidence, indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. Management judgment is also required in measuring the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. If management made different estimates or judgments, material differences in the amount accrued for uncertain tax positions would occur.
Convertible Senior Notes and Capped Call Options
April 2021, we issued Convertible Senior Notes (the "Notes") and also entered into privately negotiated capped call transactions ("Capped Call Transactions") with certain financial institutions. Applying the accounting framework for the Notes and the Capped Call Transaction requires the exercise of judgment and the determination of the fair value of the liability component of the Notes and the fair value of the Capped Calls requires the Company to make significant estimates and assumptions.
In accounting for tickets and capped buy transactions:
•The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The excess of the Notes' principal amount over the initial carrying amount of the liability component, referred to as the debt discount, is amortized as interest expense over the Notes' contractual term. The fair value was determined based on a discounted cash flow model. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. •The Notes' fair value, inclusive of the conversion feature embedded in the Notes, is determined based on the Notes' quoted price in an over-the-counter market on the last trading day of the reporting period. •The equity component, which represents the difference between the gross proceeds and the initial liability component, was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. •The Capped Call Transactions are accounted for as derivative instruments. The Capped Call Transactions qualify for the equity scope exception to derivative accounting pursuant to ASC 815 and are measured at fair value, which is the premium paid, at issuance. No subsequent measurement is required as long as they continue to meet the equity scope exception.
We recognize stock-based compensation expense based on the fair value of stock-based awards, less the present value of expected dividends when applicable, measured at the date of grant. We estimate the fair value of each stock-based award on the measurement date using either the current market price, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to the expected stock price volatility, the expected term of the award, a risk-free interest rate and a dividend yield. The expected volatility is based on the historical volatility of our stock price. The expected term is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free interest rate is based on the yield of zero-coupon
U.S. Treasurysecurities for the period that is commensurate with the expected option term at the time of grant. The expected dividend yield is based on our historical behavior and future expectations of dividend declarations. The valuations determined by the Monte Carlo Simulation simulate 250,000 future stock prices for Progress and our peer group. We have chosen this amount for the simulation as to minimize the standard modeling error and believe that the resulting distribution gives a reasonable estimate of the grant date fair value. 34 --------------------------------------------------------------------------------
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The estimates used to value the net assets acquired are based in part on historical experience and information obtained from the management of the acquired company. We generally value the identifiable intangible assets acquired using a discounted cash flow model. The significant estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, and expected technology life cycles. We also estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.
Our fair value estimates are based on assumptions believed to be reasonable at the time. If management has made different estimates or judgments, material differences in the fair values of the net assets acquired could result.
Recent accounting pronouncements
See Note 1: Nature of Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
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