Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the condensed consolidated financial statements and related notes which are primarily denominated in thousands of dollars.
Executive Summary
We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, higher education institutions, K–12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies 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.
Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud and hosted environments; (ii) providing payment and transaction services; (iii) providing software maintenance and support services; and (iv) providing professional services, including implementation, consulting, training, analytic and other services.
COVID-19 Impact
The outbreak of COVID-19 in numerous countries across the globe, including each country in which we currently operate, has adversely impacted the U.S. and global economies. We began 2020 with strong execution against our financial plan. In March 2020, we began to experience disruptions to our business from COVID-19, and the pandemic continues to impact each of our markets.
To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we have taken several actions. These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. See Note 2 to our condensed consolidated financial statements in this report for a discussion of some of these actions. In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed.
The economic impact of COVID-19 on the social good industry remains uncertain. With our existing and prospective customers remaining cautious in their purchase decisions, we expect that our operating environment may continue to be challenging for the remainder of 2020, 2021 and potentially beyond, as discussed below. Notwithstanding these conditions, we remain focused on continuing to execute our four-point growth strategy and strengthening our leadership position.
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Four-Point Growth Strategy
1 Delight Customers with Innovative Cloud Solutions
2 Drive Sales Effectiveness
3 Expand Total Addressable Market
4 Improve Operating Efficiency
1. Delight Customers with Innovative Cloud Solutions
Our solutions are already equipped with features that are lending themselves to the current environment and we have quickly acted upon customer feedback to add enhancements and new functionality to serve our customers, so they can continue to focus on their missions during this time. For example, we built new integration between our peer-to-peer fundraising and donor management solutions simplifying the process of raising donations and acquiring new supporters through pandemic-friendly virtual events and peer-to-peer campaigns. We simplified donation forms to expedite fundraising by allowing organizations to create campaigns quickly and easily, which is critical in the current environment. We also added new financial management capabilities, further easing the transition to working from home with tools that support collaboration and efficient cash flow management and financial operations from the cloud.
2. Drive Sales Effectiveness
The investments we have made to enhance our digital footprint are enabling us to be more prescriptive and cost-effective in our marketing efforts and to quickly adapt to changing market conditions, and over the longer term we believe the impact of COVID-19 will accelerate the existing trends driving adoption of modern cloud solutions in our market. Despite our optimism over the long-term, the uncertainty of the current environment has created near-term challenges in our ability to build new pipeline and elongated sales cycles, which has caused bookings to fall short of budgeted expectations for the third quarter and year-to-date periods. We expect this shortfall to put pressure on both 2020 and 2021 revenues. As a result, we have begun shifting investment towards digital marketing aimed at lead generation and put a greater emphasis on selling solutions with the highest lifetime value. In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives.
3. Expand TAM
While we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development, our top priority in the near-term is protecting our employees and continuing to support our customers at a very high standard. We have significant opportunities in front of us as we are less than 10% penetrated into a total addressable market of over $10 billion.
4. Improve Operating Efficiency
We have made transformational changes to our business over the last several years, which allowed us to immediately switch to a virtual work environment in March and supported our global employees' ability to work effectively from home. We are re-evaluating elements of our workforce strategy based on what we have learned during the COVID-19 pandemic. During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely when our offices reopen. This change also expands our access to a larger and more diverse talent pool, empowers our leaders to make decisions based on skills and business need rather than location, and it is expected to create efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices. We currently expect most of the transactions related to these real estate activities will close during the fourth quarter of 2020 with a one-time cash outlay of between of between $20.0 million and $25.0 million. We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.
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Financial Summary
Total revenue ($M) Income from operations ($M)
YoY Growth (%) YoY Growth (%)
Total revenue decreased by $6.1 million during the three months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:
- Decrease in recurring revenue primarily due to declines in transactional revenue and maintenance revenue. Transactional revenue decreased as many of our customers' in-person events have shifted online, been postponed or cancelled due to COVID-19. The decrease in maintenance revenue was related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform
- Decrease in one-time consulting revenue primarily from less one-time sales related to COVID-19
Total revenue increased by $8.0 million during the nine months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:
+ Growth in recurring revenue related to positive demand from customers across our portfolio of cloud solutions and an increase in transactional revenue, including charitable giving related to COVID-19
- Decrease in one-time consulting revenue primarily from less of one-time sales related to COVID-19
- Decrease in one-time analytics revenue as analytics are generally integrated in our cloud solutions
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Income from operations increased by $2.2 million during the three months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:
+ Reduced overall compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards and the modest and targeted headcount reduction we implemented during the second quarter
+ Decrease in travel costs of $3.7 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
+ Decrease in amortization of intangible assets from business combinations of $2.0 million
+ Decrease in acquisition-related expenses and integration costs of $1.2 million
- Decrease in total revenue, as described above
- Increase in real estate activity costs of $6.8 million due to our workforce strategy changes in response to the COVID-19 pandemic, as discussed above
- Increase in corporate costs of $2.9 million, primarily related to increases in bad debt expense; for additional details, see Note 2 of our condensed consolidated financial statements in this report
Income from operations increased by $14.5 million during the nine months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:
+ Growth in total revenue, as described above
+ Reduced overall compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
+ Decrease in travel costs of $6.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
+ Decrease in amortization of intangible assets from business combinations of $5.1 million
+ Decrease in acquisition-related expenses and integration costs of $3.1 million
+ Decrease in restructuring costs of $2.9 million as our facilities optimization plan was largely completed as of December 31, 2019
- Increase in real estate activity costs of $6.8 million due to our workforce strategy changes in response to the COVID-19 pandemic. For additional details, see "Results of Operations - General and administrative" below.
- Increase in corporate costs of $6.1 million primarily related to an increase in bad debt expense; for additional details, see Note 2 of our condensed consolidated financial statements in this report
- Increase in cost of revenue from a $4.3 million impairment charge during the three months ended June 30, 2020, against certain previously capitalized software development costs, resulting from our decision to accelerate the end of customer support for certain solutions
- Increase in hosting and data center costs of $3.3 million as we are migrating our cloud infrastructure to leading public cloud service providers
There are three primary revenue categories with related business drivers that we continue to monitor closely in light of the COVID-19 pandemic:
1. Contractual Recurring Revenue (approximately two thirds of total revenue in 2019)
Recurring subscription contracts are typically for a term of three years at contract inception, billed annually in advance, and we have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts. Our contracted recurring revenue has performed well as our renewals have continued to trend ahead of our original plan with over three quarters of 2020 now behind. We expect the shortfall in bookings to put pressure on our revenue during the fourth quarter of 2020 and more so on our full-year 2021 revenue. We are closely monitoring our customer receivable balances, payment terms, and creditworthiness. We are experiencing an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic and this development may continue in the near term.
2. Transactional Revenue (approximately one quarter of total revenue in 2019)
Transactional revenue is non-contractual and less predictable given the susceptibility to certain drivers such as timing and number of events and marketing campaigns, as well as fluctuations in donation volumes and tuition payments. We have historically experienced seasonal highs during the fourth quarter due to year-end giving
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campaigns and during the second quarter when a large number of events are held. During the third quarter, we again saw many in-person events shift online, be postponed or canceled. Social good organizations are being forced to employ new strategies to maintain momentum with current supporters while capturing the attention of potential new donors. We continue to support our customers in adapting to these circumstances through virtual campaigns and events.
3. Bookings
Given our ratable revenue recognition model for our recurring subscription contracts and implementation periods, we expect that declines in our 2020 bookings performance will have a greater negative impact on our 2021 revenue than 2020 revenue. Of these three primary revenue categories, bookings represents the smallest potential impact on recurring revenue in 2020. One-time services and other revenue, which is tied to bookings, would have a more immediate impact on our total revenue. Our first quarter has historically been the seasonal low for bookings, with the second and fourth quarters historically being seasonally higher, and our bookings tend to be back-end loaded within individual quarters given our quarterly quota plans. Although our bookings have performed slightly better than our initial COVID-19 scenario planning, we are currently expecting a significant shortfall in 2020 bookings compared to our original plan for the year as we continue to see challenges in building pipeline. The magnitude of our 2020 bookings shortfall is expected to be impacted by the depth and duration of the COVID-19 pandemic.
Our strategy has historically relied on a balanced approach to growth and profitability. As discussed above, the pandemic has created short-term uncertainty in our revenue outlook and the early impacts on pipeline and bookings will likely limit our ability to drive near-term revenue growth at our originally planned levels. Therefore, in line with our strategy, we have made a pivot to greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable.
Customer retention
Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter. We anticipate a continued decrease in maintenance contract renewals as we transition our solution portfolio and maintenance customers from a perpetual license-based model to a cloud subscription delivery model. In the long term, we also anticipate an increase in recurring subscription contract renewals as we continue focusing on innovation, quality and the integration of our cloud solutions, which we believe will provide value-adding capabilities to better address our customers' needs. Due primarily to these factors, we believe a recurring revenue customer retention measure that combines recurring subscription, maintenance and service customer contracts provides a better representation of our customers' overall behavior. For the twelve months ended September 30, 2020, approximately 92% of our customers with recurring revenue contracts were retained. This customer retention rate is unchanged from our rate for the full year ended December 31, 2019.
Balance sheet and cash flow
At September 30, 2020, our cash and cash equivalents were $30.6 million and the carrying amount of our debt under the 2017 Credit Facility was $444.0 million. Our net leverage ratio was 1.95 to 1.00 .
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During the nine months ended September 30, 2020, we generated $109.2 million in cash from operations, primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation. During the nine months ended September 30, 2020, we had a net decrease in borrowings of $23.6 million. Our assumption of the real estate loans associated with our purchase of our Headquarter Facility was a noncash investing and financing transaction (see discussion below).
During the nine months ended September 30, 2020, we also had aggregate cash outlays of $57.9 million for purchases of property and equipment and capitalized software development costs.
Recent Developments
Purchase of Headquarters Facility
In August 2020, we completed the purchase of our Headquarters Facility. Prior to the completion of the Transaction, we leased the Headquarters facility from the Seller. We paid the Seller a purchase price that included the assumption of the Seller's obligations of $61.1 million, cash of $15.2 million and certain lender fees, closing costs, adjustments and prorations as set forth in the PSA. We funded the cash portion of the purchase price through borrowings under the 2017 Credit Facility.
October 2020 refinancing
On October 30, 2020, we entered into the 2020 Credit Facility. The 2020 Credit Facility matures in October 2025 and replaces the 2017 Credit Facility by amending and restating it to (a) increase the amount available under the revolving credit facility to $500.0 million, (b) increase the amount available under the term loan facility to $400.0 million and (c) provide for a net leverage ratio of, (i) commencing with the first fiscal quarter ending December 31, 2020 and through September 30, 2022, 4.00 to 1.00 and (ii) commencing with the fiscal quarter ending December 31, 2022 and thereafter, 3.75 to 1.00, among other changes. See Part II, Item 5. “Other Information” for detailed information relating to the terms of the 2020 Credit Facility.
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Results of Operations
Comparison of the three and nine months ended September 30, 2020 and 2019
Revenue and Cost of Revenue
Recurring
Revenue ($M) Cost of revenue ($M) Gross profit ($M)
and gross margin (%)
YoY Growth (%) YoY Growth (%)
Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud 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, retained and managed services contracts that we expect to have a term consistent with our cloud solution contracts, and variable transaction revenue associated with the use of our solutions.
Cost of recurring revenue is primarily comprised of compensation costs for customer support and production IT personnel, hosting and data center costs, third-party contractor expenses, third-party royalty and data expenses, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and recurring services to our customers.
Our customers continue to prefer cloud subscription offerings with integrated analytics, training and payment services. Recurring subscription contracts are typically for a term of three years at contract inception with one to three-year renewals thereafter. We intend to continue focusing on innovation, quality and integration of our cloud solutions, which we believe will drive future revenue growth.
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Recurring revenue decreased by $5.1 million or 2.5%, during the three months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:
- Decrease in subscriptions revenue of $1.5 million largely related to a decrease in transactional revenue as many of our customers' in-person events have shifted online, been postponed or cancelled due to COVID-19
- Decrease in maintenance revenue of $3.7 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform
Recurring revenue increased by $9.4 million or 1.5%, during the nine months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:
+ Increase in subscriptions revenue of $21.0 million related to positive demand from customers across our portfolio of cloud solutions, an increase in transactional revenue, including charitable giving related to COVID-19, and an increase in services embedded in our renewable cloud solution contracts
- Decrease in maintenance revenue of $11.5 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform
Partially offsetting subscriptions revenue were decreases in the mix of retained and managed services contracts we present in recurring. Revenue from retained and managed service contracts that we do not expect to have a term consistent with our cloud solution contracts is included in one-time services and other revenue beginning January 1, 2020. This change in presentation resulted in decreases in recurring revenue and offsetting increases to one-time services and other revenue of $4.2 million and $12.7 million during the three and nine months ended September 30, 2020, respectively.
Cost of recurring revenue decreased by $3.4 million or 3.9%, during the three months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:
+ Increase in amortization of software development costs of $2.4 million due to investments made on innovation, quality and the integration of our cloud solutions
+ Increase in hosting and data center costs of $1.0 million as we are migrating our cloud infrastructure to leading public cloud service providers
- Decrease in transaction-based costs of $1.7 million related to payment services integrated in our cloud solutions
- Decrease in amortization of intangible assets from business combinations of $2.9 million
- Decrease in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
- Decrease in costs associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above
Cost of recurring revenue increased by $6.2 million or 2.4%, during the nine months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:
+ Increase in amortization of software development costs of $4.7 million due to investments made on innovation, quality and the integration of our cloud solutions
+ Impairment charge of $4.3 million during the three months ended June 30, 2020, against certain previously capitalized software development costs that reduced the carrying value of those assets to zero. The impairment charge resulted primarily from our decision to accelerate the end of customer support for certain solutions.
+ Increase in hosting and data center costs of $3.3 million as we are migrating our cloud infrastructure to leading public cloud service providers
+ Increase in transaction-based costs of $1.3 million related to payment services integrated in our cloud solutions
- Decrease in amortization of intangible assets from business combinations of $5.0 million
- Decrease in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
- Decrease in costs associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above
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The 0.6% increase in recurring gross margin for the three months ended September 30, 2020, when compared to the same period in 2019 , was primarily the result of the decrease in lower margin transactional revenue.
The 0.3% decrease in recurring gross margin for the nine months ended September 30, 2020, when compared to the same period in 2019, was primarily the result of the impairment of previously capitalized software development costs, and incremental costs associated with our continued shift toward selling cloud solutions, including data center costs and amortization of software development costs. We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to leading cloud service providers.
One-time services and other
Revenue ($M) Cost of revenue ($M) Gross profit ($M)
and gross margin (%)
YoY Growth (%) YoY Growth (%)
One-time services and other revenue is comprised of fees for one-time consulting, analytic and onsite training services, fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts, revenue from the sale of our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees.
Cost of one-time services and other is primarily comprised of compensation costs for professional services and onsite training personnel, other costs incurred in providing onsite customer training, third-party contractor expenses, data expense incurred to perform one-time analytic services, third-party software royalties, costs of user conferences, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations.
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One-time services and other revenue decreased by $1.0 million, or 6.3%, and $1.4 million, or 2.8%, during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, driven primarily by the following:
+ Increases in the mix of retained and managed services contracts we present in one-time services and other. Revenue from retained and managed service contracts that we do not expect to have a term consistent with our cloud solution contracts is included in one-time services and other revenue beginning January 1, 2020. This change in presentation resulted in increases to one-time services and other revenue and offsetting decreases in recurring revenue of $4.2 million and $12.7 million during the three and nine months ended September 30, 2020.
- Decreases in one-time consulting revenue of $2.5 million and $8.0 million, respectively, primarily from less one-time sales related to COVID-19 as well as services increasingly being embedded in our renewable cloud solution contracts. Our embedded services are recorded as recurring revenue.
- Decreases in one-time analytics revenue of $0.8 million and $2.9 million as analytics are generally integrated in our cloud solutions
- Decreases in onsite training revenue of $0.6 million and $1.1 million due to COVID-19
Cost of one-time services and other remained relatively consistent during the three and nine months ended September 30, 2020, when compared to the same periods in 2019.
The 7.8% and 3.3% decreases in one-time services and other gross margin during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, were primarily the result of the reductions in one-time consulting and analytics revenue discussed above.
Operating Expenses
Sales, marketing and
customer success ($M) Research and development ($M) General and administrative
($M)
Percentages indicate expenses as a percentage of total revenue
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Sales, marketing and customer success
Sales, marketing and customer success expense includes compensation costs, variable sales commissions, travel-related expenses, advertising and marketing materials, public relations costs, variable reseller commissions and allocated depreciation, facilities and IT support costs.
We see a large market opportunity in the long-term and will continue to make investments to drive sales effectiveness, which is a component of our four-point growth strategy. We have also implemented software tools to enhance our digital footprint and drive lead generation. In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives.
Sales, marketing and customer success expense decreased by $7.0 million or 12.7%, and $6.8 million or 4.1%, during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, primarily driven by the following:
+ For the nine months ended September 30, 2020, increase in employee severance costs of $1.0 million related to a reduction in our sales headcount in response to the COVID-19 pandemic as discussed above
- Decreases in compensation costs of $3.5 million and $2.6 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards; for the three months ended September 30, 2020, compensation costs also decreased due to the reduction in sales headcount discussed above
- Decreases in travel costs of $2.1 million and $3.6 million, respectively, due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
- Decreases in commissions expense of $0.7 million and $0.9 million, respectively, related to a decrease in commissionable sales
Research and development
Research and development expense includes compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to developing new solutions or upgrading and enhancing existing solutions that do not qualify for capitalization, and allocated depreciation, facilities and IT support costs.
We continue to make investments to delight our customers with innovative cloud solutions, which is a component of our four-point growth strategy. Research and development expenses decreased by $3.2 million or 12.2%, and $7.6 million or 9.5%, during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, primarily driven by the following:
- Decreases in compensation costs of $2.5 million and $6.0 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
- Decreases in third-party contractor costs of $0.9 million and $1.2 million, respectively
Not included in research and development expense for the three months ended September 30, 2020 and 2019 were $10.2 million and $11.1 million, respectively, and for the nine months ended September 30, 2020 and 2019 were $31.6 million and $33.9 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized software development costs associated with our cloud solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years. We expect that the amount of software development costs capitalized will be relatively consistent in the near-term as we continue making investments in innovation, quality and the integration of our solutions, which we believe will drive long-term revenue growth.
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General and administrative
General and administrative expense consists primarily of compensation costs for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related expenses and other administrative expenses.
During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely after our offices reopen. This change is expected to create efficiencies within our real estate footprint as we shift toward more collaborative workspaces within our offices. As a result, during the three months ended September 30, 2020, we reduced the estimated useful lives of our operating lease ROU assets for certain of our office locations we expect to exit, which resulted in an increase in operating lease costs during the period. For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in an increase in depreciation expense. We currently expect most of the transactions related to these real estate activities will close during the fourth quarter of 2020 with a one-time cash outlay of between $20.0 million and $25.0 million during the third and fourth quarters of 2020. We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.
General and administrative expense increased by $5.2 million or 18.1%, and $5.3 million or 6.2%, during the three and nine months ended September 30, 2020, when compared to the same periods in 2019, primarily driven by the following:
+ Increases in real estate activity costs of $6.8 and $6.8, respectively, due to our workforce strategy changes in response to the COVID-19 pandemic, as discussed above
+ Increases in corporate costs of $2.5 million and $5.9 million, respectively, primarily related to increases in bad debt expense; for additional details, see Note 2 of our condensed consolidated financial statements in this report
- Decreases in compensation costs of $2.0 million and $2.7 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
- Decreases in acquisition-related expenses and integration costs of $1.2 million and $3.1 million, respectively
- Decreases in third-party contractor costs of $1.0 million and $1.4 million, respectively
Restructuring
During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments, which was substantially completed as of December 2019. During the three and nine months ended September 30, 2019, we incurred $0.4 million and $3.1 million, respectively, in before-tax restructuring charges related to these activities. Such charges during the three and nine months ended September 30, 2020 were insignificant.
Interest Expense
Three months ended
September 30,
Nine months ended
September 30,
(dollars in millions) 2020
2019
Change 2020
2019
Change
Interest expense $ 4.0 $ 5.1 (21.8) % $ 12.0 $ 16.2 (25.8) %
% of total revenue 1.9 % 2.3 % 1.8 % 2.4 %
The decreases in interest expense in dollars and as a percentage of total revenue during the three and nine months ended September 30, 2020, when compared to the same periods in 2019, were primarily due to decreases in our average daily borrowings and our weighted average effective interest rates. We expect our interest expense to remain relatively consistent in the near-term.
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Deferred Revenue
The table below compares the components of deferred revenue from our consolidated balance sheets:
(dollars in millions) Timing of recognition September 30,
2020 December 31,
2019 Change
Recurring Over the period billed in advance,
generally one year $ 314.2 $ 302.8 3.8 %
One-time services and other As services are delivered 14.1 13.4 5.2 %
Total deferred revenue (1)
328.3 316.1 3.8 %
Less: Long-term portion 5.8 1.8 222.0 %
Current portion (1)
$ 322.5 $ 314.3 2.6 %
(1) The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding.
To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. 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. We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end of the contract term.
Deferred revenue from recurring revenue contracts increased during the nine months ended September 30, 2020, primarily due a seasonal increase in customer contract renewals. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter. Deferred revenue from one-time services and other increased during the nine months ended September 30, 2020, primarily due an increase in the mix of retained and managed services contracts we present in one-time services and other beginning January 1, 2020, as discussed above.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and services under those customer arrangements. Therefore, our deferred revenue after an acquisition will not reflect the full amount of deferred revenue that would have been reported if the acquired deferred revenue was not written down to fair value. Further explanation of this impact is included below under the caption "Non-GAAP financial measures".
Income tax provision
Three months ended
September 30,
Nine months ended
September 30,
(dollars in millions) 2020
2019
Change 2020
2019
Change
Income tax provision $ 1.8 $ 0.4 382.4 % $ 6.9 $ 1.3 450.1 %
Effective income tax rate 26.5 % 7.4 % 24.6 % 10.7 %
The increase in our effective tax rate for the three months ended September 30, 2020, when compared to the same period in 2019, was primarily attributable to higher 2019 discrete benefits against lower pre-tax income. The 2019 effective tax rate was positively impacted by a reduction to the liability for unrecognized tax benefits. The effective tax rate for 2020 was positively impacted by an adjustment to the prior year tax provision net of a tax charge resulting from an increase in the U.K. tax rate.
The increase in our effective tax rate for the nine months ended September 30, 2020, when compared to the same period in 2019, was primarily attributable to a reduction in benefits attributable to stock based compensation against increased 2020 profitability.
Non-GAAP Financial Measures
The operating results analyzed below are presented on a non-GAAP basis. We use non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per share internally in analyzing our operational performance. Accordingly, we
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believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue under arrangements predating the acquisition to fair value, which resulted in lower recognized revenue than the contributed purchase price until the related obligations to provide services under such arrangements are fulfilled. Therefore, our GAAP revenues after the acquisitions will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP measures described below reverse the acquisition-related deferred revenue write-downs so that the full amount of revenue booked by the acquired companies is included, which we believe provides a more accurate representation of a revenue run-rate in a given period and, therefore, will provide more meaningful comparative results in future periods.
The non-GAAP financial measures discussed below exclude the impact of certain transactions because we believe they are not directly related to our operating performance in any particular period, but are for our long-term benefit over multiple periods. We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.
Three months ended
September 30,
Nine months ended
September 30,
(dollars in millions) 2020
2019
Change 2020
2019
Change
GAAP Revenue $ 215.0 $ 221.1 (2.8) % $ 670.6 $ 662.6 1.2 %
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down — 0.3 (100.0) % — 1.7 (100.0) %
Non-GAAP revenue (1)
$ 215.0 $ 221.4 (2.9) % $ 670.6 $ 664.3 1.0 %
GAAP gross profit $ 116.3 $ 119.3 (2.5) % $ 362.1 $ 360.7 0.4 %
GAAP gross margin 54.1 % 54.0 % 54.0 % 54.4 %
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down — 0.3 (100.0) % — 1.7 (100.0) %
Add: Stock-based compensation expense 3.7 0.8 370.4 % 7.1 2.5 179.4 %
Add: Amortization of intangibles from business combinations 9.2 11.2 (17.9) % 29.8 34.0 (12.2) %
Add: Employee severance — — (100.0) % 0.8 1.1 (28.3) %
Subtotal (1)
12.9 12.3 5.0 % 37.8 39.3 (4.0) %
Non-GAAP gross profit (1)
$ 129.2 $ 131.6 (1.8) % $ 399.9 $ 400.0 — %
Non-GAAP gross margin 60.1 % 59.5 % 59.6 % 60.2 %
(1) The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding.
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Three months ended
September 30,
Nine months ended
September 30,
(dollars in millions, except per share amounts) 2020
2019
Change 2020
2019
Change
GAAP income from operations $ 10.1 $ 7.9 28.0 % $ 38.1 $ 23.6 61.7 %
GAAP operating margin 4.7 % 3.6 % 5.7 % 3.6 %
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down — 0.3 (100.0) % — 1.7 (100.0) %
Add: Stock-based compensation expense 20.8 14.9 40.2 % 54.6 43.6 25.1 %
Add: Amortization of intangibles from business combinations 10.0 11.9 (16.4) % 32.1 37.2 (13.8) %
Add: Employee severance 0.2 — 383.3 % 4.6 3.7 25.5 %
Add: Acquisition-related integration costs — 1.0 (101.5) % (0.1) 2.2 (105.3) %
Add: Acquisition-related expenses 0.1 0.2 (70.9) % 0.3 1.0 (72.0) %
Add: Restructuring and other real estate activities 6.9 0.4 1,635.8 % 7.0 3.1 127.6 %
Subtotal (1)
38.0 28.7 32.3 % 98.4 92.5 6.4 %
Non-GAAP income from operations (1)
$ 48.1 $ 36.6 31.4 % $ 136.5 $ 116.1 17.6 %
Non-GAAP operating margin 22.4 % 16.5 % 20.4 % 17.5 %
GAAP income before provision for income taxes $ 6.6 $ 4.9 34.5 % $ 28.3 $ 11.8 138.8 %
GAAP net income $ 4.9 $ 4.6 6.8 % $ 21.3 $ 10.6 101.6 %
Shares used in computing GAAP diluted earnings per share 48,859,707 48,464,529 0.8 % 48,582,068 48,223,712 0.7 %
GAAP diluted earnings per share $ 0.10 $ 0.09 11.1 % $ 0.44 $ 0.22 100.0 %
Non-GAAP adjustments:
Add: GAAP income tax provision 1.8 0.4 382.4 % 6.9 1.3 450.1 %
Add: Total non-GAAP adjustments affecting income from operations 38.0 28.7 32.3 % 98.4 92.5 6.4 %
Non-GAAP income before provision for income taxes 44.7 33.7 32.6 % 126.7 104.3 21.4 %
Assumed non-GAAP income tax provision (2)
8.9 6.7 32.6 % 25.3 20.9 21.4 %
Non-GAAP net income (1)
$ 35.7 $ 26.9 32.6 % $ 101.3 $ 83.5 21.4 %
Shares used in computing non-GAAP diluted earnings per share 48,859,707 48,464,529 0.8 % 48,582,068 48,223,712 0.7 %
Non-GAAP diluted earnings per share $ 0.73 $ 0.56 30.4 % $ 2.09 $ 1.73 20.8 %
(1) The individual amounts for each year may not sum to subtotal, non-GAAP income from operations or non-GAAP net income due to rounding.
(2) We apply a non-GAAP effective tax rate of 20.0% when calculating non-GAAP net income and non-GAAP diluted earnings per share.
Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, and capital expenditures for property and equipment.
Nine months ended
September 30,
(dollars in millions) 2020
2019
Change
GAAP net cash provided by operating activities $ 109.2 $ 122.1 (10.6) %
Less: purchase of property and equipment (25.8) (9.6) 169.2 %
Less: capitalized software development costs (32.0) (34.5) (7.2) %
Non-GAAP free cash flow $ 51.3 $ 78.0 (34.2) %
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Non-GAAP organic revenue growth
In addition, we discuss non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and non-GAAP organic recurring revenue growth, in analyzing our performance. We believe that these non-GAAP measures are useful to investors, as a supplement to GAAP measures, for evaluating the periodic growth of our business on a consistent basis. Each of these measures of non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period, and they include the non-GAAP revenue attributable to those companies, as if there were no acquisition-related write-downs of acquired deferred revenue to fair value as required by GAAP. In addition, each of these non-GAAP organic revenue growth measures excludes prior period revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate.
(dollars in millions) Three months ended
September 30,
Nine months ended
September 30,
2020
2019
2020
2019
GAAP revenue $ 215.0 $ 221.1 $ 670.6 $ 662.6
GAAP revenue growth (2.8) % 1.2 %
Add: Non-GAAP acquisition-related revenue (1)
— 0.3 — 1.7
Non-GAAP organic revenue (2)
$ 215.0 $ 221.4 $ 670.6 $ 664.3
Non-GAAP organic revenue growth (2.9) % 1.0 %
Non-GAAP organic revenue (2)
$ 215.0 $ 221.4 $ 670.6 $ 664.3
Foreign currency impact on Non-GAAP organic revenue (3)
(0.8) — 1.5 —
Non-GAAP organic revenue on constant currency basis (3)
$ 214.2 $ 221.4 $ 672.1 $ 664.3
Non-GAAP organic revenue growth on constant currency basis (3.2) % 1.2 %
GAAP recurring revenue $ 200.1 $ 205.2 $ 621.2 $ 611.8
GAAP recurring revenue growth (2.5) % 1.5 %
Add: Non-GAAP acquisition-related revenue (1)
— 0.3 — 1.7
Non-GAAP organic recurring revenue $ 200.1 $ 205.5 $ 621.2 $ 613.5
Non-GAAP organic recurring revenue growth (2.6) % 1.3 %
(1) Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, non-GAAP acquisition-related revenue reflects presentation of full-year incremental non-GAAP revenue derived from such companies, as if they were combined throughout the prior period, and it includes the non-GAAP revenue from the acquisition-related deferred revenue write-down attributable to those companies.
(2) Non-GAAP organic revenue for the prior year periods presented herein will not agree to non-GAAP organic revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated.
(3) To determine non-GAAP organic revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Australian Dollar, British Pound, Canadian Dollar and EURO.
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Seasonality
Our revenues normally fluctuate as a result of certain seasonal variations in our business. Our transaction revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events. Our revenue from payment services has historically increased during the fourth quarter due to year-end giving. Our revenue from professional services has historically been lower in the first quarter when many of those services commence and in the fourth quarter due to the holiday season. As a result of these and other factors, our total revenue has historically been lower in the first quarter than in the remainder of our fiscal year, with the fourth quarter historically achieving the highest total revenue. Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures. Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, the payment of bonuses, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter and the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter. Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has been lower in our second quarter as compared to our third and fourth quarters. Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are merit-based salary increases, which are generally effective in April each year. In addition, deferred revenues can vary on a seasonal basis for the same reasons. Our cash flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards. These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, or as a result of acquisitions, new market opportunities, new solution introductions, the COVID-19 pandemic or other factors.
Liquidity and Capital Resources
The following table presents selected financial information about our financial position:
(dollars in millions) September 30,
2020 December 31,
2019 Change
Cash and cash equivalents $ 30.6 $ 31.8 (3.9) %
Property and equipment, net 109.5 35.5 208.0 %
Software development costs, net 108.9 101.3 7.5 %
Total carrying value of debt 508.3 467.1 8.8 %
Working capital (207.6) (254.3) 18.4 %
The following table presents selected financial information about our cash flows:
Nine months ended September 30,
(dollars in millions) 2020
2019
Change
Net cash provided by operating activities $ 109.2 $ 122.1 (10.6) %
Net cash used in investing activities (57.9) (153.0) (62.2) %
Net cash used in financing activities (393.8) (144.6) 172.3 %
Our principal sources of liquidity are our operating cash flow, funds available under the 2020 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription and maintenance arrangements, market acceptance of our solutions and services and our customers' ability to pay. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures and meet our debt obligations. To the extent we undertake future material acquisitions, investments or unanticipated capital expenditures, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt or equity issuances.
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To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we have taken several actions. These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. Some of these actions include the following:
• Rescinded our previously announced policy to pay an annual dividend at a rate of $0.48 per share of common stock and discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020 and thereafter until such time, if any, as our Board of Directors may otherwise determine in its sole discretion;
• Temporarily suspended our 401(k)-match program, whereby we have historically matched 50% of qualified U.S. employees' contributions to our 401(k) plan up to 6% of their salaries, effective with the payroll period commencing April 1, 2020;
• Temporarily froze our hiring efforts and implemented a modest and targeted headcount reduction, though we have since began backfilling key roles, including engineering positions;
• Michael Gianoni, our President and Chief Executive Officer, elected to forego receipt of all but that portion of his base salary necessary to fund, on a pre-tax basis, his contributions to continue to participate in our health benefits plan, between April 1, 2020 and June 16, 2020;
• Restricted non-essential employee travel and put in place other operating cost containment actions;
• All of our employees with a base salary equal to or less than $75 thousand received financial support in the form of a one-time bonus of $1 thousand on April 30, 2020;
• On May 1, 2020, we granted RSUs to our employees that were eligible for base salary merit increases in lieu of such increases, which will vest on May 1, 2021 subject to the recipient's continued employment with us; and
• On May 1, 2020, we granted PRSUs to our employees that were eligible for a 2020 cash bonus plan in lieu of such cash bonus, which may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us.
• During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely when our offices reopen. This change also expands our access to a larger and more diverse talent pool, empowers our leaders to make decisions based on skills and business need rather than location, and it is expected to create efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices. We currently expect most of the transactions related to these real estate activities will close during the fourth quarter of 2020 with a one-time cash outlay of between $20.0 million and $25.0 million during the third and fourth quarters of 2020. We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.
In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed.
We are experiencing an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic and this development may continue in the near term. We have received short-term payment relief requests as a result of COVID-19, most often in the form of payment deferral requests. We are evaluating each request on a case-by-case basis to assess the customer's ability to pay. Not all customer requests will ultimately result in modified payment terms, nor are we forgoing our contractual rights under customer agreements. During the three and nine months ended September 30, 2020, our bad debt expense increased by $2.4 million and $5.3 million, respectively, compared to the same periods in 2019. We are continually monitoring our customer receivable balances, payment terms, and creditworthiness for changes that could have a significant impact on the collectability of our accounts receivables, our operating results and financial position.
At September 30, 2020, our total cash and cash equivalents balance included approximately $17.2 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.
Operating Cash Flow
Net cash provided by operating activities decreased by $13.0 million during the nine months ended September 30, 2020, when compared to the same period in 2019, primarily due to a $45.5 million decrease in cash flow from operations associated with working capital, partially offset by a $32.5 million increase in net income adjusted for non-
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cash expenses. Throughout both periods, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization, stock-based compensation, amortization of deferred financing costs and debt discount and adjustments to our provision for credit losses and sales returns; and (ii) changes in our working capital. The increase in net income adjusted for non-cash expenses was primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation in lieu of cash-based compensation.
Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. The decrease in cash flow from operations associated with working capital during the nine months ended September 30, 2020, when compared to the same period in 2019, was primarily due to:
• an increase in current period bonus payments as a result of an increase in amounts accrued as of December 31, 2019 for over-performance against 2019 targets;
• a decrease in the current period bonus accrual due to our decision to replace cash payments for our 2020 bonus plans with performance-based equity awards;
• an increase in the aging of customer receivable balances primarily due to the COVID-19 pandemic; and
• fluctuations in the timing of vendor payments.
Investing Cash Flow
Net cash used in investing activities of $57.9 million decreased by $95.1 million during the nine months ended September 30, 2020, when compared to the same period in 2019.
During the nine months ended September 30, 2019, we used net cash of $109.4 million for our acquisition of YourCause and we did not make any similar investments during the same period in 2020. During the nine months ended September 30, 2020, we used $32.0 million for software development costs, which was relatively consistent with cash spent during the same period in 2019. We continue to invest in our innovative cloud solutions, as well as development activities for Blackbaud SKY, our modern cloud platform.
We also spent $25.8 million of cash for purchases of property and equipment during the nine months ended September 30, 2020, which was an increase of $16.2 million when compared to the same period in 2019. The additional cash expended was primarily used to purchase our Headquarters Facility.
Financing Cash Flow
During the nine months ended September 30, 2020, we had a net decrease in borrowings of $23.6 million.
We paid $21.3 million to satisfy tax obligations of employees upon settlement of equity awards during the nine months ended September 30, 2020 compared to $20.3 million during the same period in 2019. The amount of taxes paid by us on the behalf of employees related to the settlement of equity awards varies from period to period based upon the timing of grants and vesting, as well as the market price for shares of our common stock at the time of settlement. Most of our equity awards currently vest in our first quarter. In addition, during the nine months ended September 30, 2020, we paid dividends of $6.0 million, down from $17.7 million during the same period of 2019, as we discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020.
Cash used in financing activities associated with changes in restricted cash due to customers increased $121.9 million during the nine months ended September 30, 2020 when compared to the same period in 2019, as the amount of restricted cash held and payable by us to customers as of December 31, 2019 was significantly larger than at the same date in 2018 primarily due to the timing of year-end donations. Additionally, effective August 3, 2020, a significant amount of restricted cash related to charitable giving transacted through our social responsibility and grantmaking solutions is now held and disbursed by the Blackbaud Giving Fund, an independent nonprofit organization, strategic partner of ours, and sponsoring organization for a donor advised fund. This change was made primarily to facilitate faster tax receipts for our customers and their employees.
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2017 Credit Facility
We have drawn on our credit facility from time to time to help us meet financial needs, such as financing for business acquisitions. At September 30, 2020, our available borrowing capacity under the 2017 Credit Facility was $229.6 million. The 2017 Credit Facility matures in June 2022.
At September 30, 2020, the carrying amount of our debt under the 2017 Credit Facility was $444.0 million. Our average daily borrowings during the three and nine months ended September 30, 2020 were $472.7 million and $496.7 million, respectively.
The following is a summary of the financial covenants under the 2017 Credit Facility:
Financial covenant Requirement Ratio as of September 30, 2020
Net leverage ratio ≤ 3.50 to 1.00 1.95 to 1.00
Interest coverage ratio ≥ 2.50 to 1.00 13.84 to 1.00
Under the 2017 Credit Facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (i) no default or event of default shall have occurred and be continuing under the 2017 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2017 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At September 30, 2020, we were in compliance with our debt covenants under the 2017 Credit Facility.
October 2020 refinancing
On October 30, 2020, we entered into the 2020 Credit Facility. The 2020 Credit Facility matures in October 2025 and replaces the 2017 Credit Facility by amending and restating it to (a) increase the amount available under the revolving credit facility to $500.0 million, (b) increase the amount available under the term loan facility to $400.0 million and (c) provide for a net leverage ratio of, (i) commencing with the first fiscal quarter ending December 31, 2020 and through September 30, 2022, 4.00 to 1.00 and (ii) commencing with the fiscal quarter ending December 31, 2022 and thereafter, 3.75 to 1.00, among other changes. See Part II, Item 5. “Other Information” for detailed information relating to the terms of the 2020 Credit Facility.
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Commitments and Contingencies
As of September 30, 2020, we had contractual obligations with future minimum commitments as follows:
Payments due by period
(in millions) Total Less than 1
year 1-3 years 3-5 years More than 5
years
Recorded contractual obligations:
Debt (1)
$ 509.6 $ 10.3 $ 442.2 $ 3.3 $ 53.8
Interest payments on debt (2)
4.0 4.0 — — —
Operating leases (3)
46.0 18.5 23.5 4.0 —
Unrecorded contractual obligations:
Interest payments on debt (4)
50.0 9.5 10.3 5.8 24.3
Purchase obligations (5)
85.9 50.6 35.2 — —
Total contractual obligations $ 695.4 $ 92.9 $ 511.3 $ 13.1 $ 78.1
(1) Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2017 Credit Facility, our Real Estate Loans and our other debt at September 30, 2020 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2017 Credit Facility for the purposes of determining minimum commitment amounts.
(2) Represents interest payment obligations related to our interest rate swap agreements.
(3) Our commitments related to operating leases have not been reduced by sublease income, incentive payments and reimbursement of leasehold improvements.
(4) The actual interest expense recognized in our consolidated statements of comprehensive income will depend on the amount of debt, the length of time the debt is outstanding and the interest rate, which could be different from our assumptions described in (1) above.
(5) 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.
The term loan under the 2017 Credit Facility required, and the 2020 Credit Facility (as described below at Part II, Item 5. “Other Information”) requires, periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans previously were due in June 2022 under the 2017 Credit Facility and now will be due in October 2025 under the 2020 Credit Facility. The Real Estate Loans also require periodic principal payments and the balance of the Real Estate Loans are due upon maturity in April 2038.
The total liability for uncertain tax positions as of September 30, 2020 and December 31, 2019, was $4.8 million and $4.3 million, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was $1.1 million and $1.0 million as of September 30, 2020 and December 31, 2019, respectively.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Foreign Currency Exchange Rates
Approximately 16% of our total revenue for the nine months ended September 30, 2020 was generated from operations outside the U.S. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a loss of $5.9 million as of September 30, 2020 and a loss of $4.0 million as of December 31, 2019.
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Blackbaud, Inc.
(Unaudited)
The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish subsidiaries are generally denominated in British Pounds, Australian dollars and Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S. currencies. During the nine months ended September 30, 2020, foreign translation resulted in decreases in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and both the British Pound and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. For the nine months ended September 30, 2020, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $1.5 million and $0.8 million, respectively. We will continue monitoring such exposure and take action as appropriate. To determine the impacts on revenue (or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. These impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2020 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Recently Issued Accounting Pronouncements
For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see Note 2 to our condensed consolidated financial statements in this report.