UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended May 31, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _____to _____.
Commission File Number: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip code)
(781 ) 280-4000
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | |||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 28, 2021, there were 43,754,747 shares of the registrant’s common stock, $.01 par value per share, outstanding.
PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2021
TABLE OF CONTENTS
| PART I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
| (In thousands, except share data) | May 31, 2021 | November 30, 2020 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Total cash, cash equivalents and short-term investments | |||||||||||
Accounts receivable (less allowances of $ | |||||||||||
| Unbilled receivables and contract assets | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term unbilled receivables and contract assets | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
| Right-of-use lease assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt, net | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and related taxes | |||||||||||
| Dividends payable to shareholders | |||||||||||
| Short-term operating lease liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Other accrued liabilities | |||||||||||
| Short-term deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Convertible senior notes, net | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Long-term deferred revenue | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See notes to unaudited condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands, except per share data) | May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Software licenses | $ | $ | $ | $ | |||||||||||||||||||
| Maintenance and services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Costs of revenue: | |||||||||||||||||||||||
| Cost of software licenses | |||||||||||||||||||||||
| Cost of maintenance and services | |||||||||||||||||||||||
| Amortization of acquired intangibles | |||||||||||||||||||||||
| Total costs of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Product development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Amortization of acquired intangibles | |||||||||||||||||||||||
| Restructuring expenses | ( | ||||||||||||||||||||||
| Acquisition-related expenses | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest income and other, net | |||||||||||||||||||||||
| Foreign currency loss, net | ( | ( | ( | ( | |||||||||||||||||||
| Total other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Cash dividends declared per common share | $ | $ | $ | $ | |||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
4
Condensed Consolidated Statements of Comprehensive Income
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands) | May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||||||||
Unrealized gain (loss) on hedging activity, net of tax provision of $ | ( | ( | |||||||||||||||||||||
Unrealized (loss) gain on investments, net of tax provision of $ | ( | ( | |||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
5
Condensed Consolidated Statements of Shareholders’ Equity
| Six Months Ended May 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| (in thousands) | Number of Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, December 1, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock units and release of deferred stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Withholding tax payments related to net issuance of RSUs | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Equity components of Notes, net of issuance costs and tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Purchase of capped calls, net of tax | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Treasury stock repurchases and retirements | ( | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, May 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Three Months Ended May 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| (in thousands) | Number of Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, March 1, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock units and release of deferred stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Withholding tax payments related to net issuance of RSUs | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Equity components of Notes, net of issuance costs and tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Purchase of capped calls, net of tax | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Treasury stock repurchases and retirements | ( | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, May 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
6
| Six Months Ended May 31, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| (in thousands) | Number of Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, December 1, 2019 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock units and release of deferred stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Withholding tax payments related to net issuance of RSUs | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Treasury stock repurchases and retirements | ( | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, May 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Three Months Ended May 31, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| (in thousands) | Number of Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, March 1, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock units and release of deferred stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Withholding tax payments related to net issuance of RSUs | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, May 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
7
Condensed Consolidated Statements of Cash Flows
| Six Months Ended | |||||||||||
| (In thousands) | May 31, 2021 | May 31, 2020 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization of property and equipment | |||||||||||
| Amortization of acquired intangibles and other | |||||||||||
| Amortization of debt discount and issuance costs on Notes | |||||||||||
| Stock-based compensation | |||||||||||
| Non-cash lease expense | |||||||||||
| Loss on disposal of property and equipment | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Allowances for bad debt and sales credits | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Other assets | |||||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Lease liabilities | ( | ( | |||||||||
| Income taxes payable | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Net cash flows from operating activities | |||||||||||
| Cash flows from (used in) investing activities: | |||||||||||
| Purchases of investments | ( | ||||||||||
| Sales and maturities of investments | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Decrease in escrow receivable | |||||||||||
| Net cash flows from investing activities | |||||||||||
| Cash flows from (used in) financing activities: | |||||||||||
| Proceeds from stock-based compensation plans | |||||||||||
| Payments for taxes related to net share settlements of equity awards | ( | ( | |||||||||
| Repurchases of common stock | ( | ( | |||||||||
Proceeds from issuance of senior convertible notes, net of issuance costs of $ | |||||||||||
| Purchase of capped calls | ( | ||||||||||
| Dividend payments to shareholders | ( | ( | |||||||||
| Payment of principal on long-term debt | ( | ( | |||||||||
| Payment of debt issuance costs | ( | ||||||||||
| Net cash flows from (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
8
Condensed Consolidated Statements of Cash Flows, continued
| Six Months Ended | |||||||||||
| May 31, 2021 | May 31, 2020 | ||||||||||
| Supplemental disclosure: | |||||||||||
Cash paid for income taxes, net of refunds of $ | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested | $ | $ | |||||||||
| Dividends declared | $ | $ | |||||||||
See notes to unaudited condensed consolidated financial statements.
9
Notes to Condensed Consolidated Financial Statements
Note 1: Basis of Presentation
Company Overview - Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") provides the best products to develop, deploy and manage high-impact business applications. Our comprehensive product stack is designed to make technology teams more productive and we have a deep commitment to the developer community, both open source and commercial alike. With Progress, organizations can accelerate the creation and delivery of strategic business applications, automate the process by which applications are configured, deployed and scaled, and make critical data and content more accessible and secure—leading to competitive differentiation and business success. Over 1,700 independent software vendors ("ISVs"), 100,000 enterprise customers, and 3 million developers rely on Progress to power their applications.
Our products are generally sold as perpetual licenses, but certain products also use term licensing models and our cloud-based offerings use a subscription-based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners, principally ISVs, original equipment manufacturers ("OEMs"), distributors and value-added resellers. ISVs develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. OEMs are companies that embed our products into their own software products or devices. Value-added resellers are companies that add features or services to our product, then resell it as an integrated product or complete "turn-key" solution.
We operate in North America and Latin America (the "Americas"); Europe, the Middle East and Africa ("EMEA"); and the Asia Pacific region, through local subsidiaries as well as independent distributors.
Basis of Presentation and Significant Accounting Policies - We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2020, as amended by Form 10-K/A filed on March 30, 2021 (together, the "2020 10-K").
We made no material changes in the application of our significant accounting policies that were disclosed in our 2020 10-K. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our 2020 10-K, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and records changes in estimates in the period in which they become known. These estimates are based on historical data and experience, as well as various other assumptions that management believes to be reasonable under the circumstances. The most significant estimates relate to: the timing and amount of revenue recognition, including the determination of the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and the transaction price allocated to performance obligations; the realization of tax assets and estimates of tax liabilities; fair values of investments in marketable securities; intangible assets and goodwill valuations; the recognition and disclosure of contingent liabilities; the collectability of accounts receivable; and assumptions used to determine the fair value of stock-based compensation. Actual results could differ from those estimates.
10
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Financial Instruments - Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of "other-than-temporary" impairments. The Company adopted this standard effective December 1, 2020. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Convertible Debt
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present an embedded conversion feature for such debt in equity. Additionally, the debt discount resulting from the separation of the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires applying the if-converted method to calculate the impact of the convertible instrument on diluted earnings per share.
The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. It can be adopted on either a full retrospective or modified retrospective basis. The Company plans to adopt this standard in accordance with the full retrospective approach in the first quarter of fiscal year 2022. We have substantially completed our assessment of the retrospective application of this new standard to our historical financial statements. On a preliminary basis, we believe that the retrospective impact of the adoption of the standard on fiscal year 2021 results will be an increase of interest expense of approximately $6.9 million, an increase of notes payable of approximately $56.0 million, a decrease of deferred tax liabilities of approximately $13.7 million, a decrease of additional paid-in capital of approximately $49.2 million, and a decrease of retained earnings of approximately $6.9 million. We will finalize our retrospective presentation of our historical financial statements under the new standard in connection with our 10-Q filings during fiscal year 2022 and our 10-K for the fiscal year ending November 30, 2022.
Note 2: Cash, Cash Equivalents and Investments
A summary of our cash, cash equivalents and available-for-sale investments at May 31, 2021 is as follows (in thousands):
| Amortized Cost Basis | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | |||||||||||||||||
| Money market funds | — | — | |||||||||||||||||||||
| U.S. treasury bonds | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
11
A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2020 is as follows (in thousands):
| Amortized Cost Basis | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | |||||||||||||||||
| Money market funds | — | — | |||||||||||||||||||||
| U.S. treasury bonds | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
| May 31, 2021 | November 30, 2020 | ||||||||||||||||||||||
| Cash and Equivalents | Short-Term Investments | Cash and Equivalents | Short-Term Investments | ||||||||||||||||||||
| Cash | $ | $ | — | $ | $ | — | |||||||||||||||||
| Money market funds | — | — | |||||||||||||||||||||
| U.S. treasury bonds | — | — | |||||||||||||||||||||
| Corporate bonds | — | — | |||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The fair value of debt securities by contractual maturity is as follows (in thousands):
| May 31, 2021 | November 30, 2020 | ||||||||||
| Due in one year or less | $ | $ | |||||||||
Due after one year(1) | |||||||||||
| Total | $ | $ | |||||||||
(1)Includes U.S. treasury bonds and corporate bonds, which are securities representing investments available for current operations and are classified as current on the condensed consolidated balance sheets.
We did not hold any investments with continuous unrealized losses as of May 31, 2021 or November 30, 2020.
12
Note 3: Derivative Instruments
Cash Flow Hedge
On July 9, 2019, we entered into an interest rate swap contract with an initial notional amount of $150.0 million to manage the variability of cash flows associated with approximately one-half of our variable rate debt. The contract matures on April 30, 2024 and requires periodic interest rate settlements. Under this interest rate swap contract, we receive a floating rate based on the greater of 1-month LIBOR or 0.00 %, and pay a fixed rate of 1.855 % on the outstanding notional amount.
We have designated the interest rate swap as a cash flow hedge and assess the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the interest rate swap is highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative are included as a component of other comprehensive loss on our condensed consolidated balance sheets. Although we have determined at the onset of the hedge that the interest rate swap will be a highly effective hedge throughout the term of the contract, any portion of the fair value swap subsequently determined to be ineffective will be recognized in earnings. As of May 31, 2021, the fair value of the hedge was a loss of $5.4 million, which was included in other noncurrent liabilities on our condensed consolidated balance sheets.
The following table presents our interest rate swap contract where the notional amount reflects the quarterly amortization of the interest rate swap, which is equal to approximately one-half of the corresponding reduction in the balance of our term loan as we make scheduled principal payments. The fair value of the derivative represents the discounted value of the expected future discounted cash flows for the interest rate swap, based on the amortization schedule and the current forward curve for the remaining term of the contract, as of the date of each reporting period (in thousands):
| May 31, 2021 | November 30, 2020 | ||||||||||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||||||||||
| Interest rate swap contracts designated as cash flow hedges | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Forward Contracts
We generally use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on intercompany accounts receivable and loans receivable denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries.
All forward contracts are recorded at fair value on the consolidated balance sheets at the end of each reporting period and expire between 30 days and two years from the date the contract was entered. At May 31, 2021, $3.2 million was recorded in other current assets on our condensed consolidated balance sheets. At November 30, 2020, $1.4 million was recorded in other assets on our condensed consolidated balance sheets.
In the three and six months ended May 31, 2021, realized and unrealized gains of $0.9 million and $2.6 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. In the three and six months ended May 31, 2020, realized and unrealized losses of $1.8 million and $2.4 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. These gains and losses were substantially offset by realized and unrealized losses and gains on the offsetting positions.
The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
| May 31, 2021 | November 30, 2020 | ||||||||||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||||||||||
| Forward contracts to sell U.S. dollars | $ | $ | $ | $ | |||||||||||||||||||
| Forward contracts to purchase U.S. dollars | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
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Note 4: Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at May 31, 2021 (in thousands):
| Fair Value Measurements Using | |||||||||||||||||||||||
| Total Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. treasury bonds | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Foreign exchange derivatives | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap | $ | ( | $ | $ | ( | $ | |||||||||||||||||
The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2020 (in thousands):
| Fair Value Measurements Using | |||||||||||||||||||||||
| Total Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. treasury bonds | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Foreign exchange derivatives | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap | $ | ( | $ | $ | ( | $ | |||||||||||||||||
When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.
Fair Value of the Convertible Senior Notes
The liability component of the Company’s Notes (as defined in Note 7: Debt) was recorded at $295.2 million upon issuance, which reflected the fair value of a similar debt instrument that does not have an associated convertible feature. The fair value was determined based on a discounted cash flow model and classified within Level 2 of the fair value hierarchy. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. The carrying value of the liability component of the Notes will be accreted, over the remaining term to maturity, to their principal value of $360.0 million.
The Notes’ fair value, inclusive of the conversion feature embedded in the Notes, was $361.5 million as of May 31, 2021. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 1 in the fair value hierarchy. See Note 7: Debt for additional information.
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Note 5: Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of the following significant classes (in thousands):
| May 31, 2021 | November 30, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| Purchased technology | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Customer-related | ( | ( | |||||||||||||||||||||||||||||||||
| Trademarks and trade names | ( | ( | |||||||||||||||||||||||||||||||||
| Non-compete agreement | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | ||||||||||||||||||||||||||||||||