What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-07-07 compared with 2021-04-05 · 166 added, 158 removed, 259 unchanged (56% of the section changed)

17 unchanged sentences

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements.

This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees

from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties.

Actual future results may differ materially.

This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties.

future results may differ materially.

Statements indicating that we “believe,” “may,” “could,” “would,” “might,” “should,” “expect,” “intend,” “plan,” “target,” “anticipate” and “continue,” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred.

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Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to impact the U.S.

and the world.

COVID-19 has disrupted the business of our customers and partners, and negatively impacted our business and consolidated results of operations, and could impact our financial condition in the future.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic.

COVID-19 has impacted the health and well-being of people on a global basis, restricted travel worldwide and caused significant economic disruption and uncertainty.

Our fiscal 2020 results of operations, as well as the financial results of our customers and partners, were negatively impacted by COVID-19.

During the second fiscal quarter of 2021, we saw greater demand for our products and solutions across almost all of our product lines.

Although the rate and pace of recovery from COVID-19 has differed and continues to differ by geography and industry, we expect demand for our products and solutions to continue to be strong during the remainder of fiscal 2021.

In addition, we are gradually returning to our offices on a limited basis, where permissible, and beginning to travel as needed, while prioritizing the well-being of our employees.

We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-Q.

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Our comprehensive product stack is designed to make technology teams more productive and we have a deep commitment to the developer community, both open source and commercial alike.

With Progress, organizations can accelerate the creation and delivery of strategic business applications, automate the process by which apps are configured, deployed and scaled, and make critical data and content more accessible and secure—leading to

competitive differentiation and business success.

Over 1,700 independent software vendors, 100,000 enterprise customers, and three million developers rely on Progress to power their applications.

We operate as three distinct segments:

OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.

Beginning in the second quarter of fiscal year 2021, we operate as one operating segment:

software products to develop, deploy, and manage high-impact business applications.

Progress previously reported results based on three segments.

The key tenets of our strategic plan and operating model are as follows:

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Total Growth Strategy Driven by Accretive M&A.

We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the software infrastructure space, with products that appeal to both IT organizations and individual developers.

We are pursuing a total growth strategy driven by accretive acquisitions of businesses within the infrastructure software space, with products that appeal to both IT organizations and individual developers.

These acquisitions must meet strict financial and other criteria, which should enable us to drive significant stockholder returns by providing scale and increased cash flows.

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and as described below, in October 2020, we acquired Chef Software.

Both acquisitions have met these strict financial criteria.

Both acquisitions met these strict financial criteria.

Chef is a global leader in providing complete infrastructure automation to build, deploy, manage and secure applications in modern multi-cloud and hybrid environments, as well as on-premises.

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Chef is the developer of Chef Enterprise Automation Stack, automating infrastructure, compliance and application delivery for many of the Fortune 500.

We will continue to evaluate possible acquisitions designed to expand our business and drive significant stockholder returns.

Holistic Capital Allocation Approach .

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In January 2020, our Board of Directors increased the total share repurchase authorization from $75.0 million to $250.0 million.

We repurchased and retired 0.4 million shares of our common stock for $15.0 million in the three months ended February 28, 2021.

We repurchased and retired 0.8 million shares of our common stock for $35.0 million in the six months ended May 31, 2021.

The shares were repurchased as part of our Board of Directors authorized share repurchase program.

As of February 28, 2021, there was $175.0 million remaining under the current authorization.

As of May 31, 2021, there was $155.0 million remaining under the current authorization.

We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and increased the quarterly cash dividend in fiscal years 2017, 2018 and 2019.

On September 23, 2020, our Board of Directors approved an additional 6% increase to our quarterly cash dividend from $0.165 to $0.175 per share of common stock.

On March 23, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on June 15, 2021 to shareholders of record as of the close of business on June 1, 2021.We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.

In furtherance of our acquisition strategy, on April 30, 2019, we acquired all of the outstanding equity interests of Ipswitch, a provider of award-winning and easy-to-use secure data file transfer and network management software, for an aggregate purchase price of approximately $225.0 million.

Additionally, on October 5, 2020, we acquired Chef, a global leader in providing complete infrastructure automation to build, deploy, manage and secure applications in modern multi-cloud and hybrid environments, as well as on-premises, for $220 million.

We expect to continue to evaluate possible acquisitions designed to expand our business and drive significant stockholder returns.

As a result, our expected uses of cash could change, our cash position could be reduced, and we may incur additional debt obligations to the extent we complete additional acquisitions.

However, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash dividends and stock repurchases to Progress stockholders, as applicable, through at least the next twelve months.

On June 22, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on September 15, 2021 to shareholders of record as of the close of business on September 1, 2021.We expect to continue paying quarterly cash dividends in subsequent quarters consistent with our capital allocation strategy.

Our existing cash balances, together with funds generated from operations and amounts available under our credit facility, are expected to be sufficient to finance our operations and meet our foreseeable cash requirements, including quarterly cash

dividends and stock repurchases to Progress stockholders, as applicable, through the foreseeable future.

Our cash position could be reduced, and we may incur additional debt obligations, to the extent we complete additional acquisitions.

We also believe that our financial resources have allowed, and will continue to allow us to manage the impact of COVID-19 on our business operations for the foreseeable future.

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Since approximately one-third of our revenue is denominated in foreign currency, and given the volatility in the global economy created by COVID-19, our revenue results in fiscal year 2021 have been impacted by fluctuations in foreign currency exchange rates.

We currently report results based on three business segments.

We are in the process of updating how we allocate resources and assess performance, which will affect our determination of business segments.

Although this process has not been completed, we anticipate that we will begin operating as one distinct segment during the fiscal second quarter ending May 31, 2021 based on expected updates to how our management internally analyzes our business.

Once we have completed our update, we will begin reporting any updates to our segments.

During the second quarter, Progress began operating as one distinct segment to align with the way management analyzes our overall business.

We previously reported results based on three segments.

Select Performance Metrics:

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Annual Recurring Revenue (ARR)

Beginning this period, we are providing an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years.

We are providing an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years.

ARR represents the annualized contract value for all active and contractually binding term-based contracts at the end of a period.

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MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage and monthly subscriptions.

Our ARR was $432 million and $355 million as of February 28, 2021 and 2020, respectively, which is an increase of 21.7% year-over-year.

Our ARR was $437 million and $355 million as of May 31, 2021 and 2020, respectively, which is an increase of 22.9% year-over-year.

The growth in our ARR is primarily driven by the acquisition of Chef.

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We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the net dollar retention rate.

Our net dollar retention rates were 98.8% and 99.1% for the trailing twelve months ended February 28, 2021 and 2020, respectively.

Our net dollar retention rates have generally ranged between 97% and 100% for all periods presented.

Our high net dollar retention rates illustrate our predictable and durable top line performance.

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Three Months Ended % Change

(In thousands) February 28, 2021 February 29, 2020 As

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

Revenue $ 122,488 $ 100,383 22 % 19 %

Total revenue increased compared to the same quarter last year primarily due to our acquisition of Chef in the fourth quarter of fiscal year 2020, as well as increases in our OpenEdge and Ipswitch product lines.

Chef revenue was $12.0 million in our first fiscal quarter of 2021.

These increases were offset by lower license revenue in our Data Connectivity and Integration segment.

Six Months Ended % Change

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

Revenue $ 243,768 $ 210,066 16 % 14 %

Total revenue increased in both the second fiscal quarter and six month period ended May 31, 2021 as compared to the same periods last year primarily due to our acquisition of Chef in the fourth quarter of fiscal year 2020, as well as increases in our OpenEdge and Ipswitch product offerings.

These increases were partially offset by lower license revenue in our DataDirect product offerings.

Chef revenue was $12.4 million and $24.3 million for the second fiscal quarter and first six months of fiscal year 2021, respectively.

Software License Revenue

Three Months Ended % Change

(In thousands) February 28, 2021 February 29, 2020 As

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

1 unchanged sentence

As a percentage of total revenue 25 % 20 %

Software license revenue increased compared to the same period last year primarily due to our acquisition of Chef and increases in license sales in our OpenEdge segment, partially offset by a decrease in license sales in our Data Connectivity and Integration segment.

Refer to the Revenue by Segment section below for further discussion.

Six Months Ended % Change

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

Software Licenses $ 63,424 $ 50,292 26 % 23 %

As a percentage of total revenue 26 % 24 %

Software license revenue increased in both the second fiscal quarter and first six months of fiscal year 2021 as compared to the same periods last year primarily due to our acquisition of Chef and increases in license sales in our OpenEdge and Ipswitch product offerings.

In the first six months of fiscal year 2021 these increases were partially offset by a decrease in license sales in our DataDirect product offerings.

Maintenance and Services Revenue

Three Months Ended % Change

(In thousands) February 28, 2021 February 29, 2020 As

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

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As a percentage of total revenue 75 % 80 %

Maintenance and services revenue both increased compared to the same quarter last year primarily due to our acquisition of Chef and increased maintenance revenue from our OpenEdge segment.

Six Months Ended % Change

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

Maintenance $ 157,046 $ 141,742 11 % 9 %

As a percentage of total revenue 64 % 67 %

Services 23,298 18,032 29 % 27 %

As a percentage of total revenue 10 % 9 %

Total maintenance and services revenue $ 180,344 $ 159,774 13 % 11 %

As a percentage of total revenue 74 % 76 %

Maintenance and services revenue both increased in the second fiscal quarter and first six months of fiscal year 2021 as compared to the same periods last year primarily due to our acquisition of Chef and increased maintenance revenue from our OpenEdge product line.

Revenue by Region

Three Months Ended % Change

(In thousands) February 28, 2021 February 29, 2020 As

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

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As a percentage of total revenue 5 % 6 %

Total revenue generated in North America increased $6.1 million, primarily due to our acquisition of Chef and increased OpenEdge segment maintenance revenue, partially offset by decreased license sales in our Data Connectivity and Integration segment.

The increase in revenue generated in both EMEA and Asia Pacific was primarily due to increases in our OpenEdge segment as well as our acquisition of Chef.

The increase in EMEA was also partially offset by decreased license sales in our Data Connectivity and Integration segment.

Revenue in Latin America decreased due to lower maintenance revenue in our OpenEdge segment.

In the first three months of fiscal years 2021 and 2020, revenue generated in markets outside North America represented 41% of total revenue compared to 40% of total revenue on a constant currency basis.

Revenue by Segment

Three Months Ended % Change

(In thousands) February 28, 2021 February 29, 2020 As

Reported Constant Currency

OpenEdge segment $ 84,603 $ 77,079 10 % 7 %

Data Connectivity and Integration segment 5,528 13,685 (60) % (60) %

Application Development and Deployment segment 31,149 18,919 65 % 65 %

Total revenue $ 121,280 $ 109,683 11 % 9 %

Revenue in our OpenEdge segment increased primarily due to higher OpenEdge license sales as well as increased Ipswitch product line revenue.

Data Connectivity and Integration revenue decreased due to the timing of term license renewals by certain of our OEM partners.

Application Development and Deployment revenue increased due to our acquisition of Chef.

Six Months Ended % Change

(In thousands) May 31, 2021 May 31, 2020 As

Reported Constant

North America $ 142,599 $ 121,977 17 % 17 %

As a percentage of total revenue 58 % 58 %

Europe, the Middle East and Africa ("EMEA") $ 81,561 $ 69,145 18 % 11 %

As a percentage of total revenue 34 % 33 %

Latin America $ 7,246 $ 7,346 (1) % 7 %

As a percentage of total revenue 3 % 4 %

Asia Pacific $ 12,362 $ 11,598 7 % 2 %

As a percentage of total revenue 5 % 5 %

Total revenue generated in North America increased $14.5 million and $20.6 million in the second fiscal quarter and first six months of fiscal year 2021, respectively.

The increases were primarily due to our acquisition of Chef, increased OpenEdge license revenue, and increased Ipswitch maintenance revenue.

In the first six months of fiscal year 2021 these increases were partially offset by a decrease in license sales in our DataDirect product offerings.

The increase in revenue generated in both EMEA and Asia Pacific was due to our acquisition of Chef, as well as increased OpenEdge and Sitefinity revenue in EMEA.

Revenue in Latin America increased in the second fiscal quarter due to higher license and maintenance revenue in our OpenEdge product line.

In the first six months of fiscal year 2021 revenue in Latin America decreased due to lower maintenance revenue in our OpenEdge product line.

In the first six months of fiscal years 2021 and 2020, revenue generated in markets outside North America represented 42% of total revenue compared to 40% of total revenue on a constant currency basis.

Cost of Software Licenses

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 Change May 31, 2021 May 31, 2020 Change

Cost of software licenses $ 1,038 $ 810 $ 228 28 % $ 2,189 $ 2,199 $ (10) — %

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Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication, and packaging.

The year over year decrease was the result of lower payments of royalties to third parties as compared to the prior period.

The increase in the second fiscal quarter of fiscal year 2021 was the result of higher payments of royalties to third parties as compared to the prior period.

Year over year costs remained the same.

Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.

Cost of Maintenance and Services

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 Change May 31, 2021 May 31, 2020 Change

Cost of maintenance and services $ 14,673 $ 11,785 $ 2,888 25 % $ 27,992 $ 23,636 $ 4,356 18 %

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Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education.

The year over year increase was primarily due to increased headcount resulting from our acquisition of Chef and increased hosting costs.

The increases in all periods were primarily due to increased headcount and hosting costs resulting from our acquisition of Chef.

Amortization of Intangibles

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 %

Amortization of intangibles $ 3,599 $ 1,664 116 % $ 7,120 $ 3,310 115 %

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Amortization of intangibles included in costs of revenue primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations.

The year over year increase was primarily due to the acquisition of Chef in the fourth quarter of 2020.

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

The increases in both periods shown were primarily due to the acquisition of Chef.

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 %

Gross profit $ 103,178 $ 86,124 20 % $ 206,467 $ 180,921 14 %

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Sales and Marketing

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020

Change May 31, 2021 May 31, 2020

Sales and marketing $ 29,262 $ 21,716 $ 7,546 35 % $ 58,731 $ 45,914 $ 12,817 28 %

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Total sales and marketing $ 29,262 $ 21,716 $ 7,546 35 % $ 58,731 $ 45,914 $ 12,817 28 %

Sales and marketing expenses increased year over year primarily due to increased personnel related costs associated with our acquisition of Chef.

Sales and marketing expenses increased in both periods shown primarily due to increased personnel related costs associated with our acquisition of Chef.

Product Development

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020

Change May 31, 2021 May 31, 2020 Change

Product development costs $ 26,415 $ 21,787 $ 4,628 21 % $ 50,963 $ 43,441 $ 7,522 17 %

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Total product development costs $ 26,415 $ 21,787 $ 4,628 21 % $ 50,963 $ 43,441 $ 7,522 17 %

Product development expenses increased as compared to the same period last year primarily due to increased personnel related costs associated with our acquisition of Chef.

Product development expenses increased in both periods shown primarily due to increased personnel related costs associated with our acquisition of Chef.

General and Administrative

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020

Change May 31, 2021 May 31, 2020 Change

General and administrative $ 16,460 $ 12,440 $ 4,020 32 % $ 29,884 $ 25,188 $ 4,696 19 %

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General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments.

General and administrative expenses increased as compared to the same quarter last year primarily due to higher personnel costs associated with our acquisition of Chef, partially offset by decreased other general and administrative costs.

General and administrative expenses increased in both periods shown primarily due to higher personnel costs associated with our acquisition of Chef.

Amortization of Intangibles

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 % Change

Amortization of intangibles $ 7,979 $ 4,177 91 % $ 14,858 $ 8,308 79 %

1 unchanged sentence

Amortization of intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology.

Amortization of intangibles increased compared to the corresponding period in 2020 due to the addition of Chef intangible assets in the fourth quarter of 2020, as discussed above.

Amortization of intangibles increased in both periods shown due to the addition of Chef intangible assets, as discussed above.

Restructuring Expenses

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 % Change

Restructuring expenses $ (64) $ 695 (109) % $ 1,093 $ 1,735 (37) %

As a percentage of total revenue — % 1 % — % 1 %

Restructuring expenses recorded in the first three months of fiscal year 2021 relate primarily to the restructuring activities that occurred in the fourth quarter of fiscal year 2020 relating to the acquisition of Chef.

Restructuring expenses recorded in the first three months of fiscal year 2020 are comprised mostly of costs related to the Ipswitch and Cognitive restructuring actions of 2019.

Restructuring expenses recorded in the second quarter and first six months of fiscal year 2021 primarily relate to the restructuring activities that occurred in the fourth quarter of fiscal year 2020 resulting from the acquisition of Chef.

Restructuring expenses recorded in the second quarter and first six months of fiscal year 2020 are comprised mostly of costs related to the Ipswitch and Cognitive restructuring actions of 2019.

See the Liquidity and Capital Resources section of this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Acquisition-Related Expenses

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 % Change

Acquisition-related expenses $ 844 $ — * $ 1,240 $ 314 295 %

As a percentage of total revenue 1 % — % 1 % — %

*Not meaningful

Acquisition-related costs are expensed as incurred and include those costs incurred as a result of a business combination.

These costs consist of professional service fees, including third-party legal and valuation-related fees.

Acquisition-related expenses in increased slightly compared to the same period in 2020 and were related to the acquisition of Chef, which was completed in the

fourth quarter of 2020.

Acquisition-related expenses increased in the second quarter and first six months of fiscal year 2021 due to the acquisition of Chef, as well as our pursuit of other acquisition opportunities.

Acquisition-related expenses in the same period of fiscal year 2020 were related to the acquisition of Ipswitch.

Income from Operations

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 % Change

Income from operations $ 22,282 $ 25,309 (12) % $ 49,698 $ 56,021 (11) %

As a percentage of total revenue 18 % 25 % 20 % 27 %

Income from operations decreased year over year due to an increase in costs of revenue and operating expenses, offset by increases in revenue as shown above.

Income from Operations by Segment

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

OpenEdge segment $ 65,687 $ 57,329 15 %

Data Connectivity and Integration segment 4,358 11,005 (60) %

Application Development and Deployment segment 15,739 11,631 35 %

Other unallocated expenses (1)

(58,368) (49,253) (19) %

Income from operations $ 27,416 $ 30,712 (11) %

(1) Note that the following expenses are not allocated to our segments as we manage and report our business in these functional areas on a consolidated basis only:

certain product development and corporate sales and marketing expenses, customer support, administration, amortization of acquired intangibles, stock-based compensation, fees related to shareholder activist, restructuring, and acquisition-related expenses.

Income from operations decreased in both periods shown due to an increase in costs of revenue and operating expenses, offset by increases in revenue as shown above.

Other (Expense) Income, Net

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 % Change

Interest expense $ (4,601) $ (2,598) (77) % $ (7,115) $ (5,390) (32) %

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As a percentage of total revenue (4) % (3) % (3) % (3) %

Other expense, net, decreased in the three month period ended February 28, 2021 as compared to the same period in the prior year.

This is a result of a lower foreign currency loss due to lower costs of forward points on our outstanding forward contracts and lower interest expense due to declining interest rates.

Provision (Benefit) for Income Taxes

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Other expense, net, increased in both the second fiscal quarter and the six month period ended May 31, 2021 as compared to the same periods in the prior year.

This is a result of increased interest expense associated with our convertible senior notes, which we issued in April 2021.

In the six month period ended May 31, 2021, the increase in interest expense is offset by lower foreign currency loss due to lower costs of forward points on our outstanding forward contracts.

Provision for Income Taxes

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 % Change

Provision for income taxes $ 3,507 $ 5,494 (36) % $ 9,310 $ 11,693 (20) %

As a percentage of total revenue 3 % 5 % 4 % 6 %

Our effective tax rate was 23% in both the first fiscal quarter of 2021 and the first fiscal quarter of 2020.

There were no significant discrete tax items in either the first fiscal quarter of 2021 or the first fiscal quarter of 2020.

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020 % Change

Our effective tax rate was 21% in the second fiscal quarter of 2021 compared to 25% in the second fiscal quarter of 2020.

The decrease is due primarily to the estimated fiscal year 2021 impact of the international tax provisions of the Tax Cuts and Jobs Act as compared to fiscal year 2020.

There were no significant discrete tax items in either the second fiscal quarter of 2021 or the second fiscal quarter of 2020.

Three Months Ended Six Months Ended

(In thousands) May 31, 2021 May 31, 2020 % Change May 31, 2021 May 31, 2020 % Change

Net income $ 13,557 $ 16,968 (20) % $ 32,518 $ 38,084 (15) %

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Cash, Cash Equivalents and Short-Term Investments

(In thousands) February 28, 2021 November 30, 2020

(In thousands) May 31, 2021 November 30, 2020

Cash and cash equivalents $ 357,360 $ 97,990

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Total cash, cash equivalents and short-term investments $ 362,660 $ 105,995

The increase in cash, cash equivalents and short-term investments of $8.4 million from the end of fiscal year 2020 was due to cash inflows from operations of $44.7 million, $2.6 million in cash received from the issuance of common stock, a decrease in other noncurrent assets of $2.1 million, and the effect of exchange rates on cash of $1.8 million.

These cash inflows were offset by payments of debt obligations in the amount of $18.8 million, repurchases of common stock of $15.0 million, dividend payments of $7.9 million, and purchases of property and equipment of $1.2 million.

The increase in cash, cash equivalents and short-term investments of $256.7 million from the end of fiscal year 2020 was due to cash inflow from the issuance of the convertible senior notes of $349.2 million, cash inflows from operations of $99.4 million, $3.9 million in cash received from the issuance of common stock, the effect of exchange rates on cash of $3.9 million, and a decrease in escrow receivable of $2.1 million.

These cash inflows were offset by payments of debt obligations of $106.0 million, cash paid for the purchase of capped calls of $43.1 million in connection with the convertible note offering, repurchases of common stock of $35.0 million, dividend payments of $15.6 million, and purchases of property and equipment of $2.1 million.

Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments.

As of February 28, 2021, $30.6 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

As of May 31, 2021, $37.1 million of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries.

Foreign cash includes unremitted foreign earnings, which are invested indefinitely outside of the U.S.

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In January 2020, our Board of Directors increased the total share repurchase authorization from $75 million to $250 million.

We repurchased and retired 0.4 million shares of our common stock for $15.0 million in the three months ended

February 28, 2021 and 0.4 million shares for $20.0 million in the three months ended February 29, 2020.

In the three months ended May 31, 2021, we repurchased and retired 0.4 million shares for $20.0 million.

In the three months ended May 31, 2020, we did not repurchase and retire any shares of our common stock.

In the six months ended May 31, 2021 and May 31, 2020, we repurchased and retired 0.8 million shares for $35.0 million and 0.4 million shares for $20.0 million, respectively.

The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program.

As of February 28, 2021, there was $175.0 million remaining under the current authorization.

We began paying quarterly cash dividends of $0.125 per share of common stock to Progress stockholders in December 2016 and increased the quarterly cash dividend to $0.14 per share in September 2017.

In September 2018, the quarterly cash dividend was increased to $0.155 per share of common stock.

On September 24, 2019, our Board of Directors approved an additional increase to our quarterly cash dividend from $0.155 to $0.165 per share of common stock.

On September 23, 2020, our Board of Directors approved an additional increase of 6% to our quarterly cash dividend from $0.165 to $0.175 per share of common stock.

On January 12, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on March 15, 2021 to stockholders of record as of the close of business on March 1, 2021.

As of May 31, 2021, there was $155.0 million remaining under the current authorization.

We began paying quarterly cash dividends to Progress stockholders in December 2016, with annual increases in the quarterly cash dividend since such time.

On January 12, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on March 15, 2021, and on March 23, 2021, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that was paid on June 15, 2021.

Restructuring Activities

1 unchanged sentence

This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef.

For the three months ended February 28, 2021, we incurred expenses of $0.9 million relating to this restructuring.

For the three and six months ended May 31, 2021, we incurred expenses of $0.9 million relating to this restructuring.

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2021.

Accordingly, the balance of the restructuring reserve of $1.9 million is included in other accrued liabilities on the consolidated balance sheet at February 28, 2021.

Accordingly, the balance of the restructuring reserve of $0.4 million is included in other accrued liabilities on the condensed consolidated balance sheet at May 31, 2021.

We expect to incur additional expenses as part of this action related to employee costs and facility closures as we consolidate offices in various locations during fiscal year 2021, but we do not expect these costs to be material.

Credit Facility

Our credit agreement provides for a $301.0 million secured term loan and a $100.0 million secured revolving line of credit.

The revolving line of credit may be made available in U.S.

Dollars and certain other currencies and may be increased by up to an additional $125.0 million if the existing or additional lenders are willing to make such increased commitments.

The revolving line of credit has sub-limits for swing line loans up to $25.0 million and for the issuance of standby letters of credit in a face amount up to $25.0 million.

We expect to use the revolving line of credit for general corporate purposes, including acquisitions of other businesses, and may also use it for working capital.

Our credit facility provides for a $301.0 million secured term loan and a $100.0 million secured revolving line of credit.

The revolving line of credit may be increased by up to an additional $125.0 million if the existing or additional lenders are willing to make such increased commitments.

The revolving line of credit has sublimits for swing line loans up to $25.0 million and for

the issuance of standby letters of credit in a face amount up to $25.0 million.

The credit facility matures on April 30, 2024, when all amounts outstanding will be due and payable in full.

The revolving line of credit does not require amortization of principal.

The outstanding balance of the term loan as of February 28, 2021 was $282.2 million, with $20.7 million due in the next 12 months.

The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ended August 31, 2019.

The principal repayment amounts are in accordance with the following schedule:

(i) four payments of $1.9 million each, (ii) four payments of $3.8 million each, (iii) four payments of $5.6 million each, (iv) four payments of $7.5 million each, (v) three payments of $9.4 million each, and (vi) the last payment is of the remaining principal amount.

Any amounts outstanding under the term loan thereafter would be due on the maturity date.

The outstanding balance of the term loan as of May 31, 2021 was $278.4 million, with $22.6 million due in the next 12 months.

The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium.

The interest rate as of February 28, 2021 was 1.75%.

Revolving loans may be borrowed, repaid, and reborrowed until April 30, 2024, at which time all amounts outstanding must be repaid.

During October 2020, we partially funded our acquisition of Chef by drawing down $98.5 million under the revolving line of credit (Note 6).

During the first fiscal quarter of 2021, we paid down $15.0 million on the revolving line of credit.

As of February 28, 2021, there was $83.5 million outstanding under the revolving line of credit and $2.1 million of letters of credit.

The credit facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of the business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary exceptions for a credit facility of this size and type.

We are also required to maintain compliance with a consolidated fixed charge coverage ratio, a consolidated total leverage ratio and a consolidated senior secured leverage ratio.

We are in compliance with these financial covenants as of February 28, 2021.

The interest rate as of May 31, 2021 was 1.75%.

As of May 31, 2021, there were no amounts outstanding under the revolving line of credit and $2.5 million of letters of credit outstanding (Note 7).

Convertible Senior Notes

In April 2021, we issued, in a private placement, Convertible Senior Notes with an aggregate principal amount of $325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted.

There are no required principal payments prior to the maturity of the Notes.

In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including, April 13, 2021, of which $35 million of additional Notes were purchased for total proceeds of $360 million.

The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021 (Note 7).

Cash Flows From Operating Activities

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Six Months Ended

(In thousands) May 31, 2021 May 31, 2020

Net income $ 32,518 $ 38,084

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The year over year increase in cash generated from operations was primarily due to particularly strong collections of our receivables, partially offset by increased expenses.

Our gross accounts receivable as of February 28, 2021 decreased by $7.0

million from the end of fiscal year 2020 and our days sales outstanding (DSO) in accounts receivable increased to 53 days from 49 days in the fiscal first quarter of 2020 due to the timing of billings and collections.

Our gross accounts receivable as of May 31, 2021 decreased by $20.6 million from the end of fiscal year 2020 and our days sales outstanding (DSO) in accounts receivable improved to 44 days from 47 days in the fiscal second quarter of 2020 due to the timing of billings and collections.

Cash Flows From (Used in) Investing Activities

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

Six Months Ended

(In thousands) May 31, 2021 May 31, 2020

Net investment activity $ 2,650 $ 9,042

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Net cash outflows and inflows of our net investment activity are generally a result of the timing of our purchases and maturities of securities, which are classified as cash equivalents or short-term securities.

We also purchased $1.2 million of property and equipment in the first three months of fiscal year 2021, as compared to $1.1 million in the first three months of fiscal year 2020.

Cash Flows (used in) from Financing Activities

Three Months Ended

(In thousands) February 28, 2021 February 29, 2020

We also purchased $2.1 million of property and equipment in the first six months of fiscal year 2021, as compared to $1.8 million in the first six months of fiscal year 2020.

Cash Flows From (Used in) Financing Activities

Six Months Ended

(In thousands) May 31, 2021 May 31, 2020

Proceeds from stock-based compensation plans $ 6,300 $ 7,308

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Payment of principal on long-term debt (106,025) (3,762)

Proceeds from issuance of senior convertible notes, net of issuance costs of $9,900 350,100 —

Purchase of capped calls (43,056) —

Dividend payments to shareholders (15,617) (14,906)

Payment of debt issuance costs (904) —

Other financing activities (2,373) (3,895)

Net cash flows used in financing activities $ (39,024) $ (27,054)

During the first three months of fiscal year 2021, we received $3.5 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $4.2 million in the first three months of fiscal year 2020.

Net cash flows from (used in) financing activities $ 153,425 $ (35,255)

During the first six months of fiscal year 2021, we received $349.2 million in net proceeds from the issuance of convertible senior notes and paid $43.1 million to purchase capped calls in connection with the convertible note offering.

We also received $6.3 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $7.3 million in the first six months of fiscal year 2020.

Further, we repurchased $35.0 million of our common stock under our share repurchase plan compared to $20.0 million in the same period of the prior year.

We also made payments on our long-term debt of $18.8 million (including a $15.0 million repayment on the revolving line of credit) in the first three months of fiscal year 2021 compared to $1.9 million in the same period of the prior year.

Finally, we made dividend payments of $7.9 million to our shareholders during the first three months of fiscal 2021, as compared to $7.5 million in the first three months of fiscal 2020.

We also made payments on our long-term debt of $106.0 million (including a $98.5 million repayment on the revolving line of credit) in the first six months of fiscal year 2021 compared to $3.8 million in the same period of the prior year.

Finally, we made dividend payments of $15.6 million to our shareholders during the first six months of fiscal year 2021, as compared to $14.9 million in the first six months of fiscal year 2020.

Indemnification Obligations

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Liquidity Outlook

We believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next twelve months.

We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of the U.S.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis