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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 31, 2022
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: 001-15169
PERFICIENT, INC.
(Exact name of registrant as specified in its charter) | | | | | | | | | | | | | | |
Delaware | | No. | 74-2853258 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
555 Maryville University Drive
Suite 600
Saint Louis, Missouri 63141
(Address of principal executive offices)
(314) 529-3600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 par value | PRFT | The Nasdaq Global Select Market |
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 during the past 90 days. þ Yes o 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). þ Yes o 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | þ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of April 21, 2022, there were 34,648,599 shares of Common Stock outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on this Form 10-Q (“Form 10-Q”) are not purely historical statements, discuss future expectations, contain projections of results of operations or financial condition, or state other forward-looking information. Those statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The “forward-looking” information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these so-called forward-looking statements by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those words and other comparable words. You should be aware that those statements only reflect our predictions and are subject to risks and uncertainties. Actual events or results may differ substantially. Important factors that could cause our actual results to be materially different from the forward-looking statements include (but are not limited to) the following, many of which are, or may be, amplified by the novel coronavirus (COVID-19) pandemic:
1.the impact of the general economy and economic and political uncertainty on our business;
2.the impact of the COVID-19 pandemic on our business;
3.risks associated with potential changes to federal, state, local and foreign laws, regulations, and policies;
4.risks associated with the operation of our business generally, including:
a.client demand for our services and solutions;
b.effectively competing in a highly competitive market;
c.risks from international operations including fluctuations in exchange rates;
d.adapting to changes in technologies and offerings;
e.obtaining favorable pricing to reflect services provided;
f.risk of loss of one or more significant software vendors;
g.maintaining a balance of our supply of skills and resources with client demand;
h.changes to immigration policies;
i.protecting our clients’ and our data and information;
j.changes to tax levels, audits, investigations, tax laws or their interpretation;
k.making appropriate estimates and assumptions in connection with preparing our consolidated financial statements; and
l.maintaining effective internal controls;
5.risks associated with managing growth organically and through acquisitions;
6.risks associated with servicing our debt, the potential impact on the value of our common stock from the conditional conversion features of our debt and the associated convertible note hedge transactions;
7.legal liabilities, including intellectual property protection and infringement or the disclosure of personally identifiable information; and
8.the risks detailed from time to time within our filings with the Securities and Exchange Commission (the “SEC”).
This discussion is not exhaustive, but is designed to highlight important factors that may impact our forward-looking statements. Because the factors referred to above, as well as the statements included under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, including documents incorporated by reference therein and herein, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.
All forward-looking statements, express or implied, included in this report and the documents we incorporate by reference that are attributable to Perficient, Inc. and its subsidiaries (collectively, “we,” “us,” “Perficient,” or the “Company”) are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or any persons acting on our behalf may issue.
Item 1. Financial Statements
Perficient, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share information)
| | | | | | | | | | | |
| March 31, 2022 (unaudited) | | December 31, 2021 |
Assets | |
Current assets: | | | |
Cash and cash equivalents | $ | 24,175 | | | $ | 24,410 | |
Accounts receivable, net | 186,368 | | | 177,602 | |
Prepaid expenses | 5,992 | | | 5,400 | |
Other current assets | 8,594 | | | 7,296 | |
Total current assets | 225,129 | | | 214,708 | |
Property and equipment, net | 15,287 | | | 14,747 | |
Operating lease right-of-use assets | 31,036 | | | 33,353 | |
Goodwill | 518,950 | | | 515,229 | |
Intangible assets, net | 76,527 | | | 81,277 | |
Other non-current assets | 35,892 | | | 23,258 | |
Total assets | $ | 902,821 | | | $ | 882,572 | |
| | | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 22,241 | | | $ | 26,074 | |
Other current liabilities | 72,516 | | | 93,877 | |
Total current liabilities | 94,757 | | | 119,951 | |
Long-term debt, net | 392,907 | | | 326,126 | |
Operating lease liabilities | 21,627 | | | 23,898 | |
Other non-current liabilities | 49,980 | | | 47,832 | |
Total liabilities | $ | 559,271 | | | $ | 517,807 | |
Stockholders’ equity: | | | |
Preferred stock (par value $0.001 per share; 8,000,000 authorized; no shares issued or outstanding as of March 31, 2022 and December 31, 2021) | $ | — | | | $ | — | |
Common stock (par value $0.001 per share; 100,000,000 authorized; 52,756,640 shares issued and 34,017,559 shares outstanding as of March 31, 2022; 52,534,967 shares issued and 33,881,196 shares outstanding as of December 31, 2021) | 53 | | | 53 | |
Additional paid-in capital | 377,927 | | | 423,235 | |
Accumulated other comprehensive (loss) income | (2,037) | | | (5,843) | |
Treasury stock, at cost (18,739,081 shares as of March 31, 2022; 18,653,771 shares as of December 31, 2021) | (333,400) | | | (324,412) | |
Retained earnings | 301,007 | | | 271,732 | |
Total stockholders’ equity | 343,550 | | | 364,765 | |
Total liabilities and stockholders’ equity | $ | 902,821 | | | $ | 882,572 | |
See accompanying notes to interim unaudited condensed consolidated financial statements.
Perficient, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share information) | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| | | | | | | |
Revenues | $ | 222,111 | | | $ | 169,341 | | | | | |
| | | | | | | |
| | | | | | | |
Cost of revenues (cost of services, exclusive of depreciation and amortization, shown separately below) | 138,518 | | | 106,062 | | | | | |
Selling, general and administrative | 42,251 | | | 33,979 | | | | | |
Depreciation | 1,873 | | | 1,460 | | | | | |
Amortization | 5,979 | | | 7,052 | | | | | |
Acquisition costs | 299 | | | 68 | | | | | |
Adjustment to fair value of contingent consideration | (979) | | | 514 | | | | | |
Income from operations | 34,170 | | | 20,206 | | | | | |
| | | | | | | |
Net interest expense | 887 | | | 3,296 | | | | | |
| | | | | | | |
Net other expense | 233 | | | 122 | | | | | |
Income before income taxes | 33,050 | | | 16,788 | | | | | |
Provision for income taxes | 5,914 | | | 3,195 | | | | | |
| | | | | | | |
Net income | $ | 27,136 | | | $ | 13,593 | | | | | |
| | | | | | | |
Basic net income per share | $ | 0.80 | | | $ | 0.43 | | | | | |
Diluted net income per share | $ | 0.75 | | | $ | 0.41 | | | | | |
Shares used in computing basic net income per share | 33,843 | | | 31,864 | | | | | |
Shares used in computing diluted net income per share | 36,839 | | | 33,015 | | | | | |
See accompanying notes to interim unaudited condensed consolidated financial statements.
Perficient, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands) | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| | | |
Net income | $ | 27,136 | | | $ | 13,593 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment, net of tax | 3,806 | | | (4,286) | | | | | |
Comprehensive income | $ | 30,942 | | | $ | 9,307 | | | | | |
See accompanying notes to interim unaudited condensed consolidated financial statements.
Perficient, Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(in thousands) | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| | | | | | | |
| | | | | | | |
Common Stock | | | | | | | |
Beginning of period | $ | 53 | | | $ | 50 | | | | | |
| Stock compensation related to restricted stock vesting and retirement savings plan contributions | — | | | 1 | | | | | |
End of period | 53 | | | 51 | | | | | |
Additional Paid-in Capital | | | | | | | |
Beginning of period | 423,235 | | | 459,866 | | | | | |
| Proceeds from the sales of stock through the Employee Stock Purchase Plan | 282 | | | 105 | | | | | |
| Stock compensation related to restricted stock vesting and retirement savings plan contributions | 5,917 | | | 5,185 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Cumulative effect of accounting changes (See Note 3) | (51,507) | | | — | | | | | |
| | | | | | | | |
End of period | 377,927 | | | 465,156 | | | | | |
Accumulated Other Comprehensive (Loss) Income | | | | | | | |
Beginning of period | (5,843) | | | 3,746 | | | | | |
| Foreign currency translation adjustment | 3,806 | | | (4,286) | | | | | |
End of period | (2,037) | | | (540) | | | | | |
Treasury Stock | | | | | | | |
Beginning of period | (324,412) | | | (289,225) | | | | | |
| Purchases of treasury stock and buyback of shares for taxes | (8,988) | | | (10,142) | | | | | |
| | | | | | | | |
End of period | (333,400) | | | (299,367) | | | | | |
Retained Earnings | | | | | | | |
Beginning of period | 271,732 | | | 219,641 | | | | | |
| Cumulative effect of accounting changes (See Note 3) | 2,139 | | | — | | | | | |
| Net income | 27,136 | | | 13,593 | | | | | |
End of period | 301,007 | | | 233,234 | | | | | |
Total Shareholders’ Equity | $ | 343,550 | | | $ | 398,534 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | |
| | | | | | | |
| | Three Months Ended March 31, | | |
Common Stock, shares | 2022 | | 2021 | | | | |
Beginning of period | 33,881 | | | 32,074 | | | | | |
| Sales of stock through the Employee Stock Purchase Plan | 2 | | | 2 | | | | | |
| Stock compensation related to restricted stock vesting and retirement savings plan contributions | 219 | | | 254 | | | | | |
| Purchases of treasury stock and buyback of shares for taxes | (84) | | | (179) | | | | | |
| | | | | | | | |
End of period | 34,018 | | | 32,151 | | | | | |
See accompanying notes to interim unaudited condensed consolidated financial statements.
Perficient, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands) | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Operating Activities | |
Net income | $ | 27,136 | | | $ | 13,593 | |
Adjustments to reconcile net income to net cash provided by operations: | | | |
Depreciation | 1,873 | | | 1,460 | |
Amortization | 5,979 | | | 7,052 | |
Deferred income taxes | 4,087 | | | 455 | |
Non-cash stock compensation and retirement savings plan contributions | 5,706 | | | 5,113 | |
Amortization of debt discount and issuance costs | 608 | | | 2,528 | |
Adjustment to fair value of contingent consideration for purchase of businesses | (979) | | | 514 | |
| | | |
Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (8,433) | | | (5,653) | |
Other assets | (1,542) | | | (3,065) | |
Accounts payable | (4,295) | | | (7,844) | |
Other liabilities | (18,966) | | | (12,992) | |
Net cash provided by operating activities | 11,174 | | | 1,161 | |
| | | |
Investing Activities | | | |
Purchase of property and equipment | (2,472) | | | (1,480) | |
Capitalization of internally developed software costs | (175) | | | (348) | |
Purchase of businesses, net of cash acquired | (67) | | | — | |
Net cash used in investing activities | (2,714) | | | (1,828) | |
| | | |
Financing Activities | | | |
Proceeds from the sale of stock through the Employee Stock Purchase Plan | 282 | | | 105 | |
Purchases of treasury stock | — | | | (4,908) | |
Remittance of taxes withheld as part of a net share settlement of restricted stock vesting | (8,988) | | | (5,234) | |
Net cash used in financing activities | (8,706) | | | (10,037) | |
Effect of exchange rate on cash and cash equivalents | 11 | | | (442) | |
Change in cash and cash equivalents | (235) | | | (11,146) | |
Cash and cash equivalents at beginning of period | 24,410 | | | 83,204 | |
Cash and cash equivalents at end of period | $ | 24,175 | | | $ | 72,058 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Supplemental Disclosures: | | | |
Cash paid for income taxes | $ | 2,363 | | | $ | 1,218 | |
Cash paid for interest | $ | 226 | | | $ | 1,445 | |
| | | |
| | | |
| | | |
See accompanying notes to interim unaudited condensed consolidated financial statements.
PERFICIENT, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
1. Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements of Perficient, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Accordingly, certain note disclosures have been condensed or omitted. In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Through March 31, 2022, the Company had not experienced a material impact to its business, operations or financial results as a result of the novel coronavirus (COVID-19) pandemic. However, the Company’s operating results for the three months ended March 31, 2022 are not necessarily indicative of future results, particularly in light of the COVID-19 pandemic and its continuing effects on domestic and global economies. For more information, refer to the statements included under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and such differences could be material to the financial statements.
There have been no changes to significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2021 that have had a material impact on the Company’s condensed consolidated financial statements and related notes, other than the changes described in Note 3, Recent Accounting Pronouncements.
3. Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (“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) (ASU 2020-06), which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments, requiring bifurcation only if the convertible debt feature qualifies as a derivative or for convertible debt issued at a substantial premium. The ASU removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception, permitting more contracts to qualify for the exception. In addition, the guidance eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The ASU is effective for annual reporting periods beginning after December 15, 2021, including interim reporting periods within those annual periods. The ASU allows entities to use a modified or full retrospective transition method. Under the modified approach, entities will apply the guidance to all financial instruments that are outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. Under the full retrospective method, entities will apply the guidance to all outstanding financial instruments for each prior reporting period presented. The Company adopted this ASU on January 1, 2022 under the modified retrospective method of transition. Upon adoption, the Company recorded a $2.1 million cumulative-effect adjustment that increased the opening balance of retained earnings on the consolidated balance sheet, largely due to the reduction in non-cash interest expense associated with the historical separation of debt and equity components for the Company's convertible senior notes (the “Notes”) described in Note 11, Long-Term Debt. The Company also recorded an increase to long-term debt, net of $66.2 million, a net change in the deferred tax balance of $16.8 million, and a decrease to additional paid-in capital of $51.5 million due to no longer separating the embedded conversion feature of the Notes. Upon adoption, the Company's interest expense recognized has been reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. This adoption did not have a material impact on the consolidated statement of cash flows. Upon adoption, the Company prospectively utilized the
if-converted method to calculate the impact of convertible instruments on diluted earnings per share. For the three months ended March 31, 2022, shares used in computing diluted net income per share increased by 2.2 million shares due to the change from the treasury stock method to the if-converted method.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Subtopic 805), which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) rather than adjust them to fair value at the acquisition date. The Company plans to adopt this ASU on January 1, 2023. The Company is currently evaluating the related impact of the new guidance on its financial statements.
4. Revenue
The Company’s revenues consist of services and software and hardware sales. In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, revenues are recognized when control of services or goods are transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or goods.
Services Revenues
Services revenues are primarily comprised of professional services that include developing, implementing, automating and extending business processes, technology infrastructure, and software applications. The Company’s professional services span multiple industries, platforms and solutions; however, the Company has remained relatively diversified and does not believe that it has significant revenue concentration within any single industry, platform or solution.
Professional services revenues are recognized over time as services are rendered. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee or fixed fee percent complete basis. For time and material contracts, revenues are generally recognized and invoiced by multiplying the number of hours expended in the performance of the contract by the hourly rates. For fixed fee contracts, revenues are generally recognized and invoiced by multiplying the fixed rate per time period established in the contract by the number of time periods elapsed. For fixed fee percent complete contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours, and the client is invoiced according to the agreed-upon schedule detailing the amount and timing of payments in the contract.
Clients are typically billed monthly for services provided during that month but can be billed on a more or less frequent basis as determined by the contract. If the time is worked and approved at the end of a fiscal period and the invoice has not yet been sent to the client, the amount is recorded as revenue once the Company verifies all other revenue recognition criteria have been met, and the amount is classified as a receivable as the right to consideration is unconditional at that point. Amounts invoiced in excess of revenues recognized are contract liabilities, which are classified as deferred revenues in the Unaudited Condensed Consolidated Balance Sheet. The term between invoicing and payment due date is not significant. Contracts for professional services provide for a general right, to the client or the Company, 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. Certain contracts may include volume discounts or holdbacks, which are accounted for as variable consideration, but are not typically significant. The Company estimates variable consideration based on historical experience and forecasted sales and includes the variable consideration in the transaction price.
Other services revenues are comprised of hosting fees, partner referral fees, maintenance agreements, training and internally developed software-as-a-service (“SaaS”) sales. Revenues from hosting fees, maintenance agreements, training and internally developed SaaS sales are generally recognized over time using a time-based measure of progress as services are rendered. Partner referral fees are recorded at a point in time upon meeting specified requirements to earn the respective fee.
On many professional service projects, the Company is also 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 and are invoiced as the expenses are incurred. The Company structures its professional services arrangements to recover the cost of reimbursable expenses without a markup.
Software and Hardware Revenues
Software and hardware revenues are comprised of third-party software and hardware resales, in which the Company is considered the agent, and sales of internally developed software, in which the Company is considered the principal. Third-party software and hardware revenues are recognized and invoiced when the Company fulfills its obligation to arrange the sale, which occurs when the purchase order with the vendor is executed and the customer has access to the software or the hardware has been shipped to the customer. Internally developed software revenues are recognized and invoiced when control is transferred to the customer, which occurs when the software has been made available to the customer and the license term has commenced. Revenues from third-party software and hardware sales are recorded on a net basis, while revenues from internally developed software sales are recorded on a gross basis. There are no significant cancellation or termination-type provisions for the Company’s software and hardware sales, and the term between invoicing and payment due date is not significant.
Revenues are presented net of taxes assessed by governmental authorities. Sales taxes are generally collected and subsequently remitted on all software and hardware sales and certain services transactions as appropriate.
Arrangements with Multiple Performance Obligations
Arrangements with clients may contain multiple promises such as delivery of software, hardware, professional services or post-contract support services. These promises are accounted for as separate performance obligations if they are distinct. For arrangements with clients that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on estimated relative standalone selling price, which is estimated by the expected cost plus a margin approach, taking into consideration market conditions and competitive factors. Because contracts that contain multiple performance obligations are typically short term due to the contract cancellation provisions, the allocation of the transaction price to the separate performance obligations is not considered a significant estimate.
Contract Costs
In accordance with the terms of the Company’s sales commission plan, commissions are not earned until the related revenue is recognized. Therefore, sales commissions are expensed as they are earned. Certain sales incentives are accrued based on achievement of specified bookings goals. For these incentives, the Company applies the practical expedient that allows the Company to expense the incentives as incurred because the amortization period would have been one year or less.
Deferred Revenue
The Company’s deferred revenue balance as of March 31, 2022 and December 31, 2021 was $7.8 million and $8.2 million, respectively. During the three months ended March 31, 2022, $7.5 million was recognized in revenue that was included in the deferred revenue balance at the beginning of the period.
Transaction Price Allocated to Remaining Performance Obligations
Due to the ability of the client or the Company to cancel or terminate the contract within a given period of time (generally 10 to 30 days’ notice is required), the majority of the Company’s contracts have a term of less than one year. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original maturity date of one year or less or time and materials contracts for which the Company has the right to invoice for services performed. Revenue related to unsatisfied performance obligations for remaining contracts as of March 31, 2022 was immaterial.
Disaggregation of Revenue
The following tables present revenue disaggregated by revenue source and pattern of revenue recognition (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Over Time | | Point In Time | | Total Revenues | | Over Time | | Point In Time | | Total Revenues |
Time and materials contracts | $ | 171,629 | | | $ | — | | | $ | 171,629 | | | $ | 128,591 | | | $ | — | | | $ | 128,591 | |
Fixed fee percent complete contracts | 14,369 | | | — | | | 14,369 | | | 11,580 | | | — | | | 11,580 | |
Fixed fee contracts | 31,207 | | | — | | | 31,207 | | | 22,477 | | | — | | | 22,477 | |
Reimbursable expenses | 1,959 | | | — | | | 1,959 | | | 2,254 | | | — | | | 2,254 | |
Total professional services fees | 219,164 | | | — | | | 219,164 | | | 164,902 | | | — | | | 164,902 | |
Other services revenue* | 1,946 | | | 324 | | | 2,270 | | | 3,117 | | | 711 | | | 3,828 | |
Total services | 221,110 | | | 324 | | | 221,434 | | | 168,019 | | | 711 | | | 168,730 | |
Software and hardware | — | | | 677 | | | 677 | | | — | | | 611 | | | 611 | |
Total revenues | $ | 221,110 | | | $ | 1,001 | | | $ | 222,111 | | | $ | 168,019 | | | $ | 1,322 | | | $ | 169,341 | |
*Other services revenue primarily consists of hosting fees, maintenance, training, internally developed SaaS revenue and partner referral fees.
The following table presents revenue disaggregated by geographic area, as determined by the billing address of customers (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
United States | $ | 211,623 | | | $ | 165,808 | | | | | |
Other countries | 10,488 | | | 3,533 | | | | | |
Total revenues | $ | 222,111 | | | $ | 169,341 | | | | | |
5. Stock-Based Compensation
Stock-based compensation is accounted for in accordance with ASC Topic 718, Compensation – Stock Compensation. Under this guidance, the Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period, which is generally three years. The fair value of restricted stock awards is based on the value of the Company’s common stock on the date of the grant.
Stock Award Plans
The Company’s Second Amended and Restated 2012 Long Term Incentive Plan (as amended, the “Incentive Plan”) allows for the granting of various types of stock awards, not to exceed a total of 7.0 million shares, to eligible individuals. The Compensation Committee of the Board of Directors administers the Incentive Plan and determines the terms of all stock awards made under the Incentive Plan. As of March 31, 2022, there were 1.1 million shares of common stock available for issuance under the Incentive Plan.
Stock-based compensation cost recognized for the three months ended March 31, 2022 was $5.9 million, which included $1.1 million of expense for retirement savings plan contributions. The associated current and future income tax benefit recognized was $1.1 million for the three months ended March 31, 2022. Stock-based compensation cost recognized for the three months ended March 31, 2021 was $5.3 million, which included $0.9 million of expense for retirement savings plan contributions. The associated current and future income tax benefit recognized was $1.6 million for the three months ended March 31, 2021. As of March 31, 2022, there was $38.1 million of total unrecognized compensation cost related to non-vested share-based awards with a weighted-average remaining life of two years.
Restricted stock activity for the three months ended March 31, 2022 was as follows (shares in thousands):
| | | | | | | | | | | |
| Shares | | Weighted-Average Grant Date Fair Value |
Restricted stock awards outstanding at December 31, 2021 | 642 | | | $ | 55.34 | |
Awards granted | 151 | | | 98.67 | |
Awards vested | (206) | | | 41.53 | |
Awards forfeited | (7) | | | 61.19 | |
Restricted stock awards outstanding at March 31, 2022 | 580 | | | $ | 71.47 | |
6. Net Income per Share
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share information):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Net income, basic | $ | 27,136 | | | $ | 13,593 | | | | | |
Add back interest expense on convertible notes, net of tax (1) | 627 | | | — | | | | | |
Net income, diluted | $ | 27,763 | | | $ | 13,593 | | | | | |
| | | | | | | |
Basic: | | | | | | | |
Weighted-average shares of common stock outstanding | 33,843 | | | 31,864 | | | | | |
Shares used in computing basic net income per share | 33,843 | | | 31,864 | | | | | |
Effect of dilutive securities: | | | | | | | |
Restricted stock subject to vesting | 372 | | | 448 | | | | | |
Shares issuable for acquisition consideration (2) | 102 | | | 246 | | | | | |
Shares issuable for conversion of convertible senior notes (1) | 2,431 | | | 433 | | | | | |
Shares issuable for exercise of warrants | 91 | | | 24 | | | | | |
Shares used in computing diluted net income per share | 36,839 | | | 33,015 | | | | | |
| | | | | | | |
Basic net income per share | $ | 0.80 | | | $ | 0.43 | | | | | |
Diluted net income per share | $ | 0.75 | | | $ | 0.41 | | | | | |
(1)Upon adoption of ASU 2020-06 on January 1, 2022, the Company prospectively utilized the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. Prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method.
(2)For the three months ended March 31, 2022, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with Zeon Solutions Incorporated and certain related entities (collectively, “Zeon”); (ii) the Asset Purchase Agreement with Catalyst Networks, Inc. (“Brainjocks”); (iii) the Stock Purchase Agreement with the shareholders of Productora de Software S.A.S. (“PSL”); (iv) the Purchase Agreement with Talos (as defined in Note 9 - Business Combinations); and (v) the Stock Purchase Agreement with the shareholders of Izmul S.A. (“Overactive”), as part of the consideration. For the three months ended March 31, 2021, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with Zeon; (ii) the Asset Purchase Agreement with MedTouch LLC (“Medtouch”); (iii) the Asset Purchase Agreement with Brainjocks; and (iv) the Stock Purchase Agreement with PSL, as part of the consideration.
The number of anti-dilutive securities not included in the calculation of diluted net income per share were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Restricted stock subject to vesting | 80 | | | — | | | | | |
| | | | | | | |
Warrants related to the issuance of convertible senior notes | 1,980 | | | 4,451 | | | | | |
Total anti-dilutive securities | 2,060 | | | 4,451 | | | | | |
See Note 11, Long-term Debt for further information on the convertible senior notes and warrants related to the issuance of convertible notes.
The Company’s Board of Directors authorized the repurchase of up to $315.0 million of Company common stock through a stock repurchase program expiring December 31, 2022. 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 on August 11, 2008, the Company has repurchased approximately $261.3 million (16.1 million shares) of outstanding common stock through March 31, 2022.
7. Balance Sheet Components
| | | | | | | | | | | |
| March 31, 2022 (unaudited) | | December 31, 2021 |
Accounts receivable: | (in thousands) |
Billed accounts receivable, net | $ | 102,520 | | | $ | 120,892 | |
Unbilled revenues, net | 83,848 | | | 56,710 | |
Total | $ | 186,368 | | | $ | 177,602 | |
| | | | | | | | | | | |
Other current assets: | | | |
Miscellaneous receivables | $ | 1,397 | | | $ | 1,576 | |
Contractual commitment asset | 1,518 | | | 1,736 | |
Federal/state income tax receivable | 3,271 | | | 2,504 | |
Other current assets | 2,408 | | | 1,480 | |
Total | $ | 8,594 | | | $ | 7,296 | |
| | | | | | | | | | | |
Property and equipment: | | | |
Computer hardware (useful life of 3 years) | $ | 23,488 | | | $ | 21,382 | |
Software (useful life of 1 to 7 years) | 6,021 | | | 6,018 | |
Furniture and fixtures (useful life of 5 years) | 4,612 | | | 4,599 | |
Leasehold improvements (useful life of 5 years) | 7,951 | | | 7,850 | |
Less: Accumulated depreciation | (26,785) | | | (25,102) | |
Total | $ | 15,287 | | | $ | 14,747 | |
| | | | | | | | | | | |
Other non-current assets: | | | |
Non-current unbilled revenue | $ | 3,206 | | | $ | 3,210 | |
Company owned life insurance (“COLI”) asset | 10,391 | | | 10,807 | |
Long term deposits | 1,625 | | | 1,653 | |
Credit facility deferred finance fees, net | 584 | | | 619 | |
Other non-current assets | 6,095 | | | 5,629 | |
Deferred income taxes | 13,991 | | | 1,340 | |
Total | $ | 35,892 | | | $ | 23,258 | |
| | | | | | | | | | | |
Other current liabilities: | March 31, 2022 (unaudited) | | December 31, 2021 |
Estimated fair value of contingent consideration liability (Note 9) | $ | 20,666 | | | $ | 21,644 | |
Accrued variable compensation | 10,972 | | | 31,244 | |
Current operating lease liabilities | 11,507 | | | 11,543 | |
Payroll related costs | 9,765 | | | 9,523 | |
Deferred revenues | 7,847 | | | 8,167 | |
Other current liabilities | 5,487 | | | 5,648 | |
Accrued medical claims expense | 2,964 | | | 2,605 | |
Professional fees | 1,794 | | | 1,727 | |
Accrued IT expenses | 1,514 | | | 1,776 | |
Total | $ | 72,516 | | | $ | 93,877 | |
| | | | | | | | | | | |
Other non-current liabilities: | | | |
Deferred income taxes | $ | 14,317 | | | $ | 13,075 | |
Reserve for uncertain tax positions | 19,747 | | | 19,127 | |
Deferred compensation liability | 9,808 | | | 9,458 | |
Other non-current liabilities | 3,374 | | | 3,462 | |
Non-current software accrual | 2,734 | | | 2,710 | |
Total | $ | 49,980 | | | $ | 47,832 | |
8. Allowance for Credit Losses
In accordance with ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company evaluates its allowance based on expected losses rather than incurred losses, which is known as the current expected credit loss model. The allowance is determined using the loss rate approach and is measured on a collective (pool) basis when similar risk characteristics exist. Where financial instruments do not share risk characteristics, they are evaluated on an individual basis. The allowance is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
Activity in the allowance for credit losses is summarized as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| | | |
| | | |
Opening balance at January 1 | $ | 2,944 | | | $ | 1,065 | |
Charges to expense, net of recoveries | 314 | | | (10) | |
Other (1) | (67) | | | (65) | |
Balance at March 31 | $ | 3,191 | | | $ | 990 | |
(1) Other is primarily related to uncollected balances written off, business acquisitions, and currency translation adjustments.
9. Business Combinations
2021 Acquisitions
On September 8, 2021, the Company acquired substantially all of the assets of Talos LLC and Talos Digital LLC, each a Delaware limited liability company, and a wholly-owned subsidiary of the Company acquired all of the outstanding capital stock of Talos Digital SAS and TCOMM SAS, each a simplified stock company organized under the laws of the Republic of Colombia (collectively, “Talos”). Talos is a digital transformation consultancy based in Miami, Florida with nearshore delivery centers in Medellin, Colombia. The acquisition of Talos strengthens the Company’s global delivery capabilities, enhancing its nearshore systems and commerce and custom developed solutions customers. Talos added more than 180 professionals and strategic client relationships with customers across several industries. The Company's total allocable purchase price consideration was $27.7 million, net of cash acquired. The Company incurred approximately $1.1 million in transaction costs, which were expensed when incurred. The amount of goodwill deductible for tax purposes is $7.8 million.
On October 15, 2021, a wholly-owned subsidiary of the Company acquired Overactive pursuant to the terms of a Stock Purchase Agreement. Overactive is based in Montevideo, Uruguay with nearshore delivery centers in Colombia, Argentina, Uruguay, Chile and Puerto Rico. The acquisition of Overactive expanded the Company’s digital modernization solution services. Overactive added nearly 700 professionals and strategic client relationships with customers across several industries and expanded the Company’s operations in Latin America. The Company’s total allocable purchase price consideration was $110.1 million, net of cash acquired. The Company incurred approximately $2.5 million in transaction costs, which were expensed when incurred. The goodwill is non-deductible for tax purposes.
The acquisition date fair value of the consideration transferred for the 2021 acquisitions consisted of the following (in millions):
| | | | | | | | | | | | | | |
| Talos | | Overactive | |
Cash | $ | 14.9 | | | $ | 93.9 | | |
Company common stock issued at closing | 3.8 | | | 2.5 | | |
Contingent consideration (1) | 9.0 | | (2) | 12.6 | | (3) |
Net working capital adjustment due to the seller(s) | — | | | 1.1 | | |
Total allocable purchase price consideration | $ | 27.7 | | | $ | 110.1 | | |
(1)Represents the initial fair value estimate of additional revenue and earnings-based contingent consideration, which may be realized by the sellers 12 months after the applicable closing date of the acquisition.
(2)The maximum cash payout that may be realized by the sellers in the Talos acquisition is $10.6 million. As of March 31, 2022, the fair value of the contingent consideration was $8.0 million. The Company recorded a pre-tax adjustment to reduce the liability in “Adjustment to fair value of contingent consideration” on the Unaudited Condensed Consolidated Statements of Operations of $1.1 million during the three months ended March 31, 2022.
(3)The maximum cash payout that may be realized by the sellers in the Overactive acquisition is $14.4 million. As of March 31, 2022, the fair value of the contingent consideration was $12.7 million.
The Company has estimated the preliminary allocation of the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):
| | | | | | | | | | | |
| Talos | | Overactive |
Acquired tangible assets | $ | 2.3 | | | $ | 13.9 | |
Identified intangible assets | 8.1 | | | 35.0 | |
Liabilities assumed | (1.4) | | | (18.5) | |
Goodwill | 18.7 | | | 79.7 | |
Total purchase price | $ | 27.7 | | | $ | 110.1 | |
The following table presents details of the intangible assets acquired during the year ended December 31, 2021 (dollars in millions).
| | | | | | | | | | | | | | | | | |
| Weighted Average Useful Life | | Estimated Useful Life | | Aggregate acquisitions |
Customer relationships | 9 years | | 6 - 10 years | | $ | 39.0 | |
Customer backlog | 1 year | | 1 year | | 3.0 | |
Non-compete agreements | 5 years | | 5 years | | 0.4 | |
Trade name | 1 year | | 1 year | | 0.7 | |
Total acquired intangible assets | | | | | $ | 43.1 | |
The above purchase price accounting estimates for Talos and Overactive are pending finalization of certain acquired tangible and intangible assets, contingent consideration valuation, and a net working capital settlement that is subject to final adjustment as the Company evaluates information during the measurement period.
Pro-forma Results of Operations
The following presents the unaudited pro-forma combined results of operations of the Company with Overactive for the three months ended March 31, 2021, after giving effect to certain pro-forma adjustments and assuming Overactive was acquired as of the beginning of 2020. These unaudited pro-forma results include adjustments for Overactive from January 1, 2020 through March 31, 2021. Pro-forma results of operations have not been presented for Talos because the effect of this acquisition on the Company's consolidated financial statements was not material individually or in the aggregate.
These unaudited pro-forma results are presented in compliance with the adoption of ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, and are not necessarily indicative of the actual consolidated results of operations had the acquisition of Overactive actually occurred on January 1, 2020 or of future results of operations of the consolidated entities (in thousands except per share data):
| | | | | |
| Three Months Ended March 31, |
| 2021 |
Revenues | $ | 177,787 | |
Net income | $ | 12,622 | |
Basic net income per share | $ | 0.40 | |
Diluted net income per share | $ | 0.38 | |
Shares used in computing basic net income per share | 31,889 | |
Shares used in computing diluted net income per share | 33,040 | |
10. Goodwill and Intangible Assets
Goodwill represents the excess purchase price over the fair value of net assets acquired, or net liabilities assumed, in a business combination. In accordance with ASC Topic 350, Intangibles – Goodwill and Other, the Company performs an annual impairment review in the fourth quarter and more frequently if events or changes in circumstances indicate that goodwill might be impaired. There was no indication that goodwill became impaired for the three months ended March 31, 2022.
Other intangible assets include customer relationships, non-compete arrangements, trade names, customer backlog, and developed software, which are being amortized over the assets’ estimated useful lives using the straight-line method. Estimated useful lives range from less than one year to ten years. Amortization of customer relationships, non-compete arrangements, trade names, customer backlog, and developed software is considered an operating expense and is included in “Amortization” in the accompanying Unaudited Condensed Consolidated Statements of Operations. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in a lack of recoverability or revised useful life. There was no indication that other intangible assets became impaired for the three months ended March 31, 2022.
Goodwill
The changes in the carrying amount of goodwill for the three months ended March 31, 2022 are as follows (in thousands):
| | | | | |
Balance at December 31, 2021 | $ | 515,229 | |
Measurement period adjustments for acquisitions | (120) | |
Effect of foreign currency translation adjustments | 3,841 | |
Balance at March 31, 2022 | $ | 518,950 | |
Intangible Assets with Definite Lives
The following table presents a summary of the Company’s intangible assets that are subject to amortization (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Gross Carrying Amounts | | Accumulated Amortization | | Net Carrying Amounts | | Gross Carrying Amounts | | Accumulated Amortization | | Net Carrying Amounts |
Customer relationships | $ | 126,791 | | | $ | (56,175) | | | $ | 70,616 | | | $ | 125,433 | | | $ | (51,253) | | | $ | 74,180 | |
Non-compete agreements | 1,456 | | | (812) | | | 644 | | | 1,444 | | | (736) | | | 708 | |
Customer backlog | 3,053 | | | (1,514) | | | 1,539 | | | 3,025 | | | (741) | | | 2,284 | |
Trade name | 687 | | | (327) | | | 360 | | | 683 | | | (155) | | | 528 | |
Developed software | 7,101 | | | (3,733) | | | 3,368 | | | 6,982 | | | (3,405) | | | 3,577 | |
Total | $ | 139,088 | | | $ | (62,561) | | | $ | 76,527 | | | $ | 137,567 | | | $ | (56,290) | | | $ | 81,277 | |
The estimated useful lives of identifiable intangible assets are as follows:
| | | | | |
Customer relationships | 5 - 10 years |
Non-compete agreements | 4 - 5 years |
Customer backlog | 1 year |
Trade name | 1 year |
Developed software | 1 - 7 years |
Estimated annual amortization expense for the next five years ended December 31 and thereafter is as follows: (in thousands):
| | | | | |
2022 remaining | $ | 17,010 | |
2023 | $ | 14,274 | |
2024 | $ | 12,173 | |
2025 | $ | 8,928 | |
2026 | $ | 6,556 | |
Thereafter | $ | 17,586 | |
11. Long-term Debt
Revolving Credit Facility
On May 7, 2021, the Company entered into an Amended and Restated Credit Agreement (the “2021 Credit Agreement”) with Wells 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 of May 7, 2026. As of March 31, 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 for the the twelve months ended December 31, 2021. The Company did not incur any additional deferred finance fees during the three months ended March 31, 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 of March 31, 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 (3.50% on March 31, 2022) plus a margin ranging from 0.00% to 1.00% or one month LIBOR (0.45% on March 31, 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 of March 31, 2022, the Company had $199.8 million of unused borrowing capacity.
The Company is required to comply with various financial covenants under the 2021 Credit Agreement. Specifically, the Company is required to maintain a ratio of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) plus stock compensation to interest expense for the previous four consecutive fiscal quarters of not less than 3.50 to 1.00, a ratio of indebtedness less the sum of all unsecured indebtedness, on a consolidated basis and without duplication, less all unrestricted cash and cash equivalents not to exceed $50,000,000 to EBITDA plus stock compensation of not more than 2.50 to 1.00, and a ratio of indebtedness less all unrestricted cash and cash equivalents not to exceed $50,000,000 to EBITDA plus stock compensation (“Consolidated Total Net Leverage Ratio”) of not more than 5.00 to 1.00. Additionally, the 2021 Credit Agreement currently restricts the payment of dividends that would result in a pro-forma Consolidated Total Net Leverage Ratio of more than 3.50 to 1.00.
At March 31, 2022, the Company was in compliance with all covenants under the 2021 Credit Agreement.
Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
The Company adopted ASU 2020-06 on January 1, 2022 under the modified retrospective method applied to Notes outstanding as of January 1, 2022 and has not changed previously disclosed amounts or provided additional disclosures for comparative periods. Under ASU 2020-06, convertible instruments with embedded conversion features, that are not required to be accounted for as a derivative or that do not result in a substantial premium, are no longer required to be separated from the host contract thereby eliminating the cash conversion feature model. Instead, these convertible debt instruments will be accounted for as a single liability measured at amortized cost under the traditional convertible debt accounting model.
Convertible Senior Notes due 2026
On November 9, 2021, the Company issued $380.0 million aggregate principal amount of the 0.125% Convertible Senior Notes Due 2026 (the “2026 Notes”) in a private placement to qualified institutional buyers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the offerings, after deducting the initial purchasers’ discount and issuance costs of $10.7 million, were $369.3 million. The Company used (i) $311.5 million of the net proceeds and 1,640,152 shares of the Company’s common stock to partially repurchase the 2025 Notes (as defined and described below), and (ii) $42.7 million of the net proceeds to fund the cost of entering into the 2026 Notes Hedges (as defined and described below), after such cost was partially offset by the proceeds that the Company received from entering into the 2026 Notes Warrants (as defined and described below). The remaining proceeds of $15.1 million were used for working capital or other general corporate purposes.
The 2026 Notes bear interest at a rate of 0.125% per year. Interest is payable in cash on May 15 and November 15 of each year, with the first payment to be made on May 15, 2022. The 2026 Notes mature on November 15, 2026 unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. The initial conversion rate is 5.2100 shares of the Company’s common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $191.94 per share of common stock. After consideration of the 2026 Notes Hedges and 2026 Notes Warrants, the conversion rate is effectively hedged to a price of $295.29 per share of common stock. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the 2026 Notes (the “2026 Indenture”). The Company may settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate(s). If a “make-whole fundamental change” (as defined in the 2026 Indenture) occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. The Company’s intent is to settle the principal amount of the 2026 Notes in cash upon conversion.
In accordance with accounting for debt with conversions and other options prior to the adoption of ASU 2020-06, the Company initially bifurcated the principal amount of the 2026 Notes into liability and equity components. The initial liability component of the 2026 Notes was valued at $313.8 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 4.0%. This rate was based on the Company’s estimated rate for a similar liability with the same maturity but without the conversion option. The equity component representing the conversion option and calculated as the residual amount of the proceeds was recorded as an increase in additional paid-in capital within stockholders’ equity of $66.2 million, partially offset by the associated deferred tax effect of
$16.9 million. Prior to the adoption of ASU 2020-06, the resulting debt discount of $66.2 million was amortized to interest expense using the effective interest method with an effective interest rate of 4.0% over the period from the issuance date through the contractual maturity date of November 15, 2026.
Issuance costs totaling $10.7 million were initially allocated pro rata based on the relative fair values of the liability and equity components. Issuance costs of $8.8 million attributable to the liability component were recorded as a direct deduction from the carrying value of the 2026 Notes and were amortized to interest expense using the effective interest method over the term of the 2026 Notes. Issuance costs of $1.9 million attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders’ equity, partially offset by the associated deferred tax effect of $0.5 million.
The Company adopted ASU 2020-06 on January 1, 2022 under the modified retrospective method of transition. Upon adoption, the Company recorded a $1.2 million cumulative-effect adjustment that increased the opening balance of retained earnings on the consolidated balance sheet, largely due to the reduction in non-cash interest expense associated with the historical separation of debt and equity components for the 2026 Notes. The Company also recorded an increase to long-term debt, net of $62.6 million, a net change in the deferred tax balance of $15.9 million, and a decrease to additional paid-in capital of $47.9 million due to no longer separating the embedded conversion feature of the 2026 Notes.
Convertible Senior Notes due 2025
On August 14, 2020, the Company issued $230.0 million aggregate principal amount of 1.250% Convertible Senior Notes Due 2025 (the “2025 Notes”) in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act. The net proceeds from the offerings, after deducting the initial purchasers’ discount and issuance costs of $7.3 million, were $222.7 million. The Company used (i) $172.0 million of the net proceeds to partially repurchase the 2023 Notes (as defined and described below), and (ii) $26.7 million of the net proceeds to fund the cost of entering into the 2025 Notes Hedges (as defined and described below), after such cost was partially offset by the proceeds that the Company received from entering into the 2025 Notes Warrants (as defined and described below). The remaining proceeds of $24.0 million were used for working capital or other general corporate purposes.
The 2025 Notes bear interest at a rate of 1.250% per year. Interest is payable in cash on February 1 and August 1 of each year. The 2025 Notes mature on August 1, 2025 unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. The initial conversion rate is 19.3538 shares of the Company’s common stock per $1,000 principal amount of 2025 Notes, which is equivalent to an initial conversion price of approximately $51.67 per share of common stock. After consideration of the 2025 Notes Hedges and 2025 Notes Warrants, the conversion rate is effectively hedged to a price of $81.05 per share of common stock. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the 2025 Notes (the “2025 Indenture”). The Company may settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate(s). If a “make-whole fundamental change” (as defined in the 2025 Indenture) occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. The Company’s intent is to settle the principal amount of the 2025 Notes in cash upon conversion.
In accordance with accounting for debt with conversions and other options prior to the adoption of ASU 2020-06, the Company initially bifurcated the principal amount of the 2025 Notes into liability and equity components. The initial liability component of the 2025 Notes was valued at $181.1 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 6.3%. The equity component representing the conversion option and calculated as the residual amount of the proceeds was recorded as an increase in additional paid-in capital within stockholders’ equity of $48.9 million, partially offset by the associated deferred tax effect of $12.6 million. Prior to the adoption of ASU 2020-06, the resulting debt discount of $48.9 million was amortized to interest expense using the effective interest method with an effective interest rate of 6.3% over the period from the issuance date through the contractual maturity date of August 1, 2025.
Issuance costs totaling $7.3 million were initially allocated pro rata based on the relative fair values of the liability and equity components. Issuance costs of $5.7 million attributable to the liability component were recorded as a direct deduction from the carrying value of the 2025 Notes and were amortized to interest expense using the effective interest method over the term of the 2025 Notes. Issuance costs of $1.6 million attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders’ equity, partially offset by the associated deferred tax effect of $0.4 million.
In November and December 2021, the Company repurchased a portion of the outstanding 2025 Notes through individual, privately negotiated transactions (the “2025 Notes Partial Repurchase”), leaving 2025 Notes with aggregate
principal amount of $23.3 million outstanding as of December 31, 2021. The Company used $311.5 million of the net proceeds from the 2026 Notes issuance in November 2021, 1,640,152 shares of the Company’s common stock, and $44.0 million of additional cash in December 2021 to complete the 2025 Notes Partial Repurchase, of which a total of $197.4 million and $400.5 million were allocated to the liability and equity components of the 2025 Notes, respectively, and $0.7 million was related to the payment of interest. The amount allocated to equity was partially offset by the associated deferred tax effect of $2.0 million. The consideration allocated to the liability component was based on the fair value of the liability component utilizing an effective discount rate of approximately 3.5%. This rate was based on the Company’s estimated rate for a similar liability with the same maturity, but without the conversion option. The consideration allocated to the equity component was calculated by deducting the fair value of the liability component from the aggregate consideration, excluding interest. The Company subsequently compared the allocated consideration with the carrying value of the liability component to record a loss on extinguishment of $21.9 million, which included the proportionate amounts of unamortized debt discount and the remaining unamortized debt issuance costs of $3.8 million. A $6.8 million inducement charge representing the difference between the fair value of the consideration delivered to the holders of the repurchased 2025 Notes and the fair value of the consideration issuable under the original conversion terms was included in “Loss on extinguishment of debt” in the Consolidated Statements of Operations during the year ended December 31, 2021.
Upon adoption of ASU 2020-06 under the modified retrospective method of transition, the Company recorded a $0.9 million cumulative-effect adjustment that increased the opening balance of retained earnings on the consolidated balance sheet, largely due to the reduction in non-cash interest expense associated with the historical separation of debt and equity components for the 2025 Notes. The Company also recorded an increase to long-term debt, net of $3.6 million, a net change in the deferred tax balance of $0.9 million, and a decrease to additional paid-in capital of $3.6 million due to no longer separating the embedded conversion feature of the 2025 Notes.
Convertible Senior Notes due 2023
On September 11, 2018, the Company issued $143.8 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2023 (the “2023 Notes”) in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act. The net proceeds from the offerings, after deducting the initial purchasers’ discount and issuance costs of $4.4 million, were $139.4 million.
In August and November 2020, the Company repurchased a portion of the outstanding 2023 Notes through individual, privately negotiated transactions (the “2023 Notes Partial Repurchase”), leaving 2023 Notes with aggregate principal amount of $5.1 million outstanding as of December 31, 2020. The Company used $172.0 million of the net proceeds from the 2025 Notes issuance in August 2020 and $9.7 million of additional cash in November 2020 to complete the 2023 Notes Partial Repurchase, of which a total of $127.7 million and $52.7 million were allocated to the liability and equity components of the 2023 Notes, respectively, and $1.3 million was related to the payment of interest. The cash consideration allocated to the liability component was based on the fair value of the liability component utilizing an effective discount rate of approximately 5.0%. This rate was based on the Company’s estimated rate for a similar liability with the same maturity, but without the conversion option. The cash consideration allocated to the equity component was calculated by deducting the fair value of the liability component and interest payment from the aggregate cash consideration. The $4.5 million loss on extinguishment was subsequently determined by comparing the allocated cash consideration with the carrying value of the liability component, which includes the proportionate amounts of unamortized debt discount and the remaining unamortized debt issuance costs of $2.4 million.
In August 2021, the Company repurchased the remainder of the outstanding 2023 Notes through individual, privately negotiated transactions (the “Final 2023 Notes Repurchase”). The Company used $13.9 million of cash to complete the Final 2023 Notes Repurchase, of which $4.9 million and $