BLACKBAUD INC 10-Q

ITEM 1. FINANCIAL STATEMENTS Blackbaud, Inc. Condensed Consolidated Balance Sheets (Unaudited) (dollars in thousands) June 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 29,041 $ 31,691 Restricted cash 761,289 702,240 Accounts receivable, net of allowance of $ 8,081 and $ 7,318 at June 30, 2023 and December 31, 2022, respectively 168,908 102,809 Customer funds receivable 3,731 249 Prepaid expenses and other current assets 81,597 81,654 Total current assets 1,044,566 918,643 Property and equipment, net 104,672 107,426 Operating lease right-of-use assets 45,497 45,899 Software and content development costs, net 151,158 141,023 Goodwill 1,053,342 1,050,272 Intangible assets, net 609,524 635,136 Other assets 84,254 94,304 Total assets $ 3,093,013 $ 2,992,703 Liabilities and stockholders’ equity Current liabilities: Trade accounts payable $ 40,730 $ 42,559 Accrued expenses and other current liabilities 102,747 86,002 Due to customers 763,845 700,860 Debt, current portion 19,176 18,802 Deferred revenue, current portion 434,631 382,419 Total current liabilities 1,361,129 1,230,642 Debt, net of current portion 827,403 840,241 Deferred tax liability 91,306 125,759 Deferred revenue, net of current portion 3,520 2,817 Operating lease liabilities, net of current portion 43,529 44,918 Other liabilities 4,756 4,294 Total liabilities 2,331,643 2,248,671 Commitments and contingencies (see Note 8) Stockholders’ equity: Preferred stock; 20,000,000 shares authorized, no ne outstanding — — Common stock, $ 0.001 par value; 180,000,000 shares authorized, 69,164,244 and 67,814,044 shares issued at June 30, 2023 and December 31, 2022, respectively 69 68 Additional paid-in capital 1,138,553 1,075,264 Treasury stock, at cost; 15,311,367 and 14,745,230 shares at June 30, 2023 and December 31, 2022, respectively ( 570,547 ) ( 537,287 ) Accumulated other comprehensive income 8,842 8,938 Retained earnings 184,453 197,049 Total stockholders’ equity 761,370 744,032 Total liabilities and stockholders’ equity $ 3,093,013 $ 2,992,703 The accompanying notes are an integral part of these condensed consolidated financial statements. Second Quarter 2023 Form 10-Q 3 Blackbaud, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three months ended June 30, Six months ended June 30, (dollars in thousands, except per share amounts) 2023 2022 2023 2022 Revenue Recurring $ 262,390 $ 252,507 $ 515,138 $ 497,173 One-time services and other 8,652 12,420 17,657 24,878 Total revenue 271,042 264,927 532,795 522,051 Cost of revenue Cost of recurring 113,926 114,487 228,426 226,661 Cost of one-time services and other 7,549 11,120 16,161 22,308 Total cost of revenue 121,475 125,607 244,587 248,969 Gross profit 149,567 139,320 288,208 273,082 Operating expenses Sales, marketing and customer success 53,191 52,737 107,576 107,953 Research and development 36,146 38,333 76,737 78,285 General and administrative 59,148 47,391 111,986 91,153 Amortization 788 805 1,562 1,616 Total operating expenses 149,273 139,266 297,861 279,007 Income (loss) from operations 294 54 ( 9,653 ) ( 5,925 ) Interest expense ( 11,167 ) ( 8,976 ) ( 21,829 ) ( 16,575 ) Other income, net 2,778 3,133 4,785 4,254 Loss before provision for income taxes ( 8,095 ) ( 5,789 ) ( 26,697 ) ( 18,246 ) Income tax benefit ( 10,200 ) ( 2,367 ) ( 14,101 ) ( 4,417 ) Net income (loss) $ 2,105 $ ( 3,422 ) $ ( 12,596 ) $ ( 13,829 ) Earnings (loss) per share Basic $ 0.04 $ ( 0.07 ) $ ( 0.24 ) $ ( 0.27 ) Diluted $ 0.04 $ ( 0.07 ) $ ( 0.24 ) $ ( 0.27 ) Common shares and equivalents outstanding Basic weighted average shares 52,642,411 51,660,739 52,389,112 51,431,501 Diluted weighted average shares 53,643,124 51,660,739 52,389,112 51,431,501 Other comprehensive income (loss) Foreign currency translation adjustment $ 3,055 $ ( 10,398 ) $ 5,213 $ ( 12,530 ) Unrealized gain (loss) on derivative instruments, net of tax 5,383 2,558 ( 5,309 ) 13,463 Total other comprehensive income (loss) 8,438 ( 7,840 ) ( 96 ) 933 Comprehensive income (loss) $ 10,543 $ ( 11,262 ) $ ( 12,692 ) $ ( 12,896 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Second Quarter 2023 Form 10-Q Blackbaud, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, (dollars in thousands) 2023 2022 Cash flows from operating activities Net loss $ ( 12,596 ) $ ( 13,829 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 53,622 51,283 Provision for credit losses and sales returns 3,798 3,653 Stock-based compensation expense 63,289 55,714 Deferred taxes ( 33,101 ) ( 16,656 ) Amortization of deferred financing costs and discount 963 1,254 Other non-cash adjustments ( 1,569 ) 4,225 Changes in operating assets and liabilities, net of acquisition and disposal of businesses: Accounts receivable ( 69,624 ) ( 50,818 ) Prepaid expenses and other assets 9,470 3,685 Trade accounts payable ( 3,431 ) 12,769 Accrued expenses and other liabilities 11,948 ( 8,739 ) Deferred revenue 52,233 39,238 Net cash provided by operating activities 75,002 81,779 Cash flows from investing activities Purchase of property and equipment ( 2,779 ) ( 7,518 ) Capitalized software and content development costs ( 28,756 ) ( 27,183 ) Purchase of net assets of acquired companies, net of cash and restricted cash acquired — ( 19,016 ) Net cash used in investing activities ( 31,535 ) ( 53,717 ) Cash flows from financing activities Proceeds from issuance of debt 158,000 113,200 Payments on debt ( 171,824 ) ( 129,548 ) Stock issuance costs — ( 557 ) Employee taxes paid for withheld shares upon equity award settlement ( 33,687 ) ( 35,600 ) Change in due to customers 61,313 ( 141,001 ) Change in customer funds receivable ( 3,359 ) ( 546 ) Net cash provided by (used in) financing activities 10,443 ( 194,052 ) Effect of exchange rate on cash, cash equivalents and restricted cash 2,489 ( 7,252 ) Net increase (decrease) in cash, cash equivalents and restricted cash 56,399 ( 173,242 ) Cash, cash equivalents and restricted cash, beginning of period 733,931 651,762 Cash, cash equivalents and restricted cash, end of period $ 790,330 $ 478,520 The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown above in the condensed consolidated statements of cash flows: (dollars in thousands) June 30, 2023 December 31, 2022 Cash and cash equivalents $ 29,041 $ 31,691 Restricted cash 761,289 702,240 Total cash, cash equivalents and restricted cash in the statement of cash flows $ 790,330 $ 733,931 The accompanying notes are an integral part of these condensed consolidated financial statements. Second Quarter 2023 Form 10-Q 5 Blackbaud, Inc. Condensed Consolidated Statements of Stockholders' Equity (Unaudited) (dollars in thousands) Common stock Additional paid-in capital Treasury stock Accumulated other comprehensive income Retained earnings Total stockholders' equity Shares Amount Balance at December 31, 2022 67,814,044 $ 68 $ 1,075,264 $ ( 537,287 ) $ 8,938 $ 197,049 $ 744,032 Net loss — — — — — ( 14,701 ) ( 14,701 ) Vesting of restricted stock units 954,147 — — — — — — Employee taxes paid for 533,597 withheld shares upon equity award settlement — — — ( 30,990 ) — — ( 30,990 ) Stock-based compensation — — 29,925 — — — 29,925 Restricted stock grants 427,941 1 — — — — 1 Restricted stock cancellations ( 41,269 ) — — — — — — Other comprehensive loss — — — — ( 8,534 ) — ( 8,534 ) Balance at March 31, 2023 69,154,863 $ 69 $ 1,105,189 $ ( 568,277 ) $ 404 $ 182,348 $ 719,733 Net income — — — — — 2,105 2,105 Vesting of restricted stock units 23,550 — — — — — — Employee taxes paid for 32,540 withheld shares upon equity award settlement — — — ( 2,270 ) — — ( 2,270 ) Stock-based compensation — — 33,364 — — — 33,364 Restricted stock grants 6,031 — — — — — — Restricted stock cancellations ( 20,200 ) — — — — — — Other comprehensive income — — — — 8,438 — 8,438 Balance at June 30, 2023 69,164,244 $ 69 $ 1,138,553 $ ( 570,547 ) $ 8,842 $ 184,453 $ 761,370 6 Second Quarter 2023 Form 10-Q Blackbaud, Inc. Condensed Consolidated Statements of Stockholders' Equity (continued) (Unaudited) (dollars in thousands) Common stock Additional paid-in capital Treasury stock Accumulated other comprehensive income Retained earnings Total stockholders' equity Shares Amount Balance at December 31, 2021 66,165,666 $ 66 $ 968,927 $ ( 500,911 ) $ 6,522 $ 242,456 $ 717,060 Net loss — — — — — ( 10,407 ) ( 10,407 ) Stock issuance costs related to purchase of EVERFI — — ( 983 ) — — — ( 983 ) Retirements of common stock (1) ( 33,075 ) — ( 2,581 ) — — — ( 2,581 ) Vesting of restricted stock units 976,312 — — — — — — Employee taxes paid for 533,139 withheld shares upon equity award settlement — — — ( 34,674 ) — — ( 34,674 ) Stock-based compensation — — 27,860 — — — 27,860 Restricted stock grants 580,209 2 — — — — 2 Restricted stock cancellations ( 30,940 ) — — — — — — Other comprehensive income — — — — 8,773 — 8,773 Balance at March 31, 2022 67,658,172 $ 68 $ 993,223 $ ( 535,585 ) $ 15,295 $ 232,049 $ 705,050 Net loss — — — — — ( 3,422 ) ( 3,422 ) Stock issuance costs related to purchase of EVERFI — — ( 223 ) — — — ( 223 ) Retirements of common stock (1) ( 395 ) — ( 19 ) — — — ( 19 ) Vesting of restricted stock units 23,549 — — — — — — Employee taxes paid for 15,540 withheld shares upon equity award settlement — — — ( 926 ) — — ( 926 ) Stock-based compensation — — 27,854 — — — 27,854 Restricted stock grants 136,598 — — — — — — Restricted stock cancellations ( 62,550 ) — — — — — — Other comprehensive loss — — — — ( 7,840 ) — ( 7,840 ) Balance at June 30, 2022 67,755,374 $ 68 $ 1,020,835 $ ( 536,511 ) $ 7,455 $ 228,627 $ 720,474 (1) Represents shares retired after determining certain EVERFI's selling shareholders would be paid in cash, rather than shares of our common stock. For more information regarding our acquisition of EVERFI on December 31, 2021, please see Note 3 of the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. The accompanying notes are an integral part of these condensed consolidated financial statements. Second Quarter 2023 Form 10-Q 7 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization We are the leading software provider exclusively dedicated to powering social impact. Serving the nonprofit and education sectors, companies committed to social responsibility and individual change makers, our essential software is built to accelerate impact in fundraising, nonprofit financial management, digital giving, grantmaking, corporate social responsibility and education management. A remote-first company, we have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom, supporting users in 100+ countries. 2. Basis of Presentation Unaudited condensed consolidated interim financial statements The accompanying condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity, for the periods presented in accordance with accounting principles generally accepted in the United States ("U.S.") ("GAAP"). The consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, and other forms filed with the SEC from time to time. Basis of consolidation The condensed consolidated financial statements include the accounts of Blackbaud, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Reportable segment We report our operating results and financial information in one operating and reportable segment. Our chief operating decision maker uses consolidated financial information to make operating decisions, assess financial performance and allocate resources. Our chief operating decision maker is our chief executive officer. 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 and content development costs, our allowances for credit losses and sales returns, costs of obtaining contracts, valuation of derivative instruments, loss contingencies and insurance recoveries, among others. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates. 8 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Recently adopted accounting pronouncements In September 2022, the Financial Accounting Standards Board issued Accounting Standards Update 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations ("ASU 2022-04"). This update requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose key terms of the programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement, or financial statement presentation of supplier finance programs. We adopted ASU 2022-04 on January 1, 2023 and the adoption did not have a material impact on our condensed consolidated financial statements. Recently issued accounting pronouncements There are no recently issued accounting pronouncements that we expect to have a material impact on our consolidated financial statements when adopted in the future. Summary of significant accounting policies There have been no material changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023. 3. Earnings (Loss) Per Share We compute basic earnings (loss) per share by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted earnings (loss) per share reflects 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, settlement of stock appreciation rights and vesting of restricted stock awards and units. Diluted loss per share for the three months ended June 30, 2022 and six months ended June 30, 2023 and 2022 was the same as basic loss per share as there were net losses each of those periods and inclusion of potentially dilutive securities was anti-dilutive. The following table sets forth the computation of basic and diluted earnings (loss) per share: Three months ended June 30, Six months ended June 30, (dollars in thousands, except per share amounts) 2023 2022 2023 2022 Numerator: Net income (loss) $ 2,105 $ ( 3,422 ) $ ( 12,596 ) $ ( 13,829 ) Denominator: Weighted average common shares 52,642,411 51,660,739 52,389,112 51,431,501 Add effect of dilutive securities: Stock-based awards 1,000,713 — — — Weighted average common shares assuming dilution 53,643,124 51,660,739 52,389,112 51,431,501 Earnings (loss) per share Basic $ 0.04 $ ( 0.07 ) $ ( 0.24 ) $ ( 0.27 ) Diluted $ 0.04 $ ( 0.07 ) $ ( 0.24 ) $ ( 0.27 ) Anti-dilutive shares excluded from calculations of diluted earnings (loss) per share 9,487 1,167,368 1,151,974 2,090,267 Second Quarter 2023 Form 10-Q 9 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 4. Fair Value Measurements 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. Recurring fair value measurements Financial 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) Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair value as of June 30, 2023 Financial assets: Interest rate swaps $ — $ 26,978 $ — $ 26,978 Total financial assets $ — $ 26,978 $ — $ 26,978 Fair value as of June 30, 2023 Financial liabilities: Interest rate swaps $ — $ 1,774 $ — $ 1,774 Foreign currency forward contracts — 693 — 693 Contingent consideration obligations — — 1,379 1,379 Total financial liabilities $ — $ 2,467 $ 1,379 $ 3,846 Fair value as of December 31, 2022 Financial assets: Interest rate swaps $ — $ 31,870 $ — $ 31,870 Foreign currency forward contracts — 247 — 247 Total financial assets $ — $ 32,117 $ — $ 32,117 Fair value as of December 31, 2022 Financial liabilities: Foreign currency forward contracts $ — $ 323 $ — $ 323 Contingent consideration obligations — — 2,710 2,710 Total financial liabilities $ — $ 323 $ 2,710 $ 3,033 10 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 and foreign currency forward contracts. See Note 7 to these condensed consolidated financial statements for additional information about our derivative instruments. The fair value of our interest rate swaps and foreign currency forward contracts are based on model-driven valuations using Secured Overnight Financing Rate ("SOFR") rates and foreign currency forward rates, respectively, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps and foreign currency forward contracts are classified within Level 2 of the fair value hierarchy. Our financial contracts that were indexed to LIBOR were modified to reference SOFR during the three months ended September 30, 2022. These modifications did not have a significant financial impact. Contingent consideration obligations arise from business acquisitions. The fair values are based on discounted cash flow analyses reflecting a probability-weighted assessment approach derived from the likelihood of possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. As the fair value measurements for our contingent consideration obligations contain significant unobservable inputs, they are classified within Level 3 of the fair value hierarchy. 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 June 30, 2023 and December 31, 2022, due to the immediate or short-term maturity of these instruments. We believe the carrying amount of our debt approximates its fair value at June 30, 2023 and December 31, 2022, as the debt bears interest rates that approximate market value. As SOFR 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 six months ended June 30, 2023. 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 right-of-use ("ROU") assets. These assets 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 impairment testing, we estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium. There were no material non-recurring fair value adjustments to our long-lived assets, intangible assets, goodwill and operating lease ROU assets during the six months ended June 30, 2023. 5. Consolidated Financial Statement Details Restricted cash (dollars in thousands) June 30, 2023 December 31, 2022 Restricted cash due to customers $ 760,114 $ 700,611 Real estate escrow balances and other 1,175 1,629 Total restricted cash $ 761,289 $ 702,240 Second Quarter 2023 Form 10-Q 11 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Prepaid expenses and other assets (dollars in thousands) June 30, 2023 December 31, 2022 Costs of obtaining contracts (1)(2) $ 68,366 $ 74,272 Prepaid software maintenance and subscriptions (3) 31,587 34,766 Derivative instruments 26,978 32,117 Implementation costs for cloud computing arrangements, net (4)(5) 10,237 10,189 Prepaid insurance 8,340 4,902 Unbilled accounts receivable 5,082 5,775 Taxes, prepaid and receivable 1,389 1,855 Deferred tax assets 1,156 1,153 Other assets 12,716 10,929 Total prepaid expenses and other assets 165,851 175,958 Less: Long-term portion 84,254 94,304 Prepaid expenses and other current assets $ 81,597 $ 81,654 (1) Amortization expense from costs of obtaining contracts was $ 8.1 million and $ 16.4 million for the three and six months ended June 30, 2023, respectively, and $ 8.5 million and $ 17.0 million for the three and six months ended June 30, 2022, respectively. (2) The current portion of costs of obtaining contracts as of June 30, 2023 and December 31, 2022 was $ 27.3 million and $ 29.1 million, respectively. (3) The current portion of prepaid software maintenance and subscriptions as of June 30, 2023 and December 31, 2022 was $ 28.0 million and $ 31.7 million, respectively. (4) These costs 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 insignificant for the three months ended June 30, 2023 and 2022, respectively, and $ 1.1 million and $ 1.1 million for the six months ended June 30, 2023 and 2022, respectively. Accumulated amortization for these costs was $ 6.3 million and $ 5.2 million as of June 30, 2023 and December 31, 2022, respectively. Accrued expenses and other liabilities (dollars in thousands) June 30, 2023 December 31, 2022 Accrued legal costs (1) $ 55,888 $ 28,448 Taxes payable 14,305 16,667 Customer credit balances 7,588 8,257 Operating lease liabilities, current portion 7,330 7,723 Accrued commissions and salaries 4,329 6,944 Accrued health care costs 2,932 2,467 Derivative instruments 2,467 323 Accrued vacation costs 2,004 2,156 Accrued transaction-based costs related to payments services 1,545 5,059 Contingent consideration liability 1,379 2,710 Other liabilities 7,736 9,542 Total accrued expenses and other liabilities 107,503 90,296 Less: Long-term portion 4,756 4,294 Accrued expenses and other current liabilities $ 102,747 $ 86,002 (1) All accrued legal costs are classified as current. See Note 8 to these unaudited, condensed consolidated financial statements for additional information about our loss contingency accruals and other legal expenses. 12 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Other income, net Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Interest income $ 2,308 $ 114 $ 3,544 $ 237 Currency revaluation (losses) gains ( 535 ) 2,271 ( 779 ) 2,853 Other income, net 1,005 748 2,020 1,164 Other income, net $ 2,778 $ 3,133 $ 4,785 $ 4,254 6. 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) June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Credit facility: Revolving credit loans $ 172,800 $ 177,800 5.38 % 5.18 % Term loans 615,625 623,750 4.30 % 4.26 % Real estate loans 57,490 58,189 5.22 % 5.22 % Other debt 2,800 2,247 8.42 % 7.38 % Total debt 848,715 861,986 4.60 % 4.52 % Less: Unamortized discount and debt issuance costs 2,136 2,943 Less: Debt, current portion 19,176 18,802 7.03 % 6.45 % Debt, net of current portion $ 827,403 $ 840,241 4.54 % 4.48 % 2020 credit facility In October 2020, we entered into a five-year $ 900.0 million senior credit facility (the "2020 Credit Facility"). At June 30, 2023, we were in compliance with our debt covenants under the 2020 Credit Facility. 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 two senior secured notes with a then-aggregate outstanding principal amount of $ 61.1 million (collectively, the “Real Estate Loans”). At June 30, 2023, we were in compliance with our debt covenants under the Real Estate Loans. Other debt From time to time, we enter into third-party financing agreements for purchases of software and related services for our internal use. Generally, the agreements are non-interest-bearing notes requiring annual payments. Interest associated with the notes is imputed at the rate we would incur for amounts borrowed under our then-existing credit facility at the inception of the notes. Second Quarter 2023 Form 10-Q 13 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table summarizes our currently effective supplier financing agreements as of June 30, 2023: (dollars in thousands) Term in Months Number of Annual Payments First Annual Payment Due Original Loan Value Effective dates of agreements (1) : December 2022 39 3 January 2023 $ 1,710 January 2023 36 3 April 2023 $ 2,491 (1) Represent noncash investing and financing transactions during the periods indicated as we purchased software and services by assuming directly related liabilities. The changes in supplier financing obligations during the six months ended June 30, 2023, consisted of the following: (dollars in thousands) Total Balance at December 31, 2022 $ 2,247 Additions 2,491 Settlements ( 1,938 ) Balance at June 30, 2023 $ 2,800 7. Derivative Instruments We generally use derivative instruments to manage our interest rate and foreign currency exchange risk. We currently have derivatives classified as cash flow hedges and net investment hedges. We do not enter into any derivatives for trading or speculative purposes. All of our derivative instruments are governed by International Swap Dealers Association, Inc. master agreements with our counterparties. As of June 30, 2023 and December 31, 2022, we have presented the fair value of our derivative instruments at the gross amounts in the condensed consolidated balance sheets as the gross fair values of our derivative instruments equaled their net fair values. Cash flow hedges 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 swaps as cash flow hedges at the inception of the contracts. As of June 30, 2023 and December 31, 2022, the aggregate notional values of the interest rate swaps were $ 935.0 million and $ 435.0 million, respectively. All of the contracts have maturities on or before October 2028. We have entered into foreign currency forward contracts to hedge revenues denominated in the Canadian Dollar ("CAD") against changes in the exchange rate with the United States Dollar ("USD"). We designated each of these foreign currency forward contracts as cash flow hedges at the inception of the contracts. As of June 30, 2023 and December 31, 2022, the aggregate notional values of the foreign currency forward contracts designated as cash flow hedges that we held to buy USD in exchange for Canadian Dollars were $ 27.1 million CAD and $ 22.6 million CAD, respectively. All of the contracts have maturities of 12 months or less. 14 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Net investment hedges We have entered into foreign currency forward contracts to hedge a portion of the foreign currency exposure that arises on translation of our investments denominated in British Pounds ("GBP") into USD. We designated each of these foreign currency forward contracts as net investment hedges at the inception of the contracts. As of June 30, 2023 and December 31, 2022, the aggregate notional values of the foreign currency forward contracts designated as net investment hedges to reduce the volatility of the U.S. dollar value of a portion of our GBP-denominated investments was £ 11.5 million and £ 11.2 million, respectively. The fair values of our derivative instruments were as follows as of: Asset derivatives Liability derivatives (dollars in thousands) Balance sheet location June 30, 2023 December 31, 2022 Balance sheet location June 30, 2023 December 31, 2022 Derivative instruments designated as hedging instruments: Foreign currency forward contracts, current portion Prepaid expenses and other current assets $ — $ 247 Accrued expenses and other current liabilities $ 693 $ 323 Interest rate swaps, long-term Other assets 26,978 31,870 Other liabilities 1,774 — Total derivative instruments designated as hedging instruments $ 26,978 $ 32,117 $ 2,467 $ 323 The effects of derivative instruments in cash flow and net investment hedging relationships were as follows: Gain (loss) recognized in accumulated other comprehensive income as of Location of gain (loss) reclassified from accumulated other comprehensive income into income (loss) Gain (loss) reclassified from accumulated other comprehensive income into income (loss) (dollars in thousands) June 30, 2023 Three months ended June 30, 2023 Six months ended June 30, 2023 Cash Flow Hedges Interest rate swaps $ 25,204 Interest expense $ 5,083 $ 9,582 Foreign currency forward contracts $ ( 292 ) Revenue $ 109 $ 234 Net Investment Hedges Foreign currency forward contracts $ ( 401 ) $ — $ — June 30, 2022 Three months ended June 30, 2022 Six months ended June 30, 2022 Cash Flow Hedges Interest rate swaps $ 25,412 Interest expense $ 323 $ ( 35 ) 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. Excluding net investment hedges, 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) and related tax effects are reclassified from accumulated other comprehensive income (loss) to current earnings. For net investment hedges, changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to translation adjustment, a component of accumulated other comprehensive income (loss), and recognized in earnings only when the hedged GBP investment is liquidated. The estimated accumulated other Second Quarter 2023 Form 10-Q 15 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) comprehensive income as of June 30, 2023 that is expected to be reclassified into earnings within the next twelve months is $ 20.9 million. There were no ineffective portions of our interest rate swap or foreign currency forward derivatives during the six months ended June 30, 2023 and 2022. See Note 10 to these condensed consolidated financial statements for a summary of the changes in accumulated other comprehensive income (loss) by component. We classify cash flows related to derivative instruments as operating activities in the condensed consolidated statements of cash flows. 8. Commitments and Contingencies Leases We have operating leases for corporate offices, subleased offices and certain equipment and furniture. As of June 30, 2023, we did not have any operating leases that had not yet commenced. The following table summarizes the components of our lease expense: Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Operating lease cost (1) $ 2,304 $ 2,445 $ 4,689 $ 4,976 Variable lease cost 395 413 827 850 Sublease income ( 854 ) ( 766 ) ( 1,665 ) ( 1,197 ) Net lease cost $ 1,845 $ 2,092 $ 3,851 $ 4,629 (1) Includes short-term lease costs, which were immaterial. 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 June 30, 2023, the remaining aggregate minimum purchase commitment under these arrangements was approximately $ 270.4 million through 2027. 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. We have not identified any losses that might be covered by these indemnifications. 16 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 investigations, 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 costs due to third-party service providers and consultants, including legal fees, 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. It is possible that our consolidated financial position, results of operations or cash flows could be materially 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 do not believe that any data went beyond the cybercriminal, has been misused, or has been disseminated or otherwise made available publicly. Our investigation into the Security Incident remains ongoing. As a result of the Security Incident, we are currently subject to certain legal proceedings, claims and investigations, as discussed below, and could be the subject of additional legal proceedings, claims, inquiries and investigations in the future that might result in adverse judgments, settlements, fines, penalties or other resolution. To limit our exposure to losses related to claims against us, including data breaches such as the Security Incident, we maintain $ 50 million of insurance above a $ 250 thousand deductible payable by us. As noted below, this coverage has reduced our fina ncial exposure related to the Security Incident. We recorded expenses and offsetting insurance recoveries related to the Security Incident as follows: Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Gross expense $ 26,777 $ 8,435 $ 44,560 $ 17,440 Offsetting insurance recoveries — ( 87 ) — ( 1,891 ) Net expense $ 26,777 $ 8,348 $ 44,560 $ 15,549 Second Quarter 2023 Form 10-Q 17 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The following summarizes our cumulative expenses, insurance recoveries recognized and insurance recoveries paid as of: (dollars in thousands) June 30, 2023 December 31, 2022 Cumulative gross expense $ 152,565 $ 108,005 Cumulative offsetting insurance recoveries recognized ( 50,000 ) ( 50,000 ) Cumulative net expense $ 102,565 $ 58,005 Cumulative offsetting insurance recoveries paid $ ( 50,000 ) $ ( 50,000 ) Recorded expenses have consisted primarily of payments to third-party service providers and consultants, including legal fees, as well as settlement of the previously disclosed SEC investigation (as discussed below), settlements of customer claims and accruals for certain loss contingencies. Not included in the expenses discussed above were costs associated with enhancements to our cybersecurity program. We present expenses and insurance recoveries related to the Security Incident in general and administrative expense on our consolidated statements of comprehensive income (loss) and as operating activities on our consolidated statements of cash flows. Total costs related to the Security Incident exceeded the limit of our insurance coverage during the first quarter of 2022. We expect to continue to experience significant expenses related to our response to the Security Incident, resolution of legal proceedings, claims and investigations, including those discussed below, and our efforts to further enhance our cybersecurity measures. For the three and six months ended June 30, 2023, we incurred net pre-tax expenses of $ 26.8 million and $ 44.6 million, respectively, related to the Security Incident, which included $ 7.0 million and $ 14.6 million, respectively, for ongoing legal fees and additional accruals for loss contingencies of $ 19.8 million and $ 30.0 million, respectively. During the six months ended June 30, 2023, we had net cash outlays of $ 15.8 million related to the Security Incident, which included ongoing legal fees and the $ 3.0 million civil penalty paid related to the SEC settlement (as discussed below). In line with our policy, legal fees are expensed as incurred. For full year 2023, we currently expect net pre-tax expense of approximately $ 20.0 million to $ 30.0 million and net cash outlays of approximately $ 25.0 million to $ 35.0 million for ongoing legal fees related to the Security Incident. Not included in these ranges are our previous settlements or current accruals for loss contingencies related to the matters discussed below. As of June 30, 2023, we have recorded approximately $ 50.0 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain governmental agencies related to the Security Incident that we believe we can reasonably estimate in accordance with our loss contingency procedures described above. Our liabilities for loss contingencies are recorded in accrued expenses and other current liabilities on our condensed consolidated balance sheets. It is reasonably possible that our estimated or actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss. There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of June 30, 2023 because we are unable at this time to reasonably estimate the possible loss or range of loss. Each of these matters could, separately or in the aggregate, result in an adverse judgment, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition. Customer claims. To date, we have received approximately 260 specific requests for reimbursement of expenses, approximately 210 (or 81 %) have been fully resolved and closed. We have also received approximately 400 reservations of the right to seek expense recovery in the future from customers or their attorneys in the U.S., U.K. and Canada related to the Security Incident. We have also received notices of proposed claims on behalf of a number of U.K. data subjects, which we are reviewing. In addition, insurance companies representing various customers’ interests through subrogation claims have contacted us, and certain insurance companies have filed subrogation claims in court. Customer and insurer subrogation claims generally seek reimbursement of their 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. Our review of customer and subrogation claims includes analyzing individual customer contracts into which we have entered, the specific claims made and applicable law. 18 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Customer constituent class actions. Presently, we are a defendant in 19 putative consumer class action cases [ 17 in U.S. federal courts (which have been consolidated under multi district litigation to a single federal 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. We are currently engaged in court proceedings to determine whether this will proceed as a class action. 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 reasonably 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 investigations. To date, we have received a consolidated, multi-state Civil Investigative Demand issued on behalf of 49 state Attorneys General and the District of Columbia, a separate Civil Investigative Demand from the office of the Indiana Attorney General and a separate Civil Investigative Demand from the office of the California Attorney General relating to the Security Incident. We have been in discussions, directly with certain Attorneys General or indirectly through an executive committee of the multi-state group of Attorneys General, about potential resolution of issues arising from these investigations. Although we are hopeful that we can resolve these matters on acceptable terms, there is no assurance that we will be able to do so on terms acceptable to us and to any or all such states. We also are subject to the following pending governmental actions: • an investigation by the U.S. Federal Trade Commission; • an investigation by the U.S. Department of Health and Human Services; • an investigation by the Office of the Australian Information Commissioner; and • an investigation by the Office of the Privacy Commissioner of Canada. As previously disclosed, on March 9, 2023, the Company reached a settlement with the SEC in connection with the Security Incident. This settlement fully resolves the previously disclosed SEC investigation of the Security Incident and is further described in an SEC cease-and-desist order (the “SEC Order”). Under the terms of the SEC Order, the Company has agreed to cease-and-desist from committing or causing any violations or any future violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended (the “Securities Act”), and Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 12b-20, 13a-13 and 13a-15(a) thereunder. No other violations of the securities laws are alleged in the SEC Order. As part of the SEC Order, the Company also agreed to pay, and has paid, a civil penalty in the amount of $ 3.0 million. The Company consented to the entry of the SEC Order without admitting or denying the findings of the SEC Order, other than with respect to the SEC’s jurisdiction over the Company and the subject matter of the SEC Order. The SEC Order describing the settlement was furnished as Exhibit 99.1 and the SEC’s press release announcing this resolution is furnished as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 9, 2023. Second Quarter 2023 Form 10-Q 19 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) On September 28, 2021, the Information Commissioner’s Office in the United Kingdom under the U.K. Data Protection Act 2018 (the "ICO") notified us that it has closed its investigation of the Security Incident. Based on its investigation and having considered our actions before, during and after the Security Incident, the ICO issued our European subsidiary a reprimand in accordance with Article 58(2)(b) of the U.K. General Data Protection Regulation ("U.K. GDPR") due to our non-compliance, in the ICO's view, with the requirements set out in Article 32 of the U.K. GDPR regarding the processing of personal data. The ICO did not impose a penalty related to the Security Incident, nor did it impose any requirements for further action by us. On September 24, 2021, we received notice from the Spanish Data Protection Authority that it has concluded its investigation of the Security Incident, pursuant to which our European subsidiary paid a penalty of € 60,000 in relation to the alleged late notification of two Spanish data controllers regarding the Security Incident. On January 15, 2021, we were notified by the Data Protection Commission of Ireland that it has concluded its investigation of the Security Incident without taking any action against us. We continue to cooperate with all ongoing investigations, which include various requests for documents, policies, narratives and communications, as well as requests to interview or depose various Company-related personnel. As noted above, each of these separate governmental investigations could result in adverse judgments, settlements, fines, penalties or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition. 9. Income Taxes Our income tax benefit and effective income tax rates, including the effects of period-specific events, were: Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Income tax benefit $ ( 10,200 ) $ ( 2,367 ) $ ( 14,101 ) $ ( 4,417 ) Effective income tax rate 126.0 % 40.9 % 52.8 % 24.2 % The increases in our effective income tax rate for the three and six months ended June 30, 2023, when compared to the same periods in 2022 were primarily attributable to unfavorable impact of non-deductible Security Incident accruals. See Note 8 to these unaudited, condensed consolidated financial statements for additional information about our loss contingency accruals related to the Security Incident. For the three and six months ended June 30, 2022, we utilized the discrete effective tax rate method, as allowed by ASC 740-270-30-18, Income Taxes—Interim Reporting, to calculate our interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. For the three and six months ended June 30, 2023 we have utilized the annual effective tax rate method, as we believe it can now be reliably estimated. This methodology requires us to apply our estimated annual effective tax rate to year-to-date pre-tax earnings. During the second quarter of 2023, our estimated annual effective tax rate increased due to the unfavorable impacts of non-deductible Security Incident accruals and its impact on pre-tax earnings. This increase, when applied to quarter-to-date and year-to-date date pre-tax losses, resulted in recognition of income tax benefits at 126.0 % and 52.8 %, respectively. 20 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 10. Stockholders' Equity Changes in accumulated other comprehensive income (loss) by component The changes in accumulated other comprehensive income (loss) by component, consisted of the following: Three months ended June 30, Six months ended June 30, (in thousands) 2023 2022 2023 2022 Accumulated other comprehensive income, beginning of period $ 404 $ 15,295 $ 8,938 $ 6,522 By component: Gains and losses on cash flow hedges: Accumulated other comprehensive income balance, beginning of period $ 13,141 $ 16,162 $ 23,833 $ 5,257 Other comprehensive income before reclassifications, net of tax effects of $( 3,238 ), $( 993 ) $( 672 ) and $( 4,782 ) 9,231 2,796 1,942 13,437 Amounts reclassified from accumulated other comprehensive income ( 5,192 ) ( 323 ) ( 9,816 ) 35 Tax expense (benefit) included in provision for income taxes 1,344 85 2,565 ( 9 ) Total amounts reclassified from accumulated other comprehensive income ( 3,848 ) ( 238 ) ( 7,251 ) 26 Net current-period other comprehensive income (loss) 5,383 2,558 ( 5,309 ) 13,463 Accumulated other comprehensive income balance, end of period $ 18,524 $ 18,720 $ 18,524 $ 18,720 Foreign currency translation adjustment: Accumulated other comprehensive (loss) income balance, beginning of period $ ( 12,737 ) $ ( 867 ) $ ( 14,895 ) $ 1,265 Translation adjustment 3,055 ( 10,398 ) 5,213 ( 12,530 ) Accumulated other comprehensive loss balance, end of period ( 9,682 ) ( 11,265 ) ( 9,682 ) ( 11,265 ) Accumulated other comprehensive income, end of period $ 8,842 $ 7,455 $ 8,842 $ 7,455 Second Quarter 2023 Form 10-Q 21 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 11. Revenue Recognition Transaction price allocated to the remaining performance obligations As of June 30, 2023, approximately $ 1.2 billion of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 50 % 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 (transactional revenue). Contract balances Our contract assets as of June 30, 2023 and December 31, 2022 were insignificant. Our closing balances of deferred revenue were as follows: (in thousands) June 30, 2023 December 31, 2022 Total deferred revenue $ 438,151 $ 385,236 The increase in deferred revenue during the six months ended June 30, 2023 was primarily due to a seasonal increase in customer contract renewals. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter. Generally, our lowest balance of deferred revenue during the year is at the end of our first quarter. The amount of revenue recognized during the six months ended June 30, 2023 that was included in the deferred reven ue balance at the beginning of the period was approximately $ 252 million. The amount of revenue recognized during the six months ended June 30, 2023 from performance obligations satisfied in prior periods was insignificant . 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: Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 United States $ 228,744 $ 223,128 $ 450,413 $ 437,522 United Kingdom 28,234 26,831 54,282 54,491 Other countries 14,064 14,968 28,100 30,038 Total revenue $ 271,042 $ 264,927 $ 532,795 $ 522,051 22 Second Quarter 2023 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) During the third quarter of 2022, we reorganized our market groups. The Social Sector and Corporate Sector market groups comprised our go-to-market organizations as of June 30, 2023. The following is a description of each market group as of that date: • The Social Sector market group focuses on sales to customers and prospects in the social sector, such as nonprofits, foundations, education institutions, healthcare organizations and other not-for-profit entities globally, and includes JustGiving; and • The Corporate Sector market group focuses on sales to customers and prospects in the corporate sector globally, and includes EVERFI and YourCause. The following table presents our revenue by market group: Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 (1) 2023 2022 (1) Social Sector $ 232,381 $ 227,756 $ 457,278 $ 447,751 Corporate Sector 38,661 37,171 75,517 74,300 Total revenue $ 271,042 $ 264,927 $ 532,795 $ 522,051 (1) Due to the market group change discussed above, we have recast our revenue by market group for the three and six months ended June 30, 2022 to present them on a consistent basis with the current year. The following table presents our recurring revenue by type: Three months ended June 30, Six months ended June 30, (dollars in thousands) 2023 2022 2023 2022 Contractual recurring $ 181,235 $ 177,350 $ 358,838 $ 351,882 Transactional recurring 81,155 75,157 156,300 145,291 Total recurring revenue $ 262,390 $ 252,507 $ 515,138 $ 497,173 12. Subsequent Events Fixed Asset Impairment On July 31, 2023, we entered into a sublease for a portion of our Washington, DC office location, which we previously closed in February 2023 to align with our remote-first workforce strategy. We considered our entry into the sublease an impairment indicator. As a result, we currently expect to incur pre-tax costs between $ 6.0 million and $ 8.0 million in the third quarter of 2023, consisting of noncash impairment charges against certain operating lease right-of-use assets and property and equipment assets. Second Quarter 2023 Form 10-Q 23 Table of Contents Blackbaud, Inc. (Unaudited)