10-Q 1 prgs-20220228.htm 10-Q prgs-20220228
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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 February 28, 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: 0-19417
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware 04-2746201
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices) (Zip code)

(781280-4000
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per sharePRGSThe Nasdaq Stock Market LLC
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.
Large accelerated filer 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 March 29, 2022, there were 43,766,260 shares of the registrant’s common stock, $.01 par value per share, outstanding.



PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2022
TABLE OF CONTENTS
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets
(In thousands, except share data)February 28, 2022November 30, 2021
Assets
Current assets:
Cash and cash equivalents$171,666 $155,406 
Short-term investments1,656 1,967 
Total cash, cash equivalents and short-term investments173,322 157,373 
Accounts receivable (less allowances of $748 and $634, respectively)
86,601 99,815 
Unbilled receivables and contract assets27,043 25,816 
Other current assets40,401 39,549 
Assets held for sale15,255 15,255 
Total current assets342,622 337,808 
Long-term unbilled receivables and contract assets16,233 17,464 
Property and equipment, net13,933 14,345 
Intangible assets, net271,290 287,185 
Goodwill673,036 671,152 
Right-of-use lease assets23,604 25,253 
Deferred tax assets3,795 1,415 
Other assets8,603 8,915 
Total assets$1,353,116 $1,363,537 
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt, net$6,234 $25,767 
Accounts payable8,041 9,683 
Accrued compensation and related taxes24,889 47,116 
Dividends payable to stockholders8,062 7,925 
Short-term operating lease liabilities8,075 7,926 
Other accrued liabilities18,658 19,491 
Short-term deferred revenue209,771 205,021 
Total current liabilities283,730 322,929 
Long-term debt, net263,896 239,992 
Convertible senior notes, net351,038 294,535 
Long-term operating lease liabilities21,230 23,130 
Long-term deferred revenue51,771 47,359 
Deferred tax liabilities5,931 14,163 
Other noncurrent liabilities7,197 8,940 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; authorized, 10,000,000 shares; issued, none
  
Common stock, $0.01 par value, and additional paid-in capital; authorized, 200,000,000 shares; issued and outstanding, 43,766,260 shares in 2022 and 44,146,193 shares in 2021
438 441 
Additional paid-in capital303,240 354,235 
Retained earnings93,661 90,256 
Accumulated other comprehensive loss(29,016)(32,443)
Total stockholders’ equity368,323 412,489 
Total liabilities and stockholders’ equity$1,353,116 $1,363,537 
See notes to unaudited condensed consolidated financial statements.
3


Condensed Consolidated Statements of Operations
 
 Three Months Ended
(In thousands, except per share data)February 28, 2022February 28, 2021
Revenue:
Software licenses$42,750 $33,317 
Maintenance and services102,172 87,963 
Total revenue144,922 121,280 
Costs of revenue:
Cost of software licenses2,609 1,151 
Cost of maintenance and services15,145 13,319 
Amortization of acquired intangibles5,458 3,521 
Total costs of revenue23,212 17,991 
Gross profit121,710 103,289 
Operating expenses:
Sales and marketing33,469 29,469 
Product development28,673 24,548 
General and administrative16,991 13,424 
Amortization of acquired intangibles11,722 6,879 
Restructuring expenses511 1,157 
Acquisition-related expenses912 396 
Total operating expenses92,278 75,873 
Income from operations29,432 27,416 
Other (expense) income:
Interest expense(3,703)(2,514)
Interest income and other, net589 119 
Foreign currency loss, net(366)(257)
Total other expense, net(3,480)(2,652)
Income before income taxes25,952 24,764 
Provision for income taxes5,498 5,803 
Net income$20,454 $18,961 
Earnings per share:
Basic$0.47 $0.43 
Diluted$0.46 $0.42 
Weighted average shares outstanding:
Basic43,981 44,108 
Diluted44,708 44,652 
Cash dividends declared per common share$0.175 $0.175 
See notes to unaudited condensed consolidated financial statements.
4


Condensed Consolidated Statements of Comprehensive Income
Three Months Ended
(In thousands)February 28, 2022February 28, 2021
Net income$20,454 $18,961 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments1,781 1,225 
Unrealized gain on hedging activity, net of tax provision of $522 and $271 for the first quarter of 2022 and 2021, respectively
1,653 837 
Unrealized (loss) gain on investments, net of tax benefit of $3 and $42 for the first quarter of 2022 and 2021, respectively
(7)14 
Total other comprehensive income, net of tax3,427 2,076 
Comprehensive income$23,881 $21,037 

See notes to unaudited condensed consolidated financial statements.

5


Condensed Consolidated Statements of Stockholders’ Equity
 
Three Months Ended February 28, 2022
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders' Equity
(in thousands)Number of SharesAmount
Balance, December 1, 202144,146 $441 $354,235 $90,256 $(32,443)$412,489 
Cumulative effect of adoption of ASU 2020-06— — (47,456)4,893 — (42,563)
Issuance of stock under employee stock purchase plan63 1 1,826 — — 1,827 
Exercise of stock options19 — 635 — — 635 
Vesting of restricted stock units and release of deferred stock units90 1 (1)— —  
Withholding tax payments related to net issuance of RSUs— — (3,139)— — (3,139)
Stock-based compensation— — 8,114 — — 8,114 
Dividends declared— — — (7,921)— (7,921)
Treasury stock repurchases and retirements(552)(5)(10,974)(14,021)— (25,000)
Net income— — — 20,454 — 20,454 
Other comprehensive income— — — — 3,427 3,427 
Balance, February 28, 202243,766 $438 $303,240 $93,661 $(29,016)$368,323 

Three Months Ended February 28, 2021
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders' Equity
(in thousands)Number of SharesAmount
Balance, December 1, 202044,241 $442 $305,802 $72,547 $(32,778)$346,013 
Issuance of stock under employee stock purchase plan56 1 1,544 — — 1,545 
Exercise of stock options28 — 917 — — 917 
Vesting of restricted stock units and release of deferred stock units28 — — — —  
Withholding tax payments related to net issuance of RSUs— — (892)— — (892)
Stock-based compensation— — 6,784 — — 6,784 
Dividends declared— — — (7,851)— (7,851)
Treasury stock repurchases and retirements(353)(3)(2,458)(12,539)— (15,000)
Net income— — — 18,961 — 18,961 
Other comprehensive income— — — — 2,076 2,076 
Balance, February 28, 202144,000 $440 $311,697 $71,118 $(30,702)$352,553 


6


Condensed Consolidated Statements of Cash Flows
 
 Three Months Ended
(In thousands)February 28, 2022February 28, 2021
Cash flows from operating activities:
Net income$20,454 $18,961 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment1,207 1,315 
Amortization of acquired intangibles and other17,486 10,547 
Amortization of debt discount and issuance costs on Notes525  
Stock-based compensation8,114 6,784 
Non-cash lease expense2,075 2,138 
Loss on disposal of property and equipment4 3 
Deferred income taxes2,218 656 
Allowances for bad debt and sales credits145 (382)
Changes in operating assets and liabilities:
Accounts receivable13,192 10,841 
Other assets(1,081)215 
Inventories418  
Accounts payable and accrued liabilities(27,448)(17,762)
Lease liabilities(2,146)(2,258)
Income taxes payable3 (1,469)
Deferred revenue8,927 15,099 
Net cash flows from operating activities44,093 44,688 
Cash flows from (used in) investing activities:
Sales and maturities of investments300 1,300 
Purchases of property and equipment(831)(1,166)
Decrease in escrow receivable and other 2,130 
Net cash flows (used in) from investing activities(531)2,264 
Cash flows from (used in) financing activities:
Proceeds from stock-based compensation plans4,094 3,485 
Payments for taxes related to net share settlements of equity awards(3,139)(892)
Repurchases of common stock(25,000)(15,000)
Dividend payments to stockholders(7,784)(7,854)
Proceeds from the issuance of debt7,474  
Payment of principal on long-term debt(1,719)(18,763)
Payment of debt issuance costs(1,957) 
Net cash flows used in financing activities(28,031)(39,024)
Effect of exchange rate changes on cash729 1,780 
Net increase in cash and cash equivalents16,260 9,708 
Cash and cash equivalents, beginning of period155,406 97,990 
Cash and cash equivalents, end of period$171,666 $107,698 
7


Condensed Consolidated Statements of Cash Flows, continued
Three Months Ended
February 28, 2022February 28, 2021
Supplemental disclosure:
Cash paid for income taxes, net of refunds of $307 in 2022 and $434 in 2021
$2,389 $3,703 
Cash paid for interest$1,432 $2,283 
Non-cash investing and financing activities:
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested$7,346 $2,088 
Dividends declared$8,062 $7,901 
See notes to unaudited condensed consolidated financial statements.
8


Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

Company Overview - Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") is dedicated to propelling business forward in a technology-driven world. Progress helps businesses drive faster cycles of innovation, fuel momentum and accelerate their path to success. As the trusted provider of the leading products to develop, deploy and manage high-impact applications, Progress enables customers to develop the applications and experiences the need, deploy where and how they want and manage it all safely and securely. Hundreds of thousands of enterprises, including 1,700 software companies and 3.5 million developers depend on Progress to achieve their goals—with confidence.

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, 2021, as amended by Form 10-K/A filed on March 30, 2022 (together, the "2021 10-K").

We made no material changes in the application of our significant accounting policies that were disclosed in our 2021 10-K. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our 2021 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.

9


Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements
Income Taxes

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 updates specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The Company adopted this standard effective December 1, 2021. The adoption of this standard did not have a material effect on the Company's condensed consolidated financial position and results of operations.

Convertible Debt

On December 1, 2021, we early adopted Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06") on a modified retrospective basis. Under ASU 2020-06, we no longer separate the convertible senior notes into liability and equity components. We recognized the cumulative effect of initially applying this new standard as of December 1, 2021 as an adjustment to the December 1, 2021 opening balance of retained earnings. The conversion option that was previously accounted for in equity under the cash conversion model was recombined into the convertible debt outstanding, and as a result, additional paid in capital and the related unamortized debt discount on the convertible senior notes were reduced. The removal of the remaining debt discount recorded for this previous separation has the effect of increasing our net debt balance. We recorded a $47.5 million decrease to additional paid-in capital, a $56.0 million decrease to debt discount, a $4.9 million increase to retained earnings, and a $13.4 million decrease to long-term deferred tax liabilities. There was no impact to the Company’s statements of cash flows as the result of the adoption of ASU 2020-06. The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. See "Note 8: Debt" for additional information regarding the terms of the Convertible Senior Notes (the "Notes").

The new standard requires the use of the "if-converted" method to calculate the diluted earnings per common share. Refer to Note 16: Earnings Per Share for effect of the convertible notes on diluted earnings per common share.

Note 2: Cash, Cash Equivalents and Investments

A summary of our cash, cash equivalents and available-for-sale investments at February 28, 2022 is as follows (in thousands):
 
Amortized Cost BasisUnrealized GainsUnrealized LossesFair Value
Cash$146,323 $— $— $146,323 
Money market funds25,343 — — 25,343 
U.S. treasury bonds749 4  753 
Corporate bonds901 2  903 
Total$173,316 $6 $ $173,322 

A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2021 is as follows (in thousands):
 
Amortized Cost BasisUnrealized GainsUnrealized LossesFair Value
Cash$130,371 $— $— $130,371 
Money market funds25,035 — — 25,035 
U.S. treasury bonds748 9  757 
Corporate bonds1,203 7  1,210 
Total$157,357 $16 $ $157,373 

10


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 February 28, 2022November 30, 2021
 Cash and EquivalentsShort-Term InvestmentsCash and EquivalentsShort-Term Investments
Cash$146,323 $— $130,371 $— 
Money market funds25,343 — 25,035 — 
U.S. treasury bonds— 753 — 757 
Corporate bonds— 903 — 1,210 
Total$171,666 $1,656 $155,406 $1,967 

The fair value of debt securities by contractual maturity due in one year or less was $1.7 million and $2.0 million as of February 28, 2022 and November 30, 2021, respectively. There were no debt securities by contractual maturity due after one year as of February 28, 2022 or November 30, 2021.
 
We did not hold any investments with continuous unrealized losses as of February 28, 2022 or November 30, 2021.

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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. On January 25, 2022, we amended our prior credit facility (see Note 8: Debt). We reassessed the hedge in connection with the debt amendment and determined that it is still highly effective. As of February 28, 2022, the fair value of the hedge was a loss of $0.9 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):
 February 28, 2022November 30, 2021
 Notional ValueFair ValueNotional ValueFair Value
Interest rate swap contracts designated as cash flow hedges$130,313 $(903)$133,125 $(3,078)

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 3 years from the date the contract was entered. At February 28, 2022, $0.1 million and $0.4 million was recorded in noncurrent assets and current liabilities on our condensed consolidated balance sheets. At November 30, 2021, $0.3 million and $0.1 million were recorded in other noncurrent liabilities and other accrued liabilities, respectively, on our condensed consolidated balance sheets.

In the three months ended February 28, 2022 and February 28, 2021, realized and unrealized gains of $0.3 million and $1.7 million, respectively, from our forward contracts were recognized in foreign currency loss, net, on our condensed consolidated statements of operations. These gains were substantially offset by realized and unrealized losses in the offsetting positions.

The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
 
 February 28, 2022November 30, 2021
 Notional ValueFair ValueNotional ValueFair Value
Forward contracts to sell U.S. dollars$87,147 $(319)$79,777 $(371)
Forward contracts to purchase U.S. dollars28  119 (1)
Total$87,175 $(319)$79,896 $(372)

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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 February 28, 2022 (in thousands):
 
  Fair Value Measurements Using
 Total Fair ValueLevel 1Level 2Level 3
Assets
Money market funds$25,343 $25,343 $ $ 
U.S. treasury bonds753  753  
Corporate bonds903  903  
Liabilities
Foreign exchange derivatives(319) (319) 
Interest rate swap$(903)$ $(903)$ 

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2021 (in thousands):
 
  Fair Value Measurements Using
 Total Fair ValueLevel 1Level 2Level 3
Assets
Money market funds$25,035 $25,035 $ $ 
U.S. treasury bonds757  757  
Corporate bonds1,210  1,210  
Liabilities
Foreign exchange derivatives(372) (372) 
Interest rate swap$(3,078)$ $(3,078)$ 

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 Notes’ fair value, inclusive of the conversion feature embedded in the Notes, was $356.0 million as of February 28, 2022. 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 8: Debt for additional information.

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Note 5: Inventories

The components of inventories were as follows (in thousands):

February 28, 2022November 30, 2021
Raw materials$1,192 $1,920 
Work in process  
Finished goods1,979 1,631 
Total$3,171 $3,551 

At February 28, 2022 and November 30, 2021, the inventories balances of $3.2 million and $3.6 million were recorded in other current assets on the condensed consolidated balance sheets.

Note 6: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):
 
February 28, 2022November 30, 2021
 Gross Carrying AmountAccumulated AmortizationNet Book ValueGross Carrying AmountAccumulated AmortizationNet Book Value
Purchased technology$212,700 $(134,257)$78,443 $212,700 $(128,797)$83,903 
Customer-related306,308 (128,519)177,789 306,308 (119,357)186,951 
Trademarks and trade names37,611 (22,664)14,947 37,611 (21,556)16,055 
Non-compete agreement2,000 (1,889)111 2,000 (1,724)276 
Total$558,619 $(287,329)$271,290 $558,619 $(271,434)$287,185 

In the first quarter of fiscal years 2022 and 2021, amortization expense related to intangible assets was $17.2 million and $10.4 million, respectively.

Future amortization expense for intangible assets as of February 28, 2022, is as follows (in thousands):
 
Remainder of 2022$52,019 
202368,895 
202456,079 
202545,569 
202635,877 
Thereafter12,851 
Total$271,290 

Goodwill

Changes in the carrying amount of goodwill in the three months ended February 28, 2022 are as follows (in thousands):

Balance, November 30, 2021$671,152 
Measurement period adjustments1,886 
Translation adjustments(2)
Balance, February 28, 2022$673,036 

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Note 7: Business Combinations

Kemp Acquisition

On November 1, 2021, we completed the acquisition of the parent company of Kemp Technologies, Inc. (“Kemp”) pursuant to the Stock Purchase Agreement (the “Purchase Agreement”), dated as of September 23, 2021. The acquisition was completed for a base purchase price of $258.0 million, subject to certain customary adjustments as further described in the Purchase Agreement (the “Aggregate Consideration”), which was paid in cash from existing cash balances. Pursuant to the Purchase Agreement, $2.0 million of the Aggregate Consideration was deposited into an escrow account to secure certain potential obligations of the former Kemp equity holders.

Kemp is an application experience company that helps enterprises deliver, optimize and secure applications and networks across any cloud or hybrid environment. With this acquisition, we extended our portfolio of industry-leading products in DevOps/DevSecOps, Application Development, Data Connectivity and Digital Experience, adding Application Experience Management (AX). Kemp Loadmaster and Flowmon Network Visibility products monitor application performance, and distribute and balance traffic and workloads across servers, in the cloud or on premise, ensuring high performance and availability.

The Aggregate Consideration has been preliminarily allocated to Kemp’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as we obtain additional information for those estimates during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.

We recorded measurement period adjustments based on our ongoing valuation and purchase price allocation procedures. We are still finalizing the valuation and purchase price allocation as it relates to the net working capital amount in the table below.

The allocation of the purchase price is as follows (in thousands):

Initial Purchase Price AllocationMeasurement Period AdjustmentsAdjusted Purchase Price AllocationLife
Net working capital$27,075 $(772)$26,303 
Property, plant and equipment803 (8)795 
Purchased technology39,400 — 39,400 5 years
Trade name7,200 — 7,200 5 years
Customer relationships75,500 — 75,500 5 years
Other assets170 27 197 
Other noncurrent liabilities(604)(1,133)(1,737)
Deferred taxes(23,187)— (23,187)
Deferred revenue(29,997)— (29,997)
Goodwill179,521 1,886 181,407 
Net assets acquired$275,881 $ $275,881 

The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition, technology obsolescence, and revenue growth projections. Based on the preliminary valuation, the acquired intangible assets are comprised of customer relationships of approximately $75.5 million, existing technology of approximately $39.4 million, and trade names of approximately $7.2 million.

Tangible assets acquired and assumed liabilities were recorded at fair value. As described in Note 1: Nature of Business and Summary of Significant Accounting Policies, we adopted ASU 2021-08, which amended ASC 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. We determined the acquisition date deferred revenue balance based on our assessment of the individual contracts acquired and our application
15


of Topic 606. A significant portion of the deferred revenue is expected to be recognized in the 12 months following the acquisition.

We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $181.4 million of goodwill, which is not deductible for tax purposes.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred but are required to be expensed as incurred. During the three months ended February 28, 2022, we incurred approximately $0.4 million of acquisition-related costs, which are included in acquisition-related expenses on our consolidated statement of operations.

We determined that disclosing the amount of Kemp related earnings included in the consolidated statements of operations is impracticable, as certain operations of Kemp were integrated into the operations of the Company from the date of acquisition.

Pro Forma Information

The following pro forma financial information presents the combined results of operations of Progress and Kemp as if the acquisition had occurred on December 1, 2019, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Kemp acquisition and factually supportable. These pro forma adjustments include: (i) an increase in revenue from Kemp as a result of the application of Topic 606 to recognize and measure contract assets and contract liabilities in the business combination, (ii) a net increase in amortization expense to record amortization expense relating to the $122.1 million of acquired identifiable intangible assets, (iii) a decrease in interest expense to remove the interest expense associated with Kemp’s debt obligations, and (iv) the income tax effect of the adjustments made at the statutory tax rate of the U.S. (approximately 24.5%).

The pro forma financial information does not reflect any adjustments for anticipated expense savings resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on December 1, 2019. These results are prepared in accordance with ASC 606.

(in thousands, except per share data)Pro Forma Three Months Ended February 28, 2021
Revenue$135,522 
Net income$17,178 
Net income per basic share$0.39 
Net income per diluted share$0.38 

Chef Acquisition

On October 5, 2020, we completed the acquisition of Chef Software Inc. (“Chef”) pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 4, 2020. The acquisition was completed for a base purchase price of $220.0 million, subject to certain customary adjustments as further described in the Merger Agreement (the “Aggregate Consideration”), which was paid in cash. Pursuant to the Merger Agreement, $12.0 million of the Aggregate Consideration was deposited into an escrow account to secure certain indemnification and other potential obligations of the former Chef equity holders.

Chef is a global leader in DevOps and DevSecOps, providing complete infrastructure automation to build, deploy, manage and secure applications in modern multi-cloud and hybrid environments, as well as on-premises. Chef has enhanced our position as a trusted provider of the leading products to develop, deploy and manage high-impact business applications by providing industry-leading compliance and application automation products for multi-cloud and on-prem infrastructure. The acquisition bolstered our core offerings, enabling customers to respond faster to business demands and improve efficiency. We funded the acquisition through a combination of existing cash resources and by drawing down $98.5 million from our then-existing revolving credit facility (Note 8).

16


The Aggregate Consideration has been allocated to Chef’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.

We recorded measurement period adjustments in accordance with FASB’s guidance regarding business combinations in the third and fourth quarters of fiscal year 2021 based on our valuation and purchase price allocation procedures. The measurement period adjustments were completed during the fourth quarter of fiscal year 2021.

The allocation of the purchase price is as follows (in thousands):
Initial Purchase Price AllocationMeasurement Period AdjustmentsFinal Purchase Price AllocationLife
Net working capital$52,330 $147 $52,477 
Property, plant and equipment498 — 498 
Purchased technology38,300 — 38,300 5 years
Trade name5,700 — 5,700 5 years
Customer relationships97,300 — 97,300 7 years
Other assets122 — 122 
Other noncurrent liabilities(841)— (841)
Lease liabilities, net(1,810)— (1,810)
Deferred taxes(7,817)126 (7,691)
Deferred revenue(12,525)— (12,525)
Goodwill59,858 (273)59,585 
Net assets acquired$231,115 $ $231,115 

The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition, technology obsolescence, and revenue growth projections.

Tangible assets acquired and assumed liabilities were recorded at fair value. The valuation of the assumed deferred revenue was based on our contractual commitment to provide post-contract customer support to Chef customers and future contractual performance obligations under existing hosting arrangements. The fair value of this assumed liability was based on the estimated cost plus a reasonable margin to fulfill these service obligations. A significant portion of the deferred revenue was expected to be recognized in the 12 months following the acquisition.

We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $59.6 million of goodwill, which is not deductible for tax purposes.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred but are required to be expensed as incurred. During the three months ended February 28, 2022, we incurred minimal acquisition-related costs, which are included in acquisition-related expenses on our consolidated statement of operations.

The operations of Chef were included in our operating results beginning on the date of acquisition. We determined that disclosing the amount of Chef related earnings included in the consolidated statements of operations is impracticable, as certain operations of Chef were integrated into the operations of the Company from the date of acquisition.


17


Note 8: Debt

The Company adopted ASU 2020-06 on December 1, 2021. See Note 1 for further discussion of this recently adopted accounting policy. As of February 28, 2022, future maturities of the Company's long-term debt were as follows:

(In thousands)2026 NotesRevolving Credit FacilityTotal
Remainder of 2022$ $5,156 $5,156 
2023 6,875 6,875 
2024 13,750 13,750 
2025 20,625 20,625 
2026 20,625 20,625 
2027360,000 206,250 566,250 
Total face value of long-term debt360,000 273,281 633,281 
Unamortized discount and issuance costs(8,962)(3,151)(12,113)
Less current portion of long-term debt, net (6,234)(6,234)
Long-term debt$351,038 $263,896 $614,934 

Notes Payable

Convertible Senior Notes and Capped Calls

In April 2021, the Company issued, in a private placement to certain initial purchasers in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act in transactions not involving any public offering, for resale by the initial purchasers to persons whom the initial purchasers believe are qualified institutional buyers pursuant to Rule144A under the Securities Act, the Notes with an aggregate principal amount of $325 million, due April 15, 2026, unless earlier repurchased, redeemed or converted. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes, including acquisitions. There are no required principal payments prior to maturity. In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including, April 13, 2021, of which $35 million of additional Notes were purchased for total proceeds of $360 million. The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021. The Company incurred approximately $10.8 million in issuance cost for the issuance of the Notes. During the three months ended February 28, 2022, the Company did not enter into any new or amended Notes.

Conversion Rights

The Company will satisfy its conversion obligations by paying cash up to the aggregate principal amount of Notes to be converted, by issuing shares of its common stock or a combination of cash and shares of its common stock, at its election. The initial conversion rate is 17.4525 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of approximately $57.30 per share of common stock. The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, make-whole fundamental change and certain stockholder distributions.

Repurchase Rights

On or after April 20, 2024, and on or before the 50th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes, subject to the partial redemption limitation, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price per share of the Company’s common stock exceeded 130% of the conversion price on (1) each of at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice and (2) the trading day immediately before the date the Company sends such notice. Pursuant to the partial redemption limitation, the Company may not elect to redeem less than all of the outstanding Notes unless at least $100.0 million aggregate principal amount of Notes are outstanding and not subject to redemption as of the time it sends the related redemption notice.

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If certain corporate events that constitute a “fundamental change” (as described below) occur at any time, holders may, subject to certain exceptions, require the Company to purchase their Notes in whole or in part for cash at a price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. A fundamental change relates to events such as business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock.

Capped Call Transactions

On April 8, 2021, in connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with one or more of the initial purchasers and/or their respective affiliates and/or other financial institutions. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, approximately 6.3 million shares (representing the number of shares of common stock initially underlying the Notes) of the Company’s common stock. The Capped Call Transactions are generally expected to reduce potential dilution to our common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions will initially be $89.88 per share of common stock, which represents a premium of 100% over the last reported sale price of the common stock of $44.94 per share on April 8, 2021, and is subject to certain adjustments under the terms of the Capped Call Transactions. The cost of the purchased capped calls of $43.1 million was recorded as a reduction to additional paid-in-capital.

We elected to integrate the capped call options with the applicable Notes for federal income tax purposes pursuant to applicable U.S. Treasury Regulations. Accordingly, the $43.1 million gross cost of the purchased capped calls will be deductible for income tax purposes as original discount interest over the term of the Notes. We recorded deferred tax assets of $10.6 million with respect to the capped calls which represents the tax benefit of these deductions with an offsetting entry to additional paid-in capital.

Accounting for the Notes

In accounting for the transaction, prior to the adoption of ASU 2020-06, the Notes were separated into liability and equity components.

The conversion option of the Notes does not require bifurcation as an embedded derivative.
The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, referred to as the debt discount, is amortized as interest expense over the Notes’ contractual term - at an effective interest rate of 5.7%.
The equity component, which represents the difference between the gross proceeds and the initial liability component, was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The Company incurred issuance costs of $10.8 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components prior to the adoption of ASU 2020-06.

Issuance costs attributable to the liability component of $8.9 million are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using the effective interest method over the contractual term of the Notes.
Issuance costs attributable to the equity component of $1.9 million are recorded as an offset to the equity component in additional paid-in capital and are not amortized.

Upon adoption of ASU 2020-06 on December 1, 2021, the Company reversed the separation of the debt and equity components and accounted for the Notes wholly as debt. The Company also reversed the amortization of the debt discount that was due to the equity component, with a cumulative adjustment to retained earnings on the adoption date. Further, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost that will be amortized as interest expense over the remaining term at an effective interest rate of 1.63% with a cumulative adjustment to retained earnin