PERFICIENT, INC. Statements made in this Form 10-Q, including without limitation this Management's Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements may sometimes be identified by such words as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of those words and other comparable words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors, including but not limited to, those set forth under "Risk Factors" in our Annual Report on Form 10-K previously filed with theSEC and elsewhere in this Form 10-Q. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results. For additional information, see the "Special Note Regarding Forward-Looking Statements" contained in this Form 10-Q.
Overview
Perficient is a global digital consultancy transforming how the world's biggest brands connect with customers and grow their businesses. We help clients, primarily focused inNorth America , gain competitive advantage by using digital technology to: make their businesses more responsive to market opportunities; strengthen relationships with customers, suppliers, and partners; improve productivity; and reduce information technology costs. With unparalleled strategy, creative and technology capabilities, across industries, our end-to-end digital consulting services help our clients drive faster speed-to-market capabilities and stronger, more compelling experiences for consumers. We go to market with six primary service categories - strategy and consulting, customer experience and design, innovation and product development, platforms and technology, data and intelligence, and optimized global delivery. Within each service category, and collectively, we deliver a deep and broad portfolio of solutions that enable our clients to operate a real-time enterprise that dynamically adapts business processes and the systems that support them to meet the changing demands of a global and competitive marketplace.
COVID-19 Pandemic
ThroughSeptember 30, 2022 , we have not experienced a material impact to our business, operations or financial results as a result of the pandemic. We continue to monitor closely the Company's financial health and liquidity and the impact of the pandemic on the Company, including emerging variants. See "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 previously filed with theSEC for additional information regarding the potential impact of COVID-19 on the Company.
Services Revenues
Services revenues are derived from professional services that include developing, implementing, integrating, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered. Most of our projects are performed on a time and materials basis, while a portion of our revenues is derived from projects performed on a fixed fee or fixed fee percent complete basis. For time and material projects, revenues are recognized and billed by multiplying the number of hours our professionals expend in the performance of the project by the hourly rates. For fixed fee contracts, revenues are recognized and billed by multiplying the established fixed rate per time period by the number of time periods elapsed. For fixed fee percent complete projects, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Fixed fee percent complete engagements represented 5% and 6% of our services revenues for the three and nine months endedSeptember 30, 2022 , respectively, and 6% for the three and nine months endedSeptember 30, 2021 . On most projects, we are reimbursed for out-of-pocket expenses including travel and other project-related expenses. These reimbursements are included as a component of the transaction price of the respective professional services contract. The aggregate amount of reimbursed expenses will fluctuate depending on the location of our clients, the total number of our projects that require travel, the impact of travel restrictions imposed as a result of the COVID-19 pandemic, and whether our arrangements with our clients provide for the reimbursement of such expenses. In conjunction with services provided, we occasionally receive referral fees under partner programs. These referral fees are recognized at a point in time when earned and recorded within services revenues. 30 --------------------------------------------------------------------------------
Software and Hardware Revenues
Software and hardware revenues are derived from sales of third-party software and hardware resales, in which we are considered the agent, and sales of internally developed software, in which we are considered the principal. Revenues from sales of third-party software and hardware are recorded on a net basis, while revenues from internally developed software sales are recorded on a gross basis. Software and hardware revenues are expected to fluctuate depending on our clients' demand for these products, which may be impacted by the COVID-19 pandemic. There are no significant cancellation or termination-type provisions for our software and hardware sales. Contracts for our professional services provide for a general right, to the client or us, to cancel or terminate the contract within a given period of time (generally 10 to 30 days' notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract.
Cost of Revenues
Cost of revenues consists of cost of services, primarily related to cash and
non-cash compensation and benefits (including bonuses and non-cash compensation
related to equity awards), costs associated with subcontractors, reimbursable
expenses and other project-related expenses. Cost of revenues does not include
depreciation of assets used in the production of revenues which are primarily
personal computers, servers, and other information technology related equipment.
In accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue
from Contracts with Customers, sales of third-party software and hardware are
presented on a net basis, and as such, third-party software and hardware costs
are not presented within cost of revenues.
Our cost of services as a percentage of services revenues is affected by the
utilization rates of our professionals (defined as the percentage of our
professionals' time billed to clients divided by the total available hours in
the respective period), the salaries we pay our professionals, and the average
billing rate we receive from our clients. If a project ends earlier than
scheduled, we retain professionals in advance of receiving project assignments,
or demand for our services declines, our utilization rate will decline and
adversely affect our cost of services as a percentage of services revenues.
Selling, General, and Administrative Expenses
Selling, general and administrative ("SG&A") expenses are primarily composed of
sales-related costs, general and administrative salaries, stock compensation
expense, office costs, recruiting expense, variable compensation costs,
marketing costs and other miscellaneous expenses. We have access to sales leads
generated by our software vendors whose products we use to design and implement
solutions for our clients. These relationships enable us to optimize our selling
costs and sales cycle times and increase win rates through leveraging our
partners' marketing efforts and endorsements.
Plans for Growth and Acquisitions
Our goal is to continue to build one of the leading information technology consulting firms by expanding our relationships with existing and new clients and through the continuation of our disciplined acquisition strategy. Our future growth plan includes expanding our business with a primary focus on customers inthe United States , both organically and through acquisitions. We also intend to further leverage our existing offshore and nearshore capabilities to support our future growth and provide our clients flexible options for project delivery. Our ability to continue to implement our growth plan and evaluate potential acquisitions may be negatively affected by the impact of the COVID-19 pandemic. When analyzing revenue growth by base business compared to acquired companies in the Results of Operations section below, revenue attributable to base business includes revenue from an acquired company that has been owned for a full four quarters after the date of acquisition. 31 --------------------------------------------------------------------------------
Results of Operations
Three months ended
Revenues. Total revenues increased 18.0% to
Explanation for Increases Over Prior Year
Financial Results Period
(in thousands) (in thousands)
Increase Increase
Three Months Ended September 30, Attributable to Attributable to
Total Increase Revenue Delivered by Revenue Delivered
Over Prior Year Resources of by Base Business
2022 2021 Period Acquired Companies ResourcesServices revenues$ 227,044 $ 192,419 $ 34,625 $ 16,471$ 18,154 Software and hardware revenues 570 401 169 - 169 Total revenues$ 227,614 $ 192,820 $ 34,794 $ 16,471$ 18,323 Services revenues increased 18.0% to$227.0 million for the three months endedSeptember 30, 2022 from$192.4 million for the three months endedSeptember 30, 2021 . Services revenues delivered by base business resources increased by$18.2 million , primarily driven by increased demand for our services. Services revenues delivered by resources of acquired companies increased$16.5 million , resulting in a total net increase of$34.6 million . Software and hardware revenues increased 42.1% to$0.6 million for the three months endedSeptember 30, 2022 from$0.4 million for the three months endedSeptember 30, 2021 . Cost of Revenues (exclusive of depreciation and amortization, discussed separately below). Cost of revenues increased 15.4% to$136.4 million for the three months endedSeptember 30, 2022 from$118.3 million for the three months endedSeptember 30, 2021 primarily due to higher headcount. Services costs as a percentage of services revenues decreased to 60.1% for the three months endedSeptember 30, 2022 from 61.5% for the three months endedSeptember 30, 2021 , primarily due to a continued shift to higher margin offshore and nearshore delivery. Selling, General and Administrative. SG&A expenses increased to$44.3 million for the three months endedSeptember 30, 2022 from$39.3 million for the three months endedSeptember 30, 2021 . SG&A expenses as a percentage of revenues decreased to 19.5% for the three months endedSeptember 30, 2022 from 20.4% for the three months endedSeptember 30, 2021 , primarily due to a$2.4 million decrease in bonus expense for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Depreciation. Depreciation expense increased 46.5% to$2.4 million for the three months endedSeptember 30, 2022 from$1.6 million for the three months endedSeptember 30, 2021 . Depreciation expense as a percentage of revenues was 1.0% for the three months endedSeptember 30, 2022 and 0.8% for the three months endedSeptember 30, 2021 . Amortization. Amortization expense increased 41.0% to$6.1 million for the three months endedSeptember 30, 2022 from$4.3 million for the three months endedSeptember 30, 2021 . Amortization expense as a percentage of revenues was 2.7% for the three months endedSeptember 30, 2022 and 2.2% for the three months endedSeptember 30, 2021 . The increase in amortization expense was primarily due to the addition of intangibles from the acquisition of substantially all of the assets ofTalos LLC andTalos Digital LLC and all of the outstanding capital stock of Talos Digital SAS and TCOMM SAS (collectively, "Talos") onSeptember 8, 2021 , the acquisition ofIzmul S.A. ("Overactive") onOctober 15, 2021 , and the acquisition ofInflection Point Systems, Inc. ("Inflection Point") onSeptember 7, 2022 . Acquisition Costs. Acquisition-related costs were$2.1 million for the three months endedSeptember 30, 2022 and$1.3 million for the three months endedSeptember 30, 2021 . Costs were incurred for legal, accounting, tax, investment bank and advisor fees, and valuation services performed by third parties in connection with merger and acquisition-related activities.
Adjustment to Fair Value of Contingent Consideration. An adjustment of
32
--------------------------------------------------------------------------------
three months ended
Net Interest Expense. Net interest expense decreased to$0.6 million for the three months endedSeptember 30, 2022 from$3.5 million for the three months endedSeptember 30, 2021 . The decrease in net interest expense was primarily due to the adoption of Accounting Standards Update ("ASU") 2020-06. Prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method. Provision for Income Taxes. Federal, state and foreign income taxes are provided for at the applicable statutory rates adjusted for non-deductible expenses. The effective tax rate increased to 29.4% for the three months endedSeptember 30, 2022 from 28.1% for the three months endedSeptember 30, 2021 . The increase in effective tax rate was primarily due to the relative decrease in research credit benefit and increase in state tax expense partially offset by a decrease in expense related to a one-time statutory tax rate change inColombia compared to the prior year quarter.
Nine months ended
Revenues. Total revenues increased 23.1% to$672.5 million for the nine months endedSeptember 30, 2022 from$546.3 million for the nine months endedSeptember 30, 2021 . Financial Results Explanation for Increases Over Prior Year (in thousands) Period (in thousands) Increase Increase Nine Months Ended September 30, Attributable to Attributable to Total Increase Revenue Delivered Revenue Delivered Over Prior Year by Resources of by Base Business 2022 2021 Period Acquired Companies Resources
Services revenues$ 670,741 $ 544,924 $ 125,817 $ 47,901$ 77,916 Software and hardware revenues 1,722 1,373 349 5 344 Total revenues$ 672,463 $ 546,297 $ 126,166 $ 47,906$ 78,260 Services revenues increased 23.1% to$670.7 million for the nine months endedSeptember 30, 2022 from$544.9 million for the nine months endedSeptember 30, 2021 . Services revenues delivered by base business resources increased by$77.9 million , primarily driven by increased demand for our services. Services revenues delivered by resources of acquired companies increased$47.9 million , resulting in a total net increase of$125.8 million .
Software and hardware revenues increased 25.4% to
Cost of Revenues (exclusive of depreciation and amortization, discussed separately below). Cost of revenues increased 22.0% to$411.7 million for the nine months endedSeptember 30, 2022 from$337.5 million for the nine months endedSeptember 30, 2021 primarily due to higher headcount. Services costs as a percentage of services revenues decreased to 61.4% for the nine months endedSeptember 30, 2022 from 61.9% for the nine months endedSeptember 30, 2021 , primarily due to a continued shift to higher margin offshore and nearshore delivery. Selling, General and Administrative. SG&A expenses increased to$127.4 million for the nine months endedSeptember 30, 2022 from$110.7 million for the nine months endedSeptember 30, 2021 . SG&A expenses as a percentage of revenues decreased to 18.9% for the nine months endedSeptember 30, 2022 from 20.3% for the nine months endedSeptember 30, 2021 , primarily due to a$6.1 million decrease in bonus expense for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Depreciation. Depreciation expense increased 33.1% to$6.2 million for the nine months endedSeptember 30, 2022 from$4.7 million for the nine months endedSeptember 30, 2021 . Depreciation expense as a percentage of revenues was 0.9% for the nine months endedSeptember 30, 2022 and 2021. Amortization. Amortization expense increased 2.0% to$18.1 million for the nine months endedSeptember 30, 2022 from$17.7 million for the nine months endedSeptember 30, 2021 . Amortization expense as a percentage of revenues was 2.7% for the nine months endedSeptember 30, 2022 and 3.2% for the nine months endedSeptember 30, 2021 . The increase in 33 --------------------------------------------------------------------------------
amortization expense was primarily due to the addition of intangibles from the
acquisition of Talos on
Acquisition Costs. Acquisition-related costs were$2.5 million and$1.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Costs were incurred for legal, accounting, tax, investment bank and advisor fees, and valuation services performed by third parties in connection with merger and acquisition-related activities. Adjustment to Fair Value of Contingent Consideration. An adjustment of$0.4 million was recorded during the nine months endedSeptember 30, 2022 which represents the net fair market value adjustment to the Talos and Overactive revenue and earnings-based contingent consideration liabilities, net of accretion. An immaterial adjustment was recorded during the nine months endedSeptember 30, 2021 which represents the net impact of the fair market value adjustment to the Productora de Software S.A.S. ("PSL"), Brainjocks, andMedTouch LLC ("Medtouch") revenue and earnings-based consideration liabilities, in addition to accretion. Net Interest Expense. Net interest expense decreased to$2.3 million for the nine months endedSeptember 30, 2022 from$10.1 million for the nine months endedSeptember 30, 2021 . The decrease in net interest expense was primarily due to the adoption of ASU 2020-06. Prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method. Provision for Income Taxes. Federal, state and foreign income taxes are provided for at the applicable statutory rates adjusted for non-deductible expenses. The effective tax rate decreased to 25.2% for the nine months endedSeptember 30, 2022 from 25.3% for the nine months endedSeptember 30, 2021 . The decrease in effective tax rate was primarily due to the decrease in expense related to a one-time statutory tax rate change inColombia partially offset by a relative decrease in research credit benefit compared to the prior year period.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources are as follows (in millions):
September 30, 2022 December 31, 2021
Cash and cash equivalents (1) $ 20.8 $ 24.4
Working capital (including cash and cash equivalents) (2)
$ 121.0 $ 94.8
Amounts available under credit facility $ 199.8 $ 199.8
(1) The balance at September 30, 2022 includes $9.2 million held by certain
foreign subsidiaries which is not available to fund domestic operations unless
deemed repatriated. We currently do not plan or foresee a need to repatriate
such funds. The balance also includes $6.5 million in cash held by certain other
foreign subsidiaries which is available to fund domestic operations. The balance
at December 31, 2021 includes $6.1 million held by certain foreign subsidiaries
which is not available to fund domestic operations unless deemed repatriated.
The balance also includes $5.2 million in cash held by certain other foreign
subsidiaries which is available to fund domestic operations.
(2) Working capital is total current assets less total current liabilities.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the nine months endedSeptember 30, 2022 was$71.4 million compared to net cash provided by operating activities of$38.1 million for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the primary components of operating cash flows were net income of$77.9 million , non-cash charges of$36.1 million and net operating asset investments of$42.6 million . For the nine months endedSeptember 30, 2021 , the primary components of operating cash flows were net income of$47.6 million , non-cash charges of$45.1 million and net operating asset investments of$54.6 million .
During the nine months endedSeptember 30, 2022 , we used$7.7 million to purchase property and equipment and to develop software,$44.6 million for the acquisition of Inflection Point, and$0.1 million for a net working capital settlement related to an acquisition. During the nine months endedSeptember 30, 2021 , we used$14.9 million for the acquisition of Talos and$6.7 million to purchase property and equipment and to develop software. 34 --------------------------------------------------------------------------------
During the nine months endedSeptember 30, 2022 , we used$13.0 million to repurchase shares of our common stock through the stock repurchase program and$9.0 million to remit taxes withheld as part of a net share settlement of restricted stock vesting. We also drew down$10.0 million from our line of credit, repaid$10.0 million million on our line of credit and received proceeds from sales of stock through the Employee Stock Purchase Plan of$0.8 million . During the nine months endedSeptember 30, 2021 , we used$17.9 million to repurchase shares of our common stock through the stock repurchase program,$13.9 million to repurchase the remainder of the 2.375% Convertible Senior Notes due 2023 (the "2023 Notes"), received$6.1 million related to the sale of privately negotiated convertible hedge transactions of the 2023 Notes, and paid$5.0 million for the repurchase of net-share-settled warrants related to the 2023 Notes. We used$6.5 million to settle contingent consideration for the purchase of MedTouch and Brainjocks,$5.2 million to remit taxes withheld as part of a net share settlement of restricted stock vesting, and$0.6 million to amend the 2021 Credit Agreement. We also received proceeds from sales of stock through the Employee Stock Purchase Plan of$0.4 million .
Availability of Funds from
OnMay 7, 2021 , the Company entered into an Amended and Restated Credit Agreement (the "2021 Credit Agreement") withWells Fargo Bank, National Association , as administrative agent and the other lenders parties thereto. The 2021 Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of$200.0 million , subject to a commitment increase of$75.0 million . All outstanding amounts owed under the 2021 Credit Agreement become due and payable no later than the final maturity date ofMay 7, 2026 . As ofSeptember 30, 2022 , there was no outstanding balance under the 2021 Credit Agreement. The Company incurred$0.6 million of deferred finance fees as a result of the 2021 Credit Agreement during the nine months endedSeptember 30, 2021 . The Company did not incur any additional deferred finance fees during the three and nine months endedSeptember 30, 2022 . The 2021 Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to$10.0 million at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. As ofSeptember 30, 2022 , the Company had two outstanding letters of credit for$0.2 million . Substantially all of the Company's assets are pledged to secure the credit facility. Borrowings under the 2021 Credit Agreement bear interest at the Company's option of the prime rate (6.25% onSeptember 30, 2022 ) plus a margin ranging from 0.00% to 1.00% or one month LIBOR (3.14% onSeptember 30, 2022 ) plus a margin ranging from 1.00% to 2.00%. The Company incurs an annual commitment fee of 0.15% to 0.20% on the unused portion of the line of credit. The additional margin amount and annual commitment fee are dependent on the level of outstanding borrowings. As ofSeptember 30, 2022 , the Company had$199.8 million of unused borrowing capacity.
At
Stock Repurchase Program Prior to 2022, the Company's Board of Directors authorized the repurchase of up to$315.0 million of Company common stock through a stock repurchase program expiringDecember 31, 2022 . Subsequent toSeptember 30, 2022 , the Board of Directors authorized a$60.0 million expansion of the Company's stock repurchase program for a total repurchase program of$375.0 million and extended the expiration date of the program fromDecember 31, 2022 toDecember 31, 2024 . The program could be suspended or discontinued at any time based on market, economic, or business conditions. The timing and amount of repurchase transactions will be determined by management based on its evaluation of market conditions, share price, and other factors. Since the program's inception onAugust 11, 2008 , the Company has repurchased approximately$274.4 million (16.3 million shares) of outstanding common stock throughSeptember 30, 2022 . From time to time, the Company establishes a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which the Company makes a portion of its stock repurchases. Additional repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors.
Cash Requirements from Contractual Obligations
For the nine months endedSeptember 30, 2022 , there were no material changes outside the ordinary course of business in lease obligations or contractual obligations. See Note 15, Leases, in the Notes to Interim Condensed Consolidated Financial Statements for further description of our contractual obligations. 35 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 andDecember 31, 2021 , there were no balances outstanding under the 2021 Credit Agreement. Any balances outstanding under the 2021 Credit Agreement would be classified as "Long-term debt" within the Condensed Consolidated Balance Sheet and become due and payable no later than the final maturity date ofMay 7, 2026 . As ofSeptember 30, 2022 , there were$394.1 million of outstanding 2026 Notes and 2025 Notes, net of unamortized issuance costs, compared to$326.1 million as ofDecember 31, 2021 . See Note 3, Recent Accounting Pronouncements, in the Notes to Interim Condensed Consolidated Financial Statements for further description of the ASU 2020-06 adoption. As ofDecember 31, 2021 , the 2023 Notes were fully repurchased. The amounts are classified as "Long-term debt" within the Condensed Consolidated Balance Sheets as ofSeptember 30, 2022 (unaudited) andDecember 31, 2021 . The 2026 Notes will become due and payable no later than the final maturity date ofNovember 15, 2026 . The 2025 Notes will become due and payable no later than the final maturity date ofAugust 1, 2025 .
Conclusion
Of the total cash and cash equivalents reported on the Condensed Consolidated Balance Sheet as ofSeptember 30, 2022 (unaudited) of$20.8 million , approximately$9.2 million was held by certain foreign subsidiaries and is considered to be indefinitely reinvested in those operations. The Company is able to fund its liquidity needs outside of these subsidiaries, primarily through cash flows generated by domestic operations and our credit facility, as well as the proceeds from the 2026 Notes issuances in the fourth quarter of 2021. Therefore, the Company has no current plans to repatriate cash from these foreign subsidiaries in the foreseeable future. As ofSeptember 30, 2022 ,$6.5 million of the total cash and cash equivalents was held by certain other foreign subsidiaries where the Company has determined that the earnings from these subsidiaries are not permanently reinvested and may repatriate available earnings from these subsidiaries from time to time. We believe that the currently available funds, access to capital from our credit facility, and cash flows generated from operations will be sufficient to meet our working capital requirements and other capital needs for the next 12 months. However, while the Company did not experience a material impact on the business, operations or financial results from the COVID-19 pandemic during the nine months endedSeptember 30, 2022 , the pandemic may materially and adversely affect our business, operations and financial results, including our cash flows, in the future. See "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for additional information regarding the potential impact of COVID-19 on the Company.
Critical Accounting Policies
Our accounting policies are fully described in Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We believe our most critical accounting policies include revenue recognition, purchase accounting and related fair value measurements, convertible debt, and income taxes. Refer to Note 3, Recent Accounting Pronouncements, in the Notes to Interim Unaudited Consolidated Financial Statements for further discussion regarding the adoption of ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) onJanuary 1, 2022 .
© Edgar Online, source
