BLACKBAUD INC 10-Q

ITEM 1. FINANCIAL STATEMENTS Blackbaud, Inc. Condensed Consolidated Balance Sheets (Unaudited) (dollars in thousands, except per share amounts) September 30, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 34,633 $ 31,251 Restricted cash 428,095 697,006 Accounts receivable, net of allowance of $ 6,307 and $ 6,907 at September 30, 2024 and December 31, 2023, respectively 97,988 101,862 Customer funds receivable 7,343 353 Prepaid expenses and other current assets 87,499 99,285 Total current assets 655,558 929,757 Property and equipment, net 95,053 98,689 Operating lease right-of-use assets 27,522 36,927 Software and content development costs, net 169,507 160,194 Goodwill 1,056,882 1,053,738 Intangible assets, net 536,008 581,937 Other assets 60,444 51,037 Total assets $ 2,600,974 $ 2,912,279 Liabilities and stockholders’ equity Current liabilities: Trade accounts payable $ 43,983 $ 25,184 Accrued expenses and other current liabilities 48,745 64,322 Due to customers 434,093 695,842 Debt, current portion 23,830 19,259 Deferred revenue, current portion 411,554 392,530 Total current liabilities 962,205 1,197,137 Debt, net of current portion 977,019 760,405 Deferred tax liability 68,196 93,292 Deferred revenue, net of current portion 1,705 2,397 Operating lease liabilities, net of current portion 35,218 40,085 Other liabilities 12,304 10,258 Total liabilities 2,056,647 2,103,574 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, 70,955,940 and 69,188,304 shares issued at September 30, 2024 and December 31, 2023, respectively; 50,869,218 and 53,625,440 shares outstanding at September 30, 2024 and December 31, 2023, respectively 71 69 Additional paid-in capital 1,227,198 1,203,012 Treasury stock, at cost; 20,086,722 and 15,562,864 shares at September 30, 2024 and December 31, 2023, respectively ( 922,516 ) ( 591,557 ) Accumulated other comprehensive loss ( 6,887 ) ( 1,688 ) Retained earnings 246,461 198,869 Total stockholders’ equity 544,327 808,705 Total liabilities and stockholders’ equity $ 2,600,974 $ 2,912,279 The accompanying notes are an integral part of these condensed consolidated financial statements. Third Quarter 2024 Form 10-Q 3 Blackbaud, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three months ended September 30, Nine months ended September 30, (dollars in thousands, except per share amounts) 2024 2023 2024 2023 Revenue Recurring $ 280,018 $ 269,001 $ 832,912 $ 784,139 One-time services and other 6,709 8,625 20,351 26,282 Total revenue 286,727 277,626 853,263 810,421 Cost of revenue Cost of recurring 122,646 114,132 361,644 342,558 Cost of one-time services and other 4,871 7,634 16,779 23,795 Total cost of revenue 127,517 121,766 378,423 366,353 Gross profit 159,210 155,860 474,840 444,068 Operating expenses Sales, marketing and customer success 49,454 52,462 147,400 160,038 Research and development 39,368 37,965 121,238 114,702 General and administrative 25,645 42,596 106,842 154,582 Amortization 918 793 2,724 2,355 Total operating expenses 115,385 133,816 378,204 431,677 Income from operations 43,825 22,044 96,636 12,391 Interest expense ( 14,140 ) ( 9,620 ) ( 40,131 ) ( 31,449 ) Other income, net 2,997 5,662 9,654 10,447 Income (loss) before provision (benefit) for income taxes 32,682 18,086 66,159 ( 8,611 ) Income tax provision (benefit) 12,140 9,069 18,567 ( 5,032 ) Net income (loss) $ 20,542 $ 9,017 $ 47,592 $ ( 3,579 ) Earnings (loss) per share Basic $ 0.41 $ 0.17 $ 0.93 $ ( 0.07 ) Diluted $ 0.40 $ 0.17 $ 0.91 $ ( 0.07 ) Common shares and equivalents outstanding Basic weighted average shares 50,409,292 52,704,974 51,067,255 52,495,556 Diluted weighted average shares 51,632,569 54,089,897 52,107,147 52,495,556 Other comprehensive loss Foreign currency translation adjustment $ 6,463 $ ( 4,794 ) $ 5,617 $ 419 Unrealized (loss) gain on derivative instruments, net of tax ( 13,525 ) 4,093 ( 10,816 ) ( 1,216 ) Total other comprehensive loss ( 7,062 ) ( 701 ) ( 5,199 ) ( 797 ) Comprehensive income (loss) $ 13,480 $ 8,316 $ 42,393 $ ( 4,376 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Third Quarter 2024 Form 10-Q Blackbaud, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, (dollars in thousands) 2024 2023 Cash flows from operating activities Net income (loss) $ 47,592 $ ( 3,579 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 91,618 81,627 Provision for credit losses and sales returns 1,721 4,815 Stock-based compensation expense 76,430 95,668 Deferred taxes ( 21,776 ) ( 31,163 ) Amortization of deferred financing costs and discount 1,786 1,388 Loss on disposition of business 1,561 — Other non-cash adjustments 2,462 5,106 Changes in operating assets and liabilities, net of acquisition and disposal of businesses: Accounts receivable 918 ( 4,757 ) Prepaid expenses and other assets ( 873 ) 14,488 Trade accounts payable 18,322 ( 3,362 ) Accrued expenses and other liabilities ( 16,373 ) 9,073 Deferred revenue 18,998 33,679 Net cash provided by operating activities 222,386 202,983 Cash flows from investing activities Purchase of property and equipment ( 7,235 ) ( 4,243 ) Capitalized software and content development costs ( 42,882 ) ( 44,664 ) Purchase of net assets of acquired companies, net of cash and restricted cash acquired — ( 13 ) Net cash used in disposition of business ( 1,179 ) — Other investing activities ( 5,029 ) ( 250 ) Net cash used in investing activities ( 56,325 ) ( 49,170 ) Cash flows from financing activities Proceeds from issuance of debt 1,303,400 175,800 Payments on debt ( 1,080,192 ) ( 293,957 ) Debt issuance costs ( 6,458 ) — Employee taxes paid for withheld shares upon equity award settlement ( 55,950 ) ( 35,568 ) Change in due to customers ( 263,732 ) ( 339,735 ) Change in customer funds receivable ( 6,777 ) ( 3,286 ) Purchase of treasury stock ( 325,408 ) — Net cash used in financing activities ( 435,117 ) ( 496,746 ) Effect of exchange rate on cash, cash equivalents and restricted cash 3,527 ( 311 ) Net decrease in cash, cash equivalents and restricted cash ( 265,529 ) ( 343,244 ) Cash, cash equivalents and restricted cash, beginning of period 728,257 733,931 Cash, cash equivalents and restricted cash, end of period $ 462,728 $ 390,687 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) September 30, 2024 December 31, 2023 Cash and cash equivalents $ 34,633 $ 31,251 Restricted cash 428,095 697,006 Total cash, cash equivalents and restricted cash in the statement of cash flows $ 462,728 $ 728,257 The accompanying notes are an integral part of these condensed consolidated financial statements. Third Quarter 2024 Form 10-Q 5 Blackbaud, Inc. Condensed Consolidated Statements of Stockholders' Equity (Unaudited) (dollars in thousands) Common stock Treasury stock Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total stockholders' equity Shares Amount Shares Amount Balance at December 31, 2023 69,188,304 $ 69 ( 15,562,864 ) $ ( 591,557 ) $ 1,203,012 $ ( 1,688 ) $ 198,869 $ 808,705 Net income — — — — — — 5,246 5,246 Purchase of treasury shares under stock repurchase program, inclusive of excise tax — — ( 2,954,211 ) ( 211,412 ) ( 52,244 ) — — ( 263,656 ) Vesting of restricted stock units 1,357,125 — — — — — — — Shares withheld to satisfy tax withholdings — — ( 720,189 ) ( 52,723 ) — — — ( 52,723 ) Stock-based compensation — — — — 33,570 — — 33,570 Restricted stock grants 335,237 2 — — — — — 2 Restricted stock cancellations ( 19,159 ) — — — — — — — Other comprehensive income — — — — — 2,910 — 2,910 Balance at March 31, 2024 70,861,507 $ 71 ( 19,237,264 ) $ ( 855,692 ) $ 1,184,338 $ 1,222 $ 204,115 $ 534,054 Net income — — — — — — 21,804 21,804 Vesting of restricted stock units 10,719 — — — — — — — Shares withheld to satisfy tax withholdings — — ( 22,273 ) ( 1,760 ) — — — ( 1,760 ) Stock-based compensation — — — — 24,286 — — 24,286 Restricted stock grants 21,164 — — — — — — — Restricted stock cancellations ( 9,902 ) — — — — — — — Other comprehensive loss — — — — — ( 1,047 ) — ( 1,047 ) Balance at June 30, 2024 70,883,488 $ 71 ( 19,259,537 ) $ ( 857,452 ) $ 1,208,624 $ 175 $ 225,919 $ 577,337 Net income — — — — — — 20,542 20,542 Purchase of treasury shares under stock repurchase program, inclusive of excise tax — — ( 807,774 ) ( 63,597 ) — — — ( 63,597 ) Vesting of restricted stock units 20,659 — — — — — — — Shares withheld to satisfy tax withholdings — — ( 19,411 ) ( 1,467 ) — — — ( 1,467 ) Stock-based compensation — — — — 18,574 — — 18,574 Restricted stock grants 62,998 — — — — — — — Restricted stock cancellations ( 11,205 ) — — — — — — — Other comprehensive loss — — — — — ( 7,062 ) — ( 7,062 ) Balance at September 30, 2024 70,955,940 $ 71 ( 20,086,722 ) $ ( 922,516 ) $ 1,227,198 $ ( 6,887 ) $ 246,461 $ 544,327 6 Third Quarter 2024 Form 10-Q Blackbaud, Inc. Condensed Consolidated Statements of Stockholders' Equity (continued) (Unaudited) (dollars in thousands) Common stock Treasury stock Additional paid-in capital Accumulated other comprehensive income Retained earnings Total stockholders' equity Shares Amount Shares Amount Balance at December 31, 2022 67,814,044 $ 68 ( 14,745,230 ) $ ( 537,287 ) $ 1,075,264 $ 8,938 $ 197,049 $ 744,032 Net loss — — — — — — ( 14,701 ) ( 14,701 ) Vesting of restricted stock units 954,147 — — — — — — — Shares withheld to satisfy tax withholdings — — ( 533,597 ) ( 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 ( 15,278,827 ) $ ( 568,277 ) $ 1,105,189 $ 404 $ 182,348 $ 719,733 Net income — — — — — — 2,105 2,105 Vesting of restricted stock units 23,550 — — — — — — — Shares withheld to satisfy tax withholdings — — ( 32,540 ) ( 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 ( 15,311,367 ) $ ( 570,547 ) $ 1,138,553 $ 8,842 $ 184,453 $ 761,370 Net income — — — — — — 9,017 9,017 Retirements of common stock (1) ( 143 ) — — — ( 13 ) — — ( 13 ) Vesting of restricted stock units 26,662 — — — — — — — Shares withheld to satisfy tax withholdings — — ( 25,710 ) ( 1,881 ) — — — ( 1,881 ) Stock-based compensation — — — — 32,379 — — 32,379 Restricted stock grants 27,913 — — — — — — — Restricted stock cancellations ( 30,909 ) — — — — — — — Other comprehensive loss — — — — — ( 701 ) — ( 701 ) Balance at September 30, 2023 69,187,767 $ 69 $ ( 15,337,077 ) $ ( 572,428 ) $ 1,170,919 $ 8,141 $ 193,470 $ 800,171 (1) Represents shares retired after determining certain EVERFI's selling shareholders would be paid in cash, rather than shares of our common stock. The accompanying notes are an integral part of these condensed consolidated financial statements. Third Quarter 2024 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, India 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 condensed 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 condensed consolidated balance sheets, condensed 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 condensed consolidated balance sheet at December 31, 2023 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the three and/or nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, 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 unaudited, 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, 2023, and other forms filed with the SEC from time to time. Basis of consolidation The unaudited, 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 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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, 2023, filed with the SEC on February 21, 2024. 3. Business Combinations and Dispositions 2024 disposition On March 2, 2024, we completed a transaction to divest our U.K.-based creative services business EVERFI Limited, formerly a wholly-owned subsidiary of EVERFI, Inc, which is a wholly-owned subsidiary of Blackbaud, Inc. EVERFI Limited's total revenue during 2023 was $ 8.4 million. We incurred an insignificant amount of legal costs associated with the disposition of this business. As a result of the disposition, we recorded a $ 1.6 million loss, which was recorded in general and administrative expense in the unaudited, condensed consolidated statement of comprehensive income for the nine months ended September 30, 2024. 4. 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) 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 vesting of restricted stock awards and units. Diluted loss per share for the nine months ended September 30, 2023 was the same as basic loss per share as there was a net loss in the period 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 September 30, Nine months ended September 30, (dollars in thousands, except per share amounts) 2024 2023 2024 2023 Numerator: Net income (loss) $ 20,542 $ 9,017 $ 47,592 $ ( 3,579 ) Denominator: Weighted average common shares 50,409,292 52,704,974 51,067,255 52,495,556 Add effect of dilutive securities: Restricted stock and units 1,223,277 1,384,923 1,039,892 — Weighted average common shares assuming dilution 51,632,569 54,089,897 52,107,147 52,495,556 Earnings (loss) per share Basic $ 0.41 $ 0.17 $ 0.93 $ ( 0.07 ) Diluted $ 0.40 $ 0.17 $ 0.91 $ ( 0.07 ) Anti-dilutive shares excluded from calculations of diluted earnings (loss) per share 47,210 21,660 380,392 474,150 Third Quarter 2024 Form 10-Q 9 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 5. 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 September 30, 2024 Financial assets: Interest rate swaps $ — $ 1,672 $ — $ 1,672 Foreign currency forward contracts — 81 — 81 Total financial assets $ — $ 1,753 $ — $ 1,753 Fair value as of September 30, 2024 Financial liabilities: Interest rate swaps $ — $ 5,490 $ — $ 5,490 Foreign currency forward contracts — 504 — 504 Total financial liabilities $ — $ 5,994 $ — $ 5,994 Fair value as of December 31, 2023 Financial assets: Interest rate swaps $ — $ 16,198 $ — $ 16,198 Total financial assets $ — $ 16,198 $ — $ 16,198 Fair value as of December 31, 2023 Financial liabilities: Interest rate swaps $ — $ 5,004 $ — $ 5,004 Foreign currency forward contracts — 536 — 536 Contingent consideration obligations — — 1,403 1,403 Total financial liabilities $ — $ 5,540 $ 1,403 $ 6,943 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 8 to these unaudited, condensed consolidated financial statements for additional information about our derivative instruments. 10 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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. 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 September 30, 2024 and December 31, 2023, due to the immediate or short-term maturity of these instruments. We believe the carrying amount of our debt approximates its fair value at September 30, 2024 and December 31, 2023, as the debt bears interest rates that approximate market value. As SOFR rates are observable at commonly quoted intervals, our debt under the 2024 Credit Facilities (as defined below) is classified within Level 2 of the fair value hierarchy. The fair value of our fixed rate debt does not exceed the carrying amount. We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the nine months ended September 30, 2024. 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. In June 2024, we entered into a sublease for an additional portion of our Washington, DC office location, which we previously closed for our own use in February 2023 to align with our remote-first workforce strategy. We considered our entry into the sublease an impairment indicator. As a result, during the nine months ended September 30, 2024, we recorded noncash impairment charges of $ 3.1 million against certain operating lease ROU assets and noncash impairment charges against certain property and equipment assets which were insignificant. We present these impairment charges in general and administrative expense on our unaudited, condensed consolidated statements of comprehensive income (loss) and as other non-cash adjustments within operating activities on our unaudited condensed consolidated statements of cash flows. There were no other significant non-recurring fair value adjustments to our long-lived assets, intangible assets, goodwill or operating lease ROU assets during the nine months ended September 30, 2024. 6. Consolidated Financial Statement Details Restricted cash (dollars in thousands) September 30, 2024 December 31, 2023 Restricted cash due to customers $ 426,750 $ 695,489 Real estate escrow balances and other 1,345 1,517 Total restricted cash $ 428,095 $ 697,006 Third Quarter 2024 Form 10-Q 11 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Prepaid expenses and other assets (dollars in thousands) September 30, 2024 December 31, 2023 Costs of obtaining contracts (1)(2) $ 60,251 $ 62,377 Prepaid software maintenance and subscriptions (3) 34,500 35,169 Implementation costs for cloud computing arrangements, net (4)(5) 10,479 9,259 Taxes, prepaid and receivable 7,376 3,418 Unbilled accounts receivable 6,427 5,615 Investment in equity securities (6) 5,284 — Prepaid insurance 5,026 3,940 Derivative instruments 1,753 16,198 Other assets 16,847 14,346 Total prepaid expenses and other assets 147,943 150,322 Less: Long-term portion 60,444 51,037 Prepaid expenses and other current assets $ 87,499 $ 99,285 (1) Amortization expense from costs of obtaining contracts was $ 5.1 million and $ 14.8 million for the three and nine months ended September 30, 2024, respectively, and $ 7.9 million and $ 24.3 million for the three and nine months ended September 30, 2023, respectively. (2) The current portion of costs of obtaining contracts as of September 30, 2024 and December 31, 2023 was $ 19.8 million and $ 25.3 million, respectively. (3) The current portion of prepaid software maintenance and subscriptions as of September 30, 2024 and December 31, 2023 was $ 31.8 million and $ 32.4 million, respectively. (4) These costs primarily relate to the multi-year implementations of our new global enterprise resource planning, customer relationship management systems and other cloud-based systems. (5) Amortization expense from capitalized cloud computing implementation costs was $ 0.8 million and insignificant for the three months ended September 30, 2024 and 2023, respectively, and $ 2.1 million and $ 1.8 million for the nine months ended September 30, 2024 and 2023, respectively. Accumulated amortization for these costs was $ 9.8 million and $ 7.7 million as of September 30, 2024 and December 31, 2023, respectively. (6) Represents a strategic investment that did not result in Blackbaud having significant influence over the investee. Accrued expenses and other liabilities (dollars in thousands) September 30, 2024 December 31, 2023 Taxes payable $ 14,168 $ 21,282 Customer credit balances 9,746 10,238 Unrecognized tax benefit 6,221 2,954 Derivative instruments 5,994 5,540 Operating lease liabilities, current portion 4,707 6,701 Accrued commissions and salaries 3,086 4,413 Accrued health care costs 3,029 3,865 Accrued vacation costs 2,810 2,452 Accrued transaction-based costs related to payments services 2,290 4,323 Accrued legal costs (1) 2,156 3,659 Contingent consideration liability — 1,403 Other liabilities 6,842 7,750 Total accrued expenses and other liabilities 61,049 74,580 Less: Long-term portion 12,304 10,258 Accrued expenses and other current liabilities $ 48,745 $ 64,322 (1) All accrued legal costs are classified as current. See Note 9 to these unaudited, condensed consolidated financial statements for additional information about our loss contingency accruals and other legal expenses. 12 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Other income, net Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Interest income $ 3,118 $ 3,012 $ 7,981 $ 6,556 Currency revaluation (losses) gains ( 1,315 ) 1,674 ( 1,412 ) 894 Other income, net 1,194 976 3,085 2,997 Other income, net $ 2,997 $ 5,662 $ 9,654 $ 10,447 7. 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) September 30, 2024 December 31, 2023 September 30, 2024 December 31, 2023 Credit facility: Revolving credit loans $ 151,000 $ 114,100 7.00 % 7.52 % Term loans 795,000 607,500 4.28 % 3.51 % Real estate loans 55,553 56,745 5.23 % 5.22 % Other debt 2,782 2,800 8.77 % 8.42 % Total debt 1,004,335 781,145 4.75 % 4.24 % Less: Unamortized discount and debt issuance costs 3,486 1,481 Less: Debt, current portion 23,830 19,259 6.86 % 7.02 % Debt, net of current portion $ 977,019 $ 760,405 4.70 % 4.17 % 2024 refinancing On April 30, 2024, we entered into the Third Amendment to Credit Agreement (the "Amendment"), by and among us, the lenders party thereto and Bank of America N.A., as administrative agent (the "Agent"). The Amendment amends the Amended and Restated Credit Agreement, dated as of October 30, 2020 (as previously amended, the "2020 Credit Agreement" and the 2020 Credit Agreement as amended by the Amendment, the “2024 Credit Agreement”), by and among us, the lenders from time-to-time party thereto and the Agent. The Amendment amends the 2020 Credit Agreement to, among other things, (a) refinance the existing $ 1.1 billion credit facilities under the 2020 Credit Agreement to provide for new credit facilities in the aggregate principal amount of $ 1.5 billion consisting of (i) a $ 700.0 million revolving credit facility (the “2024 Revolving Facility”) and (ii) a $ 800.0 million term loan facility (the “2024 Term Facility” and together with the 2024 Revolving Facility, the “2024 Credit Facilities”), (b) extend the maturity date to April 30, 2029, (c) modify the definition of Applicable Margin (as defined below) and (iv) modify certain negative and financial covenants to provide additional operational flexibility. Upon closing, we borrowed $ 800.0 million pursuant to the 2024 Term Facility and $ 208.2 million pursuant to the 2024 Revolving Facility and used the proceeds to repay the outstanding principal balances of the term loans under the 2020 Credit Agreement (the "2020 Term Facilities"), and repay $ 196.6 million of outstanding revolving credit loans under the 2020 Credit Agreement (the "2020 Revolving Facility"). Certain lenders of the 2024 Term Facility participated in the 2020 Term Facilities and the change in present value of our future cash flows to these lenders under the 2020 Term Facilities and under the 2024 Term Facility was less than 10%. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2020 Term Facilities did not participate in the 2024 Term Facility. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Certain lenders of the 2020 Revolving Facility participated in the 2024 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 2020 Revolving Facility did not participate in the 2024 Revolving Facility. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Third Quarter 2024 Form 10-Q 13 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) We recorded an insignificant loss on debt extinguishment related to the write-off of debt discount and deferred financing costs for the portions of the 2020 Credit Agreement 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 2024 Credit Agreement, we paid $ 6.5 million in financing costs, of which $ 1.6 million were capitalized in other assets and, together with a portion of the unamortized deferred financing costs from the 2020 Credit Agreement and prior agreements, are being amortized into interest expense over the term of the new facility. As of September 30, 2024, deferred financing costs totaling $ 1.8 million were included in other assets on our consolidated balance sheets. We recorded aggregate financing costs of $ 3.6 million as a direct deduction from the carrying amount of our debt liability, which related to debt discount (fees paid to lenders) and debt issuance costs for the 2024 Term Facility. Summary of the 2024 Credit Facilities The 2024 Revolving Facility includes (i) a $ 50.0 million letter of credit subfacility, (ii) a $ 50.0 million swingline subfacility and (iii) a $ 150.0 million sublimit available for multicurrency borrowings. Under the 2024 Credit Facilities, dollar tranche revolving loans and term loans bear interest at a rate per annum equal to, at the option of the Company: (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) Term SOFR plus 1.00 % (the “Base Rate”), plus an applicable margin as specified in the 2024 Credit Agreement (the “Applicable Margin”); (b) Term SOFR plus the Applicable Margin; or (c) the Daily SOFR 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 1.500 %), or a Term SOFR Loan/Daily SOFR Loan ( 1.375 % to 2.500 %). The 2024 Credit Agreement also provides for a commitment fee of between 0.250 % and 0.500 % of the unused commitment under the 2024 Revolving Facility depending on our net leverage ratio. Under the 2024 Credit Facilities, designated currency tranche revolving loans bear interest at a rate per annum equal to, at the option of the Company: (a) the Designated Currency Daily Rate (as defined in the 2024 Credit Agreement) plus the Applicable Margin; or (b) the Designated Currency Term Rate (as defined in the 2024 Credit Agreement) plus the Applicable Margin. The Applicable Margin shall be adjusted quarterly and varies based on our net leverage ratio for both Designated Currency Daily Rate Loans and Designated Currency Term Rate Loans ( 1.375 % to 2.500 %). We may prepay the 2024 Credit Agreement in whole or in part at any time without premium or penalty, other than customary breakage costs with respect to certain types of loans. Under the terms of the 2024 Credit Agreement, we are entitled on one or more occasion, subject to the satisfaction of certain conditions, to request an increase in the commitments under the 2024 Revolving Facility and/or request additional incremental term loans in the aggregate principal amount of up to the sum of (i) the greater of (A) $ 360.0 million and (B) 100 % of EBITDA (as defined in the 2024 Credit Agreement), plus (ii) at our option, up to an amount such that the net leverage ratio shall be no greater than 3.50 to 1.00. The 2024 Credit Agreement 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 September 30, 2024, we were in compliance with our debt covenants under the 2024 Credit Facilities. 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”). The Real Estate Loans require periodic principal payments and the balance of the Real Estate Loans are due upon maturity in April 2038. At September 30, 2024, 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. 14 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table summarizes our currently effective supplier financing agreements as of September 30, 2024: (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 April 2024 36 3 May 2024 $ 2,073 (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 nine months ended September 30, 2024, consisted of the following: (dollars in thousands) Total Balance at December 31, 2023 $ 2,800 Additions 2,073 Settlements ( 2,091 ) Balance at September 30, 2024 $ 2,782 As of September 30, 2024, the required annual maturities related to the 2024 Credit Facilities, the Real Estate Loans and our other debt were as follows: Years ending December 31, (dollars in thousands) Annual maturities 2024 - remaining $ 5,417 2025 23,875 2026 22,660 2027 22,166 2028 22,375 Thereafter 907,842 Total required maturities $ 1,004,335 8. 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 September 30, 2024 and December 31, 2023, 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 2024 Credit Facilities 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. Our entry into the 2024 Credit Agreement in April 2024 did not affect our interest rate swap agreements, including their designation as cash flow hedges, as the 2024 Credit Agreement has substantially the same critical terms as the the 2020 Credit Agreement. In September 2024, we entered into two additional forward-starting interest rate swap agreements each with a notional value of $ 100.0 million with effective dates beginning in March 2025 through September 2026 and March 2027 (the "September 2024 Swap Agreements"). We designated the September 2024 Swap Agreements as cash flow hedges at the inception of the contracts. Third Quarter 2024 Form 10-Q 15 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) As of September 30, 2024 and December 31, 2023, the aggregate notional values of the interest rate swaps were $ 1.1 billion and $ 935.0 million, respectively. All of the contracts have maturities on or before October 2028. The aggregate notional value as of September 30, 2024 includes the two additional forward-starting interest rate swap agreements discussed above. 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 September 30, 2024 and December 31, 2023, 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 $ 32.5 million CAD and $ 29.9 million CAD, respectively. All of the contracts have maturities of 12 months or less. 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 September 30, 2024 and December 31, 2023, 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 £ 10.5 million and £ 13.2 million, respectively. The fair values of our derivative instruments were as follows as of: Asset derivatives Liability derivatives (dollars in thousands) Balance sheet location September 30, 2024 December 31, 2023 Balance sheet location September 30, 2024 December 31, 2023 Derivative instruments designated as hedging instruments: Interest rate swaps, current portion Prepaid expenses and other current assets $ 1,672 $ 16,198 Accrued expenses and other current liabilities $ — $ — Foreign currency forward contracts, current portion Prepaid expenses and other current assets 81 — Accrued expenses and other current liabilities 504 536 Interest rate swaps, long-term Other assets — — Other liabilities 5,490 5,004 Total derivative instruments designated as hedging instruments $ 1,753 $ 16,198 $ 5,994 $ 5,540 16 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The effects of derivative instruments in cash flow and net investment hedging relationships were as follows: (Loss) gain recognized in accumulated other comprehensive loss as of Location of (loss) gain reclassified from accumulated other comprehensive loss into income (loss) Gain reclassified from accumulated other comprehensive loss into income (loss) (dollars in thousands) September 30, 2024 Three months ended September 30, 2024 Nine months ended September 30, 2024 Cash Flow Hedges Interest rate swaps $ ( 3,818 ) Interest expense $ 5,653 $ 16,582 Foreign currency forward contracts $ 21 Revenue $ 87 $ 250 Net Investment Hedges Foreign currency forward contracts $ ( 444 ) $ — $ — September 30, 2023 Three months ended September 30, 2023 Nine months ended September 30, 2023 Cash Flow Hedges Interest rate swaps $ 30,359 Interest expense $ 5,374 $ 14,956 Foreign currency forward contracts $ 182 Revenue $ 82 $ 316 Net Investment Hedges Foreign currency forward contracts $ 251 $ — $ — 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 comprehensive income as of September 30, 2024 that is expected to be reclassified into earnings within the next twelve months is $ 2.7 million. There were no ineffective portions of our interest rate swap or foreign currency forward derivatives during the nine months ended September 30, 2024 and 2023. See Note 11 to these unaudited, 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. 9. Commitments and Contingencies Leases We have operating leases for corporate offices, subleased offices and certain equipment and furniture. As of September 30, 2024, we did not have any operating leases that had not yet commenced. Third Quarter 2024 Form 10-Q 17 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table summarizes the components of our lease expense: Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Operating lease cost (1) $ 1,417 $ 2,216 $ 5,028 $ 6,905 Variable lease cost 271 357 883 1,184 Sublease income ( 914 ) ( 833 ) ( 2,518 ) ( 2,498 ) Net lease cost $ 774 $ 1,740 $ 3,393 $ 5,591 (1) Includes short-term lease costs, which were immaterial. Maturities of our operating lease liabilities as of September 30, 2024 were as follows: Years ending December 31, (dollars in thousands) Operating leases 2024 - remaining $ 1,657 2025 6,277 2026 6,109 2027 6,207 2028 6,101 Thereafter 20,689 Total lease payments 47,040 Less: Amount representing interest 7,115 Present value of future payments $ 39,925 Other commitments The term loans under the 2024 Credit Facilities 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 2024 Credit Facilities in April 2029. 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 September 30, 2024, the remaining aggregate minimum purchase commitment under these arrangements was approximately $ 206.8 million through 2029. 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. 18 Third Quarter 2024 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. 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 reduced our fina ncial exposure related to the Security Incident in prior years. We recorded expenses and offsetting insurance recoveries related to the Security Incident as follows: Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Gross expense $ 637 $ 4,086 $ 12,782 $ 48,646 Offsetting insurance recoveries — — — — Net expense $ 637 $ 4,086 $ 12,782 $ 48,646 The following summarizes our cumulative expenses, insurance recoveries recognized and insurance recoveries paid as of: (dollars in thousands) September 30, 2024 December 31, 2023 Cumulative gross expense $ 174,213 $ 161,431 Cumulative offsetting insurance recoveries recognized ( 50,000 ) ( 50,000 ) Cumulative net expense $ 124,213 $ 111,431 Cumulative offsetting insurance recoveries paid $ ( 50,000 ) $ ( 50,000 ) Third Quarter 2024 Form 10-Q 19 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Recorded expenses have consisted primarily of payments to third-party service providers and consultants, including legal fees, settlement of the previously disclosed SEC investigation, multi-state Attorneys General investigation, and Attorney General of the State of California investigation (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 unaudited, condensed consolidated statements of comprehensive income (loss) and as operating activities on our unaudited, condensed 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 months ended September 30, 2024, we incurred net pre-tax expenses which were insignificant. For the nine months ended September 30, 2024, we incurred net pre-tax expenses of $ 12.8 million related to the Security Incident, which included $ 6.0 million for ongoing legal fees and a settlement of loss contingencies of $ 6.8 million. During the nine months ended September 30, 2024, we had net cash outlays of $ 15.1 million related to the Security Incident for ongoing legal fees and the $ 6.8 million paid during the third quarter of 2024 related to our settlement with the Attorney General of the State of California. In line with our policy, legal fees are expensed as incurred. For full year 2024, we currently expect pre-tax expenses of approximately $ 5.0 million to $ 10.0 million and cash outlays of approximately $ 8.0 million to $ 13.0 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 September 30, 2024, we have recorded approximately $ 0.7 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers related to the Security Incident that we believed we could 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 unaudited, condensed consolidated balance sheets. It is reasonably possible that our estimated 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 September 30, 2024 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 from customers for reimbursement of expenses incurred by them related to the Security Incident, all of which have been fully resolved and closed or are inactive and are considered by us to have been abandoned by the customers. 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, none of which resulted in claims submitted to us and are considered by us to have been abandoned by the customers. 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, of which two cases remain active and unresolved. Customer constituent class actions. Presently, we are a defendant in putative consumer class action cases in U.S. federal courts (which have been consolidated under multi district litigation to a single federal court) and 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 20 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) determine whether this will proceed as a class action, as described below. 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. On May 14, 2024, the United States District Court for the District of South Carolina (the "Court") issued a memorandum opinion and order (1) denying the multi district litigation plaintiffs' motion for class certification because of the plaintiffs' failure to meet their burden of proof as to ascertainability, (2) granting our motion to exclude the multi district litigation plaintiffs' expert on the issue of ascertainability, and (3) denying the multi district litigation plaintiffs' motion to exclude our expert on the issue of ascertainability. Further, the Court denied as moot all other pending motions. On May 28, 2024, the plaintiffs filed a petition for permission to appeal under Rule 23(f) of the Federal Rules of Civil Procedure with the Fourth Circuit Court of Appeals (the “Fourth Circuit”), and we subsequently filed an opposition to such petition. On July 30, 2024, the Fourth Circuit denied the plaintiffs' petition. This litigation remains ongoing. Governmental investigations. As previously disclosed, we are subject to an ongoing investigation by the U.S. Department of Health and Human Services. We also responded to inquiries from the Office of the Australian Information Commissioner in September 2020 and the Office of the Privacy Commissioner of Canada in October 2020. On June 13, 2024, we agreed to a Final Judgment and Permanent Injunction with the Attorney General of the State of California (the "Final Judgment") relating to the Security Incident. This settlement fully resolved the last remaining U.S. state attorney general investigation into the Security Incident. Under the terms of the settlement, we agreed to comply with applicable laws; not to make misleading statements related to our data protection, privacy, security, confidentiality, integrity, breach notification requirements, and similar matters; and to implement and improve certain cybersecurity programs and tools. The terms of the settlement with California are generally consistent with those to which we agreed in settling with the other 49 state Attorneys General and the District of Columbia on October 5, 2023, as discussed below. As part of the settlement, we also agreed to pay a total of $ 6.8 million to the State of California. This amount was fully accrued as a contingent liability in the Company's financial statements as of March 31, 2024 and June 30, 2024, and subsequently paid in the third quarter of 2024. Nothing contained in the Final Judgment is intended to be, and shall not in any event be construed or deemed to be, an admission or concession or evidence of any liability or wrongdoing whatsoever on the part of Blackbaud or any fact or violation of law, rule, or regulation. For more information, see the Final Judgment and Permanent Injunction of the State of California, County of San Diego that was furnished as Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on June 14, 2024. On May 20, 2024, the U.S. Federal Trade Commission (the "FTC") finalized an Order (the “FTC Order”) evidencing its settlement with us in connection with the Security Incident. As part of the FTC Order, we were not fined and were not otherwise required to make any payment. Furthermore, we agreed to the FTC Order without admitting or denying any of the FTC’s allegations, except as expressly stated otherwise in the FTC Order. The settlement described in the FTC Order fully resolved the FTC investigation. For more information, see the form of proposed order that was furnished as Exhibit 99.2 to our Current Report on Form 8-K filed with the SEC on February 2, 2024 and is identical in substance to the final FTC Order, and in Note 11 to our audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC on February 21, 2024. On October 5, 2023, we entered into separate, substantially similar Administrative Orders with each of 49 state Attorneys General and the District of Columbia relating to the Security Incident which fully resolved the previously disclosed multi-state Civil Investigative Demand and the separate Civil Investigative Demand from the Office of the Indiana Attorney General relating to the Security Incident. On March 9, 2023, we reached a settlement with the SEC in connection with the Security Incident that fully resolved the previously disclosed SEC investigation of the Security Incident. On September 28, 2021, the Information Commissioner’s Office in the United Kingdom under the U.K. Data Protection Act 2018 notified us that it has closed its investigation of the Security Incident. Third Quarter 2024 Form 10-Q 21 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) On September 24, 2021, we received notice from the Spanish Data Protection Authority that it has concluded its investigation of 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. For more information about these completed government investigations and related actions, see Note 11 to our audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC on February 21, 2024. 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. 10. Income Taxes Our income tax provision (benefit) and effective income tax rates, including the effects of period-specific events, were: Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Income tax provision (benefit) $ 12,140 $ 9,069 $ 18,567 $ ( 5,032 ) Effective income tax rate 37.1 % 50.1 % 28.1 % 58.4 % The changes in our effective income tax rates for the three and nine months ended September 30, 2024, when compared to the same periods in 2023 were primarily attributable the negative impact in 2023 of non-deductible accruals related to the Security Incident that did not recur in 2024 to the same extent. Additionally, there were favorable impacts of benefits attributable to stock-based compensation. Partially offsetting these items were unfavorable impacts of our United Kingdom liability for uncertain tax positions. 11. Stockholders' Equity Stock repurchase program Under our 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 does not have an expiration date and may be limited, suspended or discontinued at any time without prior notice. Under the 2024 Credit Agreement, we have restrictions on our ability to repurchase shares of our common stock, which are summarized on page 47 in this report. We account for purchases of treasury stock under the cost method. On January 17, 2024, our Board of Directors reauthorized, expanded and replenished our stock repurchase program by expanding the total capacity under the program from $ 250.0 million to $ 500.0 million available for repurchases. In March 2024, we entered into an issuer forward repurchase transaction with a large financial institution to repurchase an aggregate $ 200 million of shares of our common stock (the "ASR Transaction"). Pursuant to the terms of the ASR Transaction, we provided the financial institution with a prepayment of $ 200 million and received an initial delivery of 2.1 million shares of our common stock, representing approximately 70 % of the total shares then-expected to be repurchased under the ASR Transaction. The final number of shares of common stock delivered to us under the ASR Transaction will be based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Transaction, less a discount and subject to customary adjustments upon events affecting the common stock (e.g., dilutive or concentrative events, mergers and acquisitions, and market disruptions). At settlement, the financial institution may be required to deliver additional shares of our common stock to us or, under certain circumstances, we may be required to deliver a cash payment 22 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) or shares of our common stock to the financial institution, with the method of settlement at our election. See Note 13 to these unaudited, condensed consolidated financial statements for additional information about the final settlement of the ASR Transaction which occurred in October 2024. The difference of $ 52.2 million between the prepayment of $ 200 million and the value of the shares repurchased on the ASR Transaction date represents an unsettled prepaid forward contract indexed to our common stock and met all of the applicable criteria for equity classification; therefore, it was not accounted for as a derivative instrument as of September 30, 2024. Because of our ability to settle in shares, the $ 52.2 million prepaid forward contract was classified as a reduction to additional paid-in capital within our unaudited, condensed consolidated statement of stockholders' equity. We funded the ASR Transaction prepayment with borrowings pursuant to a revolving credit loan under the 2020 Credit Agreement. On July 16, 2024, our Board of Directors reauthorized, expanded and replenished our stock repurchase program by expanding the total capacity under the program from $ 500.0 million to $ 800.0 million available for repurchases. During the three months ended September 30, 2024, we repurchased 807,774 shares for $ 62.8 million. During the nine months ended September 30, 2024, we repurchased an aggregate of 3,761,985 shares for $ 325.4 million, including the initial delivery of shares repurchased pursuant to the ASR Transaction. The remaining amount available to purchase stock under the approved stock repurchase program was $ 737.2 million as of September 30, 2024. 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 September 30, Nine months ended September 30, (in thousands) 2024 2023 2024 2023 Accumulated other comprehensive income (loss), beginning of period $ 175 $ 8,842 $ ( 1,688 ) $ 8,938 By component: Gains and losses on cash flow hedges: Accumulated other comprehensive income balance, beginning of period $ 10,867 $ 18,524 $ 8,158 $ 23,833 Other comprehensive (loss) income before reclassifications, net of tax effects of $ 3,315 , $( 2,873 ), $( 625 ) and $( 3,545 ) ( 9,294 ) 8,124 1,558 10,066 Amounts reclassified from accumulated other comprehensive (loss) income ( 5,740 ) ( 5,456 ) ( 16,832 ) ( 15,272 ) Tax expense included in provision for income taxes 1,509 1,425 4,458 3,990 Total amounts reclassified from accumulated other comprehensive (loss) income ( 4,231 ) ( 4,031 ) ( 12,374 ) ( 11,282 ) Net current-period other comprehensive (loss) income ( 13,525 ) 4,093 ( 10,816 ) ( 1,216 ) Accumulated other comprehensive (loss) income balance, end of period $ ( 2,658 ) $ 22,617 $ ( 2,658 ) $ 22,617 Foreign currency translation adjustment: Accumulated other comprehensive loss balance, beginning of period $ ( 10,692 ) $ ( 9,682 ) $ ( 9,846 ) $ ( 14,895 ) Translation adjustment 6,463 ( 4,794 ) 5,617 419 Accumulated other comprehensive loss balance, end of period ( 4,229 ) ( 14,476 ) ( 4,229 ) ( 14,476 ) Accumulated other comprehensive (loss) income, end of period $ ( 6,887 ) $ 8,141 $ ( 6,887 ) $ 8,141 12. Revenue Recognition Transaction price allocated to the remaining performance obligations As of September 30, 2024, approximately $ 1.2 billion of revenue under contract is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 55 % of these remaining performance obligations over the next 12 months, with the remainder recognized thereafter. Third Quarter 2024 Form 10-Q 23 Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for 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 September 30, 2024 and December 31, 2023 were insignificant. Our closing balances of deferred revenue were as follows: (in thousands) September 30, 2024 December 31, 2023 Total deferred revenue $ 413,259 $ 394,927 The increase in deferred revenue during the nine months ended September 30, 2024 was primarily due to the impact of our contract pricing initiatives within the Social Sector, as well as a seasonal increase in customer contract billings and 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 nine months ended September 30, 2024 that was included in the deferred reven ue balance at the beginning of the period was approximately $ 321 million. The amount of revenue recognized during the nine months ended September 30, 2024 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 September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 United States $ 238,661 $ 237,877 $ 718,601 $ 688,290 United Kingdom 29,846 25,694 85,955 79,976 Other countries 18,220 14,055 48,707 42,155 Total revenue $ 286,727 $ 277,626 $ 853,263 $ 810,421 The Social Sector and Corporate Sector market groups comprised our go-to-market organizations as of September 30, 2024. 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. 24 Third Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents our revenue by market group: Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Social Sector $ 255,210 $ 239,512 $ 751,818 $ 696,790 Corporate Sector 31,517 38,114 101,445 113,631 Total revenue $ 286,727 $ 277,626 $ 853,263 $ 810,421 The following table presents our recurring revenue by type: Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2024 2023 2024 2023 Contractual recurring $ 194,798 $ 189,174 $ 579,195 $ 548,012 Transactional recurring 85,220 79,827 253,717 236,127 Total recurring revenue $ 280,018 $ 269,001 $ 832,912 $ 784,139 13. Subsequent Events ASR Transaction Settlement On October 29, 2024, we settled the previously announced ASR Transaction described in Note 11. In connection with the settlement of the ASR Transaction, we received approximately 490,000 shares of our common stock, in addition to the 2.1 million shares received in March 2024. No cash was exchanged as part of the settlement of the ASR Transaction. Third Quarter 2024 Form 10-Q 25 Table of Contents Blackbaud, Inc. (Unaudited)