PROGRESS SOFTWARE CORP /MA 10-Q

Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets (In thousands, except share data) August 31, 2021 November 30, 2020 Assets Current assets: Cash and cash equivalents $ 379,895 $ 97,990 Short-term investments 3,782 8,005 Total cash, cash equivalents and short-term investments 383,677 105,995 Accounts receivable (less allowances of $ 578 and $ 1,315 , respectively) 77,031 84,040 Unbilled receivables and contract assets 28,479 24,917 Other current assets 19,710 23,983 Total current assets 508,897 238,935 Long-term unbilled receivables and contract assets 22,225 17,133 Property and equipment, net 28,724 29,817 Intangible assets, net 179,190 212,747 Goodwill 491,412 491,726 Deferred tax assets 10,872 14,490 Right-of-use lease assets 28,286 30,635 Other assets 5,881 6,299 Total assets $ 1,275,487 $ 1,041,782 Liabilities and shareholders’ equity Current liabilities: Current portion of long-term debt, net $ 23,886 $ 18,242 Accounts payable 6,667 9,978 Accrued compensation and related taxes 34,871 36,816 Dividends payable to shareholders 7,988 7,904 Short-term operating lease liabilities 7,269 7,015 Income taxes payable 5,475 1,899 Other accrued liabilities 15,712 14,302 Short-term deferred revenue 169,740 166,387 Total current liabilities 271,608 262,543 Long-term debt, net 247,375 364,260 Convertible senior notes, net 291,283 — Long-term operating lease liabilities 24,010 26,966 Long-term deferred revenue 33,280 26,908 Other noncurrent liabilities 11,158 15,092 Commitments and contingencies Shareholders’ equity: Preferred stock, $ 0.01 par value; authorized, 10,000,000 shares; issued, none — — Common stock, $ 0.01 par value, and additional paid-in capital; authorized, 200,000,000 shares; issued and outstanding, 43,842,539 shares in 2021 and 44,240,635 shares in 2020 343,677 306,244 Retained earnings 83,455 72,547 Accumulated other comprehensive loss ( 30,359 ) ( 32,778 ) Total shareholders’ equity 396,773 346,013 Total liabilities and shareholders’ equity $ 1,275,487 $ 1,041,782 See notes to unaudited condensed consolidated financial statements. 3 Condensed Consolidated Statements of Operations Three Months Ended Nine Months Ended (In thousands, except per share data) August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Revenue: Software licenses $ 51,930 $ 27,514 $ 115,354 $ 77,806 Maintenance and services 95,487 82,185 275,831 241,959 Total revenue 147,417 109,699 391,185 319,765 Costs of revenue: Cost of software licenses 1,574 1,103 3,763 3,302 Cost of maintenance and services 14,895 11,971 42,887 35,607 Amortization of acquired intangibles 3,599 1,664 10,719 4,974 Total costs of revenue 20,068 14,738 57,369 43,883 Gross profit 127,349 94,961 333,816 275,882 Operating expenses: Sales and marketing 29,737 22,186 88,468 68,100 Product development 25,616 20,676 76,579 64,117 General and administrative 16,451 13,514 46,335 38,702 Amortization of acquired intangibles 7,978 4,176 22,836 12,484 Restructuring expenses 40 91 1,133 1,826 Acquisition-related expenses 1,481 1,125 2,721 1,439 Total operating expenses 81,303 61,768 238,072 186,668 Income from operations 46,046 33,193 95,744 89,214 Other (expense) income: Interest expense ( 6,510 ) ( 2,302 ) ( 13,625 ) ( 7,692 ) Interest income and other, net 99 110 222 443 Foreign currency loss, net ( 128 ) ( 770 ) ( 1,006 ) ( 1,957 ) Total other expense, net ( 6,539 ) ( 2,962 ) ( 14,409 ) ( 9,206 ) Income before income taxes 39,507 30,231 81,335 80,008 Provision for income taxes 8,531 6,254 17,841 17,947 Net income $ 30,976 $ 23,977 $ 63,494 $ 62,061 Earnings per share: Basic $ 0.71 $ 0.53 $ 1.45 $ 1.38 Diluted $ 0.70 $ 0.53 $ 1.43 $ 1.37 Weighted average shares outstanding: Basic 43,762 45,036 43,896 44,941 Diluted 44,502 45,364 44,542 45,382 Cash dividends declared per common share $ 0.175 $ 0.165 $ 0.525 $ 0.495 See notes to unaudited condensed consolidated financial statements. 4 Condensed Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Net income $ 30,976 $ 23,977 $ 63,494 $ 62,061 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments ( 2,179 ) 4,564 922 374 Unrealized gain (loss) on hedging activity, net of tax provision of $ 155 and $ 502 for the third quarter and first nine months of 2021, respectively, and net of tax provision of $ 166 and tax benefit of $ 1,302 for the third quarter and first nine months of 2020, respectively 479 58 1,551 ( 4,106 ) Unrealized (loss) gain on investments, net of tax benefit of $ 4 and $ 16 for the third quarter and first nine months of 2021, respectively and net of tax benefit of $ 42 and tax provision of $ 3 for the third quarter and first nine months of 2020, respectively ( 15 ) 21 ( 54 ) 105 Total other comprehensive (loss) income, net of tax ( 1,715 ) 4,643 2,419 ( 3,627 ) Comprehensive income $ 29,261 $ 28,620 $ 65,913 $ 58,434 See notes to unaudited condensed consolidated financial statements. 5 Condensed Consolidated Statements of Shareholders’ Equity Nine Months Ended August 31, 2021 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity (in thousands) Number of Shares Amount Balance, December 1, 2020 44,241 $ 442 $ 305,802 $ 72,547 $ ( 32,778 ) $ 346,013 Issuance of stock under employee stock purchase plan 212 2 5,924 — — 5,926 Exercise of stock options 87 1 2,840 — — 2,841 Vesting of restricted stock units and release of deferred stock units 100 1 ( 1 ) — — — Withholding tax payments related to net issuance of RSUs — — ( 2,398 ) — — ( 2,398 ) Stock-based compensation — — 21,985 — — 21,985 Equity components of Notes, net of issuance costs and tax — — 47,456 — — 47,456 Purchase of capped calls, net of tax — — ( 32,507 ) — — ( 32,507 ) Dividends declared — — — ( 23,456 ) — ( 23,456 ) Treasury stock repurchases and retirements ( 797 ) ( 8 ) ( 5,862 ) ( 29,130 ) — ( 35,000 ) Net income — — — 63,494 — 63,494 Other comprehensive income — — — — 2,419 2,419 Balance, August 31, 2021 43,843 $ 438 $ 343,239 $ 83,455 $ ( 30,359 ) $ 396,773 Three Months Ended August 31, 2021 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity (in thousands) Number of Shares Amount Balance, June 1, 2021 43,745 $ 437 $ 333,627 $ 60,301 $ ( 28,644 ) $ 365,721 Issuance of stock under employee stock purchase plan 67 1 1,885 — — 1,886 Exercise of stock options 31 — 1,009 — — 1,009 Withholding tax payments related to net issuance of RSUs — — ( 25 ) — — ( 25 ) Stock-based compensation — — 6,839 — — 6,839 Equity components of Notes, net of issuance costs and tax — — ( 341 ) — — ( 341 ) Purchase of capped calls, net of tax — — 245 — — 245 Dividends declared — — — ( 7,822 ) — ( 7,822 ) Net income — — — 30,976 — 30,976 Other comprehensive income — — — — ( 1,715 ) ( 1,715 ) Balance, August 31, 2021 43,843 $ 438 $ 343,239 $ 83,455 $ ( 30,359 ) $ 396,773 6 Nine Months Ended August 31, 2020 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity (in thousands) Number of Shares Amount Balance, December 1, 2019 45,037 $ 450 $ 295,503 $ 64,303 $ ( 29,974 ) $ 330,282 Issuance of stock under employee stock purchase plan 178 2 4,984 — — 4,986 Exercise of stock options 115 1 3,606 — — 3,607 Vesting of restricted stock units and release of deferred stock units 197 2 ( 2 ) — — — Withholding tax payments related to net issuance of RSUs — — ( 4,072 ) — — ( 4,072 ) Stock-based compensation — — 17,359 — — 17,359 Dividends declared — — — ( 22,430 ) — ( 22,430 ) Treasury stock repurchases and retirements ( 426 ) ( 4 ) ( 6,487 ) ( 13,509 ) — ( 20,000 ) Net income — — — 62,061 — 62,061 Other comprehensive loss — — — — ( 3,627 ) ( 3,627 ) Balance, August 31, 2020 45,101 $ 451 $ 310,891 $ 90,425 $ ( 33,601 ) $ 368,166 Three Months Ended August 31, 2020 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity (in thousands) Number of Shares Amount Balance, June 1, 2020 45,033 $ 450 $ 303,832 $ 73,923 $ ( 38,244 ) $ 339,961 Issuance of stock under employee stock purchase plan 54 1 1,472 — — 1,473 Exercise of stock options 2 — 79 — — 79 Vesting of restricted stock units and release of deferred stock units 12 — — — — — Withholding tax payments related to net issuance of RSUs — — ( 177 ) — — ( 177 ) Stock-based compensation — — 5,685 — — 5,685 Dividends declared — — — ( 7,475 ) — ( 7,475 ) Net income — — — 23,977 — 23,977 Other comprehensive loss — — — — 4,643 4,643 Balance, August 31, 2020 45,101 $ 451 $ 310,891 $ 90,425 $ ( 33,601 ) $ 368,166 7 Condensed Consolidated Statements of Cash Flows Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Cash flows from operating activities: Net income $ 63,494 $ 62,061 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 4,144 4,737 Amortization of acquired intangibles and other 33,988 17,984 Amortization of debt discount and issuance costs on Notes 4,942 — Stock-based compensation 21,985 17,359 Non-cash lease expense 6,095 6,652 Loss on disposal of property and equipment 3 704 Deferred income taxes ( 1,596 ) 539 Allowances for bad debt and sales credits ( 370 ) 416 Changes in operating assets and liabilities: Accounts receivable ( 1,319 ) 13,622 Other assets 2,590 9,178 Accounts payable and accrued liabilities ( 5,994 ) ( 18,044 ) Lease liabilities ( 6,440 ) ( 5,979 ) Income taxes payable 3,079 793 Deferred revenue 10,001 ( 7,937 ) Net cash flows from operating activities 134,602 102,085 Cash flows from (used in) investing activities: Purchases of investments — ( 5,009 ) Sales and maturities of investments 4,150 14,901 Purchases of property and equipment ( 2,741 ) ( 3,419 ) Decrease in escrow receivable and other 2,330 — Net cash flows from investing activities 3,739 6,473 Cash flows from (used in) financing activities: Proceeds from stock-based compensation plans 9,247 9,027 Payments for taxes related to net share settlements of equity awards ( 2,398 ) ( 4,072 ) Repurchases of common stock ( 35,000 ) ( 20,000 ) 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 ( 23,372 ) ( 22,358 ) Payment of principal on long-term debt ( 111,669 ) ( 7,525 ) Payment of debt issuance costs ( 904 ) — Net cash flows from (used in) financing activities 142,948 ( 44,928 ) Effect of exchange rate changes on cash 616 2,686 Net increase in cash and cash equivalents 281,905 66,316 Cash and cash equivalents, beginning of period 97,990 154,259 Cash and cash equivalents, end of period $ 379,895 $ 220,575 8 Condensed Consolidated Statements of Cash Flows, continued Nine Months Ended August 31, 2021 August 31, 2020 Supplemental disclosure: Cash paid for income taxes, net of refunds of $ 807 in 2021 and $ 557 in 2020 $ 9,920 $ 7,052 Cash paid for interest $ 6,564 $ 6,864 Non-cash investing and financing activities: Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested $ 8,779 $ 12,786 Dividends declared $ 7,988 $ 7,568 See notes to unaudited condensed consolidated financial statements. 9 Notes to Condensed Consolidated Financial Statements Note 1: Basis of Presentation Company Overview - Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides the best products to develop, deploy and manage high-impact business applications. 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 applications 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 ("ISVs"), 100,000 enterprise customers, and 3 million developers rely on Progress to power their applications. Our products are generally sold as perpetual licenses, but certain products also use term licensing models and our cloud-based offerings use a subscription-based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally ISVs, original equipment manufacturers ("OEMs"), distributors and value-added resellers. ISVs develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. OEMs are companies that embed our products into their own software products or devices. Value-added resellers are companies that add features or services to our product, then resell it as an integrated product or complete "turn-key" solution. We operate in North America and Latin America (the "Americas"); Europe, the Middle East and Africa ("EMEA"); and the Asia Pacific region, through local subsidiaries as well as independent distributors. Basis of Presentation and Significant Accounting Policies - We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2020, as amended by Form 10-K/A filed on March 30, 2021 (together, the "2020 10-K"). We made no material changes in the application of our significant accounting policies that were disclosed in our 2020 10-K. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our 2020 10-K, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and records changes in estimates in the period in which they become known. These estimates are based on historical data and experience, as well as various other assumptions that management believes to be reasonable under the circumstances. The most significant estimates relate to: the timing and amount of revenue recognition, including the determination of the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and the transaction price allocated to performance obligations; the realization of tax assets and estimates of tax liabilities; fair values of investments in marketable securities; intangible assets and goodwill valuations; the recognition and disclosure of contingent liabilities; the collectability of accounts receivable; and assumptions used to determine the fair value of stock-based compensation. Actual results could differ from those estimates. 10 Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements Financial Instruments - Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of "other-than-temporary" impairments. The Company adopted this standard effective December 1, 2020. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements. Recently Issued Accounting Pronouncements Convertible Debt In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present an embedded conversion feature for such debt in equity. Additionally, the debt discount resulting from the separation of the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging , or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires applying the if-converted method to calculate the impact of the convertible instrument on diluted earnings per share. The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. It can be adopted on either a full retrospective or modified retrospective basis. The Company plans to adopt this standard in accordance with the full retrospective approach in the first quarter of fiscal year 2022. We have substantially completed our assessment of the retrospective application of this new standard to our historical financial statements. On a preliminary basis, we believe that the retrospective impact of the adoption of the standard on fiscal year 2021 results will be a decrease of interest expense of approximately $ 6.9 million, an increase of notes payable of approximately $ 56.0 million, a decrease of deferred tax liabilities of approximately $ 13.7 million, a decrease of additional paid-in capital of approximately $ 49.2 million, and an increase of retained earnings of approximately $ 6.9 million. We will finalize our retrospective presentation of our historical financial statements under the new standard in connection with our 10-Q filings during fiscal year 2022 and our 10-K for the fiscal year ending November 30, 2022. Note 2: Cash, Cash Equivalents and Investments A summary of our cash, cash equivalents and available-for-sale investments at August 31, 2021 is as follows (in thousands): Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value Cash $ 356,690 $ — $ — $ 356,690 Money market funds 23,205 — — 23,205 U.S. treasury bonds 2,248 15 — 2,263 Corporate bonds 1,505 14 — 1,519 Total $ 383,648 $ 29 $ — $ 383,677 11 A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2020 is as follows (in thousands): Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value Cash $ 79,026 $ — $ — $ 79,026 Money market funds 18,964 — — 18,964 U.S. treasury bonds 4,993 58 — 5,051 Corporate bonds 2,913 41 — 2,954 Total $ 105,896 $ 99 $ — $ 105,995 Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands): August 31, 2021 November 30, 2020 Cash and Equivalents Short-Term Investments Cash and Equivalents Short-Term Investments Cash $ 356,690 $ — $ 79,026 $ — Money market funds 23,205 — 18,964 — U.S. treasury bonds — 2,263 — 5,051 Corporate bonds — 1,519 — 2,954 Total $ 379,895 $ 3,782 $ 97,990 $ 8,005 The fair value of debt securities by contractual maturity is as follows (in thousands): August 31, 2021 November 30, 2020 Due in one year or less $ 3,021 $ 5,998 Due after one year (1) 761 2,007 Total $ 3,782 $ 8,005 (1) Includes U.S. treasury bonds and corporate bonds, which are securities representing investments available for current operations and are classified as current on the condensed consolidated balance sheets. We did not hold any investments with continuous unrealized losses as of August 31, 2021 or November 30, 2020. 12 Note 3: Derivative Instruments Cash Flow Hedge On July 9, 2019, we entered into an interest rate swap contract with an initial notional amount of $ 150.0 million to manage the variability of cash flows associated with approximately one-half of our variable rate debt. The contract matures on April 30, 2024 and requires periodic interest rate settlements. Under this interest rate swap contract, we receive a floating rate based on the greater of 1-month LIBOR or 0.00 %, and pay a fixed rate of 1.855 % on the outstanding notional amount. We have designated the interes t rate swap as a cash flow hedge and assess the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the interest rate swap is highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative are included as a component of other comprehensive loss on our condensed consolidated balance sheets. Although we have determined at the onset of the hedge that the interest rate swap will be a highly effective hedge throughout the term of the contract, any portion of the fair value swap subsequently determined to be ineffective will be recognized in earnings. As of August 31, 2021 , the fair value of the hedge was a loss of $ 4.8 million, which was included in other noncurrent liabilities on our condensed consolidated balance sheets. The following table presents our interest rate swap contract where the notional amount reflects the quarterly amortization of the interest rate swap, which is equal to approximately one-half of the corresponding reduction in the balance of our term loan as we make scheduled principal payments. The fair value of the derivative represents the discounted value of the expected future discounted cash flows for the interest rate swap, based on the amortization schedule and the current forward curve for the remaining term of the contract, as of the date of each reporting period (in thousands): August 31, 2021 November 30, 2020 Notional Value Fair Value Notional Value Fair Value Interest rate swap contracts designated as cash flow hedges $ 135,938 $ ( 4,802 ) $ 142,500 $ ( 6,855 ) Forward Contracts We generally use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on intercompany accounts receivable and loans receivable denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries. All forward contracts are recorded at fair value on the consolidated balance sheets at the end of each reporting period and expire between 30 days and two years from the date the contract was entered. At August 31, 2021, $ 1.7 million was recorded in other current assets on our condensed consolidated balance sheets. At November 30, 2020, $ 1.4 million was recorded in other assets on our condensed consolidated balance sheets. In the three and nine months ended August 31, 2021, realized and unrealized losses of $ 2.3 million and realized and unrealized gains of $ 0.4 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. In the three and nine months ended August 31, 2020, realized and unrealized gains of $ 4.5 million and $ 2.1 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. These gains and losses were substantially offset by realized and unrealized losses and gains on the offsetting positions. The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands): August 31, 2021 November 30, 2020 Notional Value Fair Value Notional Value Fair Value Forward contracts to sell U.S. dollars $ 66,289 $ 1,728 $ 69,031 $ 1,445 Forward contracts to purchase U.S. dollars — — 440 ( 3 ) Total $ 66,289 $ 1,728 $ 69,471 $ 1,442 13 Note 4: Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at August 31, 2021 (in thousands): Fair Value Measurements Using Total Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 23,205 $ 23,205 $ — $ — U.S. treasury bonds 2,263 — 2,263 — Corporate bonds 1,519 — 1,519 — Foreign exchange derivatives 1,728 — 1,728 — Liabilities Interest rate swap $ ( 4,802 ) $ — $ ( 4,802 ) $ — The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2020 (in thousands): Fair Value Measurements Using Total Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 18,964 $ 18,964 $ — $ — U.S. treasury bonds 5,051 — 5,051 — Corporate bonds 2,954 — 2,954 — Foreign exchange derivatives 1,442 — 1,442 — Liabilities Interest rate swap $ ( 6,855 ) $ — $ ( 6,855 ) $ — When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Fair Value of the Convertible Senior Notes The liability component of the Company’s Notes (as defined in Note 7: Debt ) was recorded at $ 295.2 million upon issuance, which reflected the fair value of a similar debt instrument that does not have an associated convertible feature. The fair value was determined based on a discounted cash flow model and classified within Level 2 of the fair value hierarchy. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. The carrying value of the liability component of the Notes will be accreted, over the remaining term to maturity, to their principal value of $ 360.0 million. The Notes’ fair value, inclusive of the conversion feature embedded in the Notes, was $ 364.7 million as of August 31, 2021. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 1 in the fair value hierarchy. See Note 7: Debt for additional information. 14 Note 5: Intangible Assets and Goodwill Intangible Assets Intangible assets are comprised of the following significant classes (in thousands): August 31, 2021 November 30, 2020 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Purchased technology $ 173,486 $ ( 124,584 ) $ 48,902 $ 173,486 $ ( 113,863 ) $ 59,623 Customer-related 231,342 ( 111,273 ) 120,069 231,342 ( 91,326 ) 140,016 Trademarks and trade names 30,440 ( 20,663 ) 9,777 30,440 ( 18,275 ) 12,165 Non-compete agreement 2,000 ( 1,558 ) 442 2,000 ( 1,057 ) 943 Total $ 437,268 $ ( 258,078 ) $ 179,190 $ 437,268 $ ( 224,521 ) $ 212,747 In the three and nine months ended August 31, 2021, amortization expense related to intangible assets was $ 11.6 million and $ 33.6 million, respectively. In the three and nine months ended August 31, 2020, amortization expense related to intangible assets was $ 5.8 million and $ 17.5 million, respectively. Future amortization expense for intangible assets as of August 31, 2021, is as follows (in thousands): Remainder of 2021 $ 11,334 2022 44,836 2023 44,560 2024 31,743 2025 21,233 Thereafter 25,484 Total $ 179,190 Goodwill Changes in the carrying amount of goodwill in the nine months ended August 31, 2021 are as follows (in thousands): Balance, November 30, 2020 $ 491,726 Measurement period adjustments ( 326 ) Translation adjustments 12 Balance, August 31, 2021 $ 491,412 Note 6: Business Combinations Chef Acquisition On October 5, 2020, we completed the acquisition of Chef Software Inc. (“Chef”) pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 4, 2020. The acquisition was completed for a base purchase price of $ 220.0 million, subject to certain customary adjustments as further described in the Merger Agreement (the “Aggregate Consideration”), which was paid in cash. Pursuant to the Merger Agreement, $ 12.0 million of the Aggregate Consideration was deposited into an escrow account to secure certain indemnification and other potential obligations of the former Chef equity holders. Chef is a global leader in DevOps and DevSecOps, providing complete infrastructure automation to build, deploy, manage and secure applications in modern multi-cloud and hybrid environments, as well as on-premises. Chef has enhanced our position as a trusted provider of the best products to develop, deploy and manage high-impact business applications by providing industry-leading compliance and application automation products for multi-cloud and on-prem infrastructure. The acquisition bolstered our core offerings, enabling customers to respond faster to business demands and improve efficiency. We funded the 15 acquisition through a combination of existing cash resources and by drawing down $ 98.5 million from our existing revolving credit facility (Note 7). The Aggregate Consideration has been allocated to Chef’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired were based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as we obtain additional information for those estimates during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill. We recorded measurement period adjustments based on our ongoing valuation and purchase price allocation procedures. We are still finalizing the valuation and purchase price allocation as it relates to the net working capital amount in the table below. The allocation of the purchase price is as follows (in thousands): Initial Purchase Price Allocation Measurement Period Adjustments Adjusted Purchase Price Allocation Life Net working capital $ 52,330 $ 200 $ 52,530 Property, plant and equipment 498 — 498 Purchased technology 38,300 — 38,300 5 years Trade name 5,700 — 5,700 5 years Customer relationships 97,300 — 97,300 7 years Other assets 122 — 122 Other noncurrent liabilities ( 841 ) — ( 841 ) Lease liabilities, net ( 1,810 ) — ( 1,810 ) Deferred taxes ( 7,817 ) 126 ( 7,691 ) Deferred revenue ( 12,525 ) — ( 12,525 ) Goodwill 59,858 ( 326 ) 59,532 Net assets acquired $ 231,115 $ — $ 231,115 The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition, technology obsolescence, and revenue growth projections. Tangible assets acquired and assumed liabilities were recorded at fair value. The valuation of the assumed deferred revenue was based on our contractual commitment to provide post-contract customer support to Chef customers and future contractual performance obligations under existing hosting arrangements. The fair value of this assumed liability was based on the estimated cost plus a reasonable margin to fulfill these service obligations. A significant portion of the deferred revenue is expected to be recognized in the 12 months following the acquisition. We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $ 59.5 million of goodwill, which is not deductible for tax purposes. Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred but are required to be expensed as incurred. During the three and nine months ended August 31, 2021, we incurred approximately $ 0.1 million and $ 0.7 million of acquisition-related costs, respectively, which are included in acquisition-related expenses on our consolidated statement of operations. The operations of Chef were included in our operating results beginning on the date of acquisition. We determined that disclosing the amount of Chef related earnings included in the consolidated statements of operations is impracticable, as certain operations of Chef were integrated into the operations of the Company from the date of acquisition. 16 Pro Forma Information The following pro forma financial information presents the combined results of operations of Progress and Chef as if the acquisition had occurred on December 1, 2018, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Chef acquisition and factually supportable. These pro forma adjustments include (i) a decrease in revenue from Chef due to the beginning balance of deferred revenue being adjusted to reflect the fair value of the acquired balance, (ii) a net increase in amortization expense to record amortization expense for the $ 141.3 million of acquired identifiable intangible assets, (iii) an increase in interest expense to record interest for the period presented as a result of drawing down our revolving credit facility in connection with the acquisition, and (iv) the income tax effect of the adjustments made at the statutory tax rate of the U.S. (approximately 24.5 %). The pro forma financial information does not reflect any adjustments for anticipated expense savings resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on December 1, 2018. These results are prepared in accordance with ASC 606. (In thousands, except per share data) Pro Forma Three Months Ended August 31, 2020 Revenue $ 128,782 Net income $ 22,830 Net income per basic share $ 0.51 Net income per diluted share $ 0.50 (In thousands, except per share data) Pro Forma Nine Months Ended August 31, 2020 Revenue $ 369,814 Net income $ 47,444 Net income per basic share $ 1.06 Net income per diluted share $ 1.05 Note 7: Debt As of August 31, 2021, future maturities of the Company's long-term debt were as follows: (In thousands) 2026 Notes Credit Facility Maturing in 2024 Total Remainder of 2021 $ — $ 5,644 $ 5,644 2022 — 26,338 26,338 2023 — 33,863 33,863 2024 — 206,937 206,937 2025 — — — 2026 360,000 — 360,000 Total face value of long-term debt 360,000 272,782 632,782 Unamortized discount and issuance costs ( 68,717 ) ( 1,521 ) ( 70,238 ) Less current portion of long-term debt, net — ( 23,886 ) ( 23,886 ) Long-term debt $ 291,283 $ 247,375 $ 538,658 17 Notes Payable Convertible Senior Notes and Capped Calls In April 2021, the Company issued, in a private placement to certain initial purchasers in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act in transactions not involving any public offering, for resale by the initial purchasers to persons whom the initial purchasers believe are qualified institutional buyers pursuant to Rule144A under the Securities Act, Convertible Senior Notes (the "Notes") with an aggregate principal amount of $ 325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes, including acquisitions. 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. Proceeds from the Notes: (In thousands) Principal $ 360,000 Less: issuance costs ( 10,804 ) $ 349,196 Conversion Rights Before January 15, 2026, Noteholders may convert their Notes in the following circumstances: • During any fiscal quarter (and only during such fiscal quarter) commencing after the fiscal quarter ending on May 31, 2021, if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for each of at least twenty trading days (whether or not consecutive) during the thirty consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter; • During the five consecutive business days immediately after any ten consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per share of Company’s common stock on such trading day and the conversion rate on such trading day; or • Upon the occurrence of certain corporate events or distributions on the Company’s common stock, or if the Company calls such Notes for redemption, then the Noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date. From and after January 15, 2026, Noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company will satisfy its conversion obligations by paying cash up to the aggregate principal amount of Notes to be converted, by issuing shares of its common stock or a combination of cash and shares of its common stock, at its election. The initial conversion rate is 17.4525 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of approximately $ 57.30 per share of common stock. The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, make-whole fundamental change and certain stockholder distributions. Repurchase Rights On or after April 20, 2024, and on or before the 50th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes, subject to the partial redemption limitation, at a repurchase price equal to 100 % of the principal amount, plus accrued and unpaid interest, if the last reported sale price per share of the Company’s common stock exceeded 130 % of the conversion price on (1) each of at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice and (2) the trading day immediately before the date the Company sends such notice. Pursuant to the partial redemption limitation, the Company may not elect to redeem less than all of the outstanding Notes unless at least $ 100.0 million aggregate principal amount of Notes are outstanding and not subject to redemption as of the time it sends the related redemption notice. 18 If certain corporate events that constitute a “fundamental change” (as described below) occur at any time, holders may, subject to certain exceptions, require the Company to purchase their Notes in whole or in part for cash at a price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. A fundamental change relates to events such as business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock. Capped Call Transactions On April 8, 2021, in connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with one or more of the initial purchasers and/or their respective affiliates and/or other financial institutions. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, approximately 6.3 million shares (representing the number of shares of common stock initially underlying the Notes) of the Company’s common stock. The Capped Call Transactions are generally expected to reduce potential dilution to our common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions will initially be $ 89.88 per share of common stock, which represents a premium of 100 % over the last reported sale price of the common stock of $ 44.94 per share on April 8, 2021, and is subject to certain adjustments under the terms of the Capped Call Transactions. The cost of the purchased capped calls of $ 43.1 million was recorded as a reduction to additional paid-in-capital. We elected to integrate the capped call options with the applicable Notes for federal income tax purposes pursuant to applicable U.S. Treasury Regulations. Accordingly, the $ 43.1 million gross cost of the purchased capped calls will be deductible for income tax purposes as original discount interest over the term of the Notes. We recorded deferred tax assets of $ 10.6 million with respect to the capped calls which represents the tax benefit of these deductions with an offsetting entry to additional paid-in capital. Accounting for the Notes In accounting for the transaction, the Notes have been separated into liability and equity components. • The conversion option of the Notes does not require bifurcation as an embedded derivative. • The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, referred to as the debt discount, is amortized as interest expense over the Notes’ contractual term. • The equity component, which represents the difference between the gross proceeds and the initial liability component, was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The Company incurred issuance costs of $ 10.8 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components. • Issuance costs attributable to the liability component of $ 8.9 million are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using the effective interest method over the contractual term of the Notes. • Issuance costs attributable to the equity component of $ 1.9 million are recorded as an offset to the equity component in additional paid-in capital and are not amortized. Net carrying amount of the liability component: (In thousands) August 31, 2021 Principal $ 360,000 Conversion option allocated to equity ( 64,800 ) Unamortized discount ( 3,917 ) $ 291,283 19 Net carrying amount of the equity component, included in additional paid-in capital: (In thousands) August 31, 2021 Conversion options (1) $ 62,855 Capped call ( 43,056 ) $ 19,799 (1) Net of issuance costs Interest expense related to the Notes: Three Months Ended (In thousands) August 31, 2021 August 31, 2020 Contractual interest expense ( 1 % coupon) $ 900 $ — Amortization of debt discount (1) 2,868 — Amortization of issuance costs (1) 392 — $ 4,160 $ — (1) Amortized based upon an effective interest rate of 5.7 %. Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 Contractual interest expense ( 1 % coupon) $ 1,370 $ — Amortization of debt discount (1) 4,348 — Amortization of issuance costs (1) 594 — $ 6,312 $ — (1) Amortized based upon an effective interest rate of 5.7 %. Credit Facility 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 is 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 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 August 31, 2021 was $ 272.8 million, with $ 24.5 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 term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. As of August 31, 2021, the carrying value of the term loan approximates the fair value, based on Level 2 inputs (observable market prices in less than active markets), as the interest rate is variable over the selected interest period and is similar to current rates at which we can borrow funds. The interest rate as of August 31, 2021 was 2.13 %. Costs incurred to obtain our long-term debt of $ 2.9 million are recorded as debt issuance costs as a direct deduction from the carrying value of the debt liability on our condensed consolidated balance sheets as of August 31, 2021. These costs are being amortized over the term of the debt agreement using the effective interest rate method. Amortization expense related to the debt issuance costs was $ 0.1 million for each of the three months ended August 31, 2021 and August 31, 2020. Amortization expense related to the debt issuance costs was $ 0.4 million and for each of the nine months ended August 31, 2021 and August 31, 2020. These amounts are recorded in interest expense on our condensed consolidated statements of operations. Revolving loans may be borrowed, repaid, and reborrowed until April 30, 2024, at which time all amounts outstanding must be repaid. As of August 31, 2021, there were no amounts outstanding under the revolving line of credit and $ 2.4 million of letters of credit outstanding. 20 Note 8: Leases In February 2016, the FASB issued ASC 842 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASC 842 on December 1, 2019 using the modified retrospective method and as a result did not adjust comparative periods or modify disclosures in those comparative periods. The new guidance provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which does not require the reassessment of prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company elected the practical expedients to combine lease and non-lease components. Contracts may be comprised of lease components, non-lease components, and elements that are not components. Each lease component represents a lessee’s right to use an underlying asset in the contract if the lessee can benefit from the right-of-use of the asset either on its own or together with other readily available resources and if the right-of-use is neither highly dependent or highly interrelated with other rights-of-use. Non-lease components include items such as common area maintenance and utilities provided by the lessor. We also elected the practical expedient to not recognize right-of-use assets and lease liabilities for short-term leases. Leases with an initial term of 12 months or less are classified as short-term leases. Consideration in the contract is comprised of any fixed payments and variable payments that depend on an index or rate. Payments in the Company's operating lease arrangements primarily consist of base office rent. In accordance with ASC 842, variable payments in an agreement that are not dependent on an index or rate are excluded from the calculation of ROU assets and lease liabilities. The Company makes variable payments on certain of its leases related to taxes, insurance, common area maintenance, and utilities, among other things. The adoption of ASC 842 on December 1, 2019 resulted in the recognition of operating lease ROU assets of approximately $ 28.9 million and operating lease liabilities of approximately $ 29.9 million. The difference between the value of the ROU assets and lease liabilities is due to the reclassification of existing deferred rent, prepaid rent, and unamortized lease incentives as of December 1, 2019. Operating leases are included in ROU assets and lease liabilities on the Company’s balance sheets. ROU assets and lease liabilities are to be presented separately for operating and finance leases; however, the Company currently has no material finance leases. The adoption of ASC 842 did not have a material impact on the Company’s condensed consolidated statement of operations, consolidated statement of stockholders' equity, consolidated statement of comprehensive income (loss) or consolidated statement of cash flows. The adoption of ASC 842 had no impact on liquidity or the Company’s debt-covenant compliance under its current debt agreements. The Company has operating leases for administrative, product development, and sales and marketing facilities, vehicles, and equipment under various non-cancelable lease agreements. The Company’s leases have remaining lease terms ranging from 1 year to 6 years. The Company’s lease terms may include options to extend or terminate the lease where it is reasonably certain that the Company will exercise those options. The Company considers several economic factors when making the determination as to whether the Company will exercise options to extend or terminate the lease, including but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The components of operating lease cost for the three and nine months ended August 31, 2021 were as follows (in thousands): Three Months Ended Nine Months Ended August 31, 2021 August 31, 2021 Lease costs under long-term operating leases $ 1,991 $ 6,135 Lease costs under short-term operating leases 3 22 Variable lease cost under short-term and long-term operating leases (1) 130 280 Operating lease right-of-use asset impairment — 36 Total operating lease cost $ 2,124 $ 6,473 (1) Lease costs that are not fixed at lease commencement. 21 The components of operating lease cost for the three and nine months ended August 31, 2020 were as follows (in thousands): Three Months Ended Nine Months Ended August 31, 2020 August 31, 2020 Lease costs under long-term operating leases $ 1,714 $ 5,471 Lease costs under short-term operating leases 235 379 Variable lease cost under short-term and long-term operating leases (1) 113 301 Operating lease right-of-use asset impairment — 1,189 Total operating lease cost $ 2,062 $ 7,340 (1) Lease costs that are not fixed at lease commencement. The table below presents supplemental cash flow information related to leases during the nine months ended August 31, 2021 and August 31, 2020 (in thousands): Nine Months Ended August 31, 2021 August 31, 2020 Cash paid for leases $ 6,440 $ 5,979 Right-of-use assets recognized for new leases and amendments (non-cash) $ 3,222 $ 204 Weighted average remaining lease term in years and weighted average discount rate are as follows: August 31, 2021 November 30, 2020 Weighted average remaining lease term in years 4.46 5.02 Weighted average discount rate 2.7 % 2.3 % Future payments under non-cancellable leases are as follows (in thousands): August 31, 2021 Remainder of 2021 $ 2,013 2022 7,969 2023 7,833 2024 7,605 2025 4,885 Thereafter 2,811 Total lease payments 33,116 Less imputed interest (1) ( 1,837 ) Present value of lease liabilities $ 31,279 (1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as a result of a lease reassessment event. Note 9: Common Stock Repurchases In January 2020, our Board of Directors increased the total share repurchase authorization from $ 75 million to $ 250 million. In the three months ended August 31, 2021 and August 31, 2020, we did no t repurchase any shares of our common stock. In the nine months ended August 31, 2021 and August 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 August 31, 2021, there was $ 155.0 million remaining under the current authorization. 22 Note 10: Stock-Based Compensation We issue restricted stock units, performance-based restricted stock units and stock options under our equity plans. We also issue common stock under our employee stock purchase plan that permits employees to purchase shares through accumulated payroll deductions. Stock-based compensation expense reflects the fair value of stock-based awards, less the present value of expected dividends when applicable, measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using the current market price of the stock, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model. In 2019, 2020 and 2021, we granted performance-based restricted stock units that include two performance metrics under our Long-Term Incentive Plan ("LTIP") where the performance measurement period is three years . Vesting of the LTIP awards on the 2019 and 2020 plan is based on the following: (i) 50 % is based on our level of attainment of specified total stockholder return ("TSR") targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods, and (ii) 50 % is based on achievement of a three-year cumulative performance condition (operating income). For the 2021 plan, the vesting terms were changed to the following: (i) 25 % is based on our level of attainment of specified TSR targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods, and (ii) 75 % is based on achievement of a three-year cumulative operating income. In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model for the market condition portion of the award, and used the closing price of our common stock on the date of grant for the portion related to the performance condition. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. We recognize stock-based compensation expense related to options and restricted stock units on a straight-line basis over the service period of the award, which is generally 4 years for options and 3 years for restricted stock units. We recognize stock-based compensation expense related to our employee stock purchase plan using an accelerated attribution method. The following table provides the classification of stock-based compensation as reflected on our condensed consolidated statements of operations (in thousands): Three Months Ended Nine Months Ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Cost of maintenance and services $ 374 $ 322 $ 1,234 $ 979 Sales and marketing 1,424 1,035 4,679 3,195 Product development 1,848 1,693 6,179 5,518 General and administrative 3,193 2,635 9,893 7,667 Total stock-based compensation $ 6,839 $ 5,685 $ 21,985 $ 17,359 Note 11: Accumulated Other Comprehensive Loss The following table summarizes the changes in accumulated balances of other comprehensive loss during the nine months ended August 31, 2021 (in thousands): Foreign Currency Translation Adjustment Unrealized Gains on Investments Unrealized Losses on Hedging Activity Accumulated Other Comprehensive Loss Balance, December 1, 2020 $ ( 27,616 ) $ 14 $ ( 5,176 ) $ ( 32,778 ) Other comprehensive income before reclassifications, net of tax 922 ( 54 ) 1,551 2,419 Balance, August 31, 2021 $ ( 26,694 ) $ ( 40 ) $ ( 3,625 ) $ ( 30,359 ) The tax effect on accumulated unrealized losses on hedging activity and unrealized gains on investments was $ 1.1 million and $ 1.6 million as of August 31, 2021 and November 30, 2020, respectively. 23 Note 12: Revenue Recognition Timing of Revenue Recognition Our revenues are derived from licensing our products, and from related services, which consist of maintenance, hosting services, and consulting and education. Information relating to revenue from external customers by revenue type is as follows (in thousands): Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Performance obligations transferred at a point in time: Software licenses $ 51,930 $ 27,514 $ 115,354 $ 77,806 Performance obligations transferred over time: Maintenance 82,875 72,764 239,921 214,506 Services 12,612 9,421 35,910 27,453 Total revenue $ 147,417 $ 109,699 $ 391,185 $ 319,765 Geographic Revenue In the following table, revenue attributed to North America includes sales to customers in the U.S. and sales to certain multinational organizations. Revenue from EMEA, Latin America and the Asia Pacific region includes sales to customers in each region plus sales from the U.S. to distributors in these regions. Information relating to revenue from external customers from different geographical areas is as follows (in thousands): Three Months Ended Nine Months Ended (In thousands) August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 North America $ 93,880 $ 62,927 $ 236,479 $ 184,904 EMEA 40,999 37,447 122,560 106,592 Latin America 5,298 3,547 12,544 10,893 Asia Pacific 7,240 5,778 19,602 17,376 Total revenue $ 147,417 $ 109,699 $ 391,185 $ 319,765 No single customer, partner, or country outside of the U.S. has accounted for more than 10% of our total revenue for the three and nine months ended August 31, 2021 and August 31, 2020. Contract Balances Unbilled Receivables and Contract Assets The timing of revenue recognition may differ from the timing of customer invoicing. When revenue is recognized prior to invoicing and the right to the amount due from customers is conditioned only on the passage of time, we record an unbilled receivable on our condensed consolidated balance sheets. Our multi-year term license arrangements, which are typically billed annually, result in revenue recognition in advance of invoicing and the recognition of unbilled receivables. As of August 31, 2021, invoicing of our long-term unbilled receivables is expected to occur as follows (in thousands): 2022 $ 4,710 2023 8,329 2024 2,717 2025 1,493 Total $ 17,249 24 Contract assets, which arise when revenue is recognized prior to invoicing and the right to the amount due from customers is conditioned on something other than the passage of time, such as the completion of a related performance obligation, were $ 6.9 million as of August 31, 2021 and $ 11.3 million as of November 30, 2020. These amounts are included in unbilled receivables or long-term unbilled receivables on our condensed consolidated balance sheets. Deferred Revenue Deferred revenue is recorded when revenue is recognized subsequent to customer invoicing. Our deferred revenue balance is primarily made up of deferred maintenance. As of August 31, 2021, the changes in deferred revenue were as follows (in thousands): Balance, December 1, 2020 $ 193,295 Billings and other 400,910 Revenue recognized ( 391,185 ) Balance, August 31, 2021 $ 203,020 Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of August 31, 2021, transaction price allocated to remaining performance obligations was $ 213.7 million. We expect to recognize approximately 81 % of the revenue within the next year and the remainder thereafter. Deferred Contract Costs Deferred contract costs, which include certain sales incentive programs, are incremental and recoverable costs of obtaining a contract with a customer. Incremental costs of obtaining a contract with a customer are recognized as an asset if the expected benefit of those costs is longer than one year. We have applied the practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include a large majority of our sales incentive programs as we have determined that annual compensation is commensurate with annual sales activities. Certain of our sales incentive programs meet the requirements to be capitalized. Depending upon the sales incentive program and the related revenue arrangement, such capitalized costs are amortized over the longer of (i) the product life, which is generally three to five years ; or (ii) the term of the related revenue contract. We determined that a three to five year product life represents the period of benefit that we receive from these incremental costs based on both qualitative and quantitative factors, which include customer contracts, industry norms, and product upgrades. Total deferred contract costs were $ 5.3 million and $ 2.5 million as of August 31, 2021 and November 30, 2020, respectively, and are included in other current assets and other assets on our condensed consolidated balance sheets. Amortization of deferred contract costs is included in sales and marketing expense on our condensed consolidated statement of operations and was minimal in all periods presented. Note 13: Restructuring Charges The following table provides a summary of activity for our restructuring actions, which are detailed further below (in thousands): Excess Facilities and Other Costs Employee Severance and Related Benefits Total Balance, December 1, 2020 $ 421 $ 3,552 $ 3,973 Costs incurred 311 822 1,133 Cash disbursements ( 733 ) ( 4,354 ) ( 5,087 ) Translation adjustments and other 1 11 12 Balance, August 31, 2021 $ — $ 31 $ 31 During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef (Note 6). This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef. 25 For the three months ended August 31, 2021, we incurred minimal expenses related to this restructuring. For the nine months ended August 31, 2021, we incurred expenses of $ 0.9 million related to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations. A summary of activity for this restructuring action is as follows (in thousands): Excess Facilities and Other Costs Employee Severance and Related Benefits Total Balance, December 1, 2020 $ — $ 3,523 $ 3,523 Costs incurred 105 823 928 Cash disbursements ( 105 ) ( 4,326 ) ( 4,431 ) Translation adjustments and other — 11 11 Balance, August 31, 2021 $ — $ 31 $ 31 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, which is not material, is included in other accrued liabilities on the consolidated balance sheet at August 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. In September 2021, we closed a facility as part of this restructuring action and expect to incur restructuring charges of approximately $ 2.9 million during the fourth quarter of fiscal year 2021. Note 14: Income Taxes Our income tax provision for the third quarter of fiscal years 2021 and 2020 reflects our estimate of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events, which are recorded in the period in which they occur. The estimates are reevaluated each quarter based on our estimated tax expense for the full fiscal year. Our effective tax rate was 22 % in the third fiscal quarter of 2021, compared to 21 % in the third fiscal quarter of 2020. The increase is due primarily to discrete tax benefits in the third fiscal quarter of 2020. There were no significant discrete tax items in the third fiscal quarter of 2021. Our federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2017. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal year 2016. Tax authorities for certain non-U.S. jurisdictions are also examining returns. With some exceptions, we are generally not subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal year 2014 because they are closed by statute. Note 15: Earnings per share We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common shares outstanding plus the effect of outstanding dilutive stock options, restricted stock units and deferred stock units, using the treasury stock method. The following table sets forth the calculation of basic and diluted earnings per share on an interim basis (in thousands, except per share data): Three Months Ended Nine Months Ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Net income $ 30,976 $ 23,977 $ 63,494 $ 62,061 Weighted average shares outstanding 43,762 45,036 43,896 44,941 Dilutive impact from common stock equivalents 740 328 646 441 Diluted weighted average shares outstanding 44,502 45,364 44,542 45,382 Basic earnings per share $ 0.71 $ 0.53 $ 1.45 $ 1.38 Diluted earnings per share $ 0.70 $ 0.53 $ 1.43 $ 1.37 26 We excluded stock awards representing approximately 1,250,000 and 1,241,000 shares of common stock from the calculation of diluted earnings per share in the three and nine months ended August 31, 2021, respectively, because these awards were anti-dilutive. In the three and nine months ended August 31, 2020, we excluded stock awards representing 1,450,000 shares and 1,216,000 shares of common stock, respectively, from the calculation of diluted earnings per share as they were anti-dilutive. In connection with the issuance of the Notes, we entered into Capped Calls (Note 7), which were not included for the purpose of calculating the number of diluted shares outstanding, as their effect would have been antidilutive. Note 16: Segment Information Operating segments are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer. 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. Our CODM evaluates financial information on a consolidated basis. As we operate as one operating segment, the required financial segment information can be found in the condensed consolidated financial statements. Note 17: Subsequent Events On September 23, 2021, we entered into a definitive agreement to acquire MPC Kappa Holdings, Inc. (“MPC”), the ultimate beneficial owner of Kemp Technologies, Inc. and Flowmon Networks a.s. and their subsidiaries (collectively, “Kemp”), for approximately $ 258 million in cash (the “Purchase Price”), subject to customary adjustments. The closing of the acquisition (the “Closing”) is expected to occur during the fourth quarter of our fiscal year 2021. The acquisition will be funded with existing cash on hand at the Closing. Kemp is the always-on application experience company that helps enterprises deliver, optimize and secure applications and networks across any cloud or hybrid environment. With this acquisition, we will extend our portfolio of market-leading products in DevOps, Application Development, Data Connectivity and Digital Experience, adding Application Experience Management (AX). Results of operations for Kemp will be included in our consolidated financial statements from the date of the Closing.