What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-23 compared with 2020-02-20 · 608 added, 508 removed, 890 unchanged (56% of the section changed)

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We have audited the accompanying consolidated balance sheets of Blackbaud, Inc.

and its subsidiaries (the "Company") as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive income, stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the "Company") as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts

for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

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Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the

2020 Form 10-K

transactions and dispositions of the assets of the company;

generally accepted accounting principles.

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Acquisition of YourCause Holdings, LLC - Valuation of Acquired Technology and Customer Relationships

As described in Notes 2 and 3 to the consolidated financial statements, on January 2, 2019, the Company acquired YourCause Holdings, LLC for an aggregate purchase price of $157.7 million, which resulted in $47.8 million of acquired technology and $25.9 million of customer relationships being recorded.

Management estimated the fair value of acquired technology using the relief-from-royalty method and estimated the fair value of customer relationships using the multi-period excess earnings method.

Critical estimates in management's valuation of intangible assets include, but are not limited to, estimates about expected future cash flows from customers, including revenue and operating expenses;

royalty and customer attrition rates;

proprietary technology obsolescence curve;

the acquired company's brand awareness and market position, the market awareness of the acquired company's branded technology solutions and services;

assumptions about the period of time the brand will continue to be valuable;

as well as expected costs to develop any in-process research and development into commercially viable solutions and estimated cash flows from the projects when completed, and discount rates.

The principal considerations for our determination that performing procedures relating to the valuation of intangible assets from the acquisition of YourCause Holdings, LLC is a critical audit matter are (i) there was significant auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the acquired technology and customer relationships due to the significant amount of judgment by management when developing these estimates, (ii) significant audit effort was required in assessing the significant assumptions, including future revenue and operating expenses, royalty and customer attrition rates, proprietary technology obsolescence curves, and the discount rate, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the acquired technology and customer relationships, as well as controls over development of significant assumptions related to the valuation of these intangible assets, including future revenue and operating expenses, royalty and customer attrition rates, proprietary technology obsolescence curves, and the discount rate.

These procedures also included, among others, (i) reading the purchase agreement;

(ii) testing management’s process for estimating the fair value of the acquired technology and customer relationships, and (iii) testing management’s cash flow projections used to estimate the fair value of the intangible assets.

Testing management’s process included evaluating the appropriateness of the valuation methods and the reasonableness of significant assumptions, including future revenue and operating expenses, royalty and customer attrition rates, proprietary technology obsolescence curves, and discount rate.

Evaluating the reasonableness of the future revenue and operating expenses and the customer attrition rate involved considering past performance of the acquired business, as well as economic and industry forecasts.

Evaluating the reasonableness of the proprietary technology obsolescence curves and

2019 Form 10-K

royalty rates involved evaluating the consistency of these assumptions to external market and industry data.

Evaluating the discount rate involved assessing the cost of capital of comparable benchmark rates and other industry factors.

Professionals with specialized skill and knowledge were used to assist in evaluating significant assumptions, including the royalty and customer attrition rates, proprietary technology obsolescence curves and the discount rate.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue recognition - Contracts with Multiple Performance Obligations

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For the year ended December 31, 2020, the Company’s total revenue was $913.2 million.

The principal considerations for our determination that performing procedures relating to revenue recognition, specifically contracts with multiple performance obligations, is a critical audit matter are there was significant judgment by management in identifying, evaluating and accounting for performance obligations in contracts with multiple performance obligations, which led to significant auditor judgment and effort in performing procedures to evaluate whether contracts with multiple performance obligations were appropriately identified, evaluated and accounted for by management.

The principal considerations for our determination that performing procedures relating to revenue recognition, contracts with multiple performance obligations, is a critical audit matter are the significant judgment by management in identifying, evaluating and accounting for performance obligations in contracts with multiple performance obligations, which led to significant auditor judgment and effort in performing procedures to evaluate whether contracts with multiple performance obligations were appropriately identified, evaluated and accounted for by management.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

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These procedures also included, among others, testing management’s process for identifying, evaluating and accounting for performance obligations.

This included, (i) examining revenue arrangements on a test basis, including evaluating the terms and conditions of the arrangements and testing the identification, evaluation and accounting of the performance obligations, (ii) testing the allocation of the transaction price between performance obligations based on the estimated standalone selling prices on a test basis, (iii) performing procedures to test the completeness and accuracy of the data used to determine stand-alone selling price, and (iv) evaluating the reasonableness of the approach used to determine stand-alone selling price.

(ii) testing the allocation of the transaction price between performance obligations based on the estimated standalone selling prices on a test basis;

(iii) performing procedures to test the completeness and accuracy of the data used to determine stand-alone selling price;

and (iv) evaluating the reasonableness of the approach used to determine stand-alone selling price.

/ S / P RICEWATERHOUSE C OOPERS LLP

Raleigh, North Carolina

Atlanta, Georgia

February 23, 2021

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Consolidated Balance Sheets

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

Current assets:

Cash and cash equivalents $ 35,750 $ 31,810

Restricted cash due to customers

Restricted cash 609,219 545,485

Accounts receivable, net of allowance of $ 10,292 and $ 5,529 at December 31, 2020 and December 31, 2019, respectively

95,404 88,868

Customer funds receivable 321 524

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Software development costs, net 111,827 101,302

Goodwill 635,854 634,088

Intangible assets, net 277,506 317,895

Other assets 72,639 65,193

Total assets $ 2,044,734 $ 1,992,963

Liabilities and stockholders’ equity

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Preferred stock;

20,000,000 shares authorized, none outstanding

20,000,000 shares authorized, no ne outstanding

Common stock, $ 0.001 par value;

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12,054,268 and 11,066,354 shares at December 31, 2020 and December 31, 2019, respectively

( 353,091 ) ( 290,665 )

Accumulated other comprehensive loss ( 2,497 ) ( 5,290 )

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Consolidated Statements of Comprehensive Income

(dollars in thousands, except per share amounts)

Years ended December 31,

(dollars in thousands, except per share amounts) Years ended December 31,

2020 2019 2018

Recurring $ 850,745 $ 831,609 $ 762,181

One-time services and other 62,474 68,814 86,425

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Total cost of revenue 428,065 418,424 381,742

Gross profit 485,154 481,999 466,864

Operating expenses

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General and administrative 134,852 113,414 106,354

Amortization 2,915 5,316 4,844

Restructuring 236 5,808 4,590

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Income before provision for income taxes 21,614 10,585 44,622

Income tax benefit

Income tax provision (benefit) 13,897 ( 1,323 ) ( 219 )

Net income $ 7,717 $ 11,908 $ 44,841

Earnings per share

Basic $ 0.16 $ 0.25 $ 0.95

Diluted $ 0.16 $ 0.25 $ 0.93

Common shares and equivalents outstanding

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Diluted weighted average shares 48,696,341 48,312,271 48,045,084

Other comprehensive loss

Other comprehensive income (loss)

Foreign currency translation adjustment 4,571 2,641 ( 5,218 )

Unrealized (loss) gain on derivative instruments, net of tax ( 1,778 ) ( 2,821 ) 583

Total other comprehensive loss

Total other comprehensive income (loss) 2,793 ( 180 ) ( 4,635 )

Comprehensive income $ 10,510 $ 11,728 $ 40,206

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Cash flows from operating activities

Net income $ 7,717 $ 11,908 $ 44,841

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 92,735 85,693 79,566

Provision for doubtful accounts and sales returns

Provision for credit losses and sales returns 13,230 8,725 6,890

Stock-based compensation expense 87,257 58,633 48,274

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Purchase of net assets of acquired companies, net of cash and restricted cash acquired — ( 109,353 ) ( 44,943 )

Purchase of derivative instruments

Proceeds from settlement of derivative instruments

Other investing activities — 500 ( 500 )

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Change in customer funds receivable 138 1,301 ( 844 )

Purchase of treasury stock ( 41,001 ) — —

Dividend payments to stockholders ( 5,960 ) ( 23,607 ) ( 23,312 )

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities ( 10,679 ) 111,213 ( 291,908 )

Effect of exchange rate on cash, cash equivalents and restricted cash 2,245 978 ( 2,014 )

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Cash (paid) received during the year for:

Interest $ ( 15,716 ) $ ( 19,926 ) $ ( 15,261 )

Taxes, net of refunds ( 3,563 ) ( 383 ) 7,138

Non-cash investing and financing activities:

Purchase of property and equipment by assuming directly related liabilities ( 61,064 ) — —

Purchase of equipment and other assets included in accounts payable ( 840 ) ( 794 ) ( 882 )

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The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown above in the consolidated statements of cash flows:

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

Cash and cash equivalents $ 35,750 $ 31,810

Restricted cash due to customers

Restricted cash 609,219 545,485

Total cash, cash equivalents and restricted cash in the statement of cash flows $ 644,969 $ 577,295

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Consolidated Statements of Stockholders' Equity

(dollars in thousands)

(dollars in thousands) Common stock Additional

capital Treasury

stock Accumulated

comprehensive

Total stockholders' equity

loss Retained

earnings Total stockholders' equity

Shares Amount

Balance at December 31, 2017 58,551,761 $ 59 $ 351,042 $ ( 239,199 ) $ ( 642 ) $ 225,029 $ 336,289

Net income — — — — — 44,841 44,841

Payment of dividends ($ 0.48 per share)

— — — — — ( 23,312 ) ( 23,312 )

Exercise of stock options and stock appreciation rights and vesting of restricted stock units 349,248 — 11 — — — 11

Employee taxes paid for 284,780 withheld shares upon equity award settlement

— — — ( 27,685 ) — — ( 27,685 )

Stock-based compensation — — 48,188 — — 86 48,274

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Other comprehensive loss — — — — ( 4,635 ) — ( 4,635 )

Reclassification upon adoption of ASU 2018-02 (1)

— — — — 167 ( 167 ) —

Balance at December 31, 2018 59,327,633 $ 59 $ 399,241 $ ( 266,884 ) $ ( 5,110 ) $ 246,477 $ 373,783

Net income — — — — — 11,908 11,908

Payment of dividends ($ 0.48 per share)

— — — — — ( 23,607 ) ( 23,607 )

Exercise of stock options and stock appreciation rights and vesting of restricted stock units 267,455 — 7 — — — 7

Employee taxes paid for 305,780 withheld shares upon equity award settlement

— — — ( 23,781 ) — — ( 23,781 )

Stock-based compensation — — 58,556 — — 77 58,633

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Other comprehensive loss — — — — ( 180 ) — ( 180 )

Reclassification upon adoption of ASU 2018-02 (1)

Balance at December 31, 2019 60,206,091 $ 60 $ 457,804 $ ( 290,665 ) $ ( 5,290 ) $ 234,855 $ 396,764

Net income — — — — — 7,717 7,717

Payment of dividends ($ 0.12 per share) (2)

Exercise of stock options and stock appreciation rights and vesting of restricted stock units

— — — — — ( 5,960 ) ( 5,960 )

Purchase of 714,000 treasury shares under stock repurchase program

— — — ( 41,001 ) — — ( 41,001 )

Exercise of stock options and vesting of restricted stock units 218,141 — 4 — — — 4

Employee taxes paid for 273,914 withheld shares upon equity award settlement

— — — ( 21,425 ) — — ( 21,425 )

Stock-based compensation — — 87,155 — — 102 87,257

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Restricted stock cancellations ( 177,077 ) — — — — — —

Other comprehensive loss

Other comprehensive income — — — — 2,793 — 2,793

Balance at December 31, 2020 60,904,638 $ 61 $ 544,963 $ ( 353,091 ) $ ( 2,497 ) $ 236,714 $ 426,150

(1) Refer to the discussion of recently adopted accounting pronouncements in Note 2 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on February 20, 2019.

(2) Represents dividends paid in Q1 2020.

See Note 14 of these consolidated financial statements for a discussion of our Board of Directors' decision to discontinue the declaration and payments of all cash dividends beginning in Q2 2020.

The accompanying notes are an integral part of these consolidated financial statements.

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We are the world’s leading cloud software company powering social good.

Serving the entire social good community—nonprofits, foundations, companies, education institutions, healthcare organizations and individual change agents— we connect and empower organizations and individuals to increase their impact through cloud software, services, expertise and data intelligence.

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 and individuals 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.

Serving the industry for nearly four decades, we are headquartered in Charleston, South Carolina, and have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom.

As of December 31, 2020, we had over 45,000 global customers.

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All intercompany balances and transactions have been eliminated in consolidation.

Risks and uncertainties related to COVID-19

We are subject to risks and uncertainties as a result of the global COVID-19 pandemic.

We believe that COVID-19 has impacted and will continue to impact all of our vertical markets across all of our geographies to some degree, but the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including, the duration of the outbreak, travel restrictions and business closures, the effectiveness of vaccination programs and other actions taken to contain the disease and other unforeseeable consequences.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.

On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets , income taxes, business combinations, stock-based compensation, capitalization of software development costs, our allowances for sales returns and doubtful accounts, costs of obtaining contracts, valuation of derivative instruments and loss contingencies, among others.

Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates.

On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets, income taxes, business combinations, stock-based compensation, capitalization of software development costs, our allowances for credit losses and sales returns, costs of obtaining contracts, valuation of derivative instruments and loss contingencies, among others.

Changes in the facts or circumstances underlying these estimates, including due to COVID-19, could result in material changes and actual results could materially differ from these estimates.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Response to COVID-19

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 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:

• Temporarily closed our offices worldwide and transitioned our employees to work remotely;

• 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;

• 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, between April 1, 2020 and December 31, 2020;

• Made a discretionary matching contribution to eligible employees 401(k) plans in December 2020 totaling $ 1.2 million, given our financial performance during the fourth quarter;

• Temporarily froze our hiring efforts and implemented a modest and targeted headcount reduction, though we have since begun 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 restricted stock units with a total grant date fair value of $ 8.3 million 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;

• On May 1, 2020, we granted performance-based restricted stock units with a total grant date fair value of $ 34.4 million 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.

Most of the transactions related to these real estate activities closed during the fourth quarter of 2020 with an aggregate one-time cash outlay of $ 21.9 million during the third and fourth quarters of 2020.

We incurred approximately $ 23.1 million of pre-tax costs related to these real estate activities during the third and fourth quarters of 2020.

These activities are expected to result in future annual before-tax savings of approximately $ 14.0 million beginning in 2021.

Recently adopted accounting pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02").

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

ASU 2016-13 requires certain types of financial instruments, including trade receivables, to be presented at the net amount expected to be collected based on historical events, current conditions and forward-looking information.

We adopted ASU 2016-13 as of the January 1, 2020 effective date and the adoption did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”).

ASU 2018-15 aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software.

We adopted ASU 2018-15 prospectively as of the January 1, 2020 effective date and the adoption did not have a material impact on our consolidated financial statements.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02").

ASU 2016-02 requires lessees to record most leases on their balance sheet but recognize expenses in the income statement in a manner similar to previous guidance.

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Adopting ASU 2016-02 had a material impact on our consolidated balance sheet as of January 1, 2019, as we recognized $ 121.6 million of lease liabilities and $ 113.4 million of right-of-use ("ROU") assets for those leases classified as operating leases.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Recently issued accounting pronouncements

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Our recurring revenue contracts are generally for a term of 3 years at contract inception with 1 to 3 -year renewals thereafter, billed annually in advance and non-cancelable.

Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, hosting services, online training programs, subscription-based analytic services, such as donor acquisitions and data enrichment, and payment services.

Recurring revenue also includes fees from maintenance services for our on-premises solutions, services included in our renewable subscription contracts, subscription-based contracts for professional services and variable transaction revenue associated with the use of our solutions.

Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, hosting services, payment services, online training programs, subscription-based analytic services, such as donor acquisitions and data enrichment 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.

Our payment services are offered with the assistance of third-party vendors.

In general, when we are the principal in a transaction based on the factors identified in ASC 606-10-55-36 through 55-40, we record the revenue and related costs on a gross basis.

In general, when we are the principal in a transaction based on the factors identified in ASC 606-10-55-36 through 55-40, we record the revenue and related

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

costs on a gross basis.

Otherwise, we net the cost of revenue associated with the service against the gross revenue (amount billed to the customer) and record the net amount as revenue.

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One-time services and other

One-time services and other revenue primarily consists of fees for one-time consulting, analytic and onsite training services.

One-time services and other revenue is primarily 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, and fees from user conferences.

We generally bill consulting services based on hourly rates plus reimbursable travel-related expenses.

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Revenue for all consulting services is recognized over time as the services are performed.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

We generally recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, data enrichment engagements and benchmarking studies at a point in time (upon delivery).

In certain cases, we sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the customer attending and completing training.

Fees for retained and managed services contracts are generally billed in advance and recognized over time on a ratable basis over the contract term, beginning on the date the service is made available to the customer.

Contracts with multiple performance obligations

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To the extent that our customers are billed for our solutions and services in advance of us satisfying the related performance obligations, we record such amounts in deferred revenue.

We present sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, exclude them from revenues.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Fair value measurements

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All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Derivative instruments

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Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

We record all derivative instruments on our consolidated balance sheets at fair value.

We record all derivative instruments on our consolidated balance sheets at fair value as either an asset or liability.

If the derivative is designated as a cash flow hedge, the effective portions of the changes in fair value of the derivative are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.

Ineffective portions of the changes in the fair value of cash flow hedges are recognized currently in earnings.

See Note 10 of these consolidated financial statements for further discussion of our derivative instruments.

We present sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, exclude them from revenues.

See Note 10 to these consolidated financial statements for further discussion of our derivative instruments.

Cash and cash equivalents

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Our accounts receivable is derived from sales to customers who primarily operate in the nonprofit sector.

With respect to accounts receivable, we perform ongoing evaluations of our customers and maintain an allowance for doubtful accounts based on historical experience and our expectations of future credit losses.

With respect to accounts receivable, we perform ongoing evaluations of our customers and maintain an allowance for credit losses based on historical experience and our

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

expectations of future credit losses.

As of and for the years ended December 31, 2020, 2019 and 2018, there were no significant concentrations with respect to our consolidated revenues or accounts receivable.

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There was no capitalized interest applicable to construction-in-progress for the years ended December 31, 2020, 2019 and 2018.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Business combinations

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In each of 2020, 2019 and 2018, we performed the quantitative impairment test, which indicated that the estimated fair values of the identified reporting units significantly exceeded their respective carrying values.

There was no impairment of goodwill during 2019, 2018 or 2017.

There was no impairment of goodwill during 2020, 2019 and 2018.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Intangible assets other than goodwill

We amortize finite-lived intangible assets over their estimated useful lives as follows.

Basis of amortization

Customer relationships

Straight-line and accelerated (1)

Marketing assets

Straight-line

Acquired software and technology

Straight-line and accelerated (1)

Non-compete agreements

Straight-line

Basis of amortization Amortization

Customer relationships Straight-line and accelerated (1)

Marketing assets Straight-line 2 - 15

Acquired software and technology Straight-line and accelerated (1)

(1) Certain of the customer relationships and acquired software and technology assets are amortized on an accelerated basis.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

We write off the gross carrying amount and accumulated amortization balances for all fully amortized intangible assets.

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See Note 6 to these consolidated financial statements for a discussion of our impairment of certain acquired intangible assets during 2019.

There was no impairment of acquired intangible assets during 2018 or 2017.

There were no impairments of acquired intangible assets during 2020 and 2018.

Impairment of long-lived assets

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If such events or changes in circumstances are present, the undiscounted cash flow method is used to determine whether the asset is impaired.

See Note 6 to these consolidated financial statements for a discussion of our impairment of certain long-lived assets during 2019.

No impairment of long-lived assets occurred in 2018 or 2017 .

Deferred financing costs

Deferred financing costs included in other assets represent the direct third-party costs of entering into the revolving (line-of-credit) portion of our credit facility in June 2017 and portions of the unamortized deferred financing costs from prior facilities.

See Note 6 to these consolidated financial statements for a discussion of our impairment of certain long-lived assets during 2020 and 2019.

There was no impairment of long-lived assets during 2018.

Deferred financing costs and debt discount

Deferred financing costs included in other assets represent the direct third-party costs of entering into the revolving (line-of-credit) portion of our credit facility in October 2020 and portions of the unamortized deferred financing costs from prior facilities.

These costs are amortized ratably over the term of the credit facility as interest expense.

Other debt issuance costs, as well as the debt discount associated with our 2020 Credit facility (as defined below) and portions of the unamortized balances from prior facilities, are recorded as a direct deduction from debt.

These costs are amortized over the term of the credit facility as interest expense.

Stock-based compensation

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Previously recognized compensation cost for an award is reversed in the period that the award is forfeited.

Income tax benefits resulting from the vesting and exercise of stock-based compensation awards are recognized in the period the unit or award is vested or option or right is exercised.

Income tax benefits resulting from

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

the vesting and exercise of stock-based compensation awards are recognized in the period the unit or award is vested or option or right is exercised.

We make estimates and judgments in accounting for income taxes.

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If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to increase income tax expense, thereby reducing net income in the period such determination was made.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

We measure and recognize uncertain tax positions.

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Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are recorded at the approximate rate of exchange at the transaction date in other income, net.

For the year ended December 31, 2019 , we recorded a net foreign currency loss that was insignificant.

For the year ended December 31, 2018 , we recorded a net foreign currency loss of $ 0.9 million .

For the year ended December 31, 2017 , we recorded net foreign currency gain of $ 1.1 million .

For the years ended December 31, 2020 and 2018, we recorded net foreign currency losses of $ 1.1 million and $ 0.9 million, respectively.

For the year ended 2019, we recorded a net foreign currency loss that was insignificant.

Research and development

Research and development costs are expensed as incurred except as noted below under Software development costs .

These costs include compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to researching and developing new solutions, upgrading and enhancing existing solutions, and allocated depreciation, facilities and IT support costs.

These costs include compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to researching and developing new solutions or upgrading and enhancing existing solutions that do not qualify for capitalization, and allocated depreciation, facilities and IT support costs.

Software development costs

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Qualifying costs capitalized during the application development stage include those related to specific upgrades and enhancements when it is probable that those costs incurred will result in additional functionality.

Overhead costs, including general and administrative costs, as well as maintenance, training and all other costs associated with post-implementation stage activities are expensed as incurred.

Overhead costs, including general and administrative costs, as well as maintenance, training and all other costs associated with post-implementation stage

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

activities are expensed as incurred.

In addition, internal costs that cannot be reasonably separated between maintenance and relatively minor upgrades and enhancements are expensed as incurred.

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We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

See Note 6 to these consolidated financial statements for a discussion of our impairment of certain capitalized software development costs during 2020.

There were no impairment charges related to capitalized software development costs during the years ended December 31, 2019 and 2018.

We write off the gross carrying amount and accumulated amortization balances for all fully amortized software development cost assets.

Sales returns and allowance for doubtful accounts

Allowance for credit losses

Our accounts receivable consist of a single portfolio segment.

Accounts receivable are recorded at original invoice amounts less an allowance for credit losses, an amount we estimate to be sufficient to provide adequate protection against lifetime expected losses resulting from extending credit to our customers.

In judging the adequacy of the allowance for credit losses, we consider multiple factors including historical bad debt experience, the current aging of our receivables and current economic conditions that may affect our customers' ability to pay.

A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for credit losses could be required.

Accounts are written off after all means of collection are exhausted and recovery is considered remote.

Provisions for credit losses are recorded in general and administrative expense.

Below is a summary of the changes in our allowance for credit losses.

Years ended December 31,

(in thousands) Balance at

beginning of year Provision/

adjustment Write-off Recovery Balance at

$ 4,011 $ 6,787 $ ( 2,363 ) $ 581 $ 9,016

2019 1,345 2,476 ( 2,617 ) 679 1,883

2018 741 2,446 ( 2,663 ) 821 1,345

(1) Upon adoption of ASU 2016-13 at January 1, 2020, we reclassified certain balances previously disclosed within the allowance for sales returns to the allowance for credit losses, as these amounts reflect the credit risk associated with our accounts receivable.

The amount reclassified was $ 2.1 million.

The increase in our allowance for credit losses during the year ended December 31, 2020 was primarily due to an increase in the aging of our receivables during the second and third quarters of 2020 associated with the COVID-19 pandemic.

We saw some improvement in our customers' payment behavior during the fourth quarter.

The amount of write-offs during the year ended December 31, 2020 was lower than the amount of write-offs during the same period in 2019 as we temporarily suspended sending past due customer accounts to collections during the second and third quarters due to payment delays related to COVID-19.

Allowance for sales returns

We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and the nature of service level commitments.

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Provisions for sales returns and credits are charged against the related revenue items.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Accounts receivable are recorded at original invoice amounts less an allowance for doubtful accounts, an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers.

In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment and the aging of our receivables.

A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for doubtful accounts could be required.

Accounts are written off after all means of collection are exhausted and recovery is considered remote.

Provisions for doubtful accounts are recorded in general and administrative expense.

Below is a summary of the changes in our allowance for sales returns.

Years ended December 31,

(in thousands)

beginning of year

Below is a summary of the changes in our allowance for doubtful accounts.

Years ended December 31,

(in thousands)

beginning of year

(in thousands) Balance at

beginning of year Provision/

adjustment Deduction Balance at

$ 1,518 $ 6,443 $ ( 6,685 ) $ 1,276

2019 3,377 6,232 ( 5,963 ) 3,646

2018 4,400 4,952 ( 5,975 ) 3,377

(1) As discussed above, we reclassified certain balances previously disclosed within the allowance for sales returns to the allowance for credit losses upon adoption of ASU 2016-13 at January 1, 2020.

The amount reclassified was $ 2.1 million.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Advertising costs

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The liability for costs associated with exit or disposal activities is measured initially at fair value and only recognized when the liability is incurred.

For details of our restructuring activities, see Note 19 of these consolidated financial statements.

For details of our restructuring activities, see Note 19 to these consolidated financial statements.

We determine if an arrangement is a lease at inception.

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Variable lease payments, which are primarily comprised of common-area maintenance, utilities and real estate taxes that are passed on from the lessor in proportion to the space leased by us, are recognized in operating expenses in the period in which the obligation for those payments is incurred.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Contingencies

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Potentially dilutive securities consist of shares issuable upon the exercise of stock options and stock appreciation rights and vesting of restricted stock awards and units.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Business Combinations

2019 Acquisitions

2019 Acquisition

On January 2, 2019, we acquired all of the outstanding equity securities, including all voting equity interests, of YourCause Holdings, LLC, a Delaware limited liability company ("YourCause"), pursuant to a purchase agreement and plan of merger.

The acquisition expands our footprint in corporate social responsibility and employee engagement and enhances our position as a leader in providing solutions to both nonprofit organizations and for-profit companies committed to addressing social issues.

The acquisition expanded our footprint in corporate social responsibility and employee engagement and enhanced our position as a leader in providing solutions to both nonprofit organizations and for-profit companies committed to addressing social issues.

We acquired the equity securities for an aggregate purchase price of $ 157.7 million in cash, net of closing adjustments.

The purchase price and related expenses were funded primarily through borrowings under the 2017 Credit Facility (as defined below).

As a result of the acquisition, YourCause has become a wholly owned subsidiary of ours.

The operating results of YourCause have been included in our consolidated financial statements from the date of acquisition.

During the year ended December 31, 2019 , we incurred insignificant acquisition-related expenses associated with the acquisition, which were recorded in general and administrative expense.

The fair values assigned to the assets acquired and liabilities assumed in the table below are based on our best estimates and assumptions as of the reporting date.

The purchase price and related expenses were funded primarily through borrowings under the 2017 Credit Facility.

As a result of the acquisition, YourCause became a wholly owned subsidiary of ours.

We finalized the purchase price allocation of YourCause, including the valuation of assets acquired and liabilities assumed, during the fourth quarter of 2019.

(in thousands)

Purchase price allocation

Net working capital, excluding deferred revenue

Other long-term assets

Identifiable intangible assets

Deferred tax liability

Deferred revenue

Other long-term liabilities

Total purchase price

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

The estimated fair value of accounts receivable acquired approximates the contractual value of $ 4.2 million and $ 54.6 million of the goodwill arising in the acquisition is deductible for income tax purposes.

The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining the operations and assembled workforce of YourCause.

During the year ended December 31, 2019 , we recorded insignificant measurement period adjustments to the estimated fair value of the YourCause assets acquired and liabilities assumed following the receipt of new information.

The adjustments resulted in an increase to net working capital, excluding deferred revenue, with the corresponding offset to goodwill.

The YourCause acquisition resulted in the identification of the following identifiable intangible assets:

Weighted average amortization period

Intangible assets acquired

Valuation Method

(in thousands)

Acquired technology

Relief-from-Royalty

Customer relationships

Multi-period Excess Earnings

Marketing assets

Relief-from-Royalty

Non-compete agreements

Comparative (With and Without)

Total intangible assets

The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up.

Customer relationships and acquired technology assets are being amortized on an accelerated basis.

Marketing assets are being amortized on a straight-line basis.

The non-compete agreements were fully amortized as of March 31, 2019, based on the insignificance of the acquired assets.

All measurement period adjustments were insignificant.

We determined that the impact of this acquisition was not material to our consolidated financial statements;

therefore, separate presentation of revenue and earnings since the acquisition date and pro forma information are not required nor included herein.

2018 Acquisitions

therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.

2018 Acquisition

On April 30, 2018, we acquired all of the outstanding equity securities, including all voting equity interests, of Reeher LLC, a Minnesota limited liability company (“Reeher”), pursuant to a securities purchase agreement.

The acquisition expands our fundraising performance management capabilities and is intended to drive more effective fundraising and greater social good outcomes for our customers.

The acquisition expanded our fundraising performance management capabilities with the goal of driving more effective fundraising and greater social good outcomes for our customers.

We acquired the equity securities for an aggregate purchase price of $ 41.2 million in cash, net of closing adjustments.

The purchase price and related expenses were funded primarily through borrowings under the 2017 Credit Facility (as defined in Note 9 of these consolidated financial statements).

As a result of the acquisition, Reeher has become a wholly owned subsidiary of ours.

The purchase price and related expenses were funded primarily through borrowings under the 2017 Credit Facility.

As a result of the acquisition, Reeher became a wholly owned subsidiary of ours.

We finalized the purchase price allocation of Reeher, including the valuation of assets acquired and liabilities assumed, during the second quarter of 2019.

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therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.

2017 Acquisitions

On October 2, 2017 , Blackbaud Global Limited (“Blackbaud Global”), a U.K.

limited liability company and wholly owned subsidiary of ours, acquired the entire issued share capital, including all voting equity interests, of Giving Limited, a U.K.

private limited company doing business as “JustGiving” for an aggregate purchase price, including certain post-closing adjustments set forth in the related stock purchase agreement, of £ 102.4 million , or approximately $ 137.2 million , in cash.

JustGiving is a market leading social platform for giving, and the acquisition is expected to enhance our capabilities to

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

serve both individual donors and nonprofits, expanding the peer-to-peer fundraising capabilities we offer today.

As a result of the acquisition, JustGiving has become a wholly owned subsidiary of ours.

We financed the acquisition of JustGiving through cash on hand and borrowings of $ 138.7 million under the 2017 Credit Facility.

We finalized the purchase price allocation of JustGiving, including the valuation of assets acquired and liabilities assumed, during the fourth quarter of 2018.

All measurement period adjustments were insignificant.

We determined that the impact of this acquisition was not material to our consolidated financial statements;

therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.

AcademicWorks

On April 3, 2017 , we acquired all of the outstanding shares of capital stock, including all voting equity interests, of AcademicWorks, Inc., a Texas corporation ("AcademicWorks"), pursuant to a stock purchase agreement.

AcademicWorks is the market leader in scholarship management for higher education and K-12 institutions, foundations, and grant-making institutions.

The acquisition extends our offerings for our higher education, K-12, and corporate and foundation customers.

We acquired AcademicWorks for $ 52.1 million in cash, net of closing adjustments.

We financed the acquisition through a drawdown of a revolving credit loan under our then-existing credit facility.

As a result of the acquisition, AcademicWorks has become a wholly owned subsidiary of ours.

We finalized the purchase price allocation of AcademicWorks, including the valuation of assets acquired and liabilities assumed, during the first quarter of 2018.

All measurement period adjustments were insignificant.

We determined that the impact of this acquisition was not material to our consolidated financial statements;

therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.

Goodwill and Other Intangible Assets

The change in our goodwill during 2020 consisted of the following:

(dollars in thousands)

(dollars in thousands) Total

Balance at December 31, 2019 $ 634,088

Additions related to current year business combinations

Effect of foreign currency translation 1,766

2 unchanged sentences

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

We have recorded intangible assets acquired in various business combinations based on their fair values at the date of acquisition.

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Total accumulated amortization ( 276,591 ) ( 238,596 )

Indefinite-lived gross carrying amount

Marketing assets

Intangible assets, net $ 277,506 $ 317,895

During the year ended December 31, 2019 , changes to the gross carrying amounts of intangible asset classes were primarily related to our business acquisitions as described in Note 3 of these financial statements, write-offs of fully amortized intangible assets, and the effect of foreign currency translation.

During the year ended December 31, 2019 , we also recorded an impairment charge of $ 0.9 million against an acquired marketing asset that reduced the carrying value of the asset to zero.

During the year ended December 31, 2020, changes to the gross carrying amounts of intangible asset classes were primarily related to write-offs of fully amortized intangible assets and the effect of foreign currency translation.

During the year ended December 31, 2019, we recorded an impairment charge of $ 0.9 million against an acquired marketing asset that reduced the carrying value of the asset to zero.

The impairment charge resulted from our decision during the year to rebrand the solution to which the asset related.

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Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue on the consolidated statements of comprehensive income based on the revenue stream to which the asset contributes, except for marketing assets and non-compete agreements, for which the associated amortization expense is included in operating expenses.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

The following table summarizes amortization expense of our finite-lived intangible assets:

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Total amortization of intangibles from business combinations $ 41,883 $ 50,085 $ 47,077

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

The following table outlines the estimated future amortization expense for each of the next five years for our finite-lived intangible assets as of December 31, 2020:

Years ending December 31,

(dollars in thousands)

(dollars in thousands) Amortization

Total $ 169,111

Earnings Per Share

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(dollars in thousands, except per share amounts) 2020 2019 2018

Net income $ 7,717 $ 11,908 $ 44,841

Weighted average common shares 48,184,714 47,695,383 47,206,669

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Earnings per share:

Basic $ 0.16 $ 0.25 $ 0.95

Diluted $ 0.16 $ 0.25 $ 0.93

Anti-dilutive shares excluded from calculations of diluted earnings per share 956,303 241,336 48,881

1 unchanged sentence

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

Fair Value Measurements

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Fair value measurement using

(dollars in thousands)

(dollars in thousands) Level 1 Level 2 Level 3 Total

Fair value as of December 31, 2020

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Fair value as of December 31, 2019

Financial assets:

Derivative instruments

Total financial assets

Fair value as of December 31, 2018

Financial liabilities:

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Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy.

We believe the carrying amounts of our cash and cash equivalents, restricted cash due to customers, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at December 31, 2019 and December 31, 2018 , due to the immediate or short-term maturity of these instruments.

The Financial Conduct Authority in the U.K.

has stated that it plans to phase out LIBOR by the end of calendar year 2021.

We do not currently anticipate a significant impact to our financial position or results of operations as a result of this action as we expect that our financial contracts currently indexed to LIBOR will either expire or be modified without significant financial impact before the phase out occurs.

We believe the carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at December 31, 2020 and December 31, 2019, due to the immediate or short-term maturity of these instruments.

We believe the carrying amount of our debt approximates its fair value at December 31, 2020 and December 31, 2019, as the debt bears interest rates that approximate market value.

As LIBOR rates are observable at commonly quoted intervals, our debt is classified within Level 2 of the fair value hierarchy.

As LIBOR rates are observable at commonly quoted intervals, our debt under the 2020 Credit Facility (as defined below) is classified within Level 2 of the fair value hierarchy.

Our fixed rate debt is also classified within Level 2 of the fair value hierarchy.

We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the years ended December 31, 2020, 2019 and 2018.

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Non-recurring fair value measurements

Assets and liabilities that are measured at fair value on a non-recurring basis include long-lived, intangible assets, goodwill and operating lease ROU assets, which are recognized at fair value during the period in which an acquisition is completed or at lease commencement, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired.

Assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets, intangible assets, goodwill and operating lease ROU assets, which are recognized at fair value during the period in which an acquisition is completed or at lease commencement, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired.

These non-recurring fair value measurements, primarily for long-lived assets, intangible assets acquired and operating lease ROU assets, are based on Level 3 unobservable inputs.

In the event of an impairment, we determine the fair value of these assets other than goodwill using a discounted cash flow approach, which contains

In the event of an impairment, we determine the fair value of these assets other than goodwill using a discounted cash flow approach, which contains significant unobservable inputs and, therefore, is considered a Level 3 fair value measurement.

The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

significant unobservable inputs and, therefore, is considered a Level 3 fair value measurement.

The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.

For goodwill impairment testing, we estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium.

Notes to Consolidated Financial Statements

impairment testing, we estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium.

As more fully described in Note 7 and Note 11, during the year ended December 31, 2020, we recorded impairment charges of $ 4.3 million against certain previously capitalized software development costs and $ 4.0 million against our operating lease ROU assets.

During the year ended December 31, 2019, we recorded impairment charges of $ 3.8 million against our operating lease ROU assets, $ 1.4 million against certain property and equipment assets and $ 0.9 million against certain finite-lived intangible assets.

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There were no other non-recurring fair value adjustments during 2020, 2019 and 2018 except for certain business combination accounting adjustments to the initial fair value estimates of the assets acquired and liabilities assumed at the acquisition date from updated estimates and assumptions during the measurement period.

See Note 3 and Note 4 to these consolidated financial statements for additional details.

The measurement period may be up to one year from the acquisition date.

We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.

See Note 3 to these consolidated financial statements for additional details.

Property and Equipment and Software Development Costs

Purchase of Global Headquarters Facility

In August 2020, we completed the purchase of the building, fixtures and other improvements and parcels of land of our Global Headquarters Facility in Charleston, South Carolina, pursuant to a Purchase and Sale Agreement (the "PSA") with HPBB1, LLC, a Georgia limited liability company (the "Seller") (the "Transaction").

Prior to the completion of the Transaction, we leased the Global 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 our then-existing credit facility.

We capitalized the insignificant direct transaction costs we incurred as a component of the assets acquired.

As a result of the Transaction, we derecognized the ROU asset and lease liability associated with the former lease and recorded the following long-lived assets on a relative fair value basis in property and equipment, net upon closing:

(dollars in thousands) Assets

acquired Estimated useful life (years)

Land $ 9,548 —

Building 61,284 39

Building improvements 4,393 7 - 15

Total long-lived assets $ 75,225

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Property and equipment

Property and equipment consisted of the following as of:

(years) December 31,

(dollars in thousands) 2020 2019

Land — $ 9,548 $ —

Building 39 61,284 —

Building improvements (1)

Equipment 1 - 5

Computer hardware 1 - 5

56,202 67,045

Computer software 1 - 5

23,116 35,726

Construction in progress — 3,435 213

Furniture and fixtures 1 - 7

Leasehold improvements

Lesser of lea se term or estimated useful life

Leasehold improvements Lesser of lease term or estimated useful life 6,044 24,295

Total property and equipment 175,232 139,614

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Property and equipment, net $ 105,177 $ 35,546

(1) Upon acquisition of our Global Headquarters Facility in August 2020, we reclassified related leasehold improvement costs of $ 5.5 million to building improvements given the acquisition of the underlying assets.

Depreciation expense was $ 19.2 million, $ 15.0 million and $ 15.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

During the year ended December 31, 2019, we recorded impairment charges of $ 1.4 million against certain property and equipment assets that reduced the carrying value of the assets to zero.

These impairment charges resulted primarily from our facilities optimization restructuring as we wrote-off facilities-related fixed assets that we would no longer use.

These impairment charges are reflected in restructuring on the statements of comprehensive income and resulted primarily from our facilities optimization restructuring as we wrote-off facilities-related fixed assets that we would no longer use.

See Note 19 to these consolidated financial statements for additional details regarding our facilities optimization restructuring.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Software development costs

Software development costs consisted of the following as of:

(years) December 31,

(dollars in thousands) 2020 2019

Software development costs 3 - 7

$ 164,665 $ 139,014

accumulated amortization ( 52,838 ) ( 37,712 )

Software development costs, net $ 111,827 $ 101,302

During the year ended December 31, 2019 , changes to the gross carrying amount of software development costs were primarily related to 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, write-offs of fully amortized assets, and the effect of foreign currency translation.

During the year ended December 31, 2020, we recorded an impairment charge of $ 4.3 million against certain previously capitalized software development costs that reduced the carrying value of those assets to zero.

The impairment charge is reflected in cost of recurring revenue and resulted primarily from our decision to accelerate the end of customer support for certain solutions.

Other changes to the gross carrying amount of software development costs were primarily related to 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, write-offs of fully amortized assets, and the effect of foreign currency translation.

Amortization expense related to software development costs was $ 31.7 million, $ 20.7 million and $ 16.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, and is included primarily in cost of recurring.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Consolidated Financial Statement Details

Restricted cash

(dollars in thousands) December 31,

2020 December 31,

Restricted cash due to customers $ 607,943 $ 545,485

Real estate escrow balances 1,276 —

Total restricted cash $ 609,219 $ 545,485

Prepaid expenses and other assets

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

Costs of obtaining contracts (1)(2)

$ 84,914 $ 90,764

Prepaid software maintenance and subscriptions (3)

24,471 17,384

Implementation costs for cloud computing arrangements, net (4)(5)

Unbilled accounts receivable 10,385 6,233

Receivables for probable insurance recoveries (6)

Prepaid insurance 1,426 1,585

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Security deposits 754 885

Other assets 9,578 8,051

Total prepaid expenses and other assets 151,005 133,045

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(2) The current portion of costs of obtaining contracts as of December 31, 2020 and 2019 was $ 31.9 million and $ 33.0 million, respectively.

(3) The current portion of prepaid software maintenance and subscriptions as of December 31, 2020 and December 31, 2019 was $ 19.8 million and $ 16.1 million, respectively.

(4) These costs, which were previously included in prepaid software maintenance and subscriptions, primarily relate to the multi-year implementations of our new global enterprise resource planning and customer relationship management systems.

(5) Amortization expense from capitalized cloud computing implementation costs was $ 0.8 million for the year ended December 31, 2020 and insignificant for the year ended December 31, 2019.

Accumulated amortization for these costs was $ 1.1 million as of December 31, 2020 and insignificant as of December 31, 2019.

(6) See discussion of the Security Incident at Note 11.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

Accrued expenses and other liabilities

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

Operating lease liabilities, current portion $ 9,359 $ 19,784

Accrued bonuses (1)

Accrued commissions and salaries

Taxes payable (2)

Customer credit balances 5,874 4,505

Accrued commissions and salaries 5,010 6,980

Accrued legal costs 4,808 87

Derivative instruments 4,159 1,757

Unrecognized tax benefit 3,351 3,758

Accrued vacation costs

Accrued health care costs 2,341 2,399

Accrued vacation costs 2,311 2,232

Other liabilities 6,304 6,105

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Accrued expenses and other current liabilities $ 52,228 $ 73,317

Upon adoption of ASU 2016-02 at January 1, 2019, we recognized lease liabilities for our operating leases.

See Note 2 of these consolidated financial statements for details.

(1) In March 2020, we reduced our accrued bonuses due to the payment of bonuses from the prior year and, in response to COVID-19, determined to replace our 2020 cash bonus plans with performance-based equity awards (see Note 2) .

(2) We deferred payments of the employer's portion of Social Security taxes during 2020 under the Coronavirus, Aid, Relief and Economic Security Act ("CARES Act"), half of which is due by the end of calendar year 2021 with the remainder due by the end of calendar year 2022.

Deferred revenue

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

Recurring $ 303,840 $ 302,751

One-time services and other 13,074 13,386

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Interest income $ 1,660 $ 2,802 $ 2,008

Gain on derivative instrument

Loss on debt extinguishment

Other income (expense), net

Other (expense) income, net ( 2 ) 1,256 ( 905 )

Other income, net $ 1,658 $ 4,058 $ 1,103

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Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

The following table summarizes our debt balances and the related weighted average effective interest rates, which includes the effect of interest rate swap agreements.

Debt balance at

Weighted average

Debt balance at Weighted average

effective interest rate at

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

2019 December 31,

2020 December 31,

Credit facility:

Revolving credit loans $ 69,625 $ 187,000 1.83 % 3.11 %

Term loans 400,000 281,250 3.12 % 3.22 %

Real estate loans 60,626 — 5.22 % — %

Other debt 3,926 — 5.00 % — %

Total debt 534,177 468,250 3.21 % 3.18 %

Unamortized discount and debt issuance costs 3,144 1,150

2 unchanged sentences

2020 refinancing

We were previously party to a $ 325.0 million 5 -year credit facility entered into during February 2014 .

We were previously party to a 5 -year $ 700.0 million credit facility entered into during June 2017.

The credit facility included:

a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans (the “ 2014 Revolving Facility ”) and a delayed draw term loan (the “ 2014 Term Loan ”) together, (the “ 2014 Credit Facility ”).

In June 2017 , we entered into a 5 -year $ 700.0 million senior credit facility (the “ 2017 Credit Facility ”).

The 2017 Credit Facility includes a $ 400.0 million revolving credit facility (the “ 2017 Revolving Facility ”) and a $ 300.0 million term loan facility (the “ 2017 Term Loan ”).

Upon closing we drew $ 300.0 million on a term loan and $ 110.0 million in revolving credit loans, which was used to repay all amounts outstanding under the 2014 Credit Facility , fees and expenses incurred in connection with the 2017 Credit Facility , and for other general corporate purposes.

Certain lenders of the 2014 Term Loan participated in the 2017 Term Loan and the change in the present value of our future cash flows to these lenders under the 2014 Term Loan and under the 2017 Term Loan was less than 10 % .

Accordingly, we accounted for the refinancing event for these lenders as a debt modification.

a dollar and a designated currency revolving credit facility with sublimits for letters of credit, swingline loans and multicurrency borrowings (the “2017 Revolving Facility”) and a term loan (the “2017 Term Loan”) together, (the “2017 Credit Facility”).

In October 2020, we entered into a 5 -year $ 900.0 million Amended and Restated Credit Agreement (the “2020 Credit Facility”).

The 2020 Credit Facility matures in October 2025 and replaced the 2017 Credit Facility by amending and restating it to include a $ 500.0 million revolving credit facility (the “2020 Revolving Facility”) and a $ 400.0 million term loan facility (the “2020 Term Loan”).

Upon closing, we borrowed $ 400.0 million pursuant to the 2020 Term Loan and used the proceeds to repay the outstanding principal balance of the term loan under the 2017 Credit Facility, and repay $ 124.4 million of outstanding revolving credit loans under the 2017 Revolving Facility.

In connection with the amendment and restatement of the 2017 Credit Facility, the existing Pledge Agreement dated June 2, 2017 (as amended, supplemented or modified from time to time, the “2017 Pledge Agreement”), by us in favor of Bank of Am erica, N.A., as administrative agent, was likewise amended and restated.

Certain lenders of the 2020 Term Loan participated in the 2017 Term Loan and the change in present value of our future cash flows to these lenders under the 2017 Term Loan and under the 2020 Term Loan was less than 10%.

Accordingly, we accounted for the refinancing event as a debt modification.

Certain lenders of the 2017 Term Loan did not participate in the 2020 Term Loan.

4 unchanged sentences

Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment.

In 2017, we recorded an insignificant loss on debt extinguishment related to the write-off of debt discount and deferred financing costs for the portions of the 2014 Credit Facility considered to be extinguished.

This loss was recognized in the consolidated statements of comprehensive income within other income (expense), net.

In connection with our entry into the 2017 Credit Facility , we paid $ 3.1 million in financing costs, of which $ 1.0 million were capitalized in other assets and, together with a portion of the unamortized deferred financing costs from the 2014 Credit Facility and prior facilities, are being amortized into interest expense ratably over the term of the new facility.

As of December 31, 2019 and 2018 , deferred financing costs totaling $ 0.6 million and $ 0.9 million , respectively, were included in other assets on our consolidated balance sheets.

We recorded aggregate financing costs of $ 1.8 million as a direct deduction from the carrying amount of our debt liability, which related to debt discount (fees paid to lenders) and debt issuance costs for the 2017 Term Loan .

Summary of the 2017 Credit Facility

The 2017 Revolving Facility includes (i) a $ 50.0 million sublimit available for the issuance of standby letters of credit, (ii) a $ 50.0 million sublimit available for swingline loans, and (iii) a $ 100.0 million sublimit available for multicurrency borrowings.

We recorded an insignificant loss on debt extinguishment related to the write-off of debt discount and deferred financing costs for the portions of t he 2017 Credit Facility considered to be extinguished.

This loss was recognized in the consolidated statements of comprehensive income within other income, net.

In connection with our entry into the 2020 Credit Facility, we paid $ 4.0 million in financing costs, of which $ 1.2 million were capitalized in other assets and, together with a portion of the unamortized deferred financing costs from the 2017 Credit Facility and prior facilities, are being amortized into interest expense over the term of the new facility.

As of December 31, 2020, deferred financing costs totaling $ 1.5 million were included in other assets on our consolidated balance sheets.

We recorded aggregate financing costs of $ 2.0 million as a direct deduction from the carrying amount

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

The 2017 Credit Facility is secured by the stock and limited liability company interests of certain of our subsidiaries and any of our material domestic subsidiaries.

Amounts borrowed under the dollar tranche revolving credit loans and term loan under the 2017 Credit Facility bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the highest of (i) the prime rate announced by Bank of America, N.A., (ii) the Federal Funds Rate plus 0.50 % and (iii) the Eurocurrency Rate (which varies depending on the currency in which the loan is denominated) plus 1.00 % (the “Base Rate”), in addition to a margin of 0.00 % to 0.75 % , or (b) Eurocurrency Rate plus a margin of 1.00 % to 1.75 % .

Notes to Consolidated Financial Statements

of our debt liability, which related to debt discount (fees paid to lenders) and debt issuance costs for the 2020 Term Loan.

Summary of the 2020 Credit Facility

The 2020 Revolving Facility includes (i) a $ 50.0 million sublimit available for the issuance of standby letters of credit, (ii) a $ 50.0 million sublimit available for swingline loans, and (iii) a $ 100.0 million sublimit available for multicurrency borrowings.

Our obligations under the 2020 Credit Facility are secured by the stock and limited liability company interests of certain of our direct subsidiaries and any of our material domestic subsidiaries, if any, and the proceeds therefrom pledged pursuant to an Amended and Restated Pledge Agreement dated as of October 30, 2020 (the “2020 Pledge Agreement”), by us in favor of Bank of America, N.A., as administrative agent, for the ratable benefit of itself and the secured parties referred to therein.

Dollar tranche loans under the 2020 Revolving Facility and 2020 Term Loan bear interest at a rate per annum equal to (a) a base rate equal to the highest of (i) the Federal Funds Rate plus 0.50 %, (ii) the prime rate announced by Bank of America, N.A., and (iii) the Eurocurrency Rate (which varies depending on the currency in which the loan is denominated) plus 1.00 % (the “Base Rate”), plus (b) an applicable margin as specified in the 2020 Credit Facility (the “Applicable Margin”).

Each Eurocurrency Rate Loan under the 2020 Credit Facility shall bear interest at a rate per annum equal to the Eurocurrency Rate, plus the Applicable Margin.

The Applicable Margin shall be adjusted quarterly, varies based on our net leverage ratio and varies based on whether the loan is a Base Rate Loan ( 0.375 % to 1.125 %) or a Eurocurrency Rate Loan ( 1.375 % to 2.125 %).

We also pay a quarterly commitment fee on the unused portion of the 2020 Revolving Facility from 0.250 % to 0.375 % per annum, depending on our net leverage ratio.

1 unchanged sentence

The term loan under the 2020 Credit Facility requires periodic principal payments.

The balance of the term loan and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022 .

The balance of the term loan and any amounts drawn on the revolving credit loans are due upon maturity of the 2020 Credit Facility in October 2025.

We evaluate the classification of our debt as current or non-current based on the required annual maturities of the 2020 Credit Facility.

The 2017 Credit Facility includes financial covenants related to the net leverage ratio and interest coverage ratio, as well as restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock.

We may prepay the 2020 Credit Facility in whole or in part at any time without premium or penalty, other than customary breakage costs with respect to certain types of loans.

The 2020 Credit Facility contains various representations, warranties and affirmative, negative and financial covenants customary for financings of this type.

Financial covenants include a net leverage ratio and an interest coverage ratio.

At December 31, 2020, we were in compliance with our debt covenants under the 2020 Credit Facility.

The 2017 Credit Facility also includes an option to request increases in the revolving commitments and/or request additional term loans in an aggregate principal amount of up to $ 200.0 million plus an amount, if any, such that the Net Leverage Ratio shall be no greater than 3.00 to 1.00 .

Under the terms of the 2020 Credit Facility, we are entitled on one or more occasions, subject to the satisfaction of certain conditions, to request an increase in the commitments under the Revolving Credit Facility and/or request additional incremental term loans in the aggregate principal amount of up to $ 250.0 million plus an amount, if any, such that the net leverage ratio shall be no greater than 3.25 to 1.00.

At December 31, 2020, our available borrowing capacity under the 2020 Credit Facility was $ 429.3 million.

Financing for 2019 acquisition

On January 2, 2019 , we acquired YourCause for $ 157.7 million in cash, net of closing adjustments.

We financed the acquisition with a revolving credit loan under the 2017 Credit Facility .

In December 2019, we entered into a 4 -year $ 2.2 million agreement to finance our purchase of software and related services for our internal use.

The agreement is a non-interest-bearing note requiring four equal annual payments, with the first payment due in January 2020.

Interest associated with the note will be imputed at the rate we would incur for amounts borrowed under the 2017 Credit Facility .

As of December 31, 2019, there were no amounts outstanding under the agreement.

As of December 31, 2019 , the required annual maturities related to the 2017 Credit Facility were as follows:

Years ending December 31,

(dollars in thousands)

Total required maturities

Real estate loans

In August 2020, we completed the purchase of our Global Headquarters Facility.

As part of the purchase price, we assumed the Seller’s obligations under (i) a 5.12 % Senior Secured Note, Series A1, in the outstanding principal amount of $ 49.1 million, dated May 2, 2018, and (ii) a 5.61 % Senior Secured Note, Series A2, in the outstanding principal amount of $ 12.0 million, dated May 2, 2018, or an aggregate outstanding principal amount of $ 61.1 million (collectively, the “Real Estate Loans”).

The Series A1 Note provides that we will pay the remaining principal amount due thereunder together with interest thereon at the rate indicated above, in monthly installments until it matures in April 2038.

The Series A2 Note provides that we pay interest only in monthly installments at the rate indicated above with the principal amount due at maturity in April 2038.

The Real Estate Loans are secured by a first priority lien on the real property constituting the Global Headquarters Facility.

Our assumption of the Real Estate Loans was a noncash investing and financing transaction and is reflected in our supplemental disclosure of cash flow information.

At December 31, 2020, we were in compliance with our debt covenants under the Real Estate Loans.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

In December 2019, we entered into a 51-month $ 2.2 million agreement to finance our purchase of software and related services for our internal use.

The agreement is a non-interest-bearing note requiring four equal annual payments, where the first payment was due in January 2020.

Interest associated with the note has been imputed at the rate we would incur for amounts borrowed under our then-existing credit facility.

In January 2020, we entered into an additional 39-month $ 3.5 million agreement to finance our purchase of software and related services for our internal use.

The agreement is a non-interest-bearing note requiring three equal annual payments, where the first payment was due in March 2020.

Interest associated with the note has been imputed at the rate we would incur for amounts borrowed under our then-existing credit facility.

As of December 31, 2020, the required annual maturities related to the 2020 Credit Facility, the Real Estate Loans and our other debt were as follows:

Years ending December 31,

(dollars in thousands) Annual

2021 $ 12,840

Thereafter 53,352

Total required maturities $ 534,177

Derivative Instruments

1 unchanged sentence

We generally use derivative instruments to manage our variable interest rate risk.

In July 2017 , we entered into an interest rate swap agreement (the "July 2017 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the July 2017 Swap Agreement.

The notional value of the July 2017 Swap Agreement was $ 150.0 million with an effective date beginning in July 2017 through July 2021 .

We designated the July 2017 Swap Agreement as a cash flow hedge at the inception of the contract.

In February 2018 , we entered into an additional interest rate swap agreement (the " February 2018 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the February 2018 Swap Agreement.

The notional value of the February 2018 Swap Agreement was $ 50.0 million with an effective date beginning in February 2018 through June 2021 .

We designated the February 2018 Swap Agreement as a cash flow hedge at the inception of the contract.

In June 2019 , we entered into an additional interest rate swap agreement (the " June 2019 Swap Agreement"), which effectively converts portions of our variable rate debt under the 2017 Credit Facility to a fixed rate for the term of the June 2019 Swap Agreement.

The notional value of the June 2019 Swap Agreement was $ 75.0 million with an effective date beginning in June 2019 through June 2021 .

We designated the June 2019 Swap Agreement as a cash flow hedge at the inception of the contract.

Undesignated contracts

In June 2017 , we entered into a foreign currency option contract to hedge our exposure to currency fluctuations in connection with our acquisition of JustGiving because the purchase price was denominated in British Pounds.

The notional value of the instrument was £ 100.0 million with an effective date beginning in June 2017 and maturing in September 2017 .

We settled the foreign currency option contract in September 2017.

We did not designate the foreign currency option contract as a cash flow hedge for accounting purposes since it involved a business combination.

As such, changes in the fair value of this derivative were recognized in earnings.

The insignificant premium paid for this option and the $ 1.0 million in proceeds from the settlement are shown within cash flows from investing activities in our consolidated statements of cash flows.

As the closing date of our acquisition of JustGiving extended beyond the settlement date of the foreign currency option contract, we entered into a foreign currency forward contract in September 2017 with settlement in October 2017 .

The notional value of the instrument was £ 103.5 million .

We did not designate the foreign currency forward contract as a cash flow hedge for accounting purposes since it involved a business combination.

As such, changes in the fair value of this derivative were recognized in earnings.

The insignificant premium paid for this forward contract is shown within cash flows from investing activities in our consolidated statements of cash flows.

We have entered into interest rate swap agreements, which effectively convert portions of our variable rate debt under the 2020 Credit Facility to a fixed rate for the term of the swap agreements.

We designated each of the interest rate swap agreements as a cash flow hedge at the inception of the contracts.

The terms and notional values of our derivative instruments were as follows as of December 31, 2020:

(dollars in thousands) Term of derivative instrument Notional

Derivative instruments designated as hedging instruments:

Interest rate swap July 2017 - July 2021 $ 150,000

Interest rate swap February 2018 - June 2021 50,000

Interest rate swap June 2019 - June 2021 75,000

Interest rate swap November 2020 - October 2024 60,000

Forward-starting interest rate swap June 2021 - October 2024 120,000

Forward-starting interest rate swap July 2021 - October 2024 120,000

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

The fair values of our derivative instruments were as follows as of:

Asset Derivatives

Liability Derivatives

(dollars in thousands)

Balance sheet location

(dollars in thousands) Balance sheet location December 31,

2020 December 31,

Derivative instruments designated as hedging instruments:

Interest rate swaps, current portion

Prepaid expenses

and other current assets

Accrued expenses

Interest rate swaps, current portion Accrued expenses

and other current liabilities $ 2,698 $ —

Interest rate swaps, long-term portion

Other liabilities

Interest rate swaps, long-term portion Other liabilities 1,461 1,757

Total derivative instruments designated as hedging instruments $ 4,159 $ 1,757

We did not have any undesignated derivative instruments as of December 31, 2019 and 2018 .

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

The effects of derivative instruments in cash flow hedging relationships were as follows:

2 unchanged sentences

comprehensive

loss as of Location

of gain (loss)

2 unchanged sentences

comprehensive

loss into income

Gain (loss) reclassified from accumulated

loss into income Gain (loss) reclassified from accumulated

other comprehensive loss into income

(dollars in thousands)

(dollars in thousands) December 31,

2020 Year ended

December 31, 2020

Interest rate swaps

Interest expense

Interest rate swaps $ ( 4,159 ) Interest expense $ ( 3,827 )

2019 Year ended

December 31, 2019

Interest rate swaps

Interest expense

Interest rate swaps $ ( 1,757 ) Interest expense $ 573

2018 Year ended

December 31, 2018

Interest rate swaps

Interest expense

Interest rate swaps $ 2,074 Interest expense $ 118

Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract.

1 unchanged sentence

Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings.

The estimated accumulated other comprehensive income as of December 31, 2019 that is expected to be reclassified into earnings within the next twelve months is $ 1.0 million .

The estimated accumulated other comprehensive loss as of December 31, 2020 that is expected to be reclassified into earnings within the next twelve months is $ 3.4 million.

There were no ineffective portions of our interest rate swap derivatives during the years ended December 31, 2020, 2019 and 2018.

See Note 14 to these consolidated financial statements for a summary of the changes in accumulated other comprehensive income (loss) by component.

We did not have any undesignated derivative instruments during 2019 and 2018 .

The effects of undesignated derivative instruments during 2017 were as follows:

Location of gain (loss)

recognized in income on derivative

Gain (loss) recognized in income

(dollars in thousands)

December 31, 2017

Foreign currency option contracts

Other income (expense), net

Foreign currency forward contracts

Other income (expense), net

We did no t have any undesignated derivative instruments during 2020, 2019 and 2018.

Commitments and Contingencies

We have operating leases for corporate offices, subleased offices and certain equipment and furniture.

Our leases have remaining lease terms of less than 1 year to 19 years , some of which include options to extend the leases for up to 5 years .

We do not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants.

In May 2016, we entered into a lease agreement for our Global Headquarters Facility in Charleston, South Carolina.

There are two phases for construction of the Global Headquarters Facility.

Phase One included a building with approximately 172,000 rentable square feet, which we began using in April 2018.

The lease agreement also grants us a Phase Two option to request that the landlord construct and lease to us a second office building and related improvements.

The lease agreement expires in April 2038 and provides for 4 renewal periods of 5 years each at a base rent equal to the then prevailing market rate for comparable buildings.

In August 2020, we completed the purchase of our Global Headquarters Facility that we previously leased (see Note 7).

As of December 31, 2020, we had operating leases for office space that had not yet commenced with future rent payments of $ 3.5 million with a lease term of approximately 3 years.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

We continue to lease our former headquarters facility, now called our Customer Operations Center, in Charleston, South Carolina.

The lease expires in October 2023 and has 2 renewal options of 5 years each.

We also have a lease for office space in Austin, Texas which expires in September 2023 and has 2 renewal options of 5 years each.

For each of the leases discussed above, we have not included the renewal options in the lease terms for calculating the lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time.

As of December 31, 2019 , we had an additional operating lease for equipment that had not yet commenced with future rent payments of $ 0.8 million .

This operating lease commenced on January 1, 2020 with a lease term of 3 years.

Notes to Consolidated Financial Statements

The components of lease expense for the year ended December 31, 2020, were as follows:

1 unchanged sentence

Operating lease cost (1)

$ 41,210 $ 27,519

Variable lease cost 4,266 4,035

2 unchanged sentences

(1) Includes short-term lease costs, which were immaterial.

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 is expected to create efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices.

As a result, during the three months ended September 30, 2020, we reduced the estimate d useful lives of our operating lease ROU assets for certain of our office locations we expected to exit.

We recorded $ 16.2 million in incremental operating lease costs during 2020 related to this change in accounting estimate, which accounts for a substantial portion of the increase in operating lease costs during 2020.

For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in incremental depreciation expense of $ 4.6 million during 2020 (see Note 7).

During the twelve months ended December 31, 2020, we also recorded $ 4.0 million in impairments of op erating lease ROU assets associated with certain leased office spaces we have ceased using as a result of our adjusted workforce strategy.

These impairment charges are reflected in general and administrative expense.

During the twelve months ended December 31, 2019, we recorded $ 3.8 million in impairments of operating lease ROU assets associated with certain leased office spaces we ceased using as part of our facilities optimization restructuring.

1 unchanged sentence

See Note 19 to these consolidated financial statements for additional details regarding our facilities optimization restructuring.

Total rent expense as determined under ASC 840 was $ 22.2 million and $ 17.1 million for the years ended December 31, 2018 and 2017, respectively.

Total rent expense as determined under ASC 840 was $ 22.2 million for the year ended December 31, 2018.

Maturities of our operating lease liabilities as of December 31, 2020 were as follows:

Years ending December 31,

(dollars in thousands)

Operating leases (1)

(dollars in thousands) Operating leases

Thereafter 3,847

Total lease payments 29,529

1 unchanged sentence

Present value of future payments $ 26,716

Our maturities of our operating lease liabilities do not include payments related to Phase Two of our New Headquarters Facility, as that option had not been exercised as of December 31, 2019 .

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

As determined under ASC 840, the future minimum lease payments related to lease agreements with a remaining noncancelable term in excess of one year, net of related sublease commitments and lease incentives, as of December 31, 2018 were as follows:

Years ending December 31,

(dollars in thousands)

Operating leases

Total minimum lease payments

Notes to Consolidated Financial Statements

Our ROU assets and lease liabilities are included in the following line items in our consolidated balance sheet:

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

Operating leases

4 unchanged sentences

As of December 31, 2020, the weighted average remaining lease terms and discount rates were as follows:

(dollars in thousands)

(dollars in thousands) December 31,

2020 December 31,

Operating leases

8 unchanged sentences

Other commitments

As discussed in Note 9 to these consolidated financial statements, the term loans under the 2017 Credit Facility require periodic principal payments.

The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022 .

The term loans under the 2020 Credit Facility require periodic principal payments.

The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2020 Credit Facility in October 2025.

The Real Estate Loans also require periodic principal payments and the balance of the Real Estate Loans are due upon maturity in April 2038.

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

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

In certain cases, these arrangements require a minimum annual purchase commitment by us.

As of December 31, 2020, the remaining aggregate minimum purchase commitment under these arrangements was approximately $ 94.8 million through 2024.

6 unchanged sentences

Pursuant to certain of these agreements we have agreed to indemnify the other party for certain matters, such as property damage, personal injury, acts or omissions of ours, or our employees, agents or representatives, or third-party claims alleging that the activities of its contractual partner pursuant to the contract infringe a patent, trademark or copyright of such third party.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Legal proceedings

We are subject to legal proceedings and claims that arise in the ordinary course of business.

We make a provision for a loss contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Unless otherwise specifically disclosed in this note, we have determined as of December 31, 2019 , that no provision for liability nor disclosure is required related to any claim against us because (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim;

(b) a reasonably possible loss or range of loss cannot be estimated;

or (c) such estimate is immaterial.

All legal costs associated with litigation are expensed as incurred.

Litigation is inherently unpredictable.

However, we believe that we have valid defenses with respect to the legal matters pending against us.

It is possible, nevertheless, that our consolidated financial position, results of operations or cash flows could be negatively affected in any particular period by an unfavorable resolution of one or more of such proceedings, claims or investigations.

We are subject to legal proceedings and claims that arise in the ordinary course of business, as well as certain other non-ordinary course proceedings, claims and inquiries, as described below.

We make a provision for a loss contingency when it is both probable that a material liability has been incurred and the amount of the loss can be reasonably estimated.

If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome;

if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range.

For proceedings in which an unfavorable outcome is reasonably possible but not probable and an estimate of the loss or range of losses arising from the proceeding can be made, we disclose such an estimate, if material.

If such a loss or range of losses is not reasonably estimable, we disclose that fact.

We review any such loss contingency provisions at least quarterly and adjust them to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

We recognize insurance recoveries, if any, when they are probable of receipt.

All associated legal costs are expensed as incurred.

Legal proceedings are inherently unpredictable.

However, we believe that we have valid defenses with respect to the legal matters pending or threatened against us and intend to defend ourselves vigorously against all claims asserted.

We further believe that the amount or range of reasonably possible losses related to such pending or threatened legal proceedings will not have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably.

Security incident

As previously disclosed, we are subject to risks and uncertainties as a result of a ransomware attack against us in May 2020 in which a cybercriminal removed a copy of a subset of data from our self-hosted environment (the "Security Incident").

Based on the nature of the Security Incident, our research and third party (including law enforcement) investigation, we have no reason to believe that any data went beyond the cybercriminal, was or will be misused, or will be disseminated or otherwise made available publicly.

Our investigation into the Security Incident by our cybersecurity team and third-party forensic advisors remains ongoing.

During 2020, we recorded $ 10.4 million of expenses related to the Security Incident and offsetting probable insurance recoveries of $ 9.4 million.

Due to the time required to submit and process such insurance claims, we have not yet received all of the accrued insurance recoveries.

Of the insurance recoveries recorded, $ 3.1 million had been paid as of December 31, 2020.

Recorded expenses consisted primarily of payments to third-party service providers and consultants, including legal fees, and enhancements to our cybersecurity measures.

We present expenses and insurance recoveries related to the Security Incident in general and administrative expense on our condensed consolidated statements of comprehensive income.

We expect to continue to experience increased costs related to our response to the Security Incident and our efforts to further enhance our security measures, which may or may not be material.

As a result of the Security Incident, we are currently subject to certain legal proceedings, claims, inquiries and investigations, as discussed below, and could be the subject of additional legal proceedings, claims, inquires and investigations in the future that might result in adverse judgments, settlements, fines, penalties, or other resolution.

Although we carry insurance policies that we believe will provide coverage for a significant portion of our current and expected future losses and expenses related to the Security Incident, there can be no assurance that they will do so.

Based on our analysis of the factors described above, we have not recorded a liability related to the Security Incident as of December 31, 2020 because we are unable at this time to reasonably estimate the possible loss or range of loss.

Customer claims.

To date, we have received approximately 570 claims for reimbursement of expenses from customers or their attorneys in the U.S., U.K.

and Canada related to the Security Incident (none of which have as yet been filed in court or in arbitration).

Possible exposure could result from our customers’ costs and expenses associated with notifying their own customers of the Security Incident and taking steps to assure that personal information has not been compromised as a result of the Security Incident.

We are in the process of analyzing individual customer contracts into which we have entered, the specific claims made and applicable law.

At this time we cannot determine what, if any, exposure we have in the context of customer claims.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Customer constituent class actions .

Presently, we are a defendant in 30 putative consumer class action cases [ 27 in U.S.

federal courts (some of which have been consolidated under multi district litigation to a single federal court), 1 in a U.S.

state court and 2 in Canadian courts] alleging harm from the Security Incident.

The plaintiffs in these cases, who purport to represent various classes of individual constituents of our customers, generally claim to have been harmed by alleged actions and/or omissions by us in connection with the Security Incident and assert a variety of common law and statutory claims seeking monetary damages, injunctive relief, costs and attorneys’ fees, and other related relief.

Lawsuits that are putative class actions require a plaintiff to satisfy a number of procedural requirements before proceeding to trial.

These requirements include, among others, demonstration to a court that the law proscribes in some manner our activities, the making of factual allegations sufficient to suggest that our activities exceeded the limits of the law and a determination by the court—known as class certification—that the law permits a group of individuals to pursue the case together as a class.

If these procedural requirements are not met, the lawsuit cannot proceed as a class action and the plaintiff may lose the financial incentive to proceed with the case.

Frequently, a court’s determination as to these procedural requirements is subject to appeal to a higher court.

As a result of these uncertainties, we may be unable to determine the probability of loss until, or after, a court has finally determined that a plaintiff has satisfied the applicable class action procedural requirements.

Furthermore, for putative class actions, it is often not possible to estimate the possible loss or a range of loss amounts, even where we have determined that a loss is reasonably possible.

Generally, class actions involve a large number of people and raise complex legal and factual issues that result in uncertainty as to their outcome and, ultimately, making it difficult for us to estimate the amount of damages that a plaintiff might successfully prove.

This analysis is further complicated by the fact that the plaintiffs lack contractual privity with us.

Governmental inquiries.

To date, we have received a consolidated, multi-state Civil Investigative Demand issued on behalf of 44 state Attorneys General and the District of Columbia relating to the Security Incident.

In addition, we have received communications, inquires and requests from the U.S.

Federal Trade Commission, the U.S.

Department of Health and Human Services, the U.S.

Securities and Exchange Commission, the Information Commissioner’s Office in the United Kingdom (the “ICO”) under the U.K.

Data Protection Act 2018, the Office of the Australian Information Commissioner and the Office of the Privacy Commissioner of Canada.

We are cooperating with these offices and responding to their inquiries.

We file income tax returns in the U.S.

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federal income tax examination for the calendar year 2016.

In December 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code.

Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S.

international taxation from a worldwide tax system to a territorial system, and a one-time U.S.

Federal transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

The Tax Act eliminates the exceptions for performance-based compensation and CFO compensation from the calculation under Section 162(m) of the Internal Revenue Code.

A transition rule allows for the grandfathering of performance-based compensation pursuant to a written binding contract in effect as of November 2, 2017.

The Tax Act also includes the Global Intangible Low-Tax Income ("GILTI") provision, a new mechanism for taxing certain foreign profits, the Base Erosion Anti-Abuse Tax, a minimum tax on payments to related parties, and the Foreign-Derived Intangible Income ("FDII") provision, a tax incentive to earn income abroad.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

The following summarizes the components of income tax expense (benefit):

2 unchanged sentences

Current taxes:

Federal $ ( 407 ) $ 1,534 $ ( 1,088 )

State and local 1,563 613 1,182

2 unchanged sentences

Deferred taxes:

Federal ( 1,064 ) ( 1,724 ) 659

State and local 7,725 ( 2,235 ) 45

1 unchanged sentence

Total deferred taxes 8,837 ( 3,600 ) ( 619 )

Total income tax benefit

Total income tax provision (benefit) $ 13,897 $ ( 1,323 ) $ ( 219 )

The following summarizes the components of income before provision for income taxes:

1 unchanged sentence

(dollars in thousands) 2020 2019 2018

$ ( 4,112 ) $ 5,149 $ 47,532

International 25,726 5,436 ( 2,910 )

2 unchanged sentences

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

A reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate our income tax provision (benefit) is as follows:

Years ended December 31,

2020 2019 2018

Federal statutory rate 21.0 % 21.0 % 21.0 %

State income taxes, net of federal benefit 5.9 ( 1.7 ) 4.1

Change in federal income tax rate applied to deferred tax balances

Change in foreign income tax rate applied to deferred tax balances 4.0 2.0 —

Change in state income tax rate applied to deferred tax balances 0.1 ( 3.1 ) ( 0.4 )

Unrecognized tax benefit

State credits, net of federal benefit

Change in valuation reserve (primarily state credit reserves) 38.2 3.7 0.4

Federal credits generated

Foreign tax rate

Acquisition costs

Section 162(m) limitation 17.5 30.8 4.2

Stock-based compensation

GILTI inclusion

Nondeductible meals, entertainment and transportation 3.3 11.3 2.6

Income tax benefit effective rate

The decrease in our effective income tax rate in 2019, when compared to 2018, was primarily due to the heightened impact of research credit generation net of Section 162(m) nondeductible compensation.

Furthermore, the 2019 effective tax rate was favorably impacted by other state tax credits net of an overall increase to uncertain tax positions.

Lastly, the effective tax rate was negatively impacted by GILTI, net of FDII benefit, resulting from an increase in non-US earnings.

The reduced base further magnified the impact of other nondeductible items.

Unrecognized tax benefit 1.3 4.4 ( 2.6 )

GILTI inclusion 1.3 5.9 —

FDII benefit — ( 1.5 ) ( 0.7 )

Stock-based compensation ( 1.2 ) ( 20.2 ) ( 17.4 )

Foreign tax rate ( 1.7 ) 0.3 0.2

State credits, net of federal benefit ( 2.3 ) ( 15.4 ) ( 1.9 )

DTA Adjustment – NOLs ( 3.3 ) — —

Return to accrual adjustment ( 4.1 ) ( 10.6 ) ( 1.6 )

Federal credits generated ( 17.4 ) ( 37.6 ) ( 10.4 )

Other 1.7 ( 1.8 ) 2.0

Income tax provision (benefit) effective rate 64.3 % ( 12.5 ) % ( 0.5 ) %

The increase in our effective tax rate in 2020 when compared to 2019, was primarily due to increase in valuation allowance attributable to state tax credit carryforwards for which we do not expect to realize benefit.

Furthermore, our 2020 effective tax rate was negatively impacted by reduced benefit attributable to research tax credit and stock based compensation deduction.

Lastly, higher 2020 earnings lessened impact of other non-deductible items.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

The significant components of our deferred tax assets and liabilities were as follows:

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Federal, state and foreign tax credits 42,598 24,435

Stock-based compensation 17,434 11,717

Operating leases 13,375 35,620

Allowance for credit losses 2,399 1,374

Intangible assets 1,663 1,560

Stock-based compensation

Accrued bonuses

Deferred revenue 524 682

Allowance for doubtful accounts

Accrued bonuses — 1,713

Other 9,111 7,487

Total deferred tax assets 92,696 93,791

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Intangible assets ( 45,757 ) ( 46,569 )

Operating leases

Costs of obtaining contracts

Capitalized software development costs ( 28,804 ) ( 26,107 )

Costs of obtaining contracts ( 20,256 ) ( 21,128 )

Operating leases ( 12,333 ) ( 32,888 )

Fixed assets ( 8,458 ) ( 4,446 )

Other ( 398 ) ( 315 )

Total deferred tax liabilities ( 116,006 ) ( 131,453 )

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A portion of the foreign and state net operating loss carryforwards and state credit carryforwards have a valuation reserve due to management's uncertainty regarding the future ability to use such carryforwards.

The following table illustrates the change in our deferred tax asset valuation allowance:

Years ended December 31,

(dollars in thousands)

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

As of December 31, 2020, in part because requisite tax planning strategies are no longer considered feasible and prudent, management determined that it is more likely than not that the benefit from certain state tax credit carryforwards will not be realized.

In recognition of this risk, we have provided a valuation allowance of $ 28.2 million on the deferred tax assets related to these state tax credit carryforwards.

The increase in valuation allowance resulted in $ 8.3 million charge to income tax expense and non-recognition of benefit attributable to credits generated in the current year.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

The following table illustrates the change in our deferred tax asset valuation allowance:

Years ended December 31,

(dollars in thousands) Balance

of year Acquisition-

change Charges to

expense Balance at

2020 $ 6,453 $ — $ 22,731 $ 29,184

2019 6,855 — ( 402 ) 6,453

2018 7,205 16 ( 366 ) 6,855

The following table sets forth the change to our unrecognized tax benefit for the years ended December 31, 2020, 2019 and 2018:

1 unchanged sentence

(dollars in thousands) 2020 2019 2018

Balance at December 31, 2018

Balance at beginning of year $ 4,346 $ 3,704 $ 5,160

Increases from prior period positions 414 1,183 104

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Lapse of statute of limitations ( 12 ) ( 612 ) ( 1,205 )

Balance at December 31, 2019

Balance at end of year $ 4,625 $ 4,346 $ 3,704

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate was $ 4.2 million at December 31, 2020.

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Employee stock-based compensation plans

Under the 2016 Equity and Incentive Compensation Plan (the "2016 Equity Plan"), we may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards and cash incentive awards to employees, directors and consultants.

Under the 2016 Equity and Incentive Compensation Plan Amended and Restated as of June 13, 2019 (the "2016 Equity Plan"), we may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards and cash incentive awards to employees, directors and consultants.

We maintain other stock-based compensation plans including the 2008 Equity Incentive Plan (the “2008 Equity Plan”), under which no additional grants may be made.

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Our Compensation Committee of the Board of Directors administers all of these plans and the stock-based awards are granted under terms determined by them.

The total number of authorized stock-based awards available under our plans was 7,558,625 as of December 31, 2019 .

We issue common stock from our pool of authorized stock upon exercise of stock options and stock appreciation rights, vesting of restricted stock units or upon granting of restricted stock.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

The total number of authorized stock-based awards available under our plans was 4,779,951 as of December 31, 2020.

We issue common stock from our pool of authorized stock upon exercise of stock options and stock appreciation rights, vesting of restricted stock units or upon granting of restricted stock.

Historically, we have issued four types of awards under these plans:

restricted stock awards, restricted stock units, stock appreciation rights and stock options.

restricted stock awards, restricted stock units, stock options and stock appreciation rights ("SARs").

There have been no new stock options or SARs granted since 2005 and 2013, respectively.

The following table sets forth the number of awards outstanding for each award type as of:

Outstanding at December 31,

Award type 2020 2019

Restricted stock awards 1,277,109 1,316,764

Restricted stock units 1,170,885 501,487

Stock appreciation rights

Stock options — 206

The majority of the stock-based awards granted under these plans have a 10 -year contractual term.

Stock appreciation rights (“SARs”) have contractual lives of 7 years.

Awards granted to our executive officers and certain members of management are subject to accelerated vesting upon a change in control as defined in the employees’ retention agreement.

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Total stock-based compensation expense $ 87,257 $ 58,633 $ 48,274

See Note 2 for discussion of the additional equity award grants we made in response to COVID-19.

The total amount of compensation cost related to unvested awards not recognized was $ 98.7 million at December 31, 2020.

It is expected that this amount will be recognized over a weighted average period of 1.4 years.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Restricted stock awards

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Restricted stock awards granted to employees vest in equal annual installments generally over 4 years from the grant date subject to the recipient’s continued employment with us.

Restricted stock awards granted to non-employee directors

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

vest after one year from the date of grant or, if earlier, immediately prior to the next annual election of directors, provided the non-employee director is serving as a director at that time.

Restricted stock awards granted to non-employee directors vest after one year from the date of grant or, if earlier, immediately prior to the next annual election of directors, provided the non-employee director is serving as a director at that time.

The fair market value of the stock at the time of the grant is amortized on a straight-line basis to expense over the period of vesting.

Recipients of restricted stock awards have the right to vote such shares and receive dividends.

Recipients of restricted stock awards have the right to vote such shares and receive dividends, if declared.

The following table summarizes our unvested restricted stock awards as of December 31, 2020, and changes during the year then ended:

Restricted stock awards

Restricted stock awards Restricted

stock awards Weighted

fair value Weighted

(in years) Aggregate

intrinsic value (1)

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Unvested at January 1, 2020 1,316,764 $ 79.92

Granted 657,718 77.16

Vested ( 520,296 ) 76.66

Forfeited ( 177,077 ) 80.71

Unvested at December 31, 2020 1,277,109 79.54 8.4 $ 73,510

9 unchanged sentences

The following table summarizes our unvested restricted stock units as of December 31, 2020, and changes during the year then ended:

Restricted stock units

Restricted stock units Restricted

stock units Weighted

fair value Weighted

(in years) Aggregate

intrinsic value (1)

1 unchanged sentence

Unvested at January 1, 2020 501,487 $ 80.49

Granted 1,020,381 59.59

Forfeited ( 111,450 ) 67.75

Vested ( 239,533 ) 78.97

Unvested at December 31, 2020 1,170,885 63.62 9.0 $ 67,396

(1) The intrinsic value is calculated as the market value as of the end of the fiscal period.

The total fair value of restricted stock units that vested during the years ended December 31, 2019 , 2018 and 2017 was $ 19.2 million , $ 13.7 million , and $ 9.4 million , respectively.

The weighted average grant date fair value of restricted stock units granted for the years ended December 31, 2018 and 2017 was $ 95.59 and $ 72.19 , respectively.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

The total fair value of restricted stock units that vested during the years ended December 31, 2020, 2019 and 2018 was $ 18.9 million, $ 19.2 million, and $ 13.7 million, respectively.

The weighted average grant date fair value of restricted stock units granted for the years ended December 31, 2019 and 2018 was $ 77.90 and $ 95.59 , respectively.

Stock appreciation rights

SARs granted to employees were settled in stock at the time of exercise and vested in equal annual installments generally over 4 years from the date of grant subject to the recipient’s continued employment with us.

The number of shares issued upon the exercise of the SARs was calculated as the difference between the share price of our stock on the date of exercise and the date of grant multiplied by the number of SARs divided by the share price on the exercise date.

There have been no new SARs granted since 2013 and all SARs previously granted were fully vested as of December 31, 2017.

During the year ended December 31, 2019 , 60,871 SARs were exercised, which had a weighted average exercise price of $ 22.24 .

The total intrinsic value of SARs exercised during the years ended December 31, 2019 , 2018 and 2017 was $ 3.6 million , $ 12.4 million , and $ 14.2 million , respectively.

The total fair value of SARs that vested during the year ended December 31, 2017 was insignificant.

All SARs previously granted were fully vested as of December 31, 2017.

The total intrinsic value of SARs exercised during the years ended December 31, 2019 and 2018 was $ 3.6 million and $ 12.4 million, respectively.

SARs granted with a market condition had a fair market value assigned at the grant date based on the use of a Monte Carlo simulation model.

All other SARs granted had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model.

Stock options

There have been no new stock option awards granted since 2005 and all outstanding stock options were fully vested as of December 31, 2010.

The total intrinsic value of stock options exercised during the years ended December 31, 2019 , 2018 and 2017 was insignificant.

All outstanding stock options granted had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model.

Stockholders' Equity

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Our Board of Directors may fix the relative rights and preferences of each series of preferred stock in a resolution of the Board of Directors.

Our Board of Directors has adopted a dividend policy, which provides for the distribution to stockholders a portion of cash generated by us that is in excess of operational needs and capital expenditures.

The 2017 Credit Facility limits the amount of dividends payable and certain state laws restrict the amount of dividends distributed.

In March 2020, in response to the global COVID-19 pandemic, our Board of Directors rescinded its 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 it may otherwise determine in its sole discretion.

The following table provides information with respect to quarterly dividends paid on common stock during the year ended December 31, 2020.

Declaration Date

February 6, 2019

April 30, 2019

July 30, 2019

October 28, 2019

On February 10, 2020 , our Board of Directors declared a first quarter 2020 dividend of $ 0.12 per share payable on March 13, 2020 to stockholders of record on February 28, 2020 .

Declaration Date Dividend

per Share Record Date Payable Date

February 10, 2020 $ 0.12 February 28 March 13

Stock repurchase program

In August 2010 , our Board of Directors approved a stock repurchase program that authorized us to purchase up to $ 50.0 million of our outstanding shares of common stock.

In November 2020, our Board of Directors reauthorized and expanded a stock repurchase program that authorizes us to purchase up to $ 250.0 million of our outstanding shares of common stock.

The program does not have an expiration date.

The shares can be purchased from time to time on the open market or in privately negotiated transactions depending upon market conditions

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

and other factors.

Under the 2017 Credit Facility , we also have restrictions on our ability to repurchase shares of our common stock.

Under the stock repurchase program, we are authorized to repurchase shares from time to time in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and in privately negotiated transactions.

The timing and amount of repurchases depends on several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities.

The repurchase program may be limited, suspended or discontinued at any time without prior notice.

Under the 2020 Credit Facility, we have restrictions on our ability to repurchase shares of our common stock.

We account for purchases of treasury stock under the cost method.

During the year ended December 31, 2020, we purchased 714,000 shares for $ 41.0 million.

The remaining amount available to purchase stock under the stock repurchase program was $ 209.0 million as of December 31, 2020.

Between January 1, 2021 and February 19, 2021, we repurchased an additional 465,821 shares for $ 28.1 million.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Changes in accumulated other comprehensive loss by component

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Gains and losses on cash flow hedges:

Accumulated other comprehensive income (loss) balance, beginning of period

Accumulated other comprehensive (loss) income balance, beginning of period $ ( 1,323 ) $ 1,498 $ 748

Other comprehensive (loss) income before reclassifications, net of tax effects of $ 1,625 , $ 860 and $( 239 )

Amounts reclassified from accumulated other comprehensive (loss) income to interes t expense

Tax benefit included in provision for income taxes

Total amounts reclassified from accumulated other comprehensive (los s) income

( 4,602 ) ( 2,399 ) 670

Amounts reclassified from accumulated other comprehensive (loss) income to interest expense 3,827 ( 573 ) ( 118 )

Tax (benefit) expense included in provision for income taxes ( 1,003 ) 151 31

Total amounts reclassified from accumulated other comprehensive (loss) income 2,824 ( 422 ) ( 87 )

Net current-period other comprehensive (loss) income ( 1,778 ) ( 2,821 ) 583

4 unchanged sentences

Translation adjustments 4,571 2,641 ( 5,218 )

Accumulated other comprehensive loss balance, end of period

Accumulated other comprehensive income (loss) balance, end of period 604 ( 3,967 ) ( 6,608 )

Accumulated other comprehensive loss, end of period $ ( 2,497 ) $ ( 5,290 ) $ ( 5,110 )

4 unchanged sentences

The 401K Plan also provides for additional employer contributions to be made at our discretion.

We suspended our 401(k) match program between April 1, 2020 and December 31, 2020 in response to COVID-19.

Total matching contributions to the 401K Plan for the years ended December 31, 2020, 2019 and 2018 were $ 1.9 million, $ 8.7 million and $ 8.1 million, respectively.

We made a discretionary matching contribution to eligible employees 401(k) plans in December 2020 totaling $ 1.2 million, given our financial performance during the fourth quarter.

There were no discretionary contributions by us to the 401K Plan in 2019 and 2018.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements

Segment Information

2 unchanged sentences

We have one operating segment and one reportable segment.

2019 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

The following table presents long-lived assets by geographic region based on the location of the assets.

14 unchanged sentences

Our opening and closing balances of deferred revenue were as follows:

(in thousands)

(in thousands) December 31,

2020 December 31,

Total deferred revenue $ 316,914 $ 316,137

The increase in deferred revenue during the year ended December 31, 2019 was primarily due to new subscription sales of our cloud solutions.

Our acquisition of YourCause on January 2, 2019 also modestly contributed to the increase in deferred revenue since December 31, 2018.

We also sold more subscription-based contracts for retained professional services.

The amount of revenue recognized during the year ended December 31, 2019 that was included in the deferred revenue balance at the beginning of the period was approximately $ 290 million .

The amount of revenue recognized during the year ended December 31, 2019 from performance obligations satisfied in prior periods was insignificant .

Deferred revenue was held flat during 2020, primarily due to declines in our 2020 bookings performance compared to our budgeted expectations as a result of COVID-19.

The amount of revenue recognized during the 2020 that was included in the deferred revenue balance at the beginning of the period was approximately $ 311 million.

The amount of revenue recognized during the 2020 from performance obligations satisfied in prior periods was insignificant.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

Disaggregation of revenue

We sell our cloud solutions and related services in two primary geographical markets:

to customers in the United States, and to customers located outside of the United States.

We sell our cloud solutions and related services in three primary geographical markets:

to customers in the United States, to customers in the United Kingdom and to customers located in other countries.

The following table presents our revenue by geographic area based on the address of our customers:

1 unchanged sentence

United States $ 772,188 $ 775,308 $ 727,366

United Kingdom 84,121 65,176 59,898

Other countries 56,910 59,939 61,342

7 unchanged sentences

(dollars in thousands) 2020

GMG $ 376,762 $ 378,384 $ 362,585

393,061 392,258 360,873

IMG 142,607 126,511 123,522

Other 789 3,270 1,626

Total revenue $ 913,219 $ 900,423 $ 848,606

2 unchanged sentences

(2) Beginning in the first quarter of 2019, all of our Canadian operations are included in IMG.

We have recast our revenue by market group for the twelve months ended December 31, 2018 and 2017 , to present them on a consistent basis with the current year.

We have recast our revenue by market group for the twelve months ended December 31, 2018, to present them on a consistent basis with the current year.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

Notes to Consolidated Financial Statements

Quarterly Results (Unaudited)

(dollars in thousands, except per share data)

(dollars in thousands, except per share data) December 31,

2020 September 30,

2020 June 30,

2020 March 31,

Total revenue $ 242,606 $ 215,001 $ 231,991 $ 223,621

Income from operations

Income before provision for income taxes

Earnings per share

(dollars in thousands, except per share data)

Gross profit 123,030 116,316 127,052 118,756

(Loss) income from operations ( 850 ) 10,087 19,582 8,424

(Loss) income before provision for income taxes ( 6,672 ) 6,632 16,319 5,335

Net (loss) income ( 13,621 ) 4,876 11,823 4,639

(Loss) earnings per share

Basic $ ( 0.28 ) $ 0.10 $ 0.25 $ 0.10

Diluted ( 0.28 ) 0.10 0.24 0.10

(dollars in thousands, except per share data) December 31,

2019 September 30,

2019 June 30,

2019 March 31,

Total revenue $ 237,839 $ 221,120 $ 225,634 $ 215,830

Gross profit 121,302 119,323 124,827 116,547

Income from operations 3,586 7,883 13,491 2,185

Income before provision for income taxes

Earnings per share

(Loss) income before provision for income taxes ( 1,262 ) 4,930 9,873 ( 2,956 )

Net income (loss) 1,324 4,566 7,140 ( 1,122 )

Earnings (loss) per share

Basic $ 0.03 $ 0.10 $ 0.15 $ ( 0.02 )

Diluted 0.03 0.09 0.15 ( 0.02 )

The individual amounts for each quarter may not sum to full year totals due to rounding.

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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 modern and more collaborative workspaces with short-term financial commitments.

These workspaces are also more centrally located for our employees and closer to our customers and prospects.

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.

We substantially completed our facilities optimization restructuring plan as of December 2019.

During the years ended December 31, 2019 and 2018, we incurred $ 5.8 million and $ 4.6 million, respectively, in before-tax restructuring charges related to these activities.

Such charges during the year ended December 31, 2020 were insignificant.

Restructuring costs incurred prior to our adoption of ASU 2016-02 on January 1, 2019 consisted primarily of costs to terminate lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as insignificant costs to relocate affected employees and write-off facilities-related fixed assets that we would no longer use.

Upon adoption of ASU 2016-02 at January 1, 2019, we reduced our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leased office spaces that we ceased using prior to December 31, 2018.

See additional details below.

Restructuring costs incurred during the year ended December 31, 2019 consisted primarily of operating lease ROU asset impairment costs and, to a lesser extent, lease payments for offices we have ceased using and write-offs of facilities-related fixed assets that we will no longer use.

See Notes 11 and 6 to these consolidated financial statements for additional details regarding these impairment costs and fixed asset write-offs.

As of December 31, 2019 , we have substantially completed our facilities optimization restructuring plan.

Any remaining restructuring costs related to these activities are expected to be insignificant.

Restructuring costs incurred during the year ended December 31, 2019 consisted primarily of operating lease ROU asset impairment costs and, to a lesser extent, lease payments for offices we had ceased using and write-offs of facilities-related fixed assets that we would no longer use.

2020 Form 10-K

Blackbaud, Inc.

Notes to Consolidated Financial Statements (continued)

The following table summarizes our facilities optimization restructuring costs as of December 31, 2019 :

Cumulative costs incurred as of

Costs incurred during the

year ended (1)

Cumulative costs incurred as of

(in thousands)

December 31, 2018

December 31, 2019

By component:

Contract termination costs

Includes $ 3.8 million of operating lease ROU asset impairment costs.

The change in our liability related to our facilities optimization restructuring during the twelve months ended December 31, 2019 , consisted of the following:

Increases for incurred costs (1)

upon adoption

of ASU 2016-02 (2)

(in thousands)

December 31, 2018

December 31, 2019

By component:

Contract termination costs

Includes $ 3.8 million of operating lease ROU asset impairment costs.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data