BLACKBAUD INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BLACKBAUD, INC. Index to consolidated financial statements Page No. Report of Independent Registered Public Accounting Firm 63 Consolidated Balance Sheets 65 Consolidated Statements of Comprehensive Income 66 Consolidated Statements of Cash Flows 67 Consolidated Statements of Stockholders’ Equity 68 Notes to Consolidated Financial Statements 69 62 2020 Form 10-K REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Blackbaud, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Blackbaud, Inc. 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). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. 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. 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 Controls 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. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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 2020 Form 10-K 63 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 transactions and dispositions of the assets of the company; (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; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters 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 As described in Note 2 to the consolidated financial statements, the Company has some contracts with customers that contain multiple performance obligations. For these contracts, management accounts for individual performance obligations separately if they are distinct. As described by management, management exercises judgment and uses estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2) determine the standalone selling price of each performance obligation; (3) allocate the transaction price among the various performance obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time. 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, 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. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the identification, evaluation and accounting for contracts with multiple performance obligations. 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. / S / P RICEWATERHOUSE C OOPERS LLP Atlanta, Georgia February 23, 2021 We have served as the Company's auditor since 2000. 64 2020 Form 10-K Blackbaud, Inc. Consolidated Balance Sheets (dollars in thousands) December 31, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 35,750 $ 31,810 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 Prepaid expenses and other current assets 78,366 67,852 Total current assets 819,060 734,539 Property and equipment, net 105,177 35,546 Operating lease right-of-use assets 22,671 104,400 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 Current liabilities: Trade accounts payable $ 27,836 $ 47,676 Accrued expenses and other current liabilities 52,228 73,317 Due to customers 608,264 546,009 Debt, current portion 12,840 7,500 Deferred revenue, current portion 312,236 314,335 Total current liabilities 1,013,404 988,837 Debt, net of current portion 518,193 459,600 Deferred tax liability 54,086 44,594 Deferred revenue, net of current portion 4,678 1,802 Operating lease liabilities, net of current portion 17,357 95,624 Other liabilities 10,866 5,742 Total liabilities 1,618,584 1,596,199 Commitments and contingencies (see Note 9) Stockholders’ equity: Preferred stock; 20,000,000 shares authorized, no ne outstanding — — Common stock, $ 0.001 par value; 180,000,000 shares authorized, 60,904,638 and 60,206,091 shares issued at December 31, 2020 and December 31, 2019, respectively 61 60 Additional paid-in capital 544,963 457,804 Treasury stock, at cost; 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 ) Retained earnings 236,714 234,855 Total stockholders’ equity 426,150 396,764 Total liabilities and stockholders’ equity $ 2,044,734 $ 1,992,963 The accompanying notes are an integral part of these consolidated financial statements. 2020 Form 10-K 65 Blackbaud, Inc. Consolidated Statements of Comprehensive Income (dollars in thousands, except per share amounts) Years ended December 31, 2020 2019 2018 Revenue Recurring $ 850,745 $ 831,609 $ 762,181 One-time services and other 62,474 68,814 86,425 Total revenue 913,219 900,423 848,606 Cost of revenue Cost of recurring 369,681 357,988 305,481 Cost of one-time services and other 58,384 60,436 76,261 Total cost of revenue 428,065 418,424 381,742 Gross profit 485,154 481,999 466,864 Operating expenses Sales, marketing and customer success 209,762 224,152 192,848 Research and development 100,146 106,164 98,811 General and administrative 134,852 113,414 106,354 Amortization 2,915 5,316 4,844 Restructuring 236 5,808 4,590 Total operating expenses 447,911 454,854 407,447 Income from operations 37,243 27,145 59,417 Interest expense ( 17,287 ) ( 20,618 ) ( 15,898 ) Other income, net 1,658 4,058 1,103 Income before provision for income taxes 21,614 10,585 44,622 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 Basic weighted average shares 48,184,714 47,695,383 47,206,669 Diluted weighted average shares 48,696,341 48,312,271 48,045,084 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 income (loss) 2,793 ( 180 ) ( 4,635 ) Comprehensive income $ 10,510 $ 11,728 $ 40,206 The accompanying notes are an integral part of these consolidated financial statements. 66 2020 Form 10-K Blackbaud, Inc. Consolidated Statements of Cash Flows Years ended December 31, (dollars in thousands) 2020 2019 2018 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 credit losses and sales returns 13,230 8,725 6,890 Stock-based compensation expense 87,257 58,633 48,274 Deferred taxes 8,837 ( 3,600 ) ( 619 ) Amortization of deferred financing costs and discount 781 752 752 Other non-cash adjustments 2,958 4,906 ( 1,912 ) Changes in operating assets and liabilities, net of acquisition and disposal of businesses: Accounts receivable ( 18,414 ) ( 6,569 ) 2,166 Prepaid expenses and other assets 22,568 6,383 ( 5,217 ) Trade accounts payable ( 19,997 ) 12,900 9,487 Accrued expenses and other liabilities ( 49,232 ) ( 9,718 ) ( 2,027 ) Deferred revenue ( 485 ) 12,464 19,184 Net cash provided by operating activities 147,955 182,477 201,385 Cash flows from investing activities Purchase of property and equipment ( 29,690 ) ( 11,492 ) ( 14,719 ) Capitalized software development costs ( 42,157 ) ( 46,874 ) ( 37,629 ) Purchase of net assets of acquired companies, net of cash and restricted cash acquired — ( 109,353 ) ( 44,943 ) Other investing activities — 500 ( 500 ) Net cash used in investing activities ( 71,847 ) ( 167,219 ) ( 97,791 ) Cash flows from financing activities Proceeds from issuance of debt 748,500 424,000 270,900 Payments on debt ( 747,563 ) ( 344,500 ) ( 322,476 ) Debt issuance costs ( 4,586 ) — — Employee taxes paid for withheld shares upon equity award settlement ( 21,425 ) ( 23,781 ) ( 27,685 ) Proceeds from exercise of stock options 4 7 11 Change in due to customers 61,214 77,793 ( 188,502 ) 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 (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 ) Net increase (decrease) in cash, cash equivalents and restricted cash 67,674 127,449 ( 190,328 ) Cash, cash equivalents and restricted cash, beginning of year 577,295 449,846 640,174 Cash, cash equivalents and restricted cash, end of year $ 644,969 $ 577,295 $ 449,846 Supplemental disclosure of cash flow information 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 ) Acquired restricted cash liabilities due to customers — 46,838 — The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown above in the consolidated statements of cash flows: (dollars in thousands) December 31, 2020 December 31, 2019 Cash and cash equivalents $ 35,750 $ 31,810 Restricted cash 609,219 545,485 Total cash, cash equivalents and restricted cash in the statement of cash flows $ 644,969 $ 577,295 The accompanying notes are an integral part of these consolidated financial statements. 2020 Form 10-K 67 Blackbaud, Inc. Consolidated Statements of Stockholders' Equity (dollars in thousands) Common stock Additional paid-in capital Treasury stock Accumulated other comprehensive loss Retained earnings Total stockholders' equity Shares Amount Balance at December 31, 2017 58,551,761 $ 59 $ 351,042 $ ( 239,199 ) $ ( 642 ) $ 225,029 $ 336,289 Net income — — — — — 44,841 44,841 Payment of dividends ($ 0.48 per share) — — — — — ( 23,312 ) ( 23,312 ) Exercise of stock options and stock appreciation rights and vesting of restricted stock units 349,248 — 11 — — — 11 Employee taxes paid for 284,780 withheld shares upon equity award settlement — — — ( 27,685 ) — — ( 27,685 ) Stock-based compensation — — 48,188 — — 86 48,274 Restricted stock grants 541,786 — — — — — — Restricted stock cancellations ( 115,162 ) — — — — — — Other comprehensive loss — — — — ( 4,635 ) — ( 4,635 ) Reclassification upon 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 Restricted stock grants 723,868 1 — — — — 1 Restricted stock cancellations ( 112,865 ) — — — — — — Other comprehensive loss — — — — ( 180 ) — ( 180 ) 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) — — — — — ( 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 Restricted stock grants 657,483 1 — — — — 1 Restricted stock cancellations ( 177,077 ) — — — — — — 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. 68 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements 1. Organization We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, higher education institutions, K–12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies and individual change agents—we connect and empower organizations 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 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. 2. Basis of Presentation Basis of presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Basis of consolidation The consolidated financial statements include the accounts of Blackbaud, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 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 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 69 Table of Contents 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; and • 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 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. 70 2020 Form 10-K Table of Contents 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. The way in which entities classify leases determines how to recognize lease-related revenue and expense. We adopted ASU 2016-02 as of January 1, 2019 using the transition method that allowed us to initially apply the guidance at the adoption date of January 1, 2019 without adjusting comparative periods presented. We elected to use the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any existing leases. We did not elect to use the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. Additionally, we elected not to apply the recognition requirements of the new lease accounting standard to short-term leases. Adopting ASU 2016-02 had a material impact on our consolidated balance sheet as of January 1, 2019, as we recognized $ 121.6 million of lease liabilities and $ 113.4 million of right-of-use ("ROU") assets for those leases classified as operating leases. Recently issued accounting pronouncements There are no recently issued accounting pronouncements that are expected to have a material impact on our financial position or results of operations when adopted in the future. Summary of significant accounting policies Revenue recognition Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud and hosted environments; (ii) providing payment and transaction services; (iii) providing software maintenance and support services; and (iv) providing professional services, including implementation, consulting, training, analytic and other services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We determine revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, we satisfy a performance obligation. Recurring Recurring revenue represents stand-ready performance obligations in which we are making our solutions or services available to our customers continuously over time or the value of the contract renews. Therefore, recurring revenue is generally recognized over time on a ratable basis over the contract term, beginning on the date that the solution or service is made available to the customer. Our recurring revenue contracts are generally for a term of 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, 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 2020 Form 10-K 71 Table of Contents 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. For payment and transaction services, we have the right to invoice the customer in an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18. One-time services and other One-time services and other revenue 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. Fixed price consulting engagements are generally billed as milestones towards completion are reached. Revenue for all consulting services is recognized over time as the services are performed. We generally recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, data enrichment engagements and benchmarking studies at a point in time (upon delivery). In certain cases, we sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the customer attending and completing training. 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 Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of our solutions and services are typically estimated based on observable transactions when the solutions or services are sold on a standalone basis. Costs of obtaining contracts, contract assets and deferred revenue We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract. Sales commissions and related fringe benefits earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized in a manner that aligns with the expected period of benefit, which we have determined to be 5 years. We determined the period of benefit by taking into consideration our customer contracts, including renewals, retention, our technology and other factors. We do not generally pay commissions for contract renewals. The related amortization expense is included in sales, marketing and customer success expense in our consolidated statements of comprehensive income. A contract asset is recorded when revenue is recognized in advance of our right to receive consideration (i.e., we must satisfy additional performance obligations in order to receive consideration). Amounts are recorded as receivables when our right to consideration is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Our contract assets are recorded within prepaid expenses and other current assets on our consolidated balance sheets. To the extent that our customers are billed for our solutions and services in advance of us satisfying the related performance obligations, we record such amounts in deferred revenue. Sales taxes We present sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, exclude them from revenues. 72 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Fair value measurements We measure certain financial assets and liabilities at fair value on a recurring basis, including derivative instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. An active market is defined as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: • Level 1 - Quoted prices for identical assets or liabilities in active markets; • Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and • Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable. Our financial assets and liabilities are classified in their entirety within the hierarchy based on the lowest level of input that is significant to fair value measurement. Changes to a financial asset's or liability's level within the fair value hierarchy are determined as of the end of a reporting period. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. Derivative instruments We generally use derivative instruments to manage interest rate risk. We view derivative instruments as risk management tools and do not use them for trading or speculative purposes. Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. We record all derivative instruments on our consolidated balance sheets at fair value 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 to these consolidated financial statements for further discussion of our derivative instruments. Cash and cash equivalents We consider all highly liquid investments purchased with an original maturity of three months or less and cash items in transit to be cash equivalents. Restricted cash due to customers; Customer funds receivable; Due to customers Restricted cash due to customers consists of monies collected by us and payable to our customers, net of the associated transaction fees earned. Monies associated with amounts due to customers are segregated in separate bank accounts and used exclusively for the payment of amounts due to customers. This usage restriction is either legally or internally imposed and reflects our intention with regard to such deposits. Customer funds receivable consists of monies we expect to collect and remit to our customers. Concentration of credit risk Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, restricted cash due to customers and accounts receivable. Our cash and cash equivalents and restricted cash due to customers are placed with high credit-quality financial institutions. Our accounts receivable is derived from sales to customers who primarily operate in the nonprofit sector. With respect to accounts receivable, we perform ongoing evaluations of our customers and maintain an allowance for credit losses based on historical experience and our 2020 Form 10-K 73 Table of Contents 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. Property and equipment We record property and equipment assets at cost and depreciate them over their estimated useful lives using the straight-line method. Leasehold improvements are depreciated over the lesser of the term of the lease or the estimated useful life of the asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to earnings. Repair and maintenance costs are expensed as incurred. Construction-in-progress primarily related to purchases of facilities and information technology assets which had not been placed in service at the respective balance sheet dates. We transfer these assets to the applicable property and equipment category on the date they are placed in service. There was no capitalized interest applicable to construction-in-progress for the years ended December 31, 2020, 2019 and 2018. Business combinations We include the operating results of acquired companies as well as the net assets acquired and liabilities assumed in our consolidated financial statements from the date of acquisition. We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired and liabilities assumed. This allocation and valuation require management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, estimates about: 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. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable, and unanticipated events and changes in circumstances may occur. Goodwill Goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by us in a business combination. Goodwill is not amortized, but tested annually for impairment on the first day of our fourth quarter, or more frequently if indicators of potential impairment arise. Accounting guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis to determine whether it is necessary to perform the quantitative impairment test. Significant judgment is required in the assessment of qualitative factors, including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of identified reporting units and future opportunities in the markets in which we operate. The quantitative impairment test compares the fair values of identified reporting units with their respective carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Based on our current internal reporting structure, we currently have one operating segment, one reportable segment, and one reporting unit. In each of 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 2020, 2019 and 2018. 74 2020 Form 10-K Table of Contents 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 Amortization period (in years) Customer relationships Straight-line and accelerated (1) 8 - 17 Marketing assets Straight-line 2 - 15 Acquired software and technology Straight-line and accelerated (1) 5 - 14 (1) Certain of the customer relationships and acquired software and technology assets are amortized on an accelerated basis. We write off the gross carrying amount and accumulated amortization balances for all fully amortized intangible assets. We evaluate the estimated useful lives and the potential for impairment of finite and indefinite-lived intangible assets on an annual basis or more frequently if events or circumstances indicate revised estimates of useful lives may be appropriate or that the carrying amount may be impaired. If the carrying amount of a finite-lived intangible asset is no longer recoverable based upon the undiscounted cash flows of the asset, the amount of impairment is the difference between the carrying amount and the fair value of the asset. Substantially all of our intangible assets were acquired in business combinations. See Note 6 to these consolidated financial statements for a discussion of our impairment of certain acquired intangible assets during 2019. There were no impairments of acquired intangible assets during 2020 and 2018. Impairment of long-lived assets We review long-lived assets for impairment when events change or circumstances indicate the carrying amount may not be recoverable. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used or significant adverse change in the business climate. If such events or changes in circumstances are present, the undiscounted cash flow method is used to determine whether the asset is impaired. 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 We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the requisite service period, which is the vesting period. We determine the fair value of stock options and stock appreciation rights using a Black-Scholes option pricing model, which requires us to use significant judgment to make estimates regarding the life of the award, volatility of our stock price, the risk-free interest rate and the dividend yield of our stock over the life of the award. We determine the fair value of awards that contain market conditions using a Monte Carlo simulation model. Changes to these estimates would result in different fair values of awards. We recognize the effect of awards for which the requisite service period is not rendered when the award is forfeited (that is, we recognize the effect of forfeitures in compensation cost when they occur). Previously recognized compensation cost for an award is reversed in the period that the award is forfeited. Income tax benefits resulting from 2020 Form 10-K 75 Table of Contents 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. Income taxes We make estimates and judgments in accounting for income taxes. The calculation of the income tax provision requires estimates due to transactions, credits and calculations where the ultimate tax determination is uncertain. Uncertainties arise as a consequence of the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. To the extent actual results differ from estimated amounts recorded, such differences will impact the income tax provision in the period in which the determination is made. We make estimates in determining tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and prudent and feasible tax planning strategies. If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to increase income tax expense, thereby reducing net income in the period such determination was made. We measure and recognize uncertain tax positions. To recognize such positions, we must first determine if it is more likely than not that the position will be sustained upon audit. We must then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Significant judgment is required in the identification and measurement of uncertain tax positions. Foreign currency Net assets recorded in a foreign currency are translated at the exchange rate on the balance sheet date. Revenue and expense items are translated using an average of monthly exchange rates. The resulting translation adjustments are recorded in accumulated other comprehensive income. Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are recorded at the approximate rate of exchange at the transaction date in other income, net. 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 or upgrading and enhancing existing solutions that do not qualify for capitalization, and allocated depreciation, facilities and IT support costs. Software development costs We incur certain costs associated with the development of internal-use software, which are primarily related to activities performed to develop our cloud solutions. Internal and external costs incurred in the preliminary project stage of internal-use software development are expensed as incurred. Once the software being developed has reached the application development stage, qualifying internal costs including payroll and payroll-related costs of employees who are directly associated with and devote time to the software project as well as external direct costs of materials and services are capitalized. Capitalization ceases at the point at which the developed software is substantially complete and ready for its intended use, which is typically upon completion of all substantial testing. Qualifying costs capitalized during the application development stage include those related to specific upgrades and enhancements when it is probable that those costs incurred will result in additional functionality. Overhead costs, including general and administrative costs, as well as maintenance, training and all other costs associated with post-implementation stage 76 2020 Form 10-K Table of Contents 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. Qualifying capitalized software development costs are amortized on a straight-line basis over the software asset's estimated useful life, which is generally 3 to 7 years. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. 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. 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 end of year 2020 (1) $ 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. A considerable amount of judgment is required in assessing these factors. Provisions for sales returns and credits are charged against the related revenue items. Below is a summary of the changes in our allowance for sales returns. Years ended December 31, (in thousands) Balance at beginning of year Provision/ adjustment Deduction Balance at end of year 2020 (1) $ 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 77 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Advertising costs We expense advertising costs as incurred , which were $ 3.0 million, $ 3.1 million and $ 4.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Restructuring costs Restructuring costs include charges for the costs of exit or disposal activities. The liability for costs associated with exit or disposal activities is measured initially at fair value and only recognized when the liability is incurred. For details of our restructuring activities, see Note 19 to these consolidated financial statements. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, accrued expense and other current liabilities, and operating lease liabilities, net of current portion in our consolidated balance sheet as of December 31, 2020. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate in determining the present value of lease payments. Our incremental borrowing rate is based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any initial direct costs and lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments related to our operating leases is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. We do not recognize short-term leases (those that, at the commencement date, have a lease term of 12 months or less) on our consolidated balance sheets. Variable lease payments, which are primarily comprised of common-area maintenance, utilities and real estate taxes that are passed on from the lessor in proportion to the space leased by us, are recognized in operating expenses in the period in which the obligation for those payments is incurred. Contingencies We are subject to the possibility of various loss contingencies in the normal course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and the estimation of damages are difficult to ascertain. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by us. Although we believe we have substantial defenses in these matters, we could incur judgments or enter into settlements of claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows in any particular period. Earnings per share We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted earnings per share reflect the assumed exercise, settlement and vesting of all dilutive securities using the “treasury stock method” except when the effect is anti-dilutive. Potentially dilutive securities consist of shares issuable upon the exercise of stock options and stock appreciation rights and vesting of restricted stock awards and units. 78 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements 3. Business Combinations 2019 Acquisition YourCause 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 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 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. 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. 2018 Acquisition Reeher On April 30, 2018, we acquired all of the outstanding equity securities, including all voting equity interests, of Reeher LLC, a Minnesota limited liability company (“Reeher”), pursuant to a securities purchase agreement. The acquisition 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 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. 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. 4. Goodwill and Other Intangible Assets The change in our goodwill during 2020 consisted of the following: (dollars in thousands) Total Balance at December 31, 2019 $ 634,088 Effect of foreign currency translation 1,766 Balance at December 31, 2020 $ 635,854 2020 Form 10-K 79 Table of Contents Blackbaud, Inc. 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. The table below sets forth the balances of each class of intangible asset and related amortization as of: December 31, (dollars in thousands) 2020 2019 Finite-lived gross carrying amount Customer relationships $ 287,116 $ 286,951 Marketing assets 34,642 34,246 Acquired software and technology 232,339 233,094 Non-compete agreements — 2,200 Total finite-lived gross carrying amount 554,097 556,491 Accumulated amortization Customer relationships ( 138,635 ) ( 118,031 ) Marketing assets ( 5,918 ) ( 3,648 ) Acquired software and technology ( 132,038 ) ( 115,048 ) Non-compete agreements — ( 1,869 ) Total accumulated amortization ( 276,591 ) ( 238,596 ) Intangible assets, net $ 277,506 $ 317,895 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. This impairment charge was recorded as amortization on our consolidated statements of comprehensive income. Amortization expense Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue on the consolidated statements of comprehensive income based on the revenue stream to which the asset contributes, except for marketing assets and non-compete agreements, for which the associated amortization expense is included in operating expenses. The following table summarizes amortization expense of our finite-lived intangible assets: Years ended December 31, (dollars in thousands) 2020 2019 2018 Included in cost of revenue: Cost of recurring $ 36,835 $ 42,565 $ 39,877 Cost of one-time services and other 2,133 2,204 2,356 Total included in cost of revenue 38,968 44,769 42,233 Included in operating expenses 2,915 5,316 4,844 Total amortization of intangibles from business combinations $ 41,883 $ 50,085 $ 47,077 80 2020 Form 10-K Table of Contents 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) Amortization expense 2021 36,933 2022 34,739 2023 33,735 2024 33,222 2025 30,482 Total $ 169,111 5. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Years ended December 31, (dollars in thousands, except per share amounts) 2020 2019 2018 Numerator: Net income $ 7,717 $ 11,908 $ 44,841 Denominator: Weighted average common shares 48,184,714 47,695,383 47,206,669 Add effect of dilutive securities: Stock-based awards 511,627 616,888 838,415 Weighted average common shares assuming dilution 48,696,341 48,312,271 48,045,084 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 2020 Form 10-K 81 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements 6. Fair Value Measurements Recurring fair value measurements Assets and liabilities that are measured at fair value on a recurring basis consisted of the following, as of the dates indicated below: Fair value measurement using (dollars in thousands) Level 1 Level 2 Level 3 Total Fair value as of December 31, 2020 Financial liabilities: Derivative instruments $ — $ 4,159 $ — $ 4,159 Total financial liabilities $ — $ 4,159 $ — $ 4,159 Fair value as of December 31, 2019 Financial liabilities: Derivative instruments $ — $ 1,757 $ — $ 1,757 Total financial liabilities $ — $ 1,757 $ — $ 1,757 Our derivative instruments within the scope of Accounting Standards Codification ("ASC") 815, Derivatives and Hedging , are required to be recorded at fair value. Our derivative instruments that are recorded at fair value include interest rate swaps. The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy. 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 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. Additionally, we did not hold any Level 3 assets or liabilities during the years ended December 31, 2020, 2019 and 2018. Non-recurring fair value measurements 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 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 82 2020 Form 10-K Table of Contents Blackbaud, Inc. 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. See Notes 11, 7 and 4, respectively, to these consolidated financial statements for additional details. 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 to these consolidated financial statements for additional details. 7. 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 83 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Property and equipment Property and equipment consisted of the following as of: Estimated useful life (years) December 31, (dollars in thousands) 2020 2019 Land — $ 9,548 $ — Building 39 61,284 — Building improvements (1) 7 - 20 9,942 — Equipment 1 - 5 2,865 4,512 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 2,796 7,823 Leasehold improvements Lesser of lease term or estimated useful life 6,044 24,295 Total property and equipment 175,232 139,614 Less: accumulated depreciation ( 70,055 ) ( 104,068 ) 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 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. Software development costs Software development costs consisted of the following as of: Estimated useful life (years) December 31, (dollars in thousands) 2020 2019 Software development costs 3 - 7 $ 164,665 $ 139,014 Less: accumulated amortization ( 52,838 ) ( 37,712 ) Software development costs, net $ 111,827 $ 101,302 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. 84 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements 8. Consolidated Financial Statement Details Restricted cash (dollars in thousands) December 31, 2020 December 31, 2019 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) December 31, 2020 December 31, 2019 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) 11,298 7,294 Unbilled accounts receivable 10,385 6,233 Receivables for probable insurance recoveries (6) 6,288 — Prepaid insurance 1,426 1,585 Taxes, prepaid and receivable 1,891 849 Security deposits 754 885 Other assets 9,578 8,051 Total prepaid expenses and other assets 151,005 133,045 Less: Long-term portion 72,639 65,193 Prepaid expenses and other current assets $ 78,366 $ 67,852 (1) Amortization expense from costs of obtaining contracts was $ 37.4 million, $ 38.1 million and $ 35.7 million for the years ended December 31, 2020, 2019 and 2018, respectively, and is included in sales, marketing and customer success expense in our consolidated statements of comprehensive income. (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 85 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Accrued expenses and other liabilities (dollars in thousands) December 31, 2020 December 31, 2019 Operating lease liabilities, current portion $ 9,359 $ 19,784 Accrued bonuses (1) — 24,617 Taxes payable (2) 19,577 6,835 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 health care costs 2,341 2,399 Accrued vacation costs 2,311 2,232 Other liabilities 6,304 6,105 Total accrued expenses and other liabilities 63,094 79,059 Less: Long-term portion 10,866 5,742 Accrued expenses and other current liabilities $ 52,228 $ 73,317 (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) December 31, 2020 December 31, 2019 Recurring $ 303,840 $ 302,751 One-time services and other 13,074 13,386 Total deferred revenue 316,914 316,137 Less: Long-term portion 4,678 1,802 Deferred revenue, current portion $ 312,236 $ 314,335 Other income, net Years ended December 31, (dollars in thousands) 2020 2019 2018 Interest income $ 1,660 $ 2,802 $ 2,008 Other (expense) income, net ( 2 ) 1,256 ( 905 ) Other income, net $ 1,658 $ 4,058 $ 1,103 86 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements 9. Debt The following table summarizes our debt balances and the related weighted average effective interest rates, which includes the effect of interest rate swap agreements. Debt balance at Weighted average effective interest rate at (dollars in thousands) December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 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 % Less: Unamortized discount and debt issuance costs 3,144 1,150 Less: Debt, current portion 12,840 7,500 2.61 % 3.05 % Debt, net of current portion $ 518,193 $ 459,600 3.22 % 3.18 % 2020 refinancing 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, 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. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Certain lenders of the 2017 Revolving Facility participated in the 2020 Revolving Facility and provided increased borrowing capacities. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2017 Revolving Facility did not participate in the 2020 Revolving Facility. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. 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 87 Table of Contents Blackbaud, Inc. 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. At December 31, 2020, the commitment fee was 0.25 %. 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 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. 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. 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. 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. 88 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Other debt 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 maturities 2021 $ 12,840 2022 12,985 2023 11,983 2024 11,609 2025 431,408 Thereafter 53,352 Total required maturities $ 534,177 10. Derivative Instruments Cash flow hedges We generally use derivative instruments to manage our variable interest rate risk. 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 value 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 Interest rate swap November 2020 - October 2024 60,000 $ 395,000 Forward-starting interest rate swap June 2021 - October 2024 120,000 Forward-starting interest rate swap July 2021 - October 2024 120,000 $ 240,000 2020 Form 10-K 89 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements The fair values of our derivative instruments were as follows as of: Liability Derivatives (dollars in thousands) Balance sheet location December 31, 2020 December 31, 2019 Derivative instruments designated as hedging instruments: Interest rate swaps, current portion Accrued expenses and other current liabilities $ 2,698 $ — Interest rate swaps, long-term portion Other liabilities 1,461 1,757 Total derivative instruments designated as hedging instruments $ 4,159 $ 1,757 The effects of derivative instruments in cash flow hedging relationships were as follows: Gain (loss) recognized in accumulated other comprehensive loss as of Location of gain (loss) reclassified from accumulated other comprehensive loss into income Gain (loss) reclassified from accumulated other comprehensive loss into income (dollars in thousands) December 31, 2020 Year ended December 31, 2020 Interest rate swaps $ ( 4,159 ) Interest expense $ ( 3,827 ) December 31, 2019 Year ended December 31, 2019 Interest rate swaps $ ( 1,757 ) Interest expense $ 573 December 31, 2018 Year ended December 31, 2018 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. Accumulated other comprehensive income (loss) includes unrealized gains or losses from the change in fair value measurement of our derivative instruments each reporting period and the related income tax expense or benefit. Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings. The estimated accumulated other comprehensive 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 no t have any undesignated derivative instruments during 2020, 2019 and 2018. 11. Commitments and Contingencies Leases We have operating leases for corporate offices, subleased offices and certain equipment and furniture. 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. 90 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements The components of lease expense for the year ended December 31, 2020, were as follows: Year ended December 31, (dollars in thousands) 2020 2019 Operating lease cost (1) $ 41,210 $ 27,519 Variable lease cost 4,266 4,035 Sublease income ( 3,120 ) ( 3,189 ) Net lease cost $ 42,356 $ 28,365 (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. These impairments, which were based on our estimates about our inability to sublease the office spaces, were recorded as restructuring expense on our consolidated statements of comprehensive income. 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 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 2021 10,353 2022 5,796 2023 4,417 2024 3,211 2025 1,905 Thereafter 3,847 Total lease payments 29,529 Less: Amount representing interest 2,813 Present value of future payments $ 26,716 2020 Form 10-K 91 Table of Contents Blackbaud, Inc. 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) December 31, 2020 December 31, 2019 Operating leases Operating lease right-of-use assets $ 22,671 $ 104,400 Accrued expenses and other current liabilities $ 9,359 $ 19,784 Operating lease liabilities, net of current portion 17,357 95,624 Total operating lease liabilities $ 26,716 $ 115,408 As of December 31, 2020, the weighted average remaining lease terms and discount rates were as follows: (dollars in thousands) December 31, 2020 December 31, 2019 Operating leases Weighted average remaining lease term (years) 4.6 12.5 Weighted average discount rate 5.70 % 5.96 % Supplemental cash flow information related to leases during the year ended December 31, 2020, was as follows: Year ended December 31, (dollars in thousands) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 25,120 $ 24,569 Right-of-use assets obtained in exchange for lease obligations (non-cash): Operating leases 11,002 102,245 Other commitments 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 us. As of December 31, 2020, the remaining aggregate minimum purchase commitment under these arrangements was approximately $ 94.8 million through 2024. Solution and service indemnifications In the ordinary course of business, we provide certain indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our solutions or services. If we determine that it is probable that a loss has been incurred related to solution or service indemnifications, any such loss that could be reasonably estimated would be recognized. We have not identified any losses and, accordingly, we have not recorded a liability related to these indemnifications. Guarantees and indemnification obligations We enter into agreements in the ordinary course of business with, among others, customers, creditors, vendors and service providers. Pursuant to certain of these agreements we have agreed to indemnify the other party for certain matters, such as property damage, personal injury, acts or omissions of ours, or our employees, agents or representatives, or third-party claims alleging that the activities of its contractual partner pursuant to the contract infringe a patent, trademark or copyright of such third party. 92 2020 Form 10-K Table of Contents 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, 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. 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 legal proceedings. 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 93 Table of Contents 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. 12. Income Taxes We file income tax returns in the U.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, the U.K., Australia, Ireland and Costa Rica. We are generally subject to U.S. federal income tax examination for calendar tax years 2016 through 2020 as well as state and foreign income tax examinations for various years depending on statutes of limitations of those jurisdictions. We are currently under U.S. federal income tax examination for the calendar year 2016. 94 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements The following summarizes the components of income tax expense (benefit): Years ended December 31, (dollars in thousands) 2020 2019 2018 Current taxes: U.S. Federal $ ( 407 ) $ 1,534 $ ( 1,088 ) U.S. State and local 1,563 613 1,182 International 3,904 130 306 Total current taxes 5,060 2,277 400 Deferred taxes: U.S. Federal ( 1,064 ) ( 1,724 ) 659 U.S. State and local 7,725 ( 2,235 ) 45 International 2,176 359 ( 1,323 ) Total deferred taxes 8,837 ( 3,600 ) ( 619 ) Total income tax provision (benefit) $ 13,897 $ ( 1,323 ) $ ( 219 ) The following summarizes the components of income before provision for income taxes: Years ended December 31, (dollars in thousands) 2020 2019 2018 U.S. $ ( 4,112 ) $ 5,149 $ 47,532 International 25,726 5,436 ( 2,910 ) Income before provision for income taxes $ 21,614 $ 10,585 $ 44,622 2020 Form 10-K 95 Table of Contents Blackbaud, Inc. 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 % Effect of: State income taxes, net of federal benefit 5.9 ( 1.7 ) 4.1 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 ) Change in valuation reserve (primarily state credit reserves) 38.2 3.7 0.4 Section 162(m) limitation 17.5 30.8 4.2 Nondeductible meals, entertainment and transportation 3.3 11.3 2.6 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. 96 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements The significant components of our deferred tax assets and liabilities were as follows: December 31, (dollars in thousands) 2020 2019 Deferred tax assets relating to: Federal and state and foreign net operating loss carryforwards $ 5,592 $ 9,203 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 Deferred revenue 524 682 Accrued bonuses — 1,713 Other 9,111 7,487 Total deferred tax assets 92,696 93,791 Deferred tax liabilities relating to: Intangible assets ( 45,757 ) ( 46,569 ) 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 ) Valuation allowance ( 29,184 ) ( 6,453 ) Net deferred tax liability $ ( 52,494 ) $ ( 44,115 ) As of December 31, 2020, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $ 18.5 million, $ 2.1 million and $ 21.4 million, respectively. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. If not utilized, the federal net operating loss carryforwards will begin to expire in 2028 and the state net operating loss carryforwards will expire over various periods beginning in 2021. Our foreign net operating loss carryforwards have an unlimited carryforward period. As of December 31, 2020, our foreign tax credit carryforwards for income tax purposes were insignificant. Our federal tax credit carryforwards for income tax purposes were approximately $ 14.1 million. Our state tax credit carryforwards for income tax purposes were approximately $ 30.9 million, net of federal benefit. If not utilized, the federal tax credit carryforwards will begin to expire in 2036 and the state tax credit carryforwards will begin to expire in 2021. 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. 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 97 Table of Contents Blackbaud, Inc. 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 at beginning of year Acquisition- related change Charges to expense Balance at end of year 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: Years ended December 31, (dollars in thousands) 2020 2019 2018 Balance at beginning of year $ 4,346 $ 3,704 $ 5,160 Increases from prior period positions 414 1,183 104 Decreases in prior year positions ( 614 ) ( 385 ) ( 413 ) Increases from current period positions 491 456 58 Lapse of statute of limitations ( 12 ) ( 612 ) ( 1,205 ) 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. Certain prior period amounts relating to our 2014 acquisitions are covered under indemnification agreements and, therefore, we have recorded a corresponding indemnification asset. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. The total amount of accrued interest and penalties included in the consolidated balance sheet as of December 31, 2020 and December 31, 2019 was $ 1.1 million and $ 1.0 million, respectively. The total amount of interest and penalties included in the consolidated statements of comprehensive income as an increase or decrease in income tax expense for 2020, 2019 and 2018 was insignificant. We have taken federal and state tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits might decrease within the next twelve months. This possible decrease could result from the expiration of statutes of limitations. The reasonably possible decrease at December 31, 2020 was $ 1.1 million. For our undistributed earnings of foreign subsidiaries, which we do not consider to be significant, we concluded that these earnings would be permanently reinvested in the local jurisdictions and not repatriated to the United States. Accordingly, we have not provided for U.S. state income taxes and foreign withholding taxes on those undistributed earnings of our foreign subsidiaries. If some or all of such earnings were to be remitted, the amount of taxes payable would be insignificant. 13. Stock-based Compensation Employee stock-based compensation plans Under the 2016 Equity and Incentive Compensation Plan 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. In connection with the acquisition of Convio in May 2012, we maintain the Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended (the “Convio 1999 Plan”) and Convio, Inc. 2009 Stock Incentive Plan, as amended (the “Convio 2009 Plan”), which we assumed upon the acquisition of Convio. Our Compensation Committee of the Board of Directors administers all of these plans and the stock-based awards are granted under terms determined by them. 98 2020 Form 10-K Table of Contents Blackbaud, Inc. 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 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 options — 206 The majority of the stock-based awards granted under these plans have a 10 -year contractual term. Awards granted to our executive officers and certain members of management are subject to accelerated vesting upon a change in control as defined in the employees’ retention agreement. Expense recognition We recognize compensation expense associated with stock options and awards with performance or market based vesting conditions on an accelerated basis over the requisite service period of the individual grantees, which generally equals the vesting period. We recognize compensation expense associated with restricted stock awards and SARs on a straight-line basis over the requisite service period of the individual grantees, which generally equals the vesting period. We recognize the effect of awards for which the requisite service period is not rendered when the award is forfeited (that is, we recognize the effect of forfeitures in compensation cost when they occur). Previously recognized compensation cost for an award is reversed in the period that the award is forfeited. Stock-based compensation expense is allocated to cost of revenue and operating expenses on the consolidated statements of comprehensive income based on where the associated employee’s compensation is recorded. The following table summarizes stock-based compensation expense: Years ended December 31, (in thousands) 2020 2019 2018 Included in cost of revenue: Cost of recurring $ 5,793 $ 1,879 $ 2,464 Cost of one-time services and other 7,581 1,487 2,778 Total included in cost of revenue 13,374 3,366 5,242 Included in operating expenses: Sales, marketing and customer success 15,514 11,203 9,285 Research and development 18,527 11,115 9,048 General and administrative 39,842 32,949 24,699 Total included in operating expenses 73,883 55,267 43,032 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 99 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Restricted stock awards We have granted shares of common stock subject to certain restrictions under the 2016 Equity Plan and the 2008 Equity Plan. Restricted stock awards granted to employees vest in equal annual installments generally over 4 years from the grant date subject to the recipient’s continued employment with us. 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, 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 Weighted average grant-date fair value Weighted average remaining contractual term (in years) Aggregate intrinsic value (1) (in thousands) 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 (1) The intrinsic value is calculated as the market value as of the end of the fiscal period. The total fair value of restricted stock awards that vested during the years ended December 31, 2020, 2019 and 2018 was $ 39.9 million, $ 37.5 million and $ 24.2 million, respectively. The weighted average grant-date fair value of restricted stock awards granted during the years ended December 31, 2019 and 2018 was $ 78.39 and $ 94.51 , respectively. Restricted stock units We have also granted restricted stock units subject to certain restrictions under the 2016 Equity Plan and the 2008 Equity Plan. Restricted stock units granted to employees vest in equal annual installments generally over 3 years from the grant date subject to the recipient’s continued employment with us. We have also granted restricted stock units for which vesting is subject to meeting certain performance and/or market conditions. Restricted stock units granted with a market condition had a fair market value assigned at the grant date based on the use of a Monte Carlo simulation model. The fair market value of the stock at the time of the grant is amortized to expense on a straight-line basis over the period of vesting except for awards with market or performance conditions, which are amortized on an accelerated basis over the period of vesting. The following table summarizes our unvested restricted stock units as of December 31, 2020, and changes during the year then ended: Restricted stock units Restricted stock units Weighted average grant-date fair value Weighted average remaining contractual term (in years) Aggregate intrinsic value (1) (in thousands) Unvested at January 1, 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. 100 2020 Form 10-K Table of Contents Blackbaud, Inc. 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 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. 14. Stockholders' Equity Preferred stock Our Board of Directors may fix the relative rights and preferences of each series of preferred stock in a resolution of the Board of Directors. Dividends 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 Dividend per Share Record Date Payable Date February 10, 2020 $ 0.12 February 28 March 13 Stock repurchase program 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. 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 101 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Changes in accumulated other comprehensive loss by component The changes in accumulated other comprehensive loss by component, consisted of the following: Years ended December 31, (in thousands) 2020 2019 2018 Accumulated other comprehensive loss, beginning of period $ ( 5,290 ) $ ( 5,110 ) $ ( 642 ) By component: Gains and losses on cash flow hedges: 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 ) ( 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 Reclassification upon adoption of ASU 2018-02 — — 167 Accumulated other comprehensive (loss) income balance, end of period $ ( 3,101 ) $ ( 1,323 ) $ 1,498 Foreign currency translation adjustment: Accumulated other comprehensive loss balance, beginning of period $ ( 3,967 ) $ ( 6,608 ) $ ( 1,390 ) Translation adjustments 4,571 2,641 ( 5,218 ) 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 ) 15. Defined Contribution Plan We have a defined contribution 401(k) plan (the "401K Plan") covering substantially all employees. Employees were able to contribute between 1 % and 75 % of their salaries in 2020, 2019 and 2018. We match 50 % of qualified employees’ contributions up to 6 % of their salary. The 401K Plan also provides for additional employer contributions to be made at our discretion. 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. 102 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements 16. Segment Information Our chief operating decision maker is our chief executive officer ("CEO"). Our chief operating decision maker uses consolidated financial information to make operating decisions, assess financial performance and allocate resources. We have one operating segment and one reportable segment. The following table presents long-lived assets by geographic region based on the location of the assets. Years ended December 31, (dollars in thousands) 2020 2019 United States $ 103,123 $ 32,606 Other countries 2,054 2,940 Total property and equipment $ 105,177 $ 35,546 See Note 17 to these consolidated financial statements for information about our revenues by geographic region. 17. Revenue Recognition Transaction price allocated to the remaining performance obligations As of December 31, 2020, approximately $ 755 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 60 % of these remaining performance obligations over the next 12 months, with the remainder recognized thereafter. We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less (one-time services); and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (payment services and usage). We also applied the practical expedient in ASC 606-10-65-1-(f)(3), whereby the transaction price allocated to the remaining performance obligations, or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application, is not disclosed. Contract balances Our contract assets as of December 31, 2020 and December 31, 2019 were insignificant. Our opening and closing balances of deferred revenue were as follows: (in thousands) December 31, 2020 December 31, 2019 Total deferred revenue $ 316,914 $ 316,137 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 103 Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements Disaggregation of revenue 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: Years ended December 31, (dollars in thousands) 2020 2019 2018 United States $ 772,188 $ 775,308 $ 727,366 United Kingdom 84,121 65,176 59,898 Other countries 56,910 59,939 61,342 Total revenue $ 913,219 $ 900,423 $ 848,606 The General Markets Group ("GMG"), the Enterprise Markets Group ("EMG"), and the International Markets Group ("IMG") comprise our go-to-market organizations. The following is a description of each market group as of December 31, 2020: • The GMG focuses on sales to all K-12 private schools, faith communities and arts and cultural organizations, as well as emerging and mid-sized prospects in the U.S.; • The EMG focuses on sales to all healthcare and higher education institutions, corporations and foundations, as well as large and/or strategic prospects in the U.S.; and • The IMG focuses on sales to all prospects and customers outside of the U.S. The following table presents our revenue by market group: Years ended December 31, (dollars in thousands) 2020 2019 2018 (2) GMG $ 376,762 $ 378,384 $ 362,585 EMG (1) 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 (1) The operating results of YourCause have been included in EMG from the date of acquisition. See Note 3 to these consolidated financial statements for details regarding this acquisition. (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, to present them on a consistent basis with the current year. 104 2020 Form 10-K Table of Contents Blackbaud, Inc. Notes to Consolidated Financial Statements 18. Quarterly Results (Unaudited) (dollars in thousands, except per share data) December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Total revenue $ 242,606 $ 215,001 $ 231,991 $ 223,621 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, 2019 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 (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 ) Note: The individual amounts for each quarter may not sum to full year totals due to rounding. The results of operations of acquired companies are included in the consolidated results of operations from the date of their respective acquisition. See Note 3 of these consolidated financial statements for details related to our business acquisitions. 19. Restructuring During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments. 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. 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 105 Table of Contents Blackbaud, Inc. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.