PROGRESS SOFTWARE CORPORATION 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 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 Annual Report on Form 10-K for the fiscal year endedNovember 30, 2019 .
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
28--------------------------------------------------------------------------------
Table of Contents
software, services or other offerings are compromised or subject to a successful cyber-attack, or if such 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)The coronavirus disease (COVID-19) outbreak and the impact it could have on our employees, customers, partners and the global financial markets could adversely affect our business, results of operations and financial condition. (10) Those factors discussed in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year endedNovember 30, 2019 . 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 inU.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. Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to be spread throughout theU.S. and the world. The impact from the rapidly changing market and economic conditions due to the COVID-19 outbreak is uncertain, disrupting the business of our customers and partners, and will impact our business and consolidated results of operations and could impact our financial condition in the future. While we have not incurred significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part II, Item 1A "Risk Factors" in this Form 10-Q. We will continue to evaluate the nature 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") offers the leading platform for developing and deploying strategic business applications. We enable customers and partners to deliver modern, high-impact digital experiences with a fraction of the effort, time and cost. Progress offers powerful tools for easily building adaptive user experiences across any type of device or touchpoint, the flexibility of a cloud-native app dev platform to deliver modern apps, leading data connectivity technology, web content management, business rules, secure file transfer and network monitoring. Over 1,700 independent software vendors, 100,000 enterprise customers, and two million developers rely on Progress to power their applications. We operate as three distinct segments: OpenEdge, Data Connectivity and Integration, and Application Development and Deployment.
The key tenets of our strategic plan and operating model are as follows:
Align Resources to Drive Profitability. Our organizational philosophy and operating principles focus primarily on customer and partner retention and success for our core products and a streamlined operating approach in order to more efficiently drive revenue.
Protect and Strengthen Our Core Business. A key element of our strategy is centered on providing the platform and tools enterprises need to build 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 inherent DNA and our vast experience in application development that we've acquired over the past 35+ years.
Our offerings enable developers to build the most modern applications quickly and easily, and include:
29--------------------------------------------------------------------------------
Table of Contents
• our OpenEdge software, which provides a unified development environment
consisting of development tools, application servers, application
management tools, an embedded relational database management system and
the capability to connect and integrate with other applications and data
sources;
• our leading UI development tools, which enable organizations to easily
build engaging user interfaces for any device or front end;
• our data connectivity and integration offerings;
• our business logic and rules offerings;
• our secure file transfer solutions, which provide secure collaboration and
automated file transfers of sensitive data and advanced workflow
automation offerings;
• our network management offerings, which enable small and medium-sized
businesses to monitor and manage their IT infrastructure and applications;
and
• web content management for delivering personalized and engaging digital
experiences.
Acquire Accretive Businesses. We are pursuing acquisitions of businesses within
the software infrastructure space, with products that appeal to both IT
organizations and individual developers. These acquisitions must meet strict
financial criteria, which will enable us to drive significant stockholder
returns by providing scale and increased cash flows. As described below, in
April 2019 , we acquired Ipswitch in a transaction that met these strict
financial criteria.
Holistic Capital Allocation Approach. We have adopted a shareholder friendly
capital allocation policy that utilizes dividends and share repurchases to
return capital to shareholders. Pursuant to our capital allocation strategy that
we initially announced in September 2017 , we have targeted to return
approximately 25% of our annual cash flows from operations to stockholders in
the form of dividends. We also intend to repurchase our shares sufficient to
offset dilution from our equity plans.
In January 2020 , our Board of Directors increased the total share repurchase
authorization from $75.0 million to $250.0 million . We repurchased and retired
0.4 million shares of our common stock for $20.0 million in the six months ended
May 31, 2020 . The shares were repurchased as part of our Board of Directors
authorized share repurchase program. As of May 31, 2020 , there was $230.0
million remaining under the current authorization.
We began paying quarterly cash dividends of $0.125 per share of common stock to
Progress stockholders in December 2016 and increased the quarterly cash dividend
to $0.14 per share in September 2017 . In September 2018 , the quarterly cash
dividend was increased to $0.155 per share of common stock. On September 24,
2019 , our Board of Directors approved an additional increase to our quarterly
cash dividend from $0.155 to $0.165 per share of common stock.
On January 8, 2020 , our Board of Directors declared a quarterly dividend of
$0.165 per share of common stock that was paid on March 16, 2020 to shareholders
of record as of the close of business on March 2, 2020 . On March 18, 2020 , our
Board of Directors declared a quarterly dividend of $0.165 per share of common
stock that was paid on June 15, 2020 to shareholders of record as of the close
of business on June 1, 2020 . We expect to continue paying quarterly cash
dividends in subsequent quarters consistent with our capital allocation
strategy.
In furtherance of our acquisition strategy, on April 30, 2019 , we acquired all
of the outstanding equity interests of Ipswitch, a provider of award-winning and
easy-to-use secure data file transfer and network management software, for an
aggregate purchase price of approximately $225.0 million .
We expect to continue to evaluate possible acquisitions designed to expand our
business and drive significant stockholder returns. As a result, our expected
uses of cash could change, our cash position could be reduced, and we may incur
additional debt obligations to the extent we complete additional acquisitions.
However, we believe that existing cash balances, together with funds generated
from operations and amounts available under our credit facility, will be
sufficient to finance our operations and meet our foreseeable cash requirements,
including quarterly cash dividends and stock repurchases to Progress
stockholders, as applicable, through at least the next twelve months. We also
believe that our financial resources will allow us to manage the anticipated
impact of COVID-19 on our business operations for the foreseeable future, which
could include reductions in revenue and delays in payments from customers and
partners. The challenges posed by COVID-19 on our business are expected to
evolve rapidly. 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
30--------------------------------------------------------------------------------
Table of Contents
denominated in foreign currency, and given the potential volatility in the global economy created by COVID-19, our revenue results in fiscal year 2020 are expected to be impacted by fluctuations in foreign currency exchange rates.
OnSeptember 26, 2019 , we announced that we are reducing our current and ongoing investment levels within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products. Accordingly, our fiscal fourth quarter of 2019 results include a restructuring charge of$2.5 million . This restructuring charge relates to employee costs, including severance, health benefits and outplacement services (but excluding stock-based compensation) incurred as a part of the reduction in the investment. In connection with this restructuring action, during the fiscal fourth quarter of 2019, we evaluated the ongoing value of the intangible assets primarily associated with the technologies and trade names obtained in the acquisitions of DataRPM and Kinvey. As a result of this evaluation, we wrote down these assets to fair value, which resulted in a$22.7 million asset impairment charge during the fiscal fourth quarter of 2019. Results of Operations Revenue Three Months Ended Percentage Change Constant (In thousands) May 31, 2020 May 31, 2019 As Reported Currency Revenue$ 100,383 $ 99,995 - % 2 % Six Months Ended Percentage Change Constant
(In thousands)
12 %
Total revenue remained flat in the three month period ended May 31, 2020
compared to the same quarter last year. Total revenue increased in the six month
period ended May 31, 2020 compared to the corresponding period in 2019,
primarily due to the acquisition of Ipswitch, partially offset by a decrease in
license sales in our Data Connectivity and Integration segment. Ipswitch revenue
was $17.3 million and $32.5 million for the second quarter and first six months
of fiscal year 2020, respectively. Ipswitch revenue was $3.3 million for each of
the second quarter and first six months of fiscal year 2019.
Software License Revenue
Three Months Ended Percentage Change
Constant
(In thousands) May 31, 2020 May 31, 2019 As Reported Currency
Software Licenses $ 19,663 $ 29,728 (34 )% (33 )%
As a percentage of total revenue 20 % 30 %
Six Months Ended Percentage Change
Constant
(In thousands) May 31, 2020 May 31, 2019 As Reported Currency
Software Licenses $ 50,292 $ 52,530 (4 )% (3 )%
As a percentage of total revenue 24 % 28 %
Software license revenue decreased compared to the same periods last year
primarily due to a decrease in license sales in our Data Connectivity and
Integration segment, partially offset by an increase in Ipswitch license sales,
which are included in our OpenEdge segment. Refer to Revenue by Segment section
below for further discussion.
31--------------------------------------------------------------------------------
Table of Contents
Maintenance and Services Revenue
Three Months Ended Percentage Change
Constant
(In thousands) May 31, 2020 May 31, 2019 As Reported Currency
Maintenance $ 71,686 $ 62,528 15 % 16 %
As a percentage of total revenue 71 % 63 %
Services 9,034 7,739 17 % 18 %
As a percentage of total revenue 9 % 8 %
Total maintenance and services revenue
15 % 17 %
As a percentage of total revenue 80 % 70 %
Six Months Ended Percentage Change
Constant
(In thousands) May 31, 2020 May 31, 2019 As Reported Currency
Maintenance $ 141,742 $ 122,527 16 % 17 %
As a percentage of total revenue 67 % 65 %
Services 18,032 14,487 24 % 25 %
As a percentage of total revenue 9 % 8 %
Total maintenance and services revenue
17 % 18 %
As a percentage of total revenue 76 % 72 %
Maintenance and services revenue increased in all periods due to our acquisition
of Ipswitch. The increase in services revenue was also driven by our Application
Development and Deployment segment.
Revenue by Region
Three Months Ended Percentage Change
Constant
(In thousands) May 31, 2020 May 31, 2019 As Reported Currency
North America $ 56,564 $ 57,060 (1 )% (1 )%
As a percentage of total revenue 57 % 57 %
2 % 4 % As a percentage of total revenue 34 % 34 % Latin America$ 3,346 $ 4,108 (19 )% (3 )% As a percentage of total revenue 3 % 4 % Asia Pacific$ 6,316 $ 5,194 22 % 26 % As a percentage of total revenue 6 % 5 % Six Months Ended Percentage Change Constant (In thousands) May 31, 2020 May 31, 2019 As Reported Currency North America$ 121,977 $ 103,558 18 % 18 % As a percentage of total revenue 58 % 55 % EMEA$ 69,145 $ 67,005 3 % 5 % As a percentage of total revenue 33 % 35 % Latin America$ 7,346 $ 8,569 (14 )% (4 )% As a percentage of total revenue 4 % 5 % Asia Pacific$ 11,598 $ 10,412 11 % 14 % As a percentage of total revenue 5 % 5 % 32
--------------------------------------------------------------------------------
Table of Contents
Total revenue generated inNorth America decreased by$0.5 million for the three month period endedMay 31, 2020 , compared to the corresponding period in 2019, primarily due to decreased license sales in our Data Connectivity and Integration segment, partially offset by our acquisition of Ipswitch. The revenue generated inNorth America increased for the six month period endedMay 31, 2020 , compared to the corresponding period in 2019, primarily due to our acquisition of Ipswitch as well as higher maintenance and services revenue generated by our Application Development and Deployment segment. The increase in revenue generated in EMEA in all periods was also due to our acquisition of Ipswitch. Revenue inLatin America decreased in all periods primarily due to the effect of foreign exchange. Revenue inAsia Pacific increased in both periods primarily due to an increase in OpenEdge license sales. In the first six months of fiscal year 2020, revenue generated in markets outsideNorth America represented 42% of total revenue compared to 43% of total revenue on a constant currency basis and 45% of total revenue in the same period last year. Revenue by Segment Three Months Ended Percentage Change (In thousands) May 31, 2020 May 31, 2019 As Reported Constant Currency OpenEdge segment$ 77,735 $ 67,820 15 % 17 % Data Connectivity and Integration segment 3,662 12,932 (72 )% (72 )% Application Development and Deployment segment 18,986 19,243 (1 )% (1 )% Total revenue$ 100,383 $ 99,995 - % 2 % Six Months Ended Percentage Change (In thousands) May 31, 2020 May 31, 2019 As Reported Constant Currency OpenEdge segment$ 154,814 $ 133,072 16 % 18 % Data Connectivity and Integration segment 17,347 18,932 (8 )% (9 )% Application Development and Deployment segment 37,905 37,540 1 % 1 % Total revenue$ 210,066 $ 189,544 11 % 12 % Revenue in our OpenEdge segment increased in all periods primarily due to our acquisition of Ipswitch. Data Connectivity and Integration revenue decreased in all periods due to the timing of term license renewals by certain of our OEM partners. Application Development and Deployment revenue decreased in the three month period endedMay 31, 2020 , compared to the corresponding period in 2019, primarily due to lower license revenue, and increased in the six month period endedMay 31, 2020 , primarily due to higher professional services and maintenance revenues. Cost of Software Licenses Three Months Ended Six Months Ended Percentage Percentage (In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change Cost of software licenses$ 810 $ 925 (12 )%$ 2,199 $ 2,092 5 % As a percentage of software license revenue 4 % 3 % 4 % 4 % As a percentage of total revenue 1 % 1 % 1 % 1 % Cost of software licenses consists primarily of costs of royalties, electronic software distribution, duplication, and packaging. The slight increase in cost of software licenses in the six month period endingMay 31, 2020 , compared to the corresponding period in 2019, was due to our acquisition of Ipswitch. 33
--------------------------------------------------------------------------------
Table of Contents
Cost of Maintenance and Services
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Cost of maintenance and
services $ 11,785 $ 10,580 11 % $ 23,636 $ 20,019 18 %
As a percentage of maintenance
and services revenue 15 % 15 % 15 % 15 %
As a percentage of total
revenue 12 % 11 % 11 % 11 %
Cost of maintenance and services consists primarily of costs of providing
customer support, consulting, and education. The year over year increase in all
periods was primarily due to increased headcount resulting from our acquisition
of Ipswitch.
Amortization of Intangibles
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019
Change
2 % 6 % 2 % 6 %
Amortization of intangibles included in costs of revenue primarily represents
the amortization of the value assigned to technology-related intangible assets
obtained in business combinations. The year over year decrease in all periods
was due to certain intangible assets being fully amortized and the impairment of
intangible assets recorded in the fourth fiscal quarter of 2019 associated with
the technology of our Kinvey and DataRPM acquisitions.
Gross Profit
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Gross profit $ 86,124 $ 82,384 5
%
86 % 82 % 86 % 82 %
Our gross profit increased in both periods primarily due to the increase in
maintenance revenue and the decrease in the amortization of intangibles, offset
slightly by the decrease of license revenue and increase of cost of maintenance
and services, each as described above.
Sales and Marketing
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Sales and marketing $ 21,716 $ 24,832 (13
)%
22 % 25 % 22 % 25 %
Sales and marketing expenses decreased in both periods as compared to the
corresponding periods last year primarily due to decreased travel and in-person
events resulting from restrictions related to the COVID-19 pandemic as well as
cost reductions resulting from our decision to reduce our current and ongoing
investment levels within our cognitive application product lines in the fourth
quarter of fiscal year 2019. These decreases were partially offset by increased
costs resulting from the acquisition of Ipswitch on April 30, 2019 .
34--------------------------------------------------------------------------------
Table of Contents
Product Development
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Product development costs $ 21,787 $ 21,688 - % $ 43,441 $ 41,578 4 %
As a percentage of total revenue 22 % 22 % 21 % 22 %
Product development expenses increased in both periods presented as compared to
the same periods last year primarily due to increased compensation-related
expenses as a result of the acquisition of Ipswitch, partially offset by
decreased travel resulting from restrictions related to the COVID-19 pandemic
and cost reductions resulting from our decision to reduce our current and
ongoing investment levels within our cognitive application product lines in the
fourth quarter of fiscal year 2019.
General and Administrative
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
General and administrative $ 12,440 $ 12,654 (2 )% $ 25,188 $ 24,939 1 %
As a percentage of total revenue 12 % 13 % 12 % 13 %
General and administrative expenses include the costs of our finance, human
resources, legal, information systems and administrative departments. General
and administrative expenses decreased during the three month period ended May
31, 2020 due to decreased stock-based compensation expense compared to the same
quarter last year. General and administrative expenses increased during the six
month period ended May 31, 2020 as compared to the same period last year
primarily due to higher headcount-related costs, partially offset by decreased
stock-based compensation expense.
Amortization of Intangibles
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Amortization of intangibles $ 4,177 $ 4,585 (9 )% $ 8,308 $ 7,773 7 %
As a percentage of total revenue 4 % 5 % 4 % 4 %
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 decreased in the three month period ended May 31, 2020 , compared
to the corresponding period in 2019, due to certain intangible assets being
fully amortized and the impairment of intangible assets, as discussed above.
Amortization of intangibles for the six month period ended May 31, 2020
increased year over year due to the addition of intangible assets obtained in
connection with our acquisition of Ipswitch, partially offset by certain
intangible assets being fully amortized and the impairment of intangible assets,
as discussed above.
35--------------------------------------------------------------------------------
Table of Contents
Restructuring Expenses
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Restructuring expenses $ 695 $ 2,777 (75
)%
1 % 3 % 1 % 2 %
Restructuring expenses recorded in the first six months of fiscal year 2020
relate primarily to the restructuring activities that occurred in fiscal year
2019. See Note 13 to the condensed consolidated financial statements for
additional details, including types of expenses incurred and the timing of
future expenses and cash payments. See also 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 Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019
Change
* $ 314 $ 1,107 (72 )%
As a percentage of total revenue - % 1 % - % 1 %
* Not meaningful
Acquisition-related costs are expensed as incurred and include those costs
incurred as a result of a business combination. These costs consist of
professional service fees, including third-party legal and valuation-related
fees. Acquisition-related expenses in both the second quarter and first six
months of fiscal year 2020 were minimal. Acquisition-related expenses in both
the second quarter and first six months of fiscal year 2019 were related to the
acquisition of Ipswitch.
Income from Operations
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Income from operations $ 25,309 $ 14,741 72
%
25 % 15 % 27 % 16 %
Income from operations increased year over year in both periods due to an increase in revenue and decreases in costs of revenue and operating expenses as shown above.
Income from Operations by Segment
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
OpenEdge segment $ 59,859 $ 48,723 23 % $ 117,188 $ 95,660 23 %
Data Connectivity and
Integration segment 2,033 11,126 (82 )% 13,038 15,626 (17 )%
Application Development and
Deployment segment 12,000 13,696 (12 )% 23,631 26,566 (11 )%
Other unallocated expenses(1) (48,583 ) (58,804 ) 17 % (97,836 ) (107,702 ) 9 %
Income from operations $ 25,309 $ 14,741 72 % $ 56,021 $ 30,150 86 %
(1)Note that the following expenses are not allocated to our segments as we
manage and report our business in these functional areas on a consolidated basis
only: certain product development and corporate sales and marketing expenses,
customer support, administration, amortization of acquired intangibles,
stock-based compensation, fees related to shareholder activist, restructuring,
and acquisition-related expenses.
36--------------------------------------------------------------------------------
Table of Contents
Other (Expense) Income, Net
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Interest expense $ (2,598 ) $ (2,210 ) (18
)%
122 344 (65 )% 333 573 (42 )%
Foreign currency loss, net (371 ) (451 ) 18
% (1,187 ) (1,294 ) 8 %
Total other expense, net
(2 )% (3 )% (2 )%
Other expense, net increased in all periods presented due to an increase in interest expense. The change in interest expense is a result of an increase in the principal balance of our debt, which was used to fund the Ipswitch acquisition.
(Benefit) Provision for Income Taxes
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019
Change
5 % 4 % 6 % 4 %
Our effective tax rate was 25% in the second fiscal quarter of 2020 compared to
34% in the second fiscal quarter of 2019. Our effective tax rate was 24% in the
six month period ended May 31, 2020 compared to 32% in the same period of
2019.The primary reason for the decrease in effective rate is that during the
preparation of our financial statements for the three months ended August 31,
2019 , we identified an error in our income tax provisions for the first and
second quarters of fiscal year 2019 related to the tax treatment of an
intercompany sale of intellectual property that occurred in fiscal year 2018. As
a result of the error, income tax expense was overstated by $1.1 million and
$2.5 million during the first and second quarters of fiscal year 2019,
respectively. We determined that the error was not material to the first and
second quarters of fiscal year 2019 and corrected the error by recording an out
of period $3.6 million tax benefit in our financial statements for the period
ended August 31, 2019 . If the error had not occurred, the effective tax rate in
the second quarter of fiscal year 2019 would have been 14% and the effective tax
rate in the six month period ended May 31, 2019 would have been 18%. The primary
reason why the effective tax rate would have been lower in fiscal year 2019
versus fiscal year 2020 is due to a shift in a significant amount of income from
a low tax jurisdiction to the United States from fiscal year 2019 to fiscal year
2020.
Net Income
Three Months Ended Six Months Ended
Percentage Percentage
(In thousands) May 31, 2020 May 31, 2019 Change May 31, 2020 May 31, 2019 Change
Net income $ 16,968 $ 8,181 107
%
17 % 8 % 18 % 9 %
37--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-Term Investments
May 31, November 30,
(In thousands) 2020 2019
Cash and cash equivalents $ 193,222 $ 154,259
Short-term investments 10,423 19,426
Total cash, cash equivalents and short-term investments
The increase in cash, cash equivalents and short-term investments of$30.0 million from the end of fiscal year 2019 was due to cash inflows from operations of$71.0 million , and$3.4 million in cash received from the issuance of common stock. These cash inflows were offset by repurchases of common stock of$20.0 million , dividend payments of$14.9 million , payments of debt obligations in the amount of$3.8 million , the effect of exchange rates on cash of$4.0 million and purchases of property and equipment of$1.8 million . Except as described below, there are no limitations on our ability to access our cash, cash equivalents and short-term investments. As ofMay 31, 2020 ,$24.5 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 theU.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 toU.S. income tax. However, we do not anticipate that this would have a material adverse impact on our liquidity.
Share Repurchase Program
InJanuary 2020 , our Board of Directors increased the total share repurchase authorization from$75.0 million to$250.0 million . We repurchased and retired 0.4 million shares of our common stock for$20.0 million in the six months endedMay 31, 2020 and 0.7 million shares for$25.0 million in the six months endedMay 31, 2019 . We did not repurchase and retire any shares of our common stock in the three month periods endedMay 31, 2020 andMay 31, 2019 . The shares were repurchased in both periods as part of our Board of Directors authorized share repurchase program. As ofMay 31, 2020 , there was$230.0 million remaining under the current authorization. Dividends We began paying quarterly cash dividends of$0.125 per share of common stock to Progress stockholders inDecember 2016 and increased the quarterly cash dividend to$0.14 per share inSeptember 2017 . InSeptember 2018 , the quarterly cash dividend was increased to$0.155 per share of common stock. OnSeptember 24, 2019 , our Board of Directors approved an additional increase to our quarterly cash dividend from$0.155 to$0.165 per share of common stock. OnJanuary 8, 2020 , our Board of Directors declared a quarterly dividend of$0.165 per share of common stock that was paid onMarch 16, 2020 to stockholders of record as of the close of business onMarch 2, 2020 . OnMarch 18, 2020 , our Board of Directors declared a quarterly dividend of$0.165 per share of common stock that will be paid onJune 15, 2020 to shareholders of record as of the close of business onJune 1, 2020 . OnJune 23, 2020 , our Board of Directors declared a quarterly dividend of$0.165 per share of common stock that will be paid onSeptember 15, 2020 to shareholders of record as of the close of business onSeptember 1, 2020 .
Restructuring Activities
During the second quarter of fiscal year 2019, we restructured our operations in connection with the acquisition of Ipswitch. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Ipswitch. 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 2020, but we do not expect these costs to be material. For the three and six months endedMay 31, 2020 , we incurred expenses of$0.3 million and$1.4 million , respectively, in connection with the restructuring, which are recorded as restructuring expenses in the consolidated statements of operations. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2020. We do not expect to incur additional material costs with respect to this restructuring. 38
--------------------------------------------------------------------------------
Table of Contents
During the fourth quarter of fiscal year 2019, we announced the reduction of our current and ongoing investment level within our cognitive application product lines, which consist primarily of our DataRPM and Kinvey products. This restructuring resulted in a reduction in positions primarily within the sales and product development functions. For the three and six months endedMay 31, 2020 , we incurred minimal expenses in connection with the restructuring, which are recorded as restructuring expenses in the consolidated statements of operations. Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2020. We do not expect to incur additional material costs with respect to this restructuring.
Credit Facility
Our credit agreement provides for a$301.0 million secured term loan and a$100.0 million secured revolving credit facility. The revolving credit facility may be made available inU.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 credit facility has sub-limits for swing line loans up to$25.0 million and for the issuance of standby letters of credit in a face amount up to$25.0 million . We expect to use the revolving credit facility for general corporate purposes, including acquisitions of other businesses, and may also use it for working capital. The credit facility matures onApril 30, 2024 , when all amounts outstanding will be due and payable in full. The revolving credit facility does not require amortization of principal. The outstanding balance of the term loan as ofMay 31, 2020 was$293.5 million , with$15.1 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 endedAugust 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. The interest rate of the credit facility as ofMay 31, 2020 was 2.06%. Revolving loans may be borrowed, repaid, and reborrowed untilApril 30, 2024 , at which time all amounts outstanding must be repaid. As ofMay 31, 2020 , there were no amounts outstanding under the revolving line and$1.8 million of letters of credit. The credit facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, make acquisitions, incur indebtedness, merge or consolidate, dispose of assets, pay dividends or make distributions, repurchase stock, change the nature of the business, enter into certain transactions with affiliates and enter into burdensome agreements, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a consolidated fixed charge coverage ratio, a consolidated total leverage ratio and a consolidated senior secured leverage ratio. We are in compliance with these financial covenants as ofMay 31, 2020 .
© Edgar Online, source
