PROGRESS SOFTWARE CORP /MA 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. However, actual results may differ from these estimates. The most significant estimates relate to: the timing and amounts 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; assets held for sale; intangible assets and goodwill valuations; the recognition and 27 disclosure of contingent liabilities; the collectability of accounts receivable; and assumptions used to determine the fair value of stock-based compensation. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements in Item 8 of our 2021 10-K. Cautionary Note Regarding Forward-Looking Statements 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. 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. There are a number of factors that could cause actual results or future events to differ materially from those anticipated by the forward-looking statements, including, without limitation: (1) Economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price. (2) We may fail to achieve our financial forecasts due to such factors as delays or size reductions in transactions, fewer large transactions in a particular quarter, fluctuations in currency exchange rates, or a decline in our renewal rates for contracts. (3) Our ability to successfully manage transitions to new business models and markets, including an increased emphasis on a cloud and subscription strategy, may not be successful. (4) If we are unable to develop new or sufficiently differentiated products and services, or to enhance and improve our existing products and services in a timely manner to meet market demand, partners and customers may not purchase new software licenses or subscriptions or purchase or renew support contracts. (5) We depend upon our extensive partner channel and we may not be successful in retaining or expanding our relationships with channel partners. (6) Our international sales and operations subject us to additional risks that can adversely affect our operating results, including risks relating to foreign currency gains and losses. (7) If the security measures for our software, services, other offerings or our internal information technology infrastructure are compromised or subject to a successful cyber-attack, or if our software offerings contain significant coding or configuration errors, we may experience reputational harm, legal claims and financial exposure. (8) We have made acquisitions, and may make acquisitions in the future, and those acquisitions may not be successful, may involve unanticipated costs or other integration issues or may disrupt our existing operations. (9) Delay or failure to realize the expected synergies and benefits of the Kemp acquisition could negatively impact our future results of operations and financial condition; (10) The continuing impact of the coronavirus disease (COVID-19) outbreak on our employees, customers, partners, and the global financial markets could adversely affect our business, results of operations and financial condition. (11) Russia's recent invasion of Ukraine, and the international community's response, have created substantial political and economic disruption, uncertainty, and risk. For further information regarding risks and uncertainties associated with Progress' business, please refer to Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our 2021 10-K. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make. Use of Constant Currency Revenue from our international operations has historically represented a substantial portion of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries strengthen, our consolidated results stated in U.S. dollars are positively impacted. As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. 28 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. 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, the risk of additional, currently-unknown COVID-19 variations necessitating further measures to mitigate risk and seek to protect employee and vendor health and safety, and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-Q. We will continue to evaluate the scope and extent of the impact to our business, consolidated results of operations, and financial condition. Overview Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") is dedicated to propelling business forward in a technology-driven world. As the trusted provider of the leading products to develop, deploy and manage high-impact applications, Progress enables customers to develop the applications and experiences the need, deploy where and how they want and manage it all safely and securely. Beginning in the second quarter of fiscal year 2021, we operate as one operating segment. The key tenets of our strategic plan and operating model are as follows: Trusted Partner of the Best Products to Develop, Deploy and Manage High Impact Business Applications . A key element of our strategy is centered on providing the platform and tools enterprises need to build, deploy, and manage modern, strategic business applications. We offer these products and tools to both new customers and partners as well as our existing partner and customer ecosystems. This strategy builds on our vast experience in application development that we've acquired over the past 40 years. Focus on Customer and Partner Retention to Drive Recurring Revenue and Profitability . Our organizational philosophy and operating principles focus primarily on customer and partner retention and success and a streamlined operating approach in order to more efficiently drive, predictable and stable recurring revenue and high levels of profitability. Total Growth Strategy Driven by Accretive M&A. 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 help further our goal to provide significant stockholder returns by providing scale and increased cash flows. In April 2019, we acquired Ipswitch, Inc., in October 2020, we acquired Chef Software, Inc., and, as described below, in November 2021, we acquired Kemp Technologies. These acquisitions met our strict financial criteria. Kemp is the always-on application experience company that helps enterprises deliver, optimize and secure applications and networks across any cloud or hybrid environment. The purchase price for Kemp was $258 million and we funded the purchase price with existing cash balances. With this acquisition, we extended our portfolio of market-leading products in DevOps/DevSecOps, Application Development, Data Connectivity and Digital Experience, adding Application Experience Management (AX). Kemp Loadmaster and Flowmon Network Visibility products monitor application performance, and distribute and balance traffic and workloads across servers, in the cloud or on premise, ensuring high performance and availability. Multi-Faceted Capital Allocation Approach . Our capital allocation policy emphasizes accretive M&A, which allows us to expand our business and drive significant stockholder returns, and utilizes dividends and share repurchases to return capital to stockholders. We intend to repurchase our shares in sufficient quantities to offset dilution from our equity plans. Lastly, we return a significant portion of our annual cash flows from operations to stockholders in the form of dividends. In the first fiscal quarter of 2022, we repurchased and retired 0.6 million shares of our common stock for $25.0 million. As of February 28, 2022, there was $130.0 million remaining under share repurchase authorization. The timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors, and the Board of Directors may choose to suspend, expand or discontinue the repurchase program at any time. 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 annually in fiscal years 2017, 2018 and 2019. On September 22, 2020, our Board of Directors approved an additional increase of 6% to our quarterly cash dividend from $0.165 to $0.175 and declared a quarterly dividend of $0.175 per share of common stock. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors. 29 We will continue to pursue acquisitions meeting our financial criteria and 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. 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. The challenges posed by COVID-19 on our business continue to evolve. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations. 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 the first fiscal quarter of 2022 were impacted by fluctuations in foreign currency exchange rates. Results of Operations Revenue Three Months Ended % Change (In thousands) February 28, 2022 February 28, 2021 As Reported Constant Currency Revenue $ 144,922 $ 121,280 19 % 21 % Total revenue increased compared to the same quarter last year primarily due to our acquisition of Kemp in the fourth quarter of fiscal year 2021, as well as increases in our Chef, OpenEdge, and DevTools product offerings. Software License Revenue Three Months Ended % Change (In thousands) February 28, 2022 February 28, 2021 As Reported Constant Currency Software licenses $ 42,750 $ 33,317 28 % 31 % As a percentage of total revenue 29 % 27 % Software license revenue increased compared to the same quarter last year primarily due to our acquisition of Kemp in the fourth quarter of fiscal year 2021. Maintenance and Services Revenue Three Months Ended % Change (In thousands) February 28, 2022 February 28, 2021 As Reported Constant Currency Maintenance $ 89,963 $ 76,977 17 % 19 % As a percentage of total revenue 62 % 63 % Services 12,209 10,986 11 % 12 % As a percentage of total revenue 9 % 10 % Total maintenance and services revenue $ 102,172 $ 87,963 16 % 18 % As a percentage of total revenue 71 % 73 % Maintenance and services revenue increased compared to the same quarter last year primarily due to our acquisition of Kemp in the fourth quarter of fiscal year 2021, as well as increases in our Chef, Ipswitch, DevTools, and OpenEdge product offerings. 30 Revenue by Region Three Months Ended % Change (In thousands) February 28, 2022 February 28, 2021 As Reported Constant Currency North America $ 78,093 $ 71,505 9 % 9 % As a percentage of total revenue 54 % 59 % Europe, the Middle East and Africa ("EMEA") $ 53,702 $ 40,240 34 % 38 % As a percentage of total revenue 37 % 33 % Latin America $ 3,883 $ 3,493 11 % 13 % As a percentage of total revenue 3 % 3 % Asia Pacific $ 9,244 $ 6,042 53 % 58 % As a percentage of total revenue 6 % 5 % Total revenue generated in North America increased $6.6 million in the first quarter of fiscal year 2022. The increase was primarily due to our acquisition of Kemp and increased Chef maintenance revenue, partially offset by decreased revenue from our OpenEdge product offerings. The increase in revenue generated in both EMEA and Asia Pacific was due to our acquisition of Kemp, as well as increased Chef and OpenEdge revenue in both regions. Revenue in Latin America increased due to the acquisition of Kemp and higher maintenance revenue from our OpenEdge product offerings. In the first three months of fiscal year 2022 revenue generated in markets outside North America represented 46% of total revenue compared to 47% of total revenue on a constant currency basis. In the first three months of fiscal year 2021 revenue generated in markets outside North America represented 41% of total revenue at both actual rates and on a constant currency basis. Cost of Software Licenses Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Change Cost of software licenses $ 2,609 $ 1,151 $ 1,458 127 % As a percentage of software license revenue 6 % 3 % As a percentage of total revenue 2 % 1 % Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication, and packaging. The year over year increase was the result of higher payments of royalties to third parties as compared to the prior period. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix. The year over year increase is due to our acquisition of Kemp in the fourth quarter of fiscal year 2021. Cost of Maintenance and Services Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Change Cost of maintenance and services $ 15,145 $ 13,319 $ 1,826 14 % As a percentage of maintenance and services revenue 15 % 15 % As a percentage of total revenue 10 % 11 % Components of cost of maintenance and services: Personnel related costs $ 10,804 $ 9,539 $ 1,265 13 % Contractors and outside services 2,968 2,579 389 15 % Hosting and other 1,373 1,201 172 14 % Total cost of maintenance and services $ 15,145 $ 13,319 $ 1,826 14 % Cost of maintenance and services consists primarily of costs of providing customer support, consulting, and education. The increase year over year was primarily due to increased headcount, outside services and hosting costs resulting from our acquisition of Kemp. 31 Amortization of Intangibles Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Amortization of intangibles $ 5,458 $ 3,521 55 % As a percentage of total revenue 4 % 3 % 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 increase year over year is due to the acquisition of Kemp. Gross Profit Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Gross profit $ 121,710 $ 103,289 18 % As a percentage of total revenue 84 % 85 % Our gross profit increased primarily due to the increase in revenue, offset by the increases in costs of software licenses, costs of maintenance and services and the amortization of intangibles, each as described above. Sales and Marketing Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Change Sales and marketing $ 33,469 $ 29,469 $ 4,000 14 % As a percentage of total revenue 23 % 24 % Components of sales and marketing: Personnel related costs $ 28,395 $ 25,891 $ 2,504 10 % Contractors and outside services 820 388 432 111 % Marketing programs and other 4,254 3,190 1,064 33 % Total sales and marketing $ 33,469 $ 29,469 $ 4,000 14 % Sales and marketing expenses increased year over year, primarily due to increased personnel related costs associated with our acquisition of Kemp, as well as increases in contractors and outside services and marketing and sales events costs. Product Development Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Change Product development costs $ 28,673 $ 24,548 $ 4,125 17 % As a percentage of total revenue 20 % 20 % Components of product development costs: Personnel related costs $ 27,479 $ 23,604 $ 3,875 16 % Contractors and outside services 1,018 725 293 40 % Other product development costs 176 219 (43) (20) % Total product development costs $ 28,673 $ 24,548 $ 4,125 17 % Product development expenses increased year over year primarily due to increased personnel related costs associated with our acquisition of Kemp, as well as an increase in contractors and outside services costs. 32 General and Administrative Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Change General and administrative $ 16,991 $ 13,424 $ 3,567 27 % As a percentage of total revenue 12 % 11 % Components of general and administrative: Personnel related costs $ 14,051 $ 11,887 $ 2,164 18 % Contractors and outside services 2,067 1,460 607 42 % Other general and administrative costs 873 77 796 * Total cost of general and administrative $ 16,991 $ 13,424 $ 3,567 27 % *not meaningful General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses increased year over year primarily due to higher personnel costs and contractors and outside services costs associated with our acquisition of Kemp, as well as an increase in other general and administrative costs. Amortization of Intangibles Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Amortization of intangibles $ 11,722 $ 6,879 70 % As a percentage of total revenue 8 % 6 % 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 year over year due to the addition of Kemp intangible assets, as discussed above. Restructuring Expenses Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Restructuring expenses $ 511 $ 1,157 (56) % As a percentage of total revenue — % 1 % Restructuring expenses recorded in the first quarter of fiscal year 2022 primarily relates to the restructuring activities that occurred in the fourth quarters of fiscal years 2021 and 2020 resulting from the acquisitions of Kemp and Chef, respectively. Restructuring expenses recorded in the first quarter of fiscal year 2020 are comprised mostly of costs related to the Chef restructuring actions of 2020. 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, 2022 February 28, 2021 % Change Acquisition-related expenses $ 912 $ 396 130 % As a percentage of total revenue 1 % — % 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 increased in the first quarter of fiscal year 2022 due to the acquisition of Kemp, as well as our pursuit of other acquisition opportunities. Acquisition-related expenses in the same period of fiscal year 2021 were primarily related to the acquisition of Chef. 33 Income from Operations Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Income from operations $ 29,432 $ 27,416 7 % As a percentage of total revenue 20 % 23 % Income from operations increased in both periods shown due to increases of revenue, offset by an increase in costs of revenue and operating expenses as shown above. Other (Expense) Income, Net Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Interest expense $ (3,703) $ (2,514) (47) % Interest income and other, net 589 119 395 % Foreign currency loss, net (366) (257) (42) % Total other expense, net $ (3,480) $ (2,652) (31) % As a percentage of total revenue (2) % (2) % Other expense, net, increased year over year primarily due to increased interest expense associated with our convertible senior notes, which we issued in April 2021. The increase in interest expense was offset by higher interest income and other, net, which resulted from the recognition of grant income during the quarter. Provision for Income Taxes Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Provision for income taxes $ 5,498 $ 5,803 (5) % As a percentage of total revenue 4 % 5 % Our effective tax rate was 21% in the first fiscal quarter of 2022 compared to 23% in the first fiscal quarter of 2021. The decrease is due primarily to discrete tax expense related to the vesting of our Long-Term Incentive Plan ("LTIP") in the first fiscal quarter of 2021. There were no significant discrete tax items in the first fiscal quarter of 2022. Net Income Three Months Ended (In thousands) February 28, 2022 February 28, 2021 % Change Net income $ 20,454 $ 18,961 8 % As a percentage of total revenue 14 % 16 % Select Performance Metrics: Management evaluates our financial performance using a number of financial and operating metrics. These metrics are periodically reviewed and revised to reflect changes in our business. Annual Recurring Revenue (ARR) 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. ARR includes maintenance, software upgrade rights, public cloud and on-premises subscription-based transactions and managed services. ARR mitigates 34 fluctuations due to seasonality, contract term and the sales mix of subscriptions for term-based licenses and SaaS. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of GAAP revenue and deferred revenue and is not intended to be combined with or to replace, not be superior to, either of those items. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. We define ARR as the annual recurring revenue of term-based contracts from all customers at a point in time. We calculate ARR by taking monthly recurring revenue, or MRR, and multiplying it by 12. 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 $479.0 million and $426.0 million as of February 28, 2022 and 2021, respectively, which is an increase of 12% year-over-year. The growth in our ARR is primarily driven by the acquisition of Kemp. Net Dollar Retention Rate We calculate net dollar retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end (“Prior Period ARR”). We then calculate the ARR from these same customers as of the current period end (“Current Period ARR”). Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period. 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 have generally ranged between 100% and 102% for all periods presented. Our high net dollar retention rates illustrate our predictable and durable top line performance. Liquidity and Capital Resources Cash, Cash Equivalents and Short-Term Investments (In thousands) February 28, 2022 November 30, 2021 Cash and cash equivalents $ 171,666 $ 155,406 Short-term investments 1,656 1,967 Total cash, cash equivalents and short-term investments $ 173,322 $ 157,373 The increase in cash, cash equivalents and short-term investments of $15.9 million from the end of fiscal year 2021 was due to cash inflows from operations of $44.1 million, proceeds from the issuance of debt of $7.5 million, $1.0 million in cash received from the issuance of common stock, and the effect of exchange rates on cash of $0.7 million. These cash inflows were offset by repurchases of common stock of $25.0 million, dividend payments of $7.8 million, payments of issuance costs for long-term debt of $2.0 million, payments of debt obligations of $1.7 million, and purchases of property and equipment of $0.8 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, 2022, $45.9 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. As such, it is not available to fund our domestic operations. If we were to repatriate these earnings, we may be subject to income tax withholding in certain tax jurisdictions and a portion of the repatriated earnings may be subject to U.S. income tax. However, we do not anticipate that this would have a material adverse impact on our liquidity. Share Repurchase Program In January 2020, our Board of Directors increased the total share repurchase authorization from $75 million to $250 million. In the three months ended February 28, 2022 and February 28, 2021, we repurchased and retired 0.6 million shares for $25.0 million and 0.4 million shares for $15.0 million, respectively. The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As of February 28, 2022, there was $130.0 million remaining under the current authorization. 35 Dividends We began paying quarterly cash dividends to Progress stockholders in December 2016, and have paid a quarterly cash dividend since that time. On March 29, 2022, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock that will be paid on June 15, 2022 to stockholders of record as of the close of business on June 1, 2022. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors. Restructuring Activities During the fourth quarter of fiscal year 2021, we restructured our operations in connection with the acquisition of Kemp. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Kemp. For the three months ended February 28, 2022, we incurred expenses of $0.4 million relating to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations. 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 2022, but we do not expect these costs to be material. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2022. Accordingly, the balance of the restructuring reserve of $1.1 million is included in other accrued liabilities on the consolidated balance sheet at February 28, 2022. During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef (Note 7). This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef. For the three months ended February 28, 2022, we incurred expenses of $0.1 million relating to this restructuring. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2027. Accordingly, the balance of the restructuring reserve of $4.3 million is included in short-term and long-term lease liabilities on the condensed consolidated balance sheet at February 28, 2022. 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 2022, but we do not expect these costs to be material. Credit Facility On January 25, 2022, we entered into an amended and restated credit agreement (the "Credit Agreement") providing for a $275.0 million secured term loan and a $300.0 million secured revolving credit facility. The revolving credit facility may be increased, and new term loan commitments may be entered into, by up to an additional amount up to the sum of (A) the greater of (x) $260.0 million and (y) 100% of our consolidated EBITDA and (B) an unlimited additional amount subject to pro forma compliance with a consolidated senior secured net leverage ratio of no greater than 3.75 to 1.00 if the existing or additional lenders are willing to make such increased commitments. This new credit facility replaces our prior secured credit facility dated April 30, 2019. The amount of the term loan outstanding under our prior secured credit facility was incorporated into the amended and restated credit facility. 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. We expect to use the revolving credit facility for general corporate purposes, which may include the acquisitions of other businesses, and may also use it for working capital. Interest rates for the Credit Agreement are determined by reference to a term benchmark rate or a base rate at our option and would range from 1.00% to 2.00% above the term benchmark rate or would range from 0.00% to 1.00% above the defined base rate for base rate borrowings, in each case based upon our leverage ratio. Additionally, we may borrow certain foreign currencies at rates set in the same range above the respective term benchmark rates for those currencies, based on our leverage ratio. We will incur a quarterly commitment fee on the undrawn portion of the revolving credit facility, ranging from 0.125% to 0.275% per annum, based upon our leverage ratio. At closing of the revolving credit facility, the applicable interest rate and commitment fee are at the third lowest rate in each range. The Credit Agreement matures on the earlier of (i) January 25, 2027 and (ii) the date that is 181 days prior to the maturity date of our Notes subject to certain conditions as set forth in the amended credit agreement, including the repayment of the Notes, the refinancing of the Notes including a maturity date that is at least 181 days after January 25, 2027 and compliance with a liquidity test, when all amounts outstanding will be due and payable in full. The revolving credit facility does not require amortization of principal. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ending February 28, 2022. The first eight payments are in the principal amount of $1.7 million each, the following 36 four payments are in the principal amount of $3.4 million each, the following eight payments are in the principal amount of $5.2 million each and 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. We are the sole borrower under the credit facility. Our obligations under the amended credit agreement are guaranteed by each of our material domestic subsidiaries and are secured by substantially all of our assets and such material domestic subsidiaries, as well as 100% of the capital stock of our domestic subsidiaries and 65% of the capital stock of our first-tier foreign subsidiaries, in each case, subject to certain exceptions as described in the amended credit agreement. Future material domestic subsidiaries will be required to guaranty our obligations under the amended credit agreement, and to grant security interests in substantially all of their assets to secure such obligations. The amended credit agreement generally prohibits, with certain exceptions, any other liens on our assets and the assets of our subsidiaries, subject to certain exceptions as described in the amended credit agreement. The amended credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries’ 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 its 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 interest charge coverage ratio and a consolidated total net leverage ratio. The amended credit agreement includes customary events of default that include, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the amended credit agreement. The outstanding balance of the term loan as of February 28, 2022 was $273.3 million, with $6.9 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, 2022 was 1.79%. As of February 28, 2022, there were no amounts outstanding under the revolving line of credit and $2.2 million of letters of credit outstanding (Note 8). Convertible Senior Notes In April 2021, we issued, in a private placement, Convertible Senior Notes (the "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 granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, 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. The adoption of ASU 2020-06 had no impact on the Company's debt covenant compliance under the current arrangement. Refer to Note 8: Debt for further discussion. Cash Flows From Operating Activities Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Net income $ 20,454 $ 18,961 Non-cash reconciling items included in net income 31,774 21,061 Changes in operating assets and liabilities (8,135) 4,666 Net cash flows from operating activities $ 44,093 $ 44,688 In the first quarter of fiscal year 2022, operating cash flows decreased due to higher compensation related payments as compared to the same period in 2021, partially offset by increased cash generated from the acquisition of Kemp and particularly strong collections of our receivables. Our gross accounts receivable as of February 28, 2022, decreased by $13.1 million from the end of fiscal year 2021 and our days sales outstanding (DSO) in accounts receivable decreased to 52 days from 53 days in the first fiscal quarter of 2021 due to the timing of billings and collections. 37 Cash Flows From (Used in) Investing Activities Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Net investment activity $ 300 $ 1,300 Purchases of property and equipment (831) (1,166) Decrease in escrow receivable and other — 2,130 Net cash flows (used in) from investing activities $ (531) $ 2,264 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 $0.8 million of property and equipment in the first three months of fiscal year 2022, as compared to $1.2 million in the first three months of fiscal year 2021. Cash Flows From (Used in) Financing Activities Three Months Ended (In thousands) February 28, 2022 February 28, 2021 Proceeds from stock-based compensation plans $ 4,094 $ 3,485 Repurchases of common stock (25,000) (15,000) Proceeds from the issuance of debt 7,474 — Payment of debt issuance costs (1,957) — Payment of principal on long-term debt (1,719) (18,763) Dividend payments to stockholders (7,784) (7,854) Other financing activities (3,139) (892) Net cash flows from (used in) financing activities $ (28,031) $ (39,024) During the first three months of fiscal year 2022, we received $5.5 million in net proceeds from the issuance of debt. We also received $4.1 million from the exercise of stock options and the issuance of shares under our employee stock purchase plan as compared to $3.5 million in the first three months of fiscal year 2021. Further, we repurchased $25.0 million of our common stock under our share repurchase plan compared to $15.0 million in the same period of the prior year. We also made payments on our long-term debt of $1.7 million in the first three months of fiscal year 2022 compared to $18.8 million in the same period of the prior year (including a $15.0 million repayment on the revolving line of credit). Finally, we made dividend payments of $7.8 million to our stockholders during the first three months of fiscal year 2022, as compared to $7.9 million in the first three months of fiscal year 2021. Indemnification Obligations We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial. 38 Liquidity Outlook Cash from operations in fiscal year 2022 could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in Part II, Item 1A titled “Risk Factors.” While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets generally which could adversely affect our liquidity and capital resources in the future. However, based on our current business plan, 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 cash requirements for the foreseeable future. We do not contemplate a need for any foreign repatriation of the earnings which are deemed invested indefinitely outside of the U.S. Our foreseeable cash needs include our planned capital expenditures, debt repayments, quarterly cash dividends, share repurchases, acquisitions, lease commitments, restructuring obligations and other long-term obligations. Legal and Other Regulatory Matters See discussion regarding legal and other regulatory matters in Part II, Item 1. Legal Proceedings. Recent Accounting Pronouncements Refer to Note 1 - Nature of Business and Basis of Presentation (Part I, Item 1 of this Form 10-Q) for further discussion.