UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ | ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended: September 30, 20192022
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: 0-18059
PTC Inc.
Massachusetts | 04-2866152 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
121 Seaport Boulevard, Boston, MA 02210
(781) 370-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $.01 par value per share | PTC | NASDAQ Global Select Market |
Securities registered pursuant
to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ¨☐
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨☐ No ☑
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 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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☑ | 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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of our voting stock held by non-affiliates was approximately $10,784,576,792$11,336,087,091 on April 1, 2019March 31, 2022 based on the last reported sale price of our common stock on the Nasdaq Global Select Market on March 29, 2019.that date. There were 118,097,684116,975,644 shares of our common stock outstanding on that day and 115,492,735117,471,969 shares of our common stock outstanding on November 15, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement in connection with the 20202023 Annual Meeting of Stockholders (2020(2023 Proxy Statement) are incorporated by reference into Part III.
PTC Inc.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2019
Table of Contents
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Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspection | |
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| (PricewaterhouseCoopers LLP, Boston, MA, PCAOB ID: 238) | ||
Cautionary Note About Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in this Annual Reportthe Private Securities Litigation Reform Act of 1995. In particular, statements that are not historical facts, including but not limited to, statements about our anticipated financial results, capital development and growth, as well as about the development of our products, markets and markets,workforce, are forward-looking statements. These forward-looking statements thatare generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on our current plans, expectations and assumptions. Important information about factorsassumptions and are not guarantees of future performance. Factors that may cause our actual results to differ materially from these statements isinclude, but are not limited to, the risks and uncertainties discussed in Item 1A. “Risk Factors” and generallyelsewhere throughout this Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
PART I
ITEM 1. Business
Our Business
PTC is a global software and services company that provides a portfolio of innovative digital solutions that work together with a partner ecosystem, drives digital transformation for industrial companies. We serve a broad range of these companies, including discrete manufacturers (industrial machinery & components, aerospace & defense, automotive,to transform how physical products are engineered, manufactured, and electronics & high technology), process/continuous manufacturers (life sciences, energy & resources,serviced.
Our software portfolio includes award-winning offerings in the computer-aided design (CAD) and consumer packaged goods), and operators. Our technology enables customers to improve operational efficiency, accelerate product and service innovation, and increase workforce productivity.
Our customer success program partners with customers to enable successful deploymentbase includes some of the world's most innovative manufacturers in the aerospace and utilization of our solutions.
We generate revenue through the sale of software subscriptions, which include license access and support (technical support and software updates),; support for existing perpetual licenses,licenses; cloud services (hosting for our software and software-as-a-service (SaaS)); perpetual licenses; and professional services (consulting, implementation, and training),.
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Our Strategy
There are three key elements to our strategy to deliver long-term shareholder value.
Accelerate Digital Thread Solutions
With our solutions, we enable companies to adopt a “digital thread” strategy to drive innovation and cloud services.
Accelerate Product Innovation
We enable companies to create conceptual and detailed designs, analyze designs, perform engineering calculations and leverage the information created downstream using 2D, 3D, parametric and direct modeling. Our principal 3D product is described below.
Accelerate SaaS Transformation
Manufacturers today face a myriad of business challenges. Macroeconomic forces, such as an ever-evolving workforce, supply chain disruptions, the rise of smart, connected products, and the need to prove sustainability, are all driving the need for change. We enable companies to respond to these challenges with technology that leverages the cloud to transform how, where, and when work gets done. Software-as-a-service (SaaS), which has already reshaped nearly all aspects of business, is poised to transform management of the entire product lifecycle. Anticipating this need, PTC acquired the Onshape and Arena cloud-native product development solutions. In parallel, we are heavily investing to transform our technology portfolio to SaaS.
Strategic Transactions
During FY'22, we completed two strategic transactions. In Q3'22, we acquired the CodebeamerTM application lifecycle management business to broaden and deepen our ALM footprint across safety-critical and regulated industries. In Q3'22, we also sold a portion of our PLM services business to ITC Infotech. The transaction is designed to accelerate customer digital transformation initiatives and adoption of our Windchill+ SaaS solution. Refer to Note 6. Acquisitions and Disposition of Business of Notes to Consolidated Financial Statements in this Annual Report for additional discussion regarding these transactions.
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Our Principal Products and Services
In 2022, we reported our business in two product groups: Digital Thread and Velocity. Digital Thread included products focused on customers that are embracing enterprise-wide digital transformation and Velocity included products focused on customers that prioritize agile product development. Beginning in fiscal year 2023, we are reporting our businesses in two new product groups: CAD (Computer-Aided Design) and PLM (Product Lifecycle Management). Products designated as CAD refer to software used for product data authoring. Products designated as PLM refer to software used for product data management and process orchestration.
The new reporting structure aligns better to our strategy, product offerings and industry segments.
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Our Windchill® PLM application suite manages all aspects of the product development lifecycle - from concept through service and retirement - by enabling a digital thread of product parts, materials, and configuration information. Windchill provides real-time information sharing, dynamic data visualization, and the ability to collaborate across geographically-distributed teams, enabling manufacturers to elevate their product development process. With its open architecture that integrates with other enterprise systems, Windchill provides a solid foundation for a product-driven digital thread. Our Arena®SaaS PLM solution enables product teams to collaborate virtually anytime and anywhere, making it easier to share the latest product and quality information with internal teams and supply chain partners and help deliver innovative products to customers faster. Our Arena quality management system software connects quality and product designs into a single system to simplify regulatory compliance. Our ThingWorx® platform is flexible and purpose-built for Industrial Internet of Things (IIoT). It offers a rich set of capabilities that enable enterprises to digitally transform every aspect of their business with innovative solutions that are simple to create, easy to implement, scalable to meet future needs, and designed to enable customers to accelerate time to value. Our ThingWorx Digital Performance Management solution enables manufacturers to identify, prioritize, and overcome their most significant production bottlenecks. Our CodebeamerTM and IntegrityTM application lifecycle management (ALM) and model-based systems engineering capabilities enable users to accelerate the development of software-intensive products through system modeling, software configuration, and requirements, risk, and test management. Our Servigistics®service parts management solution enables customers to effectively manage their service parts inventory, enabling them to optimize equipment availability and uptime, and increase customer satisfaction. Our FlexPLM® solution provides retailers with a single platform for merchandising and line planning, materials management, sampling, and more. | Our Creo® 3D CAD technology enables the digital design, testing, and modification of product models. With its design simulation, additive manufacturing, and generative design innovations, we enable our customers to be first to market with differentiated products. From initial concept to design, simulation, and analysis, Creo provides designers with innovative tools to efficiently create better products, faster. Our Onshape® SaaS product development platform unites computer-aided design with data management, collaboration tools, and real-time analytics. A cloud-native multi-tenant solution that can be instantly deployed on virtually any computer or mobile device, Onshape enables teams to work together from just about anywhere. Real-time design reviews, commenting, and simultaneous editing enable a collaborative workflow where multiple design iterations can be completed in parallel and merged into the final design. Our Vuforia® augmented reality (AR) technology enables the visualization of digital information in a physical context and the creation of AR and mixed reality experiences to deliver workforce productivity and business results in manufacturing, service, engineering, and operations. Vuforia solutions equip frontline workers with focused and effective step-by-step instructions, procedural guidance, skill development and remote assistance that enable enterprises to reduce errors, increase asset utilization and drive higher profitability. Our Arbortext® dynamic publishing solution streamlines how organizations create, manage, and publish technical documentation. |
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To meet the increasing demand for SaaS delivered solutions, we expect to introduce a number of new SaaS offerings over time. These service offerings will provide an alternative to our traditional on-premises software products and introduceprovide our customers with the benefits of SaaS including accelerated time to value, reduced complexity, lower costs to implement, upgrade and administer, improved user collaboration and mobility, and scalability. We are giving this new revenue streams, while reducing operating costs.
Our Markets and How We Address Them
The markets we serve present different growth opportunities for us. We see greater opportunity for further market growth for all our IIoT and AR solutions forwith a new generation of SaaS solutions we are developing to bring to market over the enterprise, followed by more moderate market growth for our CAD and PLM solutions.
We derive most of our sales from products and services sold directly by our sales force to end-user customers. Approximately 20%25% to 30% of our sales of products and services are through third-party resellers and other strategic partners.resellers. Our sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market. Our strategic alliance partners enable us to increase our market reach, offer broader solutions, and add compelling technology to our offerings. Our strategic services partners provide service offerings to help customers implement our product offerings. As we grow our IIoT business, we expect our go-to-market strategy will rely more on partners, including the types of strategic partners described above,offerings and marketing directlytransition to end users and developers.
Additional financial information about our segments and international and domestic operations may be found in Note 18. Segment and Geographic Information of Notes to Consolidated Financial Statements in this Annual Report, which information is incorporated herein by reference.
Competition
We compete with a number of companies that offer solutions thatwhose offerings address one or more specific functional areas covered by our solutions. For enterprise Creo and Windchill solutions, we compete with large established companies including Autodesk, Dassault Systèmes SA, and Siemens AG. In our IIoT business, we compete with large established companies likesuch as Amazon, IBM, Oracle, SAP, Siemens AG, and GE.Software AG as well as customers’ homegrown solutions. There are also a number of smallsmaller companies that compete in the market for IoTIIoT products. We believeFor our ThingWorx IoT platformAR products, our primary competitors include Microsoft, TeamViewer, and solutions are complementary to the offerings of many ofScopeAR. For our competitors,ALM products, we compete with IBM and we have partnered with many of the named competitors.Siemens AG. For enterprise CAD and PLM solutions and for discrete desktop CADour SLM products, we compete with companies including AutoDesk, Dassault Systèmes SAthat offer point solutions and Siemens AG. For PLM solutions, we also compete with Oracle and SAP, but we believe our products are more specifically targeted toward the business process challenges of manufacturing companies and offer broader and deeper functionality for those processes than ERP-basedcustomers’ homegrown solutions.
Proprietary Rights
Our software products and related technical know-how, along with our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection. The nature and extent of such legal protection depends in part on the type of intellectual property right and the relevant jurisdiction. In the U.S., we are generally able to maintain our trademark registrations for as long as the trademarks are in use and to maintain our patents for up to 20 years from the earliest effective filing date. We also use license management and other anti-piracy technology measures, as well as contractual restrictions, to curtail the unauthorized use and distribution of our products.
Our proprietary rights are subject to the risks and uncertainties described under Item 1A. “Risk Factors” below. You should read that discussion,below, which is incorporated into this section by reference.
PTC’s commitment to building a diverse, equitable, and Backlog (Unbilled Deferred Revenue)inclusive culture is discussed in Item 7. “Management’s Discussionfundamental to our purpose – the Power to Create – and Analysiscritical to every aspect of Financial Conditionour talent strategy. Our approach is focused on sustainable talent practices and Resultscore values that promote an agile culture, an increased sense of Operations - Executive Overview” below. You should read that discussion, which is incorporated into this section by reference.
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PTC at-a-Glance
As of September 30, 2019, we2022, PTC had 6,055 employees, including 1,889 in product development; 1,674 in6,503 full-time employees. Our employee population is geographically diverse and serves a geographically diverse customer support, training, consulting, cloud services and product distribution; 1,777 in sales and marketing; and 715 in general and administration. Of these employees, 2,203 were located in the partner network.
Worldwide Employee Representation
United States Employee Representation
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Compensation and 3,852 were located outsideBenefits
PTC provides a comprehensive and competitive compensation and benefits package designed to attract, retain, motivate, and engage talent around the United States.
We provide employees with competitive base salaries, incentive compensation and, in many cases, equity compensation.
Our benefits offerings are designed to Reportsmeet the unique needs of our employees. We believe we provide competitive benefits in each local market we operate in to help our employees care for themselves and Codetheir families. Common offerings are health benefits, retirement benefits, life insurance and disability protection, employee assistance, vacation time, holidays and leave benefits. To ensure our employees and families have the support they need as the COVID-19 pandemic begins to ease, PTC has continued its global emergency leave policy, which provides for ten days of Business Conductpaid time off over and Ethics
Employee Development
We invest in our employees, creating meaningful opportunities to learn, grow, develop and advance their careers. We have specific development programs, including our Rotational Leadership Development, Managing at PTC, Leading at PTC, and 360-degree development programs.
Commitment to Diversity, Equity, and Inclusion (DEI)
We are improving our systems and processes to enable us to better track, manage and develop our employees. With these improvements, we are gaining a better understanding of our current demographic population and developing demographic goals, as we strive to create a more demographically diverse, inclusive, and equitable organization.
Starting in FY’22, our Self-Identification program invited U.S. employees to volunteer their personal information across categories such as race/ethnicity, sexual orientation, gender identity, pronouns, disability, veteran and military status, and more. By analyzing this information in aggregate, we can determine what we should adjust in terms of DEI programming, policies, and hiring practices.
Commitment to our values and diversity in our workforce has inspired our top-line company goals. Key milestones include launching leadership development experiences for underrepresented minority and underrepresented group populations, offering learning programs in psychological safety, requiring unconscious bias training for hiring managers, and enhancing our Employee Resource Group (ERG) program and Global DEI Champions Network. PTC currently supports 12 ERGs that span a broad spectrum of identities, experiences, and interests: Asian, Black, Early Career, Energize (Health & Wellness), Family, Green (Sustainability), Hola (Hispanic & Latine), Prism (LGBTQ+), SMART (Neurodiversity), Veterans, Virtual, and Women. In 2021, we introduced a CEO Rotation program that allows our CEO to spend three months with each ERG as a rotational sponsor.
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Additional Information About Our Employee Initiatives
You can find more information about our employee initiatives, including our DEI, Training and Career Development, Compensation & Benefits, Employee Engagement, and Employee Health & Safety initiatives, in our Corporate Social Responsibility Report available on PTC.com. The references to our Corporate Social Responsibility Report and our website are not intended to incorporate information in that report or on our website into this Annual Report by reference.
Available Information
We make available free of charge on our website at www.ptc.com the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3, 4 and 5 also are available on our website. The reference to our website is not intended to incorporate information on our website into this Annual Report by reference.
Corporate Information
PTC was incorporated in Massachusetts in 1985 and is headquartered in Boston, Massachusetts.
ITEM 1A.Risk Factors
The following are important factors we have identified that could affect our future results and youran investment in our securities. You should consider them carefully when evaluating an investment in PTC securities, or any forward-looking statements made by us, including those contained in this Annual Report, because these factors could cause actual results to differ materially from historical results or the performance projected in forward- lookingany forward-looking statements. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results. Holders of the 6.00% Senior Notes due 2024 (the “2024 6% Notes”) that we issued in May 2016 should also consider the risk factors related to those notes described in the prospectus supplement we filed with the Securities and Exchange Commission on May 5, 2016, which are incorporated herein by reference.
I.Risks Related to Our Business Operations and Industry
We face significant competition, which may reduce our profitability and limit or reduce our market share.
The markets for our products and solutions are rapidly changing and characterized by intense competition, disruptive technology developments, evolving distribution models and increasingly lower barriers to entry. If we are unable to provide products and solutions that address customers’ needs as well as our competitors’ products and solutions do, or to align our pricing, licensing and delivery models with customer preferences, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share. Competitive
For example, the COVID-19 pandemic caused companies worldwide to close their offices and their employees to have to work remotely from their homes, and there remains uncertainty about the extent to which employees will return to the office in the long term. This has focused companies on the need for solutions that empower and support remote work by employees. We believe customers and potential customers will increasingly seek software solutions that support remote work by employees. Although many of our solutions support remote work, others are less efficient at doing so. We have embarked on an effort to make our solutions available on a SaaS platform; however, this will require significant effort and investment and we cannot be sure that we will be able to make our solutions available as SaaS solutions as quickly as we expect or that customers will adopt them as we expect. If we are unable to compete successfully with competitors offering SaaS solutions, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share, which would adversely affect our business and financial results.
In addition, competitive pressures could also cause us to reduce our prices, which could reduce our revenue and margins.
Our current and potential competitors range from large and well-established companies to emerging start-ups. Some of our competitors and potential competitors have greater name recognition in the markets we serve and greater financial, technical, sales and marketing, and other resources, which could limit our ability to gain customer recognition and confidence in our products and solutions and successfully sell our products and solutions, which could adversely affect our ability to grow our business.
A breach of security in our products or computer systems, or those of our third-party service providers, could compromise the integrity of our products, cause loss of data, harm our reputation, create additional liability and adversely impact our financial results.
We have implemented and continue to implement measures intended to maintain the security and integrity of our products, source code and computerIT systems. The potential consequences offor a security breach or system disruption (particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists) havehas significantly increased in scopeover time as the scope, number, intensity and sophistication of attempted attackscyberattacks and cyber intrusions have increased – particularly cyberattacks and intrusions from arounddesigned to access and exfiltrate information and to disrupt and lock-up access to systems for the world have increased. Despite efforts to create security barriers to such threats, itpurpose of demanding a ransom payment. It is impossible for us to eliminate thisthe risk of a successful cyberattack or intrusion, and, in fact, we deal with security issues on a regular basis and have experienced security incidents from time to time. Accordingly, there is a risk that we might encounter a material eventcyberattack or issueintrusion will be successful and that such an event or issue may occur.
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In addition, we offer cloud services to our customers and some of our products, including our SaaS products, are hosted by third-party service providers, which expose us to additional risks as those repositories of our customers’ proprietary data may be targeted and a cyberattack or intrusion may be successful and material. Interception of data transmission, misappropriation or modification of data, corruption of data and attacks against our service providers may adversely affect our products or product and service delivery. Malicious code, viruses or vulnerabilities that are undetected by hackers.
While we devote resources to maintaining the security and integrity of our products and systems, as well as performing due diligence of our third-party service providers, security breaches that have not had a material effect on our business or that of our customers have occurred, and we will continue to face cybersecurity threats and exposure. A significant breach of the security and/or integrity of our products or systems, or those of our third-party service providers, whether or intentional or by human error by our employees or others, could disrupt our business operations or those of our customers, could prevent our products from functioning properly, could enable access to sensitive, proprietary or confidential information including that of our customers, or could disruptenable access to our business operationssensitive, proprietary or those of our customers.confidential information. This could require us to incur significant costs of investigation, remediation and further protection,and/or payment of a ransom; harm our reputation,reputation; cause customers to stop buying our products,products; and cause us to face lawsuits and potential liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
We increasingly rely on third-party providers of cloud infrastructure services to deliver our offerings to users on our platform, and any disruption of or interference with our use of these services could adversely affect our business.
Our continued growth depends in part on the ability of our existing and potential customers to use and access our cloud services or our website in order to download our software or encrypted access keys for our software within an acceptable amount of time. We use a number of third-party service providers that we do not control for key components of our infrastructure, particularly with respect to development and delivery of our cloud-based products. The use of these service providers gives us greater flexibility in efficiently delivering a more tailored, scalable customer experience, but also exposes us to additional risks and vulnerabilities. Third-party service providers operate their own platforms that we access, and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party service providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent. Such outages could trigger our service level agreements with customers and require us to issue the issuance of credits to our cloud-based product customers, which could adversely impact our business, financial condition and results of operations.
If we are unable to renew our agreements with our cloud service providers on commercially reasonable terms, or any of our agreements are prematurely terminated, or we need to add new cloud services providers to increase capacity and uptime, we could experience interruptions, downtime, delays, and additional expenses related to transferring to and providing support for these new platforms. Any of the above circumstances or events may harm our reputation and brand, reduce the availability or usage of our platforms and impair our ability to attract new users, any of which could adversely affect our business, financial condition and results of operations.
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We may be unable to hire or retain personnel with the necessary skills to operate and grow our business, which could adversely affect our ability to compete.
Our success depends upon our ability to attract and retain highly skilled managerial, sales and marketing, technical, financial and administrative personnel to operate and grow our business. Competition for such personnel in our industry is intense, particularly in the Boston, Massachusetts area where our global headquarters is located.
The technical personnel required to develop our products and solutions are in high demand, particularly technical personnel with augmented and virtual reality and analytics expertise as there are comparatively fewer persons with those skills.demand. If we are unable to attract and retain technical personnel with the requisite skills, our product and solution development efforts could be delayed, which could adversely affect our ability to compete and thereby adversely affect our revenues and profitability.
The managerial, sales and marketing, financial and administrative personnel necessary to guide our operations, market and sell our solutions and support our business operations are also in high demand due to the intense competition in our industry.
If we are unable to attract and retain the personnel we need to develop compelling products and solutions, and guide, operate and support our business, we may be unable to successfully compete, in the marketplace, which would adversely affect our revenuesbusiness, financial condition and profitability.
We depend on sales within the discrete manufacturing sector and our business could be adversely affected if manufacturing activity does not grow, or if it contracts, or if manufacturers are adversely affected by other economicmacroeconomic factors.
A large amount of our sales are to customers in the discrete manufacturing sector. The global Manufacturing Purchasing Managers' Index (PMI) has declined significantly over the past year and remained below the 50% level in September 2019, with a particularly large recent decline in Europe. Although the decline in Manufacturing PMI did not have a significant adverse affect on our business in 2019, if the manufacturing sector does not improve or continuesManufacturers worldwide continue to decline, our customers in this sector may, as they have in the past, reduce or defer purchases of our products and services, which could adversely affect our financial results.
If we fail to successfully manage our transition to a subscription-based licensingSaaS company, our business and financial results could be adversely affected.
Becoming a subscription-based licensingSaaS company requires a considerable additional investment of technical, financial, legal and sales resources, and a scalablein our organization. Whether our transition will be successful and will accomplish our business and financial objectives is subject to uncertainties, including but not limited to: customer demand, attach and renewal rates, channel acceptance,adoption, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, and our costs. If we are unable to successfully establish these new offerings and navigate our business transition due to the foregoingthese risks and uncertainties, our business and financial results could be adversely impacted.
Because our sales and operations are globally dispersed, we face additional compliance risks and any compliance riskfailure could adversely affect our business and financial results.
We sell and deliver software and services, and maintain support operations, in a large number ofmany countries whose laws and practices differ from one another and are subject to unexpected changes. Managing these geographically dispersed operations requires significant attention and resources to
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Those laws include, but are not limited to, anti-corruption laws and regulations (including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act 2010), data privacy laws and regulations (including the European Union's General Data Privacy Regulation), and trade and economic sanctions laws and regulations (including laws administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. State Department, the U.S. Department of Commerce, the United Nations Security Council and other relevant sanctions authorities). Our compliance risks are heightened due to the go-to-market approach for our businessesbusiness that relies heavily on a partner ecosystem, the fact that we operate in and are expanding into, countries with a higher incidence of corruption and fraudulent business practices than others, the fact that we deal with governments and state-owned business enterprises, the fact that cyber attacks and intrusions that could expose sensitive information have increased, and the fact that global enforcement of laws has significantly increased.
Accordingly, while we strive to maintain a comprehensive compliance program, we cannot guarantee that an employee, agent or business partner will not act in violation ofmay violate our policies or U.S. or other applicable laws that a cyber attack or intrusion would not be successful, or that we may inadvertently violate such laws. Investigations of alleged violations of those laws and cyber intrusions can be expensive and disruptive. Violations of such laws can lead to civil and/or criminal prosecutions, substantial fines and other sanctions, including the revocation of our rights to continue certain operations, and also cause business loss and reputation loss,reputational harm, which could adversely affect our financial results and/or stock price.
II.Risks Related to Acquisitions and Strategic Relationships
Businesses we acquire may not generate the revenue and earnings we anticipate and may otherwise adversely affect our business.
We have acquired, and intend to continue to acquire, new businesses and technologies. If we fail to successfully integrate and manage the businesses and technologies we acquire, or if an acquisition does not further our business strategy as we expect, or if a business we acquire has unexpected legal or financial liabilities, our operating results will be adversely affected.
The types of issues that can adversely affect our operationswe may face in integrating and operating results, including:
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Further, if we do not achieve the expected return on our investments, it could impair the intangible assets and goodwill that we recorded as part of an acquisition, which could require us to record a reduction to the value of those assets.
We may incur significant debt or issue a material amount of debt or equity securities to finance an acquisition, which could adversely affect our businessoperating flexibility and financial statements.
If we were to incur a significant amount of debt—whether by borrowing funds under our credit facility or If we were to issue a significant amount of equity securities in connection with Our inability to maintain or develop our strategic and technology relationships could adversely affect our business. We have many strategic and technology relationships with other companies with which we work to offer complementary solutions and services, that market and sell our solutions and that provide technologies that we embed in our solutions. We may not realize the expected benefits from these relationships and such relationships may be terminated by the other party. If these companies fail to perform or if a company terminates or substantially alters the terms of the relationship, we could suffer delays in product development, reduced sales or other operational difficulties and our business, results of operations and financial condition could be materially adversely affected. III.Risks Related to Our Intellectual Property We may be unable to adequately protect our proprietary rights, which could adversely affect our business and our ability to compete effectively. Our software products are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, the laws of all relevant jurisdictions may not afford adequate protection to our products and other intellectual property. In addition, we frequently encounter attempts by individuals and companies to pirate our software. If our measures to protect our intellectual property rights fail, others may be able to use those rights, which could reduce our competitiveness and revenues. In addition, any legal action to protect our intellectual property rights that we may bring or be engaged in could be costly, may distract management from day-to-day operations and may lead to additional claims against us, and we may not succeed, all of which would materially adversely affect our operating results. Intellectual property infringement claims could be asserted against us, which could be expensive to defend and could result in limitations on our use of the claimed intellectual property. The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. If a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel. We cannot be sure that we would prevail against any such asserted claims. If we did not prevail, we could be prevented from using the claimed intellectual property or be required to enter into royalty or licensing agreements, which might not be available on terms acceptable to us. In addition to possible claims with respect to our proprietary products, some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement claims with respect to these third-party technologies. Our substantial indebtedness could adversely affect our business, financial condition and results of operations, as well as our ability to meet our payment obligations under our debt. We have a significant amount of indebtedness. As of November 15, Specifically, our level of debt could:operating results and impair the assets that we recorded as a part ofotherwise or issuing new debt securities—to finance an acquisition, including intangible assets and goodwill;diversion of management and employee attention;loss of key personnel;assumption of unanticipated legal or financial liabilities or other unidentified issues with the acquired business;potential incompatibility of business cultures;significant increases in our interest expense, leverage and debt service requirements ifand leverage would increase significantly. The increases in these expenses and in our leverage could constrain our ability to operate as we incurmight otherwise or to borrow additional debt to pay for an acquisition; andifamounts.future acquisitions,an acquisition, existing stockholders would be diluted and earnings per share would likelycould decrease.2019,2022, our total debt outstanding was approximately $1.1 $1,359billion, approximately $628 million of which was under our $1 billion secured credit facility (which matures in September 2023) and $500 million of which was associated with the 6%3.625% Senior Notes and 4.000% Senior Notes (together, “Senior Notes”) issued May 2016,in February 2020, which mature in May 2024February 2025 and 2028, respectively, and are unsecured. Of the $628unsecured, and $359 million outstandingof which was borrowed under our secured credit facility, $455 million was borrowed on November 1, 2019 to finance our acquisition of Onshape. In November 2019, we also amended the credit facility to increase the revolving loan commitment from $700 million to $1 billion (see Liquidity and Capital Resources-Outstanding Notes which matures in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report).February 2025. All amounts outstanding under the credit facility and the notesSenior Notes will be due and payable in full on their respective maturity dates. As of November 15, 2019,2022, we had unused commitments under our credit facility of approximately $357$641 million. PTC Inc. and one of our foreign subsidiaries are eligible borrowers under the credit facility and certain other foreign subsidiaries may become borrowers under our credit facility in the future, subject to certain conditions.Notwithstanding the limits contained in the credit agreement governing our credit facility and the indenture governing our 2024 6% Notes, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of debt could intensify.
Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under our debt agreements.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt and other obligations. This could further exacerbate the risks to our financial condition described above.
We and our subsidiaries may be able to incur significant additional indebtedness and other obligations in the future, including secured debt. Although the credit agreement governing our credit facility contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions. The additional indebtedness incurred in compliance with these restrictions could be substantial. In addition, the credit agreement and the indenture governing our Senior Notes due 2025 and 2028, will not prevent us from incurring obligations that do not constitute indebtedness. If new debt is added to our current debt levels, or we incur other obligations, the related risks that we now face could intensify.
15
We may not be able to generate sufficientenough cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors, some
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our debt agreements restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our debt obligations.
If we cannot make scheduled payments on our debt, we will be in default and the lenders under our credit facility could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings, the holders of our 2024 6%Senior Notes could declare all outstanding principal, premium, if any, and interest to be due and payable, and we could be forced into bankruptcy or liquidation. All of theseThese events could result in a loss of your investment.
We are required to comply with certain financial and operating covenants under our debt agreements. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.
We are required to comply with specified financial and operating covenants under our debt agreements and to make payments under our debt, which limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We might not have sufficientenough working capital or liquidity to satisfy any repayment obligations in the event of an acceleration ofif those obligations.obligations were accelerated. In addition, if we are not in compliance with the financial and operating covenants under the credit facility when we wish to borrow funds, we will be unable to borrow funds.
In addition, the financial and operating covenants under the credit facility may limit our ability to borrow funds, including for strategic acquisitions and share repurchases.
Our credit facility has variable interest tied to LIBOR and we could become subject to higher interest rates if the replacement rate we agree on with our banks is higher.
Borrowings under our revolving credit facility use the London Interbank Offering Rate (LIBOR) as a benchmark for establishing the interest rate. On March 5, 2021, the Intercontinental Exchange Benchmark Administration, the U.K. Financial Conduct Authority (FCA) regulated and authorized administrator of LIBOR, isannounced, and the subjectFCA confirmed, that one week and two-month USD LIBOR settings will cease on December 31, 2021, and that the USD LIBOR panel for all other tenors will cease on June 30, 2023.
16
Table of recent national, internationalContents
The credit facility provides a mechanism pursuant to which we and other regulatory guidance and proposalsthe administrative agent may agree, under certain circumstances, to transition to an alternate base rate borrowing or amend the credit facility to establish an alternate interest rate to LIBOR that includes consideration of the then-prevailing market convention for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently thandetermining interest rates for syndicated loans in the past. United States at that time.
Although we believe the recent discussions about alternative rates will not materially increase the interest rates on our credit facility, the final agreed rate may increase the cost of our variable rate indebtedness.
V.Risks Related to Our Common Stock and Debt Securities
Our operating results fluctuate from quarter to quarter, making future operating results difficult to predict; failure to meet market expectations could cause the price of our securities to decline.
Our quarterly operating results historically have fluctuated and are likely to continue to fluctuate depending on many factors, including:
Accordingly, our quarterly results are difficult to predict prior to the end of the quarter and we may be unable to confirm or adjust expectations with respect to our operating results for a quarter until that quarter has closed. Any failure to meet our quarterly revenue or earnings targetsexpectations could adversely impact the market price of our securities.
Our stock price has been volatile, which may make it harder to resell shares at a favorable time and price.
Market prices for securities of software companies are generally volatile and are subject to significant fluctuations that may be unrelated or disproportionate to the operating performance of these companies. TheFurther, our stock price has been more volatile than that of other software companies. Accordingly, the trading prices and valuations of thesesoftware companies’ stocks, and of ours, may not be predictable. Negative changes in the public’s perception of the prospects of software companies, or of PTC or the markets we serve, could depress our stock price regardless of our operating results.
17
Also, a large percentage of our common stock is held by institutional investors and by Rockwell Automation. Purchases and sales of our common stock by these investors could have a significant impact on the market price of the stock. For more information about those investors, please see
VI. General Risk Factors
Our international businesses present economic and operating risks, which could adversely affect our proxy statement with respectbusiness and financial results.
We expect that our international operations will continue to expand and to account for a significant portion of our most recent annual meetingtotal revenue. Because we transact business in various foreign currencies, the volatility of stockholdersforeign exchange rates has had and Schedules 13Dmay in the future have a material adverse effect on our revenue, expenses and 13G filed with the SEC with respect tooperating results.
Other risks inherent in our common stock.
We may have exposure to additional tax liabilities and our effective tax rate may increase or included in any automated quotation system,fluctuate, which could make it harder to resell the notes at a favorable timeincrease our income tax expense, reduce our net income, and price.
As a result,multinational organization, we are subject to income taxes as well as non-income based taxes in the U.S. and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our tax returns are subject to review by various taxing authorities. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes could be different from what is reflected in our historical income tax provisions and accruals.
Our effective tax rate and tax payment obligations can be adversely affected by several factors, many of which are outside of our control, including:
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
We currently have 80 primary98 office locations used in operations in the United States and internationally, predominately as sales and/or support offices and for research and development work. Of our total of approximately 1,812,0001,209,000 square feet of leased facilities used in operations, approximately 420,000484,000 square feet are located in the U.S., including 250,000 square feet at our headquarters facility located in Boston, Massachusetts, and approximately 289,000250,000 square feet are located in India, where a significant amount of our research and development is conducted. In addition, approximately 520,000 feet are associated with facilities that have been restructured, primarily our previous headquarters facility
ITEM 3. Legal Proceedings
Information on legal proceedings can be found in Needham, Massachusetts. We believe that our facilities are adequateNote 10. Commitments and Contingencies-- Legal Proceedings of Notes to Consolidated Financial Statements in this Annual Report, which information is incorporated herein by reference.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for our presentRegistrant’s Common Equity, Related Stockholder Matters and foreseeable needs.
Our common stock is traded on the Nasdaq Global Select Market under the symbol "PTC."
On September 30, 2019,2022, the close of our fiscal year, and on November 13, 2019,14, 2022, our common stock was held by 1,1071,003 and 1,1041,000 shareholders of record, respectively.
The table below shows the shares of our common stock we repurchased in the fourth quarter of 2019.
| Period (1) | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||
| June 30, 2019 - July 27, 2019 | — | $— | — | $310,005,304 (2) | ||||
| July 28, 2019 - August 24, 2019 | 301,459 | $66.39 | 301,459 | $290,006,120 (2) | ||||
| August 25, 2019 - September 30, 2019 | 76,705 | $65.19 | 76,705 | $285,006,347 (2) | ||||
| Total | 378,164 | $66.15 | 378,164 | $285,006,347 (2) | ||||
19
ITEM 7. Management’s Discussion and Analysis of Financial Data
Forward-Looking Statements
Statements in this Annual Report about anticipated financial results, capital developments and growth, as well as about the development of our products, markets and markets,workforce, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. “Risk Factors” of this Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
Operating and Non-GAAP Financial Measures
Our discussion of results includes discussion of our ARR (Annual Run Rate) operating measures (including "ARR," “license and subscription bookings” and other subscription-related measures) andmeasure, non-GAAP financial measures. Our operating measures, and disclosure of our results on a constant currency basis. ARR and our non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating MeasuresMeasure and Results of Operations - Non-GAAP Financial Measures, respectively. The methodology used to calculate constant currency disclosures is described in Results of Operations - Impact of Foreign Currency Exchange on Results of Operations.You should read those sections to understand our operating andmeasure, non-GAAP financial measures.
Subscription revenue is comprised of time-based licenses whereby customers use our software and receive related support for a specified term. Results for reporting periods beginning on or after October 1, 2018 are presented under the Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606), while prior period amounts are not adjusted and continue to be reported in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (ASC 605). Through 2018, revenue for our subscription contracts was recognized ratably over the term of the contract under ASC 605; this differs from how revenue for such contracts is recognized under ASC 606. Our contracts with customers may include multiple goods and services. Under ASC 606, revenue is recognized for each performance obligation that can be separately identified under the contract. Accordingly, our on-premise subscription contracts are unbundled into multiple performance obligations (i.e., license, cloud and support). Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. To date, for the majority of our products, we have concluded that the on-premise software licenses and cloud services provided in our subscription offerings are distinct from each other such that revenue from each performance obligation within the offering should be recognized separately. We will continue to review this conclusion as the cloud services that we deliver in combination with our on-premise subscriptions continue to evolve, which could result in changes to how we recognize revenue for such products. The license portion of our on-premise subscription contracts (approximately 50% to 55%) is recognized upfront and the cloud and support portions (approximately 45% to 50%) are recognized ratably over the term. Software as a Service (SaaS) and cloud services for which revenue is generally recognized ratably over the term of the contract are included in subscription revenue and have been immaterial to date.
ARR increased 10% to $1,116 million ($1,134 million and 12% at the guidance rate) as of the end of 2019 reflecting solid growth for this metric across all our businesses, particularly in our IoT and AR businesses.
| Year Ended September 30, | ||||||||||||||||||
| Percent change | ||||||||||||||||||
| ASC 605 | ||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | 2019 vs 2018 | |||||||||||||||
Revenue (in thousands) | 2019 | 2019 | 2018 | Change | Constant Currency | |||||||||||||
| Subscription license | $ | 253.7 | ||||||||||||||||
| Subscription support & cloud services | 348.5 | |||||||||||||||||
| Total subscription | 602.2 | 667.6 | 482.0 | 38 | % | 41 | % | |||||||||||
| Perpetual support | 415.2 | 411.0 | 496.8 | (17 | )% | (15 | )% | |||||||||||
| Total recurring revenue | 1,017.4 | 1,078.6 | 978.9 | 10 | % | 13 | % | |||||||||||
| Perpetual license | 70.7 | 72.2 | 109.6 | (34 | )% | (32 | )% | |||||||||||
Total software revenue (1) | 1,088.1 | 1,150.8 | 1,088.5 | 6 | % | 8 | % | |||||||||||
| Professional services | 167.5 | 160.7 | 153.3 | 5 | % | 9 | % | |||||||||||
| Total revenue | $ | 1,255.6 | $ | 1,311.5 | $ | 1,241.8 | 6 | % | 8 | % | ||||||||
| (1) Total software revenue includes: | ||||||||||||||||||
License (2) | $ | 324.4 | $ | 666.8 | $ | 529.3 | 26 | % | 29 | % | ||||||||
| Support and cloud services | 763.7 | 484.0 | 559.2 | (13 | )% | (11 | )% | |||||||||||
| Total software revenue | $ | 1,088.1 | $ | 1,150.8 | $ | 1,088.5 | 6 | % | 8 | % | ||||||||
| Year Ended September 30, | |||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | ASC 605 | ||||||||||||
| Earnings Measures | 2019 | 2019 | 2018 | Change | |||||||||||
| Operating Margin | 5.0 | % | 7.7 | % | 5.8 | % | 33 | % | |||||||
| Earnings (Loss) Per Share | $ | (0.23 | ) | $ | 0.03 | $ | 0.44 | (94 | )% | ||||||
Non-GAAP Operating Margin(1) | 20.3 | % | 22.4 | % | 18.3 | % | 22 | % | |||||||
Non-GAAP Earnings Per Share(1) | $ | 1.64 | $ | 1.74 | $ | 1.45 | 20 | % | |||||||
FY’22 revenue of $1.93 billion increased 7% over FY’21 (11% in constant currency). FY’22 operating margin of 23% increased approximately 200 basis points over FY’21 and non-GAAP operating margin of 38% increased approximately 300 basis points. Operating margin improvements are due to higher revenue and continued operating expense discipline. FY’22 diluted EPS was $2.65 compared to $4.03 in FY'21. Diluted EPS in FY'22 included a $35 million non-operating charge associated with the decrease in value of an equity investment in a publicly-traded company, offset by a non-operating $30 million credit associated with the sale of a portion of our PLM services business. Diluted EPS in FY'21 benefited from gains associated with an equity investment in a publicly-traded company, and income tax credits related to a limited annual cancellation right,release of which approximately $158a previously held valuation allowance. FY'22 non-GAAP diluted EPS was $4.58, representing a 15% increase over non-GAAP diluted EPS of $3.97 in FY'21.
FY’22 operating cash flow of $435 million was cancellable at September 30, 2019) for which the associated revenue has not been recognizedgrew 18% over FY’21; FY’22 free cash flow of $416 million grew 21% over FY’21. FY'22 operating cash flow and the customer has not yet been invoiced. Early in the fourth quarter of 2019, we discontinued the cancellation right for substantially all new contracts. We do not record unbilled deferred revenue on our Consolidated Balance Sheets; such amounts are recorded as deferred revenue when we invoice the customer. We provide this view of deferred revenuefree cash flow included an $11.8 million outflow related to acquisition and backlog to enable investors to understand the significant contractual commitments we have to customerstransaction-related costs and to provide a view of future revenue that we expect will be recognized, even if those commitments are not reflected on our balance sheet.
| (Dollar amounts in millions) | September 30, | |||||||||||||||
ASC 606 (1) | ASC 605 | ASC 605 | ASC 605 | |||||||||||||
| 2019 | 2019 | 2018 | 2017 | |||||||||||||
| Deferred revenue | $ | 397 | $ | 579 | $ | 499 | $ | 459 | ||||||||
| Unbilled deferred revenue | 738 | 881 | 911 | 633 | ||||||||||||
| Total | $ | 1,135 | $ | 1,460 | $ | 1,410 | $ | 1,092 | ||||||||
 | ||
 | ||
 | ||
The following table shows the financial measures that we consider the most significant indicators of the performance of our business.business performance. In addition to providing measuresoperating income, operating margin, diluted earnings per share and cash from operations as calculated under generally accepted accounting principles (“GAAP”),GAAP, we also provide our ARR operating measure and non-GAAP financial measuresoperating income, non-GAAP operating margin, non-GAAP diluted earnings per share, and free cash flow for the reported periods. We also provide a view of our actual results on a constant currency basis. Our non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. Investors should use theseour non-GAAP financial measures only in conjunction with our GAAP results.
20
For discussion of 2018our FY'21 results and comparison with 2017to our FY'20 results, refer to "Management'sManagement's Discussion and Analysis of Financial Conditions and Results of Operations"Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
| (Dollar amounts in millions, except per share data) | Year ended September 30, | ||||||||||||||||||||||||||
| Percent Change | |||||||||||||||||||||||||||
| ASC 605 | |||||||||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | Actual | Constant Currency | Actual | Constant Currency | ||||||||||||||||||||
| Subscription | $ | 602.2 | $ | 667.6 | $ | 482.0 | $ | 279.2 | 38 | % | 41 | % | 73 | % | 69 | % | |||||||||||
| Perpetual support | 415.2 | 411.0 | 496.8 | 574.7 | (17 | )% | (15 | )% | (14 | )% | (16 | )% | |||||||||||||||
| Total recurring revenue | 1,017.4 | 1,078.6 | 978.9 | 853.9 | 10 | % | 13 | % | 15 | % | 12 | % | |||||||||||||||
| Perpetual license | 70.7 | 72.2 | 109.6 | 133.4 | (34 | )% | (32 | )% | (18 | )% | (20 | )% | |||||||||||||||
| Total software revenue | 1,088.1 | 1,150.8 | 1,088.5 | 987.3 | 6 | % | 8 | % | 10 | % | 8 | % | |||||||||||||||
| Professional services | 167.5 | 160.7 | 153.3 | 176.7 | 5 | % | 9 | % | (13 | )% | (16 | )% | |||||||||||||||
| Total revenue | 1,255.6 | 1,311.5 | 1,241.8 | 1,164.0 | 6 | % | 8 | % | 7 | % | 4 | % | |||||||||||||||
| Total cost of revenue | 325.4 | 318.2 | 326.5 | 328.5 | (3 | )% | (1 | )% | |||||||||||||||||||
| Gross margin | 930.3 | 993.3 | 915.3 | 835.5 | 9 | % | 10 | % | |||||||||||||||||||
| Operating expenses | 867.2 | 891.7 | 842.7 | 793.8 | 6 | % | 6 | % | |||||||||||||||||||
| Total costs and expenses | 1,192.6 | 1,209.9 | 1,169.2 | 1,122.3 | 3 | % | 5 | % | 4 | % | 2 | % | |||||||||||||||
| Operating income | $ | 63.0 | $ | 101.6 | $ | 72.6 | $ | 41.8 | 40 | % | 55 | % | 74 | % | 52 | % | |||||||||||
Non-GAAP operating income (1) | $ | 255.3 | $ | 293.9 | $ | 229.4 | $ | 189.3 | 28 | % | 33 | % | 21 | % | 15 | % | |||||||||||
| Operating margin | 5.0 | % | 7.7 | % | 5.8 | % | 3.6 | % | |||||||||||||||||||
Non-GAAP operating margin (1) | 20.3 | % | 22.4 | % | 18.3 | % | 16.2 | % | |||||||||||||||||||
Diluted earnings (loss) per share (2) | $ | (0.23 | ) | $ | 0.03 | $ | 0.44 | $ | 0.05 | ||||||||||||||||||
Non-GAAP diluted earnings per share (2) | $ | 1.64 | $ | 1.74 | $ | 1.45 | $ | 1.17 | |||||||||||||||||||
Cash flow from operations (3) | $ | 285.1 | $ | 285.1 | $ | 247.8 | $ | 135.2 | |||||||||||||||||||
(Dollar amounts in millions, except per share data) |
| Year ended September 30, |
|
| Percent Change |
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|
| 2022 |
|
| 2021 |
|
| Actual |
|
| Constant Currency(1) |
| ||||
ARR as of September 30(2) |
| $ | 1,572.0 |
|
| $ | 1,468.5 |
|
|
| 7 | % |
|
| 16 | % |
|
|
|
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|
|
|
|
|
|
|
|
| ||||
Total recurring revenue(3) |
| $ | 1,736.2 |
|
| $ | 1,616.3 |
|
|
| 7 | % |
|
| 12 | % |
Perpetual license |
|
| 34.1 |
|
|
| 33.0 |
|
|
| 3 | % |
|
| 6 | % |
Professional services |
|
| 163.1 |
|
|
| 157.8 |
|
|
| 3 | % |
|
| 9 | % |
Total revenue |
|
| 1,933.3 |
|
|
| 1,807.2 |
|
|
| 7 | % |
|
| 11 | % |
Total cost of revenue |
|
| 386.0 |
|
|
| 371.1 |
|
|
| 4 | % |
|
| 7 | % |
Gross margin |
|
| 1,547.4 |
|
|
| 1,436.1 |
|
|
| 8 | % |
|
| 12 | % |
Operating expenses |
|
| 1,100.0 |
|
|
| 1,055.3 |
|
|
| 4 | % |
|
| 6 | % |
Operating income |
| $ | 447.4 |
|
| $ | 380.7 |
|
|
| 17 | % |
|
| 30 | % |
Non-GAAP operating income(1) |
| $ | 732.2 |
|
| $ | 634.4 |
|
|
| 15 | % |
|
| 23 | % |
Operating margin |
|
| 23.1 | % |
|
| 21.1 | % |
|
|
|
|
|
| ||
Non-GAAP operating margin(1) |
|
| 37.9 | % |
|
| 35.1 | % |
|
|
|
|
|
| ||
Diluted earnings per share |
| $ | 2.65 |
|
| $ | 4.03 |
|
|
|
|
|
|
| ||
Non-GAAP diluted earnings per share(1) |
| $ | 4.58 |
|
| $ | 3.97 |
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|
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|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
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|
| ||||
Cash flow from operations(4) |
| $ | 435.3 |
|
| $ | 368.8 |
|
|
|
|
|
|
| ||
Capital expenditure |
|
| (19.5 | ) |
|
| (24.7 | ) |
|
|
|
|
|
| ||
Free cash flow |
| $ | 415.8 |
|
| $ | 344.1 |
|
|
|
|
|
|
| ||
Impact of Foreign Currency Exchange on Results of Operations
Approximately 60%55% of our revenue and 40% of our expenses are transacted in currencies other than the U.S. dollar. CurrencyDollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported results, which areresults. Changes in U.S. Dollars. If 2019 reported results were converted into U.S. dollars based on the corresponding prior year’s foreign currency exchange rates 2019 revenue would have been higher by $34 million and expenses would have been higher by $22 million. The net impact on year-over-yeara headwind to reported results would have been an increase in operating income of $12 million in 2019. FY’22.
The results of operations in the table above, and the tables and discussions below about revenue by line of business, product group, and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.
21
Table of comparability. In 2019 ourContents
Revenue
Under ASC 606, softwarethe volume, mix, and duration of contract types (support, SaaS, on-premises subscription) starting or renewing in any given period may have a material impact on revenue results were lower than under ASC 605 primarilyin the period, and as a result can impact the comparability of reported revenue period-over-period. We recognize revenue for the accelerationlicense portion of on-premises subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support element of on-premises subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to on-premises subscriptions, resulting in a shift to up-front recognition of on-premises subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract. Revenue from our cloud services (primarily SaaS) contracts is recognized ratably. As we continue to expand our SaaS offerings and release additional cloud functionality into our products, and customers begin to migrate from on-premises subscriptions to SaaS products, we expect that over time a higher portion of our on-premise subscription revenue associated withwill be recognized ratably. Given the retained earnings adoption adjustment recordeddifferent mix, duration and volume of new and renewing contracts in the first quarter, offset byany period, year-over-year or sequential revenue recognized in 2019, which would otherwise have been recognized ratably over future years under ASC 605. Professional services revenue under ASC 606 was higher than under ASC 605 due to the requirement to separately identify certain performance obligations, which would have otherwise been combined and recognized ratably under ASC 605, but instead were recognized in 2019.
Revenue by Line of Business
(Dollar amounts in millions) |
| Year ended September 30, |
|
| Percent Change |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| Actual |
|
| Constant |
| ||||
License (1) |
| $ | 782.7 |
|
| $ | 738.1 |
|
|
| 6 | % |
|
| 10 | % |
Support (2) and cloud services |
|
| 987.6 |
|
|
| 911.3 |
|
|
| 8 | % |
|
| 13 | % |
Total software revenue |
|
| 1,770.3 |
|
|
| 1,649.3 |
|
|
| 7 | % |
|
| 12 | % |
Professional services |
|
| 163.1 |
|
|
| 157.8 |
|
|
| 3 | % |
|
| 9 | % |
Total revenue |
| $ | 1,933.3 |
|
| $ | 1,807.2 |
|
|
| 7 | % |
|
| 11 | % |
The strengthening of the U.S. dollar compared to foreign currencies had a substantial impact on our revenue growth in FY'22. On an actual currency basis, FY'22 revenue increased $126 million (7%), compared to an increase of $202 million (11%) on a constant currency basis.
Software revenue increased in FY’22 compared to FY’21 due to growth of Windchill and supportArena revenue in the Americas and was 82% of totalcontribution from the recently acquired Codebeamer business in Europe, offset by a decline in Creo revenue primarily driven by foreign currency fluctuations in Europe and 94% of softwarechanges in contract durations. In FY'22, our average durations for on-premises subscriptions starting in the year decreased slightly, resulting in a reduced revenue for 2019. Our subscription revenue includes an immaterial amount of Software as a Service (SaaS) and cloud services revenue.
Professional services engagements typically result from sales of new licenses; revenue is recognized over the term of the engagement. Under ASC 605 professional services revenue was up 5% (9% constant currency) in 2019FY’22 compared to 2018.FY'21 reflects an increase in revenue associated with large PLM consulting engagements, particularly with automotive, aerospace and defense and consumer electronics customers. Professional services revenue in 2018 includes a $14.5 million write-down related to a settlementthe first half of a customer dispute concerning a receivable. ExcludingFY’21 was negatively impacted by services delivery challenges associated with the impact of this write-down, professional services revenue in 2019 would have declined 4% year over year. We expectCOVID-19 pandemic.
Our long-term expectation is that professional services revenue will trend flat-to-downdown over time due to our strategy to expand margins by migratingas we migrate more services engagements to our partners and deliveringdeliver products that require less consulting and training services.
22
Revenue and ARR by Product Group
Software Revenue by Product Group(1) |
| |||||||||||||||
(Dollar amounts in millions) |
| Year ended September 30, |
|
| Percent Change |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| Actual |
|
| Constant |
| ||||
Digital Thread - Core |
| $ | 1,212.1 |
|
| $ | 1,161.7 |
|
|
| 4 | % |
|
| 9 | % |
Digital Thread - Growth |
|
| 249.6 |
|
|
| 236.7 |
|
|
| 5 | % |
|
| 9 | % |
Digital Thread - FSG |
|
| 227.0 |
|
|
| 210.2 |
|
|
| 8 | % |
|
| 12 | % |
Digital Thread (Total) |
|
| 1,688.7 |
|
|
| 1,608.6 |
|
|
| 5 | % |
|
| 9 | % |
Velocity |
|
| 81.6 |
|
|
| 40.7 |
|
|
| 101 | % |
|
| 101 | % |
Software revenue |
| $ | 1,770.3 |
|
| $ | 1,649.3 |
|
|
| 7 | % |
|
| 12 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product lifecycle management (PLM) |
| $ | 980.5 |
|
| $ | 862.9 |
|
|
| 14 | % |
|
| 18 | % |
Computer-aided design (CAD) |
|
| 789.8 |
|
|
| 786.4 |
|
|
| 0 | % |
|
| 5 | % |
Software revenue |
| $ | 1,770.3 |
|
| $ | 1,649.3 |
|
|
| 7 | % |
|
| 12 | % |
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||||||||
| Percent Change | |||||||||||||||||||||||||||
| ASC 605 | |||||||||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | Actual | Constant Currency | Actual | Constant Currency | ||||||||||||||||||||
| Solutions Products | |||||||||||||||||||||||||||
| Software revenue | $ | 947.9 | $ | 1,000.2 | $ | 964.6 | $ | 893.6 | 4 | % | 6 | % | 8 | % | 5 | % | |||||||||||
| Professional services | 151.9 | 135.7 | 137.9 | 167.1 | (2 | )% | 2 | % | (17 | )% | (20 | )% | |||||||||||||||
| Total revenue | $ | 1,099.8 | $ | 1,135.9 | $ | 1,102.5 | $ | 1,060.7 | 3 | % | 6 | % | 4 | % | 1 | % | |||||||||||
| IoT Products | |||||||||||||||||||||||||||
| Software revenue | $ | 140.2 | $ | 150.6 | $ | 123.9 | $ | 93.7 | 22 | % | 24 | % | 32 | % | 31 | % | |||||||||||
| Professional services | 15.6 | 25.0 | 15.4 | 9.6 | 62 | % | 65 | % | 60 | % | 57 | % | |||||||||||||||
| Total revenue | $ | 155.8 | $ | 175.6 | $ | 139.3 | $ | 103.3 | 26 | % | 28 | % | 35 | % | 33 | % | |||||||||||
Windchill software revenue grewincreased by 12% (16% constant currency), driven by a significant increase in 2019on-premises subscription license revenue and an increase in cloud services revenue. Windchill ARRincreased 10% (19% constant currency) in FY'22 compared to 2018,FY'21.
Arena software revenue increased by 122% (actual and constant currency), driven by an increase in cloud services revenue and an increase in on-premises subscription license revenue. Arena was acquired in January 2021, so it did not contribute to FY'21 revenue for the full year and purchase accounting adjustments to acquired deferred revenue had a greater impact on FY'21 revenue than FY'22. Arena ARR increased by 27% (actual and constant currency) in FY'22 compared to FY'21.
IIoT software revenueincreased by 7% (10% constant currency) driven by an increase in cloud services revenue. IIoT ARRincreased 14% (21% constant currency) in FY'22 compared to FY'21.
The Codebeamer business, which we acquired in the third quarter, performed well and added a point of ARR growth, taking constant currency ARR growth to 16% for the fourth quarter and full year. Codebeamer generated $9 million of revenue in FY'22, with $6 million of on-premises subscription revenue whichand $2 million of perpetual support revenue. Codebeamer ARR as of September 30, 2022 was up 41% (44%$16 million ($18 million on a constant currency basis) year over year. This growth was offset in part.
Creo software revenue decreased by 1% primarily driven by the 49% (46%effect of foreign currency headwinds in Europe. Creo software revenue increased 4% on a constant currency basis) declinebasis. Creo ARRwas flat (increased 11% in perpetual license revenueconstant currency) in 2019 due to the end of life of perpetual licenses.
23
Software Revenue & ARR by Geographic Region
A significant portion of our strategy to limit the amount of professional services we provide.
(Dollar amounts in millions) |
| Year ended September 30, |
|
| Percent Change |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| Actual |
|
| Constant |
| ||||
Americas |
| $ | 835.9 |
|
| $ | 710.7 |
|
|
| 18 | % |
|
| 18 | % |
Europe |
|
| 633.4 |
|
|
| 645.8 |
|
|
| (2 | )% |
|
| 6 | % |
Asia Pacific |
|
| 301.0 |
|
|
| 292.8 |
|
|
| 3 | % |
|
| 9 | % |
Total Software revenue |
| $ | 1,770.3 |
|
| $ | 1,649.3 |
|
|
| 7 | % |
|
| 12 | % |
Americas software revenue growth in FY’22 was driven by Windchill revenue growth of 23%, Arena revenue growth of 133%, and IIoT revenue growth of 10%. The increase in revenue from Arena includes the effect of purchase accounting adjustments to reduce acquired deferred revenue. Americas ARR was up 17%.
Europe software revenue declined in FY’22, driven by a $48 million foreign currency impact associated with the strengthening of the U.S. Dollar compared to foreign currencies. Creo revenue decreased 5% (2% increase in constant currency), partially offset by Windchill revenue growth of 4% (12% constant currency) and the addition of Codebeamer revenue. ARR in Europe was up 16% constant currency.
Asia Pacific software revenue growth in FY’22 included a $19 million foreign currency impact associated with the strengthening of the US Dollar compared to foreign currencies. Creo revenue grew by 25% (27%4% (11% constant currency) and Windchill revenue grew 3% (9% constant currency). ARR in Asia Pacific was up 13% constant currency.
Gross Margin
(Dollar amounts in millions) |
| Year ended September 30, |
|
|
|
| ||||||
|
| 2022 |
|
| 2021 |
|
| Percent Change |
| |||
Gross margin: |
|
|
|
|
|
|
|
|
| |||
License gross margin |
| $ | 733.4 |
|
| $ | 676.3 |
|
|
| 8 | % |
License gross margin percentage |
|
| 94 | % |
|
| 92 | % |
|
|
| |
Support and cloud services gross margin |
| $ | 802.8 |
|
| $ | 747.2 |
|
|
| 7 | % |
Support and cloud services gross margin percentage |
|
| 81 | % |
|
| 82 | % |
|
|
| |
Professional services gross margin |
| $ | 11.1 |
|
| $ | 12.6 |
|
|
| (11 | )% |
Professional services gross margin percentage |
|
| 7 | % |
|
| 8 | % |
|
|
| |
|
|
|
|
|
|
|
|
|
| |||
Total gross margin |
| $ | 1,547.4 |
|
| $ | 1,436.1 |
|
|
| 8 | % |
Total gross margin percentage |
|
| 80 | % |
|
| 79 | % |
|
|
| |
|
|
|
|
|
|
|
|
|
| |||
Non-GAAP gross margin(1) |
| $ | 1,595.7 |
|
| $ | 1,485.1 |
|
|
| 7 | % |
Non-GAAP gross margin percentage(1) |
|
| 83 | % |
|
| 82 | % |
|
|
| |
(1) Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.
The strengthening of the U.S. dollar compared to foreign currencies had a substantial impact on our gross margin increase in FY'22. On an actual currency basis, FY'22 gross margin increased $111 million (8%), compared to an increase of $176 million (12%) on a constant currency basis)basis.
License gross margin increased in 2019, reflecting the strong bookings growth over the past several yearsFY’22 compared to FY’21 due to an increase in license revenue of $44.6 million and the compounding benefita decrease in cost of our maturing subscription model. IoT softwarelicense of $12.5 million, which was driven by lower amortization expense, royalty expense and compensation costs.
24
Support and cloud services gross margin increased in FY’22 compared to FY’21 due to increases in support and cloud services revenue of $76.3 million, partially offset by increases in 2018 reflects $5.2cost of support and cloud services of $20.7 million, which were driven by higher compensation, maintenance and hosting costs.
Professional services gross margin decreased in FY’22 compared to FY’21 due to increases in professional services costs of $6.7 million, including $5.1 million of new subscription revenuestock-based compensation expense recognized in FY'22 related to the customer dispute settlement described above, which settlement included the purchasesale of new subscription licenses.
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||||||||
| Percent Change | |||||||||||||||||||||||||||
| ASC 605 | |||||||||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | AS Reported ASC 605 | AS Reported ASC 605 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | Actual | Constant Currency | Actual | Constant Currency | ||||||||||||||||||||
| Americas | |||||||||||||||||||||||||||
| Software revenue | $ | 484.1 | $ | 512.3 | $ | 468.3 | $ | 433.7 | 9 | % | 10 | % | 8 | % | 8 | % | |||||||||||
| Professional services revenue | 53.4 | 53.0 | 42.9 | 67.2 | 24 | % | 24 | % | (36 | )% | (36 | )% | |||||||||||||||
| Total Revenue | $ | 537.5 | $ | 565.3 | $ | 511.2 | $ | 500.9 | 11 | % | 11 | % | 2 | % | 2 | % | |||||||||||
| Europe | |||||||||||||||||||||||||||
| Software revenue | $ | 379.9 | $ | 417.2 | $ | 402.9 | $ | 356.5 | 4 | % | 9 | % | 13 | % | 7 | % | |||||||||||
| Professional services revenue | 84.8 | 77.7 | 83.0 | 78.7 | (6 | )% | (1 | )% | 5 | % | (1 | )% | |||||||||||||||
| Total Revenue | $ | 464.7 | $ | 494.9 | $ | 485.9 | $ | 435.2 | 2 | % | 7 | % | 12 | % | 5 | % | |||||||||||
| Asia Pacific | |||||||||||||||||||||||||||
| Software revenue | $ | 224.1 | $ | 221.3 | $ | 217.3 | $ | 197.1 | 2 | % | 4 | % | 10 | % | 8 | % | |||||||||||
| Professional services revenue | 29.4 | 29.9 | 27.4 | 30.9 | 9 | % | 12 | % | (11 | )% | (13 | )% | |||||||||||||||
| Total Revenue | $ | 253.4 | $ | 251.3 | $ | 244.7 | $ | 228.0 | 3 | % | 5 | % | 7 | % | 5 | % | |||||||||||
Operating Expenses
(Dollar amounts in millions) |
| Year ended September 30, |
|
|
|
| ||||||
|
| 2022 |
|
| 2021 |
|
| Percent Change |
| |||
Sales and marketing |
| $ | 485.2 |
|
| $ | 517.8 |
|
|
| (6 | )% |
% of total revenue |
|
| 25 | % |
|
| 29 | % |
|
|
| |
Research and development |
|
| 338.8 |
|
|
| 299.9 |
|
|
| 13 | % |
% of total revenue |
|
| 18 | % |
|
| 17 | % |
|
|
| |
General and administrative |
|
| 204.7 |
|
|
| 206.0 |
|
|
| (1 | )% |
% of total revenue |
|
| 11 | % |
|
| 11 | % |
|
|
| |
Amortization of acquired intangible assets |
|
| 35.0 |
|
|
| 29.4 |
|
|
| 19 | % |
% of total revenue |
|
| 2 | % |
|
| 2 | % |
|
|
| |
Restructuring and other charges, net |
|
| 36.2 |
|
|
| 2.2 |
|
|
| 1545 | % |
% of total revenue |
|
| 2 | % |
|
| 0 | % |
|
|
| |
Total operating expenses |
| $ | 1,100.0 |
|
| $ | 1,055.3 |
|
|
| 4 | % |
The strengthening of 9% (8%the U.S. dollar compared to foreign currencies had a substantial reduction to our operating expense increase in FY'22. On an actual currency basis, FY'22 operating expenses increased $45 million (4%), compared to an increase of $67 million (6%) on a constant currency basis)basis.
Total headcount decreased by 3% in perpetual license revenue in 2019 dueFY'22 to 6,503 from 6,709 at the end of life of perpetual licensesFY'21.
Operating expenses in the Americas as of January 1, 2018.
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Gross margin | $ | 930.3 | $ | 993.3 | $ | 915.3 | $ | 835.5 | 9 | % | 10 | % | |||||||||
| Non-GAAP gross margin | 970.0 | 1,033.1 | 963.7 | 877.0 | 7 | % | 10 | % | |||||||||||||
| Gross margin as a % of revenue: | |||||||||||||||||||||
| License | 84 | % | 92 | % | 91 | % | 81 | % | |||||||||||||
| Support and cloud services | 83 | % | 73 | % | 76 | % | 82 | % | |||||||||||||
| Professional services | 16 | % | 16 | % | 6 | % | 15 | % | |||||||||||||
| Gross margin as a % of total revenue | 74 | % | 76 | % | 74 | % | 72 | % | |||||||||||||
| Non-GAAP gross margin as a % of total non-GAAP revenue | 77 | % | 79 | % | 77 | % | 75 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||||
| ASC 605 | |||||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||
| Cost of license revenue | 51.9 | 50.2 | 47.7 | 66.8 | 5 | % | (29 | )% | |||||||||||||||
| Cost of support and cloud services revenue | 133.5 | 133.0 | 135.1 | 110.9 | (2 | )% | 22 | % | |||||||||||||||
| Cost of professional services revenue | 140.0 | 134.9 | 143.7 | 150.7 | (6 | )% | (5 | )% | |||||||||||||||
| Sales and marketing | 417.4 | 442.0 | 414.8 | 372.7 | 7 | % | 11 | % | |||||||||||||||
| Research and development | 246.9 | 246.9 | 249.8 | 236.0 | (1 | )% | 6 | % | |||||||||||||||
| General and administrative | 127.9 | 127.9 | 143.0 | 145.0 | (11 | )% | (1 | )% | |||||||||||||||
| Amortization of acquired intangible assets | 23.8 | 23.8 | 31.4 | 32.1 | (24 | )% | (2 | )% | |||||||||||||||
| Restructuring and other charges, net | 51.1 | 51.1 | 3.8 | 7.9 | 1,258 | % | (53 | )% | |||||||||||||||
| Total costs and expenses | $ | 1,192.6 | $ | 1,209.8 | $ | 1,169.2 | $ | 1,122.3 | 3 | % | (1) | 4 | % | (1) | |||||||||
| Total headcount at end of period | 6,055 | 6,055 | 6,110 | 6,041 | (1 | )% | 1 | % | |||||||||||||||
partially offset by:
25
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Cost of license revenue | $ | 51.9 | $ | 50.2 | $ | 47.7 | $ | 66.8 | 5 | % | (29 | )% | |||||||||
| % of total revenue | 4 | % | 4 | % | 4 | % | 6 | % | |||||||||||||
| % of total license revenue | 16 | % | 8 | % | 9 | % | 19 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Cost of support and cloud services revenue | $ | 133.5 | $ | 133.0 | $ | 135.1 | $ | 110.9 | (2 | )% | 22 | % | |||||||||
| % of total revenue | 11 | % | 10 | % | 11 | % | 10 | % | |||||||||||||
| % of total support and cloud services revenue | 17 | % | 27 | % | 24 | % | 18 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Cost of professional service revenue | $ | 140.0 | $ | 134.9 | $ | 143.7 | $ | 150.7 | (6 | )% | (5 | )% | |||||||||
| % of total revenue | 11 | % | 10 | % | 12 | % | 13 | % | |||||||||||||
| % of total professional service revenue | 84 | % | 84 | % | 94 | % | 85 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Sales and marketing expenses | $ | 417.4 | $ | 442.0 | $ | 414.8 | $ | 372.7 | 7 | % | 11 | % | |||||||||
| % of total revenue | 33 | % | 34 | % | 33 | % | 32 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Research and development expenses | $ | 246.9 | $ | 246.9 | $ | 249.8 | $ | 236.0 | (1 | )% | 6 | % | |||||||||
| % of total revenue | 20 | % | 19 | % | 20 | % | 20 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| General and administrative expenses | $ | 127.9 | $ | 127.9 | $ | 143.0 | $ | 145.0 | (11 | )% | (1 | )% | |||||||||
| % of total revenue | 10 | % | 10 | % | 12 | % | 12 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Amortization of acquired intangible assets | $ | 23.8 | $ | 23.8 | $ | 31.4 | $ | 32.1 | (24 | )% | (2 | )% | |||||||||
| % of total revenue | 2 | % | 2 | % | 3 | % | 3 | % | |||||||||||||
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Restructuring charges (credits), net | $ | 48.6 | $ | 48.6 | $ | (1.0 | ) | $ | 7.9 | (4,947 | )% | (113 | )% | ||||||||
| Headquarters relocation charges | 2.5 | 2.5 | 4.8 | — | (48 | )% | - | ||||||||||||||
| Restructuring and Other Charges, Net | 51.1 | 51.1 | 3.8 | 7.9 | 1,258 | % | (53 | )% | |||||||||||||
| % of total revenue | 4 | % | 4 | % | — | % | 1 | % | |||||||||||||
Interest Expense
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Interest expense | $ | (43.0 | ) | $ | (43.0 | ) | $ | (41.7 | ) | $ | (42.4 | ) | 3 | % | (2 | )% | |||||
(Dollar amounts in millions) |
| Year ended September 30, |
|
|
|
| ||||||
|
| 2022 |
|
| 2021 |
|
| Percent Change |
| |||
Interest and debt premium expense |
| $ | (54.3 | ) |
| $ | (50.5 | ) |
|
| 8 | % |
Interest expense includes interest under our credit facility and senior notes. Interest expense was higher in FY'22 than FY'21. We had $673$1,359 million of total debt at September 30, 2019,2022, compared to $648$1,450 million at September 30, 2018.
The average interest rate on our total borrowings was 5.4%3.4% in 2019, 5.2%FY'22 and 3.3% in 2018 and 4.9% in 2017.
Other Income (Expense), net
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Foreign currency losses, net | $ | (3.2 | ) | $ | (3.3 | ) | $ | (7.0 | ) | $ | (5.7 | ) | (52 | )% | 23 | % | |||||
| Interest income | 4.1 | 4.1 | 3.8 | 3.2 | 7 | % | 18 | % | |||||||||||||
| Other non-operating income (expense), net | (0.6 | ) | (0.6 | ) | 0.9 | 1.7 | (172 | )% | (47 | )% | |||||||||||
| Other income (expense), net | $ | 0.3 | $ | 0.1 | $ | (2.3 | ) | $ | (0.8 | ) | (106 | )% | 196 | % | |||||||
(Dollar amounts in millions) |
| Year ended September 30, |
|
|
|
| ||||||
|
| 2022 |
|
| 2021 |
|
| Percent Change |
| |||
Interest income |
| $ | 2.5 |
|
| $ | 1.8 |
|
|
| 39 | % |
Other income (expense), net |
|
| 1.5 |
|
|
| 59.7 |
|
|
| (97 | )% |
Other income, net |
| $ | 4.0 |
|
| $ | 61.5 |
|
|
| (93 | )% |
Interest income represents earnings on the investment of our available cash balances.
The decrease in Other non-operating income, (expense), net, is primarily made upin FY’22 over FY’21 was driven by a FY'21 credit of $69 million associated with unrealized gains related to an equity investment in a publicly-traded company. In FY'22, the value of that equity investment decreased, resulting in a $35 million charge. That FY'22 charge was offset by a gain on the sale of a portion of our PLM services business of $30 million and $6 million of gains on the sale of other non-operating gainsassets and losses.
Income Taxes
(Dollar amounts in millions) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| Percent Change |
| |||
Income before income taxes |
| $ | 397.1 |
|
| $ | 391.8 |
|
|
| 1 | % |
Provision (benefit) for income taxes |
|
| 84.0 |
|
|
| (85.2 | ) |
|
| (199 | )% |
Effective income tax rate |
|
| 21 | % |
|
| (22 | )% |
|
|
| |
In FY’22 and Effective Income Tax Rate
| (Dollar amounts in millions) | Year ended September 30, | ||||||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | Percent Change | |||||||||||||||||
| ASC 605 | |||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
| Income (loss) before income taxes | $ | 20.3 | $ | 58.7 | $ | 28.7 | $ | (1.4 | ) | 105 | % | (2,138 | )% | ||||||||
Provision (benefit) for income taxes | 47.8 | 55.7 | (23.3 | ) | (7.6 | ) | (339 | )% | 205 | % | |||||||||||
| Effective income tax rate | 235 | % | 95 | % | (81 | )% | 544 | % | |||||||||||||
Additionally in FY’22, our results include tax expense inrelating to the year incurred.
26
In FY’21, our tax rate includes a benefit due to the benefitrelease of this amortization.
Our results for the twelve months ended September 30, 2021, include a charge of $37.3 million related to be realizedthe effects of a tax matter in the future. We will continueRepublic of Korea (South Korea) of $34.4 million, and the resulting impact on U.S. income taxes of $2.9 million. The charge related to reassess our valuation allowance requirements each financial reporting period. However, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.
Liquidity and Capital Resources
(in millions) |
| September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash and cash equivalents |
| $ | 272.2 |
|
| $ | 326.5 |
|
Restricted cash |
|
| 0.7 |
|
|
| 0.5 |
|
Total |
| $ | 272.9 |
|
| $ | 327.0 |
|
Activity for the year included the following: |
|
|
|
|
|
| ||
Net cash provided by operating activities |
| $ | 435.3 |
|
| $ | 368.8 |
|
Net cash used in investing activities |
| $ | (201.2 | ) |
| $ | (687.9 | ) |
Net cash (used in) provided by financing activities |
| $ | (264.1 | ) |
| $ | 370.3 |
|
Cash, cash equivalents and restricted cash
We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. cash and cash equivalents include highly liquid investments with original maturities of three months or less. At September 30, 2022, cash and cash equivalents totaled $272 million, compared to $327 million at September 30, 2021.
A significant portion of our cash is generated and held outside the U.S. As of September 30, 2022, we had cash and cash equivalents of $11 million in the U.S., $105 million in Europe, $128 million in Asia Pacific (including India) and $28 million in other non-U.S. countries. We have appealedsubstantial cash requirements in the U.S., but we believe that the combination of our existing U.S. cash and intendcash equivalents, marketable securities, our ability to vigorously defendrepatriate cash to the U.S., future U.S. operating cash flows and cash available under our positions. credit facility will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.
Cash provided by operating activities
Cash provided by operating activities was $435 million in FY'22 compared to $369 million in FY'21. The year-over-year increase is primarily due to approximately $170 million of higher cash collections, offset by $30 million more in salary and salary-related payments, a $57 million increase in disbursements largely related to prepayments made in FY'22, and a $12 million increase in tax-related payments.
Restructuring payments totaled $41 million in FY'22, compared to $15 million in FY'21. Cash paid for income taxes was $55 million in FY'22 compared to $58 million in FY'21.
Cash used in investing activities
(in millions) |
| Year ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Additions to property and equipment |
| $ | (19.5 | ) |
| $ | (24.7 | ) |
Proceeds from short- and long-term marketable securities, net |
|
| — |
|
|
| 58.4 |
|
Acquisitions of businesses, net of cash acquired |
|
| (282.9 | ) |
|
| (718.0 | ) |
Proceeds from sales of investments |
|
| 46.9 |
|
|
| — |
|
Purchases of investments |
|
| — |
|
|
| (4.0 | ) |
Purchase of intangible assets |
|
| (6.5 | ) |
|
| (0.6 | ) |
Settlement of net investment hedges |
|
| 24.9 |
|
|
| 1.0 |
|
Divestiture of business, net |
|
| 32.5 |
|
|
| — |
|
Other investing activities |
|
| 3.4 |
|
|
| — |
|
Net cash used in investing activities |
| $ | (201.2 | ) |
| $ | (687.9 | ) |
27
Cash used in investing activities in FY'22 reflects $278 million ($264 million of which we borrowed under our credit facility) used to acquire the Codebeamer business in FY'22, compared to $718 million used in FY’21 for the Arena acquisition, offset by FY'22 proceeds from the sale of a portion of our PLM services business of $33 million and proceeds from the sale of investments of $47 million. For additional detail on our acquisitions, see Note 6.Acquisitions and Disposition of Business of Notes to Consolidated Financial Statements in this Annual Report.
Cash (used in) provided by financing activities
(in millions) |
| Year ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Borrowings (repayments) on debt, net |
| $ | (91.0 | ) |
| $ | 432.0 |
|
Repurchases of common stock |
|
| (125.0 | ) |
|
| (30.0 | ) |
Proceeds from issuance of common stock |
|
| 21.2 |
|
|
| 21.6 |
|
Payments of withholding taxes in connection with stock-based awards |
|
| (69.0 | ) |
|
| (53.0 | ) |
Payments of principal for financing leases |
|
| (0.3 | ) |
|
| (0.4 | ) |
Net cash (used in) provided by financing activities |
| $ | (264.1 | ) |
| $ | 370.3 |
|
Cash used in financing activities in FY’22 reflects borrowings of $264 million, offset by repayments of $355 million under our credit facility, repurchases of common stock of $125 million, payments of withholding taxes related to stock-based awards of $69 million and proceeds from the issuance of common stock of $21 million. In FY'21, net borrowings of $600 million were offset by $168 million of repayments under our credit facility, repurchases of common stock of $30 million, and payments of withholding taxes related to stock-based awards of $53 million.
Outstanding Debt
As of September 30, 2022, we had:
(in millions) |
| September 30, 2022 |
| |
4.000% Senior notes due 2028 |
| $ | 500.0 |
|
3.625% Senior notes due 2025 |
|
| 500.0 |
|
Credit facility revolver |
|
| 359.0 |
|
Total debt |
|
| 1,359.0 |
|
Unamortized debt issuance costs for the Senior notes |
|
| (8.4 | ) |
Total debt, net of issuance costs |
| $ | 1,350.6 |
|
|
|
|
| |
Undrawn under credit facility revolver |
| $ | 641.0 |
|
Undrawn under credit facility revolver available for borrowing |
| $ | 625.1 |
|
As of September 30, 2022, we were in compliance with all financial and operating covenants of the credit facility and the note indentures. Any failure to comply with such covenants under the credit facility would prevent us from being able to borrow additional funds under the credit facility, and, as with any failure to comply with such covenants under the note indentures, could constitute a default that could cause all amounts outstanding to become due and payable immediately. Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days. As of September 30, 2022, the annual rate for borrowings outstanding was 4.1%, which has subsequently increased to 5.7%.
Our credit facility and our Senior Notes are described in Note 9. Debt of Notes to the Consolidated Financial Statements in this Annual Report.
Share Repurchase Authorization
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors has authorized us to repurchase up to $1 billion of our common stock through September 30, 2023. We may use cash from operations and borrowings under our credit facility to make any such repurchases. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
28
In FY'22 and in FY'21 we repurchased 1.05 million shares for $125 million and approximately 0.23 million shares in the open market for $30 million, respectively.
Our long-term goal is to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic initiatives and acquisitions, which could cause us to reduce, suspend, or cease repurchases.
Expectations for Fiscal 2023
We believe that upon completion of a multi-level appeal process it is more likely than not that our positionsexisting cash and cash equivalents, together with cash generated from operations and amounts available under the credit facility and otherwise, will be sustained. Accordingly,sufficient to meet our working capital and capital expenditure requirements (which we haveexpect to be approximately $20 million in FY’23) through at least the next twelve months and to meet our known long-term capital requirements.
Our expected uses and sources of cash could change, our cash position could be reduced, and we could incur additional debt obligations if we engage in strategic transactions, retire debt, or repurchase shares, any of which could be commenced, suspended, or completed at any time. Any share repurchases or debt retirement will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Such debt retirement or issuance, share repurchases, or strategic transactions may be material. We regularly borrow under our credit facility to make strategic acquisitions and expect to continue to do so, and may substantially increase our indebtedness to pursue strategic acquisitions, which would increase our debt repayment obligations, including related interest obligations.
Contractual Obligations
At September 30, 2022, our future contractual obligations were related to debt, leases, pension liabilities, unrecognized tax benefits, and purchase obligations. See Note 9. Debt, Note 19. Leases, Note 14. Pension Plans, and Note 8. Income Taxes of Notes to Consolidated Financial Statements in this Annual Report for information about those obligations, which Notes are incorporated by reference into this section. Our purchase obligations were approximately $161.4 million, with $64.2 million expected to be paid in FY'23 and $97.2 million thereafter. Purchase obligations represent minimum commitments due to third parties, including royalty contracts, research and development contracts, telecommunication contracts, information technology maintenance contracts in support of internal-use software and hardware, financing leases, operating leases with original terms of less than 12 months, and other marketing and consulting contracts. Contracts for which our commitment is variable, based on volumes, with no fixed minimum quantities, and contracts that can be canceled without payment penalties are not recorded a tax reserve for this matter. We paid this assessmentincluded in the first quarter of 2017, pending resolution of the appeal process. If the South Korean tax authorities werepurchase obligation amounts above. The purchase obligations included above are in addition to prevail the potential additional exposure through 2019 would be approximately $13 million.
As of September 30, 2022, we had letters of credit and bank guarantees outstanding of approximately $15 million (of which $0.5 million was offset by a corresponding increase in the valuation allowance against U.S. deferred tax assets. On June 7, 2019, the U.S. Courtcollateralized).
29
Operating Measures
ARR
ARR operating measure. On September 5, 2019, we revised the ARR definition. ARR(Annual Run Rate) represents the annualized value of our portfolio of recurring customer arrangementsactive subscription software, cloud, SaaS, and support contracts as of the end of the reporting period, including subscription software, cloud, and support contracts. This is a change from our prior definition where ARR for a quarter was calculated by dividing the portion of non-GAAP software revenue attributable to subscription and support under ASC 605 for the quarter by the number of days in the quarter and multiplying by 365. The definition change did not materially change the amount of ARR reported under ASC 605 for the period.
We believe ARR is a valuable operating metric to measure the health of a subscription business because it captures expected subscription and support cash generation from new customers, existing customer expansions and includes the impact of total churn, which reflects churn, offset by the impact of any pricing increases.
Non-GAAP Financial Measures
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
Free cash flow is cash flow from operations net of capital expenditures, which are expenditures for property and equipment and consist primarily of facility improvements, office equipment, computer equipment, and software. We believe that free cash flow, in conjunction with cash from operations, is a useful measure of liquidity since capital expenditures are a necessary component of ongoing operations.
The non-GAAP financial measures other than free cash flow exclude, fair value adjustments related to acquired deferred revenue and deferred costs,as applicable: stock-based compensation expense,expense; amortization of acquired intangible assets expense, acquisition-related charges, pension plan termination-related costs, a legal accrual, restructuring charges, non-operating credit facility refinancing costs, identified discreteassets; acquisition and transaction-related charges included in general and administrative expenses; restructuring and other charges, net; non-operating other expense, netcharges; and the relatedincome tax effects of the precedingadjustments.
The items and any other identified tax items.
Stock-based compensation is a non-cash expense relating to stock-based awards issued to executive officers, employees and outside directors, consisting of restricted stock, stock options and restricted stock units. We exclude this expense as it is a non-cash expense and we assess our internal operations excluding this expense and believe it facilitates comparisons to the performance of other companies in our industry.
Amortization of acquired intangible assets is a non-cash expense that is impacted by the timing and magnitude of our acquisitions. We believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of other companies in our industry.
Acquisition-related30
Acquisition and other transactionaltransaction-related charges included in generalGeneral and administrative costs expenses are direct costs of potential and completed acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, severance and professional fees. Subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are also included within acquisition-relatedacquisition and transaction-related charges. Other transactional charges include third-party costs related to structuring unusual transactions. We do not include these costs when reviewing our operating results internally. The occurrence and amount of these costs will vary depending on the timing and size of acquisitions.acquisitions and transactions.
Restructuring and other charges, net include includes excess facility restructuring charges headquarters relocation(credits); impairment and accretion expense charges related to the lease assets of exited facilities; sublease income from previously impaired facilities; and severance costs resulting from reductions of personnel driven byand third-party professional consulting fees related to modifications toof our business strategy. Headquarters relocation charges are non-cash accelerated depreciation expense recorded in anticipation of exiting our prior headquarters facility due to changes in the estimated useful lives of fixed assets. We do not include these costs when reviewing our operating results internally. These costs may vary in size based on our restructuring plan.
Non-operating credit facility refinancing costscharges (credits) includes gains or losses associated with sales or changes in value of assets or liabilities which are non-operating chargesgenerally investing or financing in nature, and are inconsistent with our ordinary operating activities. In FY'22, we record asrecorded gains associated with the sale of assets, including the sale of a result of the refinancingportion of our credit facility. We assess our internal operations excluding these costs and believe it facilitates comparisonsPLM services business. Additionally in FY'22, we recorded a loss associated with the reduction in value of an equity investment in a publicly-traded company. In FY'21, we recorded a gain related to the performancechange in value of other companiesan equity investment in our industry.a publicly-traded company.
Income tax adjustments include the tax impact of the items above and assumes that we are profitable on a non-GAAP basis in the U.S. and one foreign jurisdiction. It also eliminates the effect of the valuation allowance recorded against our net deferred tax assets in those jurisdictions. Additionally, we exclude other material tax items that we do not include when reviewing our operating results internally.
We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP financial measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals (communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP financial measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results.
The items excluded from the non-GAAP financial measures often have a material impact on our financial results and such items often recur. Accordingly, the non-GAAP financial measures included in this Annual Report should be considered in addition to, and not as a substitute for or superior to, the
31
(in millions, except per share amounts) |
| Year ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
GAAP gross margin |
| $ | 1,547.4 |
|
| $ | 1,436.1 |
|
Stock-based compensation |
|
| 22.8 |
|
|
| 19.3 |
|
Amortization of acquired intangible assets included in cost of revenue |
|
| 25.6 |
|
|
| 29.8 |
|
Non-GAAP gross margin |
| $ | 1,595.7 |
|
| $ | 1,485.1 |
|
GAAP operating income |
| $ | 447.4 |
|
| $ | 380.7 |
|
Stock-based compensation |
|
| 174.9 |
|
|
| 177.3 |
|
Amortization of acquired intangible assets |
|
| 60.5 |
|
|
| 59.2 |
|
Acquisition and transaction-related charges |
|
| 13.2 |
|
|
| 15.0 |
|
Restructuring and other charges, net |
|
| 36.2 |
|
|
| 2.2 |
|
Non-GAAP operating income |
| $ | 732.2 |
|
| $ | 634.4 |
|
GAAP net income |
| $ | 313.1 |
|
| $ | 476.9 |
|
Stock-based compensation |
|
| 174.9 |
|
|
| 177.3 |
|
Amortization of acquired intangible assets |
|
| 60.5 |
|
|
| 59.2 |
|
Acquisition and transaction-related charges |
|
| 13.2 |
|
|
| 15.0 |
|
Restructuring and other charges, net |
|
| 36.2 |
|
|
| 2.2 |
|
Non-operating charges(credits), net(1) |
|
| (1.4 | ) |
|
| (68.8 | ) |
Income tax adjustments(2) |
|
| (55.1 | ) |
|
| (191.6 | ) |
Non-GAAP net income |
| $ | 541.5 |
|
| $ | 470.2 |
|
GAAP diluted earnings per share |
| $ | 2.65 |
|
| $ | 4.03 |
|
Stock-based compensation |
|
| 1.48 |
|
|
| 1.50 |
|
Total amortization of acquired intangible assets |
|
| 0.51 |
|
|
| 0.50 |
|
Acquisition and transaction-related charges |
|
| 0.11 |
|
|
| 0.13 |
|
Restructuring and other charges, net |
|
| 0.31 |
|
|
| 0.02 |
|
Non-operating charges(credits), net(1) |
|
| (0.01 | ) |
|
| (0.58 | ) |
Income tax adjustments(2) |
|
| (0.47 | ) |
|
| (1.62 | ) |
Non-GAAP diluted earnings per share |
| $ | 4.58 |
|
| $ | 3.97 |
|
|
|
|
|
|
|
| ||
Cash flow from operations |
| $ | 435.3 |
|
| $ | 368.8 |
|
Capital expenditure |
|
| (19.5 | ) |
|
| (24.7 | ) |
Free cash flow |
| $ | 415.8 |
|
| $ | 344.1 |
|
| (in millions, except per share amounts) | Year ended September 30, | ||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | ||||||||||||
| 2019 | 2019 | 2018 | 2017 | ||||||||||||
| GAAP revenue | $ | 1,255.6 | $ | 1,311.5 | $ | 1,241.8 | $ | 1,164.0 | |||||||
| Settlement revenue exclusion | — | — | 9.3 | — | |||||||||||
| Fair value of acquired deferred revenue | 0.8 | 0.8 | 1.3 | 2.7 | |||||||||||
| Non-GAAP revenue | $ | 1,256.4 | $ | 1,312.3 | $ | 1,252.4 | $ | 1,166.8 | |||||||
| GAAP gross margin | $ | 930.3 | $ | 993.3 | $ | 915.3 | $ | 835.5 | |||||||
| Settlement revenue exclusion | — | — | 9.3 | — | |||||||||||
| Fair value of acquired deferred revenue | 0.8 | 0.8 | 1.3 | 2.7 | |||||||||||
| Fair value to acquired deferred costs | (0.3 | ) | (0.3 | ) | (0.4 | ) | (0.4 | ) | |||||||
| Stock-based compensation | 11.9 | 11.9 | 11.5 | 12.6 | |||||||||||
| Amortization of acquired intangible assets included in cost of revenue | 27.3 | 27.3 | 26.7 | 26.6 | |||||||||||
| Non-GAAP gross margin | $ | 970.0 | $ | 1,033.1 | $ | 963.7 | $ | 877.0 | |||||||
| GAAP operating income (loss) | $ | 63.0 | $ | 101.6 | $ | 72.6 | $ | 41.8 | |||||||
| Settlement revenue exclusion | — | — | 9.3 | — | |||||||||||
| Fair value of acquired deferred revenue | 0.8 | 0.8 | 1.3 | 2.7 | |||||||||||
| Fair value to acquired deferred costs | (0.3 | ) | (0.3 | ) | (0.4 | ) | (0.4 | ) | |||||||
| Stock-based compensation | 86.4 | 86.4 | 82.9 | 76.7 | |||||||||||
| Amortization of acquired intangible assets included in cost of revenue | 27.3 | 27.3 | 26.7 | 26.6 | |||||||||||
| Amortization of acquired intangible assets | 23.8 | 23.8 | 31.4 | 32.1 | |||||||||||
| Acquisition-related and other transactional charges included in general and administrative expenses | 3.1 | 3.1 | 1.9 | 1.6 | |||||||||||
| U.S. pension plan termination-related costs | — | — | — | 0.3 | |||||||||||
| Restructuring and other charges, net | 51.1 | 51.1 | 3.8 | 7.9 | |||||||||||
| Non-GAAP operating income | $ | 255.3 | $ | 293.9 | $ | 229.4 | $ | 189.3 | |||||||
| GAAP net income (loss) | $ | (27.5 | ) | $ | 3.0 | $ | 52.0 | $ | 6.2 | ||||||
| Settlement revenue exclusion | — | — | 9.3 | — | |||||||||||
| Fair value of acquired deferred revenue | 0.8 | 0.8 | 1.3 | 2.7 | |||||||||||
| Fair value to acquired deferred costs | (0.3 | ) | (0.3 | ) | (0.4 | ) | (0.4 | ) | |||||||
| Stock-based compensation | 86.4 | 86.4 | 82.9 | 76.7 | |||||||||||
| Amortization of acquired intangible assets included in cost of revenue | 27.3 | 27.3 | 26.7 | 26.6 | |||||||||||
| Amortization of acquired intangible assets | 23.8 | 23.8 | 31.4 | 32.1 | |||||||||||
| Acquisition-related and other transactional charges included in general and administrative expenses | 3.1 | 3.1 | 1.9 | 1.6 | |||||||||||
| U.S. pension plan termination-related costs | — | — | — | 0.3 | |||||||||||
| Restructuring and other charges, net | 51.1 | 51.1 | 3.8 | 7.9 | |||||||||||
| Non-operating credit facility refinancing costs | — | — | — | 1.2 | |||||||||||
Income tax adjustments (1) | 29.7 | 11.8 | (37.6 | ) | (17.4 | ) | |||||||||
| Non-GAAP net income | $ | 194.5 | $ | 207.0 | $ | 171.2 | $ | 137.6 | |||||||
| GAAP diluted earnings (loss) per share | $ | (0.23 | ) | $ | 0.03 | $ | 0.44 | $ | 0.05 | ||||||
| Settlement revenue exclusion | — | — | 0.08 | — | |||||||||||
| Fair value of acquired deferred revenue | 0.01 | 0.01 | 0.01 | 0.02 | |||||||||||
| Stock-based compensation | 0.73 | 0.73 | 0.70 | 0.65 | |||||||||||
| Total amortization of acquired intangible assets | 0.43 | 0.43 | 0.49 | 0.50 | |||||||||||
| Acquisition-related and other transactional charges included in general and administrative expenses | 0.03 | 0.03 | 0.02 | 0.01 | |||||||||||
| Restructuring and other charges, net | 0.43 | 0.43 | 0.03 | 0.07 | |||||||||||
| Non-operating credit facility refinancing costs | — | — | — | 0.01 | |||||||||||
Income tax adjustments (1) | 0.25 | 0.10 | (0.32 | ) | (0.15 | ) | |||||||||
Non-GAAP diluted earnings per share (2) | $ | 1.64 | $ | 1.74 | $ | 1.45 | $ | 1.17 | |||||||
| Year ended September 30, | ||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | |||||||||
| Operating margin impact of non-GAAP adjustments: | 2019 | 2019 | 2018 | 2017 | ||||||||
| GAAP operating margin | 5.0 | % | 7.7 | % | 5.8 | % | 3.6 | % | ||||
| Settlement revenue exclusion | — | % | — | % | 0.6 | % | — | % | ||||
| Fair value of acquired deferred revenue | 0.1 | % | 0.1 | % | 0.1 | % | 0.2 | % | ||||
| Stock-based compensation | 6.9 | % | 6.6 | % | 6.7 | % | 6.6 | % | ||||
| Total amortization of acquired intangible assets | 4.1 | % | 3.9 | % | 4.7 | % | 5.0 | % | ||||
| Acquisition-related and other transactional charges included in general and administrative expenses | 0.2 | % | 0.2 | % | 0.1 | % | 0.1 | % | ||||
| Restructuring and other charges, net | 4.1 | % | 3.9 | % | 0.3 | % | 0.7 | % | ||||
| Non-GAAP operating margin | 20.3 | % | 22.4 | % | 18.3 | % | 16.2 | % | ||||
Operating margin impact of non-GAAP adjustments:
|
| Year ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
GAAP operating margin |
|
| 23.1 | % |
|
| 21.1 | % |
Stock-based compensation |
|
| 9.0 | % |
|
| 9.8 | % |
Total amortization of acquired intangible assets |
|
| 3.1 | % |
|
| 3.3 | % |
Acquisition and transaction-related charges |
|
| 0.7 | % |
|
| 0.8 | % |
Restructuring and other charges, net |
|
| 1.9 | % |
|
| 0.1 | % |
Non-GAAP operating margin |
|
| 37.9 | % |
|
| 35.1 | % |
32
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenues, results of operations, and net income, as well as on the value of certain assets and liabilities on our balance sheet. These estimates, assumptions and judgments are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time.
The accounting policies, methods and estimates used to prepare our financial statements are described generally in Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements in this Annual Report. The most important accounting judgments and estimates that we made in preparing the financial statements involved:
A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make subjective or complex judgments that could have a material effect on our financial condition and results of operations. Critical accounting policies require us to make assumptions about matters that are uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimates that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.
Accounting policies, guidelines and interpretations related to our critical accounting policies and estimates are generally subject to numerous sources of authoritative guidance and are often reexamined by accounting standards rule makers and regulators. These rule makers and/or regulators may promulgate interpretations, guidance or regulations that may result in changes to our accounting policies, which could have a material impact on our financial position and results of operations.
We record revenues in accordance with the guidance provided by ASC 606, Revenue from Contracts with Customer. In accordance with ASC 606,Customers. For a full description of our revenue is recognized when a customer obtains controlaccounting policy, refer to Note 2. Summary of promised products or services. The amountSignificant Accounting Policies, included in the Notes to Consolidated Financial Statements in this Annual Report.
Our sources of revenue recognized reflects the consideration that we expect to be entitled to receive in exchangeinclude: (1) subscriptions, (2) perpetual licenses, (3) support for these products orperpetual licenses and (4) professional services. To achieve the core principleSubscriptions include term-based on-premises licenses, Software-as-a-Service (SaaS), and hosting services.
Judgments and Estimates
Determination of this standard, we apply the following five steps:
Allocation of transaction price. We estimate the standalone selling price of each identified performance obligation from the software and support components of the subscription.
Right to software licenses and 45% to 50%, depending upon the product offering, is attributable to support for those licenses.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to calculate our income tax expense based on taxable income by jurisdiction. There are many transactions and calculations about which the ultimate tax outcome is uncertain; as a result, our calculations involve estimates by management. Some of these uncertainties arise as a consequence of revenue-sharing, cost-reimbursement and transfer pricing arrangements among related entities and the differing tax treatment of revenue and cost items across various jurisdictions. If we were compelled to revise or to account differently for our arrangements, that revision could affect our recorded tax liability.
34
The income tax accounting process also involves estimating our actual current tax liability, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of our deferred tax assets will not be realized, we must establish a valuation allowance as a charge to income tax expense.
As of September 30, 2019,2022, we have a valuation allowance of $146.1$17.8 million against net deferred tax assets in the U.S. and a valuation allowance of $31.6$4.5 million against net deferred tax assets in certain foreign jurisdictions. We have concluded, based on the weight of available evidence, that a full valuation allowance continues to beis not required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period.
The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our net operatingcapital loss carryforwards, the majority of which do not expire. ThereHowever, there are limitations imposed on the utilization of such net operatingcapital losses that could further restrict the recognition of any tax benefits.
Prior to the passage of the U.S. Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely invested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to a one-time transition tax.tax and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion to permanently reinvest these earnings outside the U.S. unless repatriation can be done with no significant tax cost,substantially tax-free, with the exception of a
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service (IRS) in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.
Valuation of Assets and Liabilities Acquired in Business Combinations
In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets.
Our identifiable intangible assets acquired consist of developed technology, core technology, tradenames, customer lists and contracts, and software support agreements and related relationships. Developed technology consists of products that have reached technological feasibility. Core technology represents a combination of processes, inventions and trade secrets related to the design and development of acquired products. Customer lists and contracts and software support agreements and related relationships represent the underlying relationships and agreements with customers of the acquired company’s installed base. We have generally valued intangible assets using a discounted cash flow model. Critical estimates in valuing certain of the intangible assets include but are not limited to:
35
In addition, we estimate the useful lives of our intangible assets based upon the expected period over which we anticipate generating economic benefits from the related intangible asset.
Net tangible assets consist of the fair values of tangible assets less the fair values of assumed liabilities and obligations. Except for deferred revenues, net tangible assets were generally valued by us at the respective carrying amounts recorded by the acquired company, if we believed that their carrying values approximated their fair values at the acquisition date. TheFor acquisitions completed prior to FY'22, the values assigned to deferred revenue reflect an amount equivalent to the estimated cost plus an appropriate profit margin to perform the services related to the acquired company’s software support contracts.
In addition, uncertain tax positions and tax relatedtax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period (up to one year from the acquisition date) and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the estimated value of uncertain tax positions or tax relatedtax-related valuation allowances, whichever comes first, changes to these uncertain tax positions and tax relatedtax-related valuation allowances will affect our provision for income taxes in our Consolidated Statements of Operations.
Our estimates of fair value are based upon assumptions believed to be reasonable at that time, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.
When events or changes in circumstances indicate that the carrying value of a finite-lived intangible asset may not be recoverable, we perform an assessment of the asset for potential impairment. This assessment is based on projected undiscounted future cash flows over the asset’s remaining life. If the carrying value of the asset exceeds its undiscounted cash flows, we record an impairment loss equal to the excess of the carrying value over the fair value of the asset, determined using projected discounted future cash flows of the asset.
Recent Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and Capital Resources
| (in thousands) | September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash and cash equivalents | $ | 269,579 | $ | 259,946 | $ | 280,003 | |||||
| Marketable securities | 57,435 | 55,951 | 50,315 | ||||||||
| Total | $ | 327,014 | $ | 315,897 | $ | 330,318 | |||||
| Activity for the year included the following: | |||||||||||
| Cash provided by operating activities | $ | 285,145 | $ | 247,752 | $ | 135,203 | |||||
| Cash used by investing activities | (150,024 | ) | (49,212 | ) | (16,127 | ) | |||||
| Cash used by financing activities | (122,960 | ) | (210,846 | ) | (118,105 | ) | |||||
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Acquisitions of businesses, net of cash acquired | $ | (86,737 | ) | $ | (3,000 | ) | $ | (4,960 | ) | ||
| Additions to property and equipment | (64,411 | ) | (36,041 | ) | (25,444 | ) | |||||
| Purchases of short- and long-term marketable securities | (33,027 | ) | (24,311 | ) | (19,726 | ) | |||||
| Proceeds from maturities of short- and long-term marketable securities | 31,976 | 18,140 | 18,785 | ||||||||
| Proceeds from sales of investments | — | — | 15,218 | ||||||||
| Purchase on intangible asset | — | (3,000 | ) | — | |||||||
| Settlement of net investment hedges | 9,675 | — | — | ||||||||
| Purchases of investments | (7,500 | ) | (1,000 | ) | — | ||||||
| $ | (150,024 | ) | $ | (49,212 | ) | $ | (16,127 | ) | |||
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Borrowings under debt agreements | $ | 205,000 | $ | 250,000 | $ | 150,000 | |||||
| Repayments of borrowings under credit facility | (180,000 | ) | (320,000 | ) | (190,000 | ) | |||||
| Repurchases of common stock | (114,994 | ) | (1,100,000 | ) | (50,991 | ) | |||||
| Proceeds from issuance of common stock | 12,975 | 1,015,654 | 10,778 | ||||||||
| Payments of withholding taxes in connection with vesting of stock-based awards | (44,366 | ) | (45,374 | ) | (26,654 | ) | |||||
| Credit facility origination costs | — | (2,851 | ) | (184 | ) | ||||||
| Contingent consideration | (1,575 | ) | (8,275 | ) | (11,054 | ) | |||||
| $ | (122,960 | ) | $ | (210,846 | ) | $ | (118,105 | ) | |||
Any failure to comply with such covenants would prevent us from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding and terminate the credit facility. As of September 30, 2019, we were in compliance with all financial and operating covenants of the credit facility.
| Payments due by period | ||||||||||||||||||||
Contractual Obligations (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Debt (1) | $ | 851.7 | $ | 37.2 | $ | 74.4 | $ | 740.0 | $ | — | ||||||||||
Operating leases (2) | 312.8 | 31.9 | 58.7 | 36.2 | 186.0 | |||||||||||||||
Purchase obligations (3) | 101.8 | 67.6 | 34.0 | 0.2 | — | |||||||||||||||
Pension liabilities (4) | 25.1 | 2.7 | 6.1 | 6.7 | 9.6 | |||||||||||||||
Unrecognized tax benefits (5) | 11.5 | |||||||||||||||||||
| Total | $ | 1,302.9 | $ | 139.4 | $ | 173.2 | $ | 783.1 | $ | 195.7 | ||||||||||
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated (to
ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk
We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.
Foreign currency exchange risk
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, Israel, China and Canada. We enter into foreign currency forward contracts to manage our exposure to fluctuations in foreign exchange rates that arise from receivables and payables denominated in foreign currencies. We do not enter into or hold foreign currency derivative financial instruments for trading or speculative purposes, nor do we enter into derivative financial instruments to hedge future cash flowflows or forecast transactions.
Our non-U.S. revenues generally are transacted through our non-U.S. subsidiaries and typically are denominated in their local currency. In addition, expenses that are incurred by our non-U.S. subsidiaries typically are denominated in their local currency. In 2019, approximately 60%Approximately 55% of our revenue and 40% of our expenses were transacted in currencies other than the U.S. dollar. Historically two-thirds of our revenue and half of our expenses were transacted in currencies other than U.S. Dollars. Currency translation affects our reported results because we report our results of operations in U.S. Dollars. Historically, our most significant currency risk has been changes in the Euro and Japanese Yen relative to the U.S. Dollar. Based on current revenue and expense levels (excluding restructuring charges and stock-based compensation), a $0.10 change in the USD to EuropeanEUR exchange ratesrate and a 10 Yen change in the Yen to USD exchange rate would impact operating income by approximately $17$32 million and $7$12 million, respectively.
Our exposure to foreign currency exchange rate fluctuations arises in part from intercompany transactions, with most intercompany transactions occurring between a U.S. dollar functional currency entity and a foreign currency denominated entity. Intercompany transactions typically are denominated in the local currency of the non-U.S. dollar functional currency subsidiary in order to centralize foreign currency risk. Also, both PTC (the parent company) and our non-U.S. subsidiaries may transact business with our customers and vendors in a currency other than their functional currency (transaction risk). In addition, we are exposed to foreign exchange rate fluctuations as the financial results and balances of our non-U.S. subsidiaries are translated into U.S. dollars (translation risk). If sales to customers outside of the United States increase, our exposure to fluctuations in foreign currency exchange rates will increase.
Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. dollar value of balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. Our foreign currency hedging program uses forward contracts to manage the foreign currency exposures that exist as part of our ongoing business operations. The contracts are primarily are denominated in Canadian DollarsJapanese Yen and European currencies, and have maturities of less than threefour months.
The majority of our foreign currency forward contracts are not designated as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and
37
As of September 30, 20192022 and 2018,2021, we had outstanding forward contracts for derivatives not designated as hedging instruments with notional amounts equivalent to the following:
| September 30, | ||||||||
Currency Hedged (in thousands) | 2019 | 2018 | ||||||
| Canadian / U.S. Dollar | $ | 9,408 | $ | 7,334 | ||||
| Euro / U.S. Dollar | 308,282 | 297,730 | ||||||
| British Pound / U.S. Dollar | 3,756 | 7,074 | ||||||
| Israeli Sheqel / U.S. Dollar | 10,272 | 9,778 | ||||||
| Japanese Yen / U.S. Dollar | 37,462 | 37,456 | ||||||
| Swiss Franc / U.S. Dollar | 12,001 | 11,944 | ||||||
| Swedish Krona / U.S. Dollar | 20,636 | 18,207 | ||||||
| Chinese Yuan offshore / U.S. Dollar | 43,387 | 116 | ||||||
| Singapore Dollar / U.S. Dollar | 34,585 | 1,314 | ||||||
| Chinese Renminbi/U.S. Dollar | 9,079 | 9,010 | ||||||
| All other | 9,487 | 5,993 | ||||||
| Total | $ | 498,355 | $ | 405,956 | ||||
|
| September 30, |
| |||||
Currency Hedged (in thousands) |
| 2022 |
|
| 2021 |
| ||
Canadian / U.S. Dollar |
| $ | 2,731 |
|
| $ | 4,894 |
|
Euro / U.S. Dollar |
|
| 316,869 |
|
|
| 387,466 |
|
British Pound / U.S. Dollar |
|
| 7,368 |
|
|
| 23,141 |
|
Israeli Shekel / U.S. Dollar |
|
| 12,052 |
|
|
| 10,475 |
|
Japanese Yen / U.S. Dollar |
|
| 25,566 |
|
|
| 46,450 |
|
Swiss Franc / U.S. Dollar |
|
| 25,559 |
|
|
| 18,039 |
|
Swedish Krona / U.S. Dollar |
|
| 35,713 |
|
|
| 34,196 |
|
Singapore Dollar / U.S. Dollar |
|
| 3,637 |
|
|
| 3,498 |
|
Chinese Renminbi / U.S. Dollar |
|
| 23,965 |
|
|
| 23,297 |
|
New Taiwan Dollar / U.S. Dollar |
|
| 13,906 |
|
|
| 3,369 |
|
Russian Ruble/ U.S. Dollar |
|
| — |
|
|
| 2,614 |
|
Korean Won/ U.S. Dollar |
|
| 4,919 |
|
|
| — |
|
Danish Krone/ U.S. Dollar |
|
| 3,192 |
|
|
| 2,380 |
|
Australian Dollar/ U.S. Dollar |
|
| 3,269 |
|
|
| 2,086 |
|
All other |
|
| 4,432 |
|
|
| 2,016 |
|
Total |
| $ | 483,178 |
|
| $ | 563,921 |
|
As of September 30, 2019 and 2018, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:
| September 30, | ||||||||
Currency Hedged (in thousands) | 2019 | 2018 | ||||||
| Euro / U.S. Dollar | $ | — | $ | 8,495 | ||||
| Japanese Yen / U.S. Dollar | — | 2,193 | ||||||
| SEK / U.S. Dollar | — | 1,708 | ||||||
| Total | $ | — | $ | 12,396 | ||||
Debt
In addition to the $500 million$1 billion due under our 2024 6%2025 and 2028 Senior Notes, as of September 30, 2019,2022, we had $173$359 million outstanding under our credit facility. As of November 15, 2019, we have $628 million outstanding under our credit facility due to the Onshape acquisition. Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by us. These loans are subject to interest rate risk as interest rates will be adjusted at each rollover date to the extent such amounts are not repaid. As of September 30, 2019,2022, the annual rate on the credit facility loans was 3.44%4.14%. If there waswere a hypothetical 100 basis point change in interest rates, the annual net impact to earnings and cash flows would be $1.7$3.6 million. This hypothetical change in cash flows and earnings has been calculated based on the borrowings outstanding at September 30, 20192022 and a 100 basis point per annum change in interest rate applied over a one-year period.
Cash and cash equivalents
As of September 30, 2019,2022, cash equivalents were invested in highly liquid investments with maturities of three months or less when purchased. We invest our cash with highly rated financial institutions in North America, Europe and Asia-PacificAsia Pacific and in diversified domestic and international money market mutual funds. At September 30, 2019,2022, we had cash and cash equivalents of $40.0$11 million in the United States, $83.0$105 million in Europe, $122.0$128 million in Asia Pacific Rim (including India), and $25.0$28 million in other non-U.S. countries. Given the short maturities and investment grade quality of the portfolio holdings at September 30, 2019,2022, a hypothetical 10% change in interest rates would not materially affect the fair value of our cash and cash equivalents.
Our invested cash is subject to interest rate fluctuations and, for non-U.S. operations, foreign currency exchange rate risk. In a declining interest rate environment, we would experience a decrease in interest income. The
ITEM 8.Financial Statements and Supplementary Data
The consolidated financial statements and notes to the consolidated financial statements are attached as APPENDIX A.
ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on this evaluation, we concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2019.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
39
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 20192022 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment and those criteria, our management concluded that, as of September 30, 2019,2022, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of September 30, 20192022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears under Item 8.
Change in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 20192022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.Other Information
None.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
40
PART III
ITEM 10.Directors, Executive Officers and Corporate Governance
The information required by this item with respect to our directors and executive officers may be found inunder the sections captionedheadings “Proposal 1: Election of Directors,” “Corporate Governance,” "Our"Information About Our Executive Officers," and “Transactions Withwith Related Persons” appearing in our 20202023 Proxy Statement. Such information is incorporated into this Item 10herein by reference.
Code of Ethics for Senior Executive Officers
We have adopted a Code of Ethics for Senior Executive Officers that applies to our Chief Executive Officer, President, Chief Financial Officer, and Controller, as well as others. The Code is embedded in our Code of Business Conduct and Ethics applicable to all employees. A copy of the Code of Business Conduct and Ethics is publicly available on our website at www.ptc.com. If we make any substantive amendments to, or grant any waiver from, including any implicit waiver, the Code of Ethics for Senior Executive Officers to or for our Chief Executive Officer, President, Chief Financial Officer or Controller, we will disclose the nature of such amendment or waiver in a current report on Form 8-K.
ITEM 11.Executive Compensation
Information with respect to director and executive compensation may be found under the headings “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation,” and “Compensation Committee Report” appearing in our 20202023 Proxy Statement. Such information is incorporated herein by reference.
ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item may be found under the headings “Proposal 2: Approve an Increase in the Number of Shares Available under the 2000 Equity Incentive Plan,” ”Equity Compensation Plan Information,” and “Information about PTC Common Stock Ownership” appearing in our 20202023 Proxy Statement. Such information is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION as of SEPTEMBER 30, 2019 | ||||||||||
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | |||||||
| Equity compensation plans approved by security holders: | ||||||||||
| 2000 Equity Incentive Plan (1) | 3,230,724 | — | (1) | 6,949,302 | ||||||
| 2016 Employee Stock Purchase Plan (2) | — | — | 1,164,289 | (2) | ||||||
| Total | 3,230,724 | — | 8,113,591 | |||||||
| (1) All of the shares issuable upon vesting are restricted stock units, which have no exercise price. | ||||||||||
| (2) This amount represents the total number of shares remaining available under the 2016 Employee Stock Purchase Plan, of which 165,909 shares are subject to purchase during the current offering period. | ||||||||||
ITEM 13.Certain Relationships and Related Transactions, and Director Independence
Information with respect to this item may be found under the headings “Independence of Our Directors,” “Review of Transactions with Related Persons” and “Transactions with Related Persons” appearing in our 20202023 Proxy Statement. Such information is incorporated herein by reference.
ITEM 14.Principal Accounting Fees and Services
Information with respect to this item may be found under the headings “Engagement of Independent Auditor and Approval of Professional Services and Fees” and “PricewaterhouseCoopers LLP Professional Services and Fees” in our 20202023 Proxy Statement. Such information is incorporated herein by reference.
PART IV
ITEM 15.ITEM15. Exhibits and Financial Statement Schedules
(a) Documents Filed as Part of Form 10-K
1. | Financial Statements | |
| (PricewaterhouseCoopers LLP, Boston, MA, PCAOB ID: 238) | ||
2. | Financial Statement Schedules | |
Schedules have been omitted since they are either not required, not applicable, or the information is otherwise included in the Financial Statements per Item 15(a)1 above. | ||
3. | Exhibits | |
The list of exhibits in the Exhibit Index is incorporated herein by reference. | ||
(b) Exhibits
We hereby file the exhibits listed in the attached Exhibit Index.
(c) Financial Statement Schedules
None.
ITEM 16.ITEM16. Form 10-K Summary
EXHIBIT INDEX
Exhibit Number | Exhibit | |
2.1 | — | |
3.1 | — | |
3.2 | — | |
4.1 | — | |
4.2 | — | |
4.3 | — | |
4.4 | — | |
10.1.1* | — | |
10.1.2 | — | |
10.1.3* | — | |
10.1.4 | — | |
10.1.5 | — | |
10.1.6 | — | |
10.1.7 | — | |
10.1.8* | — | |
10.1.9 | — | |
10.1.10 | — | |
10.1.11* | — | |
10.1.12* | — | |
10.2* | — | |
10.3* | — | |
43
10.4* | — | |
10.5* | — | |
10.6* | — | |
10.7 | — | |
10.8 | — |
10.9 | — | |
10.10 | — | |
10.11 | — | |
10.12*** | — | |
10.13 | — | |
10.14 | — | |
10.15 | — | |
10.16 | — | |
21.1 | — | |
23.1 | — | |
31.1 | — | |
31.2 | — | |
32** | — | |
101 | — | The following materials from PTC Inc.'s Annual Report on Form 10-K for the year ended September 30, |
104 | — | The cover page of the Annual Report on Form 10-K formatted in Inline XBRL (included in Exhibit 101). |
* Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of PTC participates.
** Indicates that the exhibit is being furnished with this report and is not filed as a part of it.
*** Certain information has been excluded from this exhibit because it is not material and would likely cause competitive harm to the registrant if publicly disclosed.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of November, 2019.
PTC Inc. | |||
By: | |||
| |||
James Heppelmann President and Chief Executive Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below, on the 15th day of November, 2019.
Signature | Title | |
(i) Principal Executive Officer: | ||
/s/ JAMES HEPPELMANN | President and Chief Executive Officer | |
James Heppelmann | ||
(ii) Principal Financial and Accounting Officer: | ||
/s/ | Executive Vice President and Chief Financial Officer | |
Kristian Talvitie | ||
(iii) Board of Directors: | ||
/s/ ROBERT SCHECHTER | Chairman of the Board of Directors | |
Robert Schechter | ||
/s/ MARK BENJAMIN | Director | |
Mark Benjamin | ||
/s/ JANICE CHAFFIN | Director | |
Janice Chaffin | ||
/s/ A | Director | |
Amar Hanspal | ||
/s/ JAMES HEPPELMANN | Director | |
James Heppelmann | ||
/s/ KLAUS HOEHN | Director | |
Klaus Hoehn | ||
/s/ MICHAL KATZ | Director | |
Michal Katz | ||
/s/ PAULLACY | Director | |
Paul Lacy | ||
/s/ CORINNA LATHAN | Director | |
Corinna Lathan | ||
/s/ BLAKE MORET | Director | |
Blake Moret | ||
APPENDIX A
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of PTC Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of PTC Inc. and its subsidiaries (the “Company”) as of September 30, 20192022 and 2018,2021, and the related consolidated statements of operations, of comprehensive income, (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended September 30, 2019,2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2019,2022, based on criteria established in Internal Control - Integrated Framework(2013) (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customersleases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
F-1
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that waswere communicated or required to be communicated to the audit committee and that (i) relatesrelate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue from Contracts with Customers - Identification of Distinct Performance Obligations and Estimate of Standalone Selling Price
As described in Note 2 to the consolidated financial statements, the Company’s sources of revenue include: (1) subscription,subscriptions, (2) perpetual license,licenses, (3) support for perpetual licenses and (4) professional services. Revenue is derived from the licensing of computer software products and from related support and/or professional services contracts. During the year ended September 30, 2019,2022, the Company recognized revenue from contracts with customers of $1,255.6$1,933.3 million. The Company’s adoption of the accounting standard related to revenue recognition resulted in a decrease in accumulated deficit of $363.2 million, net of tax. The Company’s contracts with customers for subscriptions typically include commitments to transfer term-based, on-premiseon-premises software licenses bundled with support. On-premisesupport and/or cloud services. On-premises software is determined to be a distinct performance obligation from support. Judgment is required by management to allocate the transaction price to each performance obligation. Management uses the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to management, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied.
F-2
The principal considerations for our determination that performing procedures relating to revenue recognition, specifically related to management’s identification of distinct performance obligations, and their estimate of standalone selling price, is a critical audit matter are there wasthe significant judgment by management in both the identification of distinct performance obligations, specifically the determination that the on-premiseon-premises software is determined to be a distinct performance obligation from support, and in estimating the standalone selling price using market pricing conditions and other observable inputs, such as historical pricing practices, for each distinct performance obligation. Thiswhich in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s identification of distinct performance obligations within contracts with customers and the judgments made by management used to estimate the standalone selling price used to allocate the transaction price to the distinct performance obligations. Due to this complexity, there
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over management’s adoption of the accounting standard related to revenue recognition, identification of distinct performance obligations and estimate of standalone selling prices used to allocate transaction price to distinct performance obligations in its contracts with customers.obligations. These procedures also included, among others (i) evaluating the Company’s revenue recognition accounting policy resulting from its adoption of the accounting standard related to revenue recognition and testing the completeness and accuracy of management’s cumulative adoption adjustments; (ii) testing management’s identification of distinct performance obligations in its contracts with customers; (iii) testing management’s process for estimating standalone selling price which included testing the completeness and accuracy of input data usedcustomers by examining revenue contracts on a sample basis and evaluating the reasonableness of significant assumptions used by management, principally market and pricing conditions and other observable inputs such as historical pricing practices; and (iv) evaluation of the accuracy of management’s allocation of transaction price to thewhether these performance obligations contained withinare satisfied at a sample of contracts with customers.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 2019
We have served as the Company’s auditor since 1992.
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| September 30, | |||||||
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 269,579 | $ | 259,946 | |||
| Short-term marketable securities | 27,891 | 25,836 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $744 and $607 at September 30, 2019 and 2018, respectively | 372,743 | 129,297 | |||||
| Prepaid expenses | 52,701 | 48,997 | |||||
| Other current assets | 59,707 | 169,708 | |||||
| Total current assets | 782,621 | 633,784 | |||||
| Property and equipment, net | 105,531 | 80,613 | |||||
| Goodwill | 1,238,179 | 1,182,457 | |||||
| Acquired intangible assets, net | 169,949 | 200,202 | |||||
| Long-term marketable securities | 29,544 | 30,115 | |||||
| Deferred tax assets | 198,634 | 165,566 | |||||
| Other assets | 140,130 | 36,285 | |||||
| Total assets | $ | 2,664,588 | $ | 2,329,022 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 42,442 | $ | 53,473 | |||
| Accrued expenses and other current liabilities | 104,028 | 74,388 | |||||
| Accrued compensation and benefits | 88,769 | 101,784 | |||||
| Accrued income taxes | 17,407 | 18,044 | |||||
| Deferred revenue | 385,509 | 487,590 | |||||
| Total current liabilities | 638,155 | 735,279 | |||||
| Long-term debt / Revolving credit facility | 669,134 | 643,268 | |||||
| Deferred tax liabilities | 41,683 | 5,589 | |||||
| Deferred revenue | 11,123 | 11,852 | |||||
| Other liabilities | 102,495 | 58,445 | |||||
| Total liabilities | 1,462,590 | 1,454,433 | |||||
| Commitments and contingencies (Note 10) | |||||||
| Stockholders’ equity: | |||||||
| Preferred stock, $0.01 par value; 5,000 shares authorized; none issued | — | — | |||||
| Common stock, $0.01 par value; 500,000 shares authorized; 114,899 and 117,981 shares issued and outstanding at September 30, 2019 and 2018, respectively | 1,149 | 1,180 | |||||
| Additional paid-in capital | 1,502,949 | 1,558,403 | |||||
| Accumulated deficit | (191,390 | ) | (599,409 | ) | |||
| Accumulated other comprehensive loss | (110,710 | ) | (85,585 | ) | |||
| Total stockholders’ equity | 1,201,998 | 874,589 | |||||
| Total liabilities and stockholders’ equity | $ | 2,664,588 | $ | 2,329,022 | |||
|
| September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 272,182 |
|
| $ | 326,532 |
|
Accounts receivable, net of allowance for doubtful accounts of $362 and $304 at September 30, 2022 and September 30, 2021, respectively |
|
| 636,556 |
|
|
| 541,072 |
|
Prepaid expenses |
|
| 88,854 |
|
|
| 69,991 |
|
Other current assets |
|
| 71,065 |
|
|
| 135,415 |
|
Total current assets |
|
| 1,068,657 |
|
|
| 1,073,010 |
|
Property and equipment, net |
|
| 98,101 |
|
|
| 100,237 |
|
Goodwill |
|
| 2,353,654 |
|
|
| 2,191,887 |
|
Acquired intangible assets, net |
|
| 382,718 |
|
|
| 378,967 |
|
Deferred tax assets |
|
| 256,091 |
|
|
| 297,789 |
|
Operating right-of-use lease assets |
|
| 137,780 |
|
|
| 152,337 |
|
Other assets |
|
| 390,267 |
|
|
| 313,333 |
|
Total assets |
| $ | 4,687,268 |
|
| $ | 4,507,560 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Accounts payable |
| $ | 40,153 |
|
| $ | 33,381 |
|
Accrued expenses and other current liabilities |
|
| 117,158 |
|
|
| 113,067 |
|
Accrued compensation and benefits |
|
| 104,022 |
|
|
| 117,784 |
|
Accrued income taxes |
|
| 5,142 |
|
|
| 5,055 |
|
Deferred revenue |
|
| 503,781 |
|
|
| 482,131 |
|
Short-term lease obligations |
|
| 22,002 |
|
|
| 27,864 |
|
Total current liabilities |
|
| 792,258 |
|
|
| 779,282 |
|
Long-term debt |
|
| 1,350,628 |
|
|
| 1,439,471 |
|
Deferred tax liabilities |
|
| 28,396 |
|
|
| 4,165 |
|
Deferred revenue |
|
| 16,552 |
|
|
| 15,546 |
|
Long-term lease obligations |
|
| 167,573 |
|
|
| 180,935 |
|
Other liabilities |
|
| 35,827 |
|
|
| 49,693 |
|
Total liabilities |
|
| 2,391,234 |
|
|
| 2,469,092 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
|
| ||
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued |
|
| — |
|
|
| — |
|
Common stock, $0.01 par value; 500,000 shares authorized; 117,472 and 117,163 shares issued and outstanding at September 30, 2022 and September 30, 2021, respectively |
|
| 1,175 |
|
|
| 1,172 |
|
Additional paid-in capital |
|
| 1,720,580 |
|
|
| 1,718,504 |
|
Retained earnings |
|
| 727,737 |
|
|
| 414,656 |
|
Accumulated other comprehensive loss |
|
| (153,458 | ) |
|
| (95,864 | ) |
Total stockholders’ equity |
|
| 2,296,034 |
|
|
| 2,038,468 |
|
Total liabilities and stockholders’ equity |
| $ | 4,687,268 |
|
| $ | 4,507,560 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year ended September 30, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Revenue: | |||||||||||
| License | $ | 324,400 | $ | 529,265 | $ | 356,326 | |||||
| Support and cloud services | 763,700 | 559,222 | 630,990 | ||||||||
| Total software revenue | 1,088,100 | 1,088,487 | 987,316 | ||||||||
| Professional services | 167,531 | 153,337 | 176,723 | ||||||||
| Total revenue | 1,255,631 | 1,241,824 | 1,164,039 | ||||||||
| Cost of revenue: | |||||||||||
| Cost of license revenue | 51,936 | 47,737 | 66,841 | ||||||||
| Cost of support and cloud services revenue | 133,478 | 135,106 | 110,931 | ||||||||
| Total cost of software revenue | 185,414 | 182,843 | 177,772 | ||||||||
| Cost of professional service revenue | 139,964 | 143,659 | 150,730 | ||||||||
| Total cost of revenue | 325,378 | 326,502 | 328,502 | ||||||||
| Gross margin | 930,253 | 915,322 | 835,537 | ||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 417,449 | 414,764 | 372,702 | ||||||||
| Research and development | 246,888 | 249,786 | 236,028 | ||||||||
| General and administrative | 127,919 | 143,045 | 144,991 | ||||||||
| Amortization of acquired intangible assets | 23,841 | 31,350 | 32,108 | ||||||||
| Restructuring and other charges, net | 51,114 | 3,764 | 7,942 | ||||||||
| Total operating expenses | 867,211 | 842,709 | 793,771 | ||||||||
| Operating income | 63,042 | 72,613 | 41,766 | ||||||||
| Interest expense | (43,047 | ) | (41,673 | ) | (42,400 | ) | |||||
| Other income (expense), net | 305 | (2,284 | ) | (772 | ) | ||||||
| Income before income taxes | 20,300 | 28,656 | (1,406 | ) | |||||||
Provision (benefit) for income taxes | 47,760 | (23,331 | ) | (7,645 | ) | ||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Earnings (loss) per share—Basic | $ | (0.23 | ) | $ | 0.45 | $ | 0.05 | ||||
| Earnings (loss) per share—Diluted | $ | (0.23 | ) | $ | 0.44 | $ | 0.05 | ||||
| Weighted average shares outstanding—Basic | 117,724 | 116,390 | 115,523 | ||||||||
| Weighted average shares outstanding—Diluted | 117,724 | 118,158 | 117,356 | ||||||||
|
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Revenue: |
|
|
|
|
|
|
|
|
| |||
License |
| $ | 782,680 |
|
| $ | 738,053 |
|
| $ | 509,792 |
|
Support and cloud services |
|
| 987,573 |
|
|
| 911,288 |
|
|
| 804,825 |
|
Total software revenue |
|
| 1,770,253 |
|
|
| 1,649,341 |
|
|
| 1,314,617 |
|
Professional services |
|
| 163,094 |
|
|
| 157,818 |
|
|
| 143,798 |
|
Total revenue |
|
| 1,933,347 |
|
|
| 1,807,159 |
|
|
| 1,458,415 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
| |||
Cost of license revenue |
|
| 49,240 |
|
|
| 61,750 |
|
|
| 53,195 |
|
Cost of support and cloud services revenue |
|
| 184,789 |
|
|
| 164,108 |
|
|
| 145,386 |
|
Total cost of software revenue |
|
| 234,029 |
|
|
| 225,858 |
|
|
| 198,581 |
|
Cost of professional services revenue |
|
| 151,951 |
|
|
| 145,244 |
|
|
| 135,690 |
|
Total cost of revenue |
|
| 385,980 |
|
|
| 371,102 |
|
|
| 334,271 |
|
Gross margin |
|
| 1,547,367 |
|
|
| 1,436,057 |
|
|
| 1,124,144 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Sales and marketing |
|
| 485,247 |
|
|
| 517,779 |
|
|
| 435,451 |
|
Research and development |
|
| 338,822 |
|
|
| 299,917 |
|
|
| 256,575 |
|
General and administrative |
|
| 204,732 |
|
|
| 206,006 |
|
|
| 159,826 |
|
Amortization of acquired intangible assets |
|
| 34,970 |
|
|
| 29,396 |
|
|
| 28,713 |
|
Restructuring and other charges, net |
|
| 36,234 |
|
|
| 2,211 |
|
|
| 32,716 |
|
Total operating expenses |
|
| 1,100,005 |
|
|
| 1,055,309 |
|
|
| 913,281 |
|
Operating income |
|
| 447,362 |
|
|
| 380,748 |
|
|
| 210,863 |
|
Interest and debt premium expense |
|
| (54,268 | ) |
|
| (50,478 | ) |
|
| (76,428 | ) |
Other income, net |
|
| 4,004 |
|
|
| 61,485 |
|
|
| 271 |
|
Income before income taxes |
|
| 397,098 |
|
|
| 391,755 |
|
|
| 134,706 |
|
Provision (benefit) for income taxes |
|
| 84,017 |
|
|
| (85,168 | ) |
|
| 4,011 |
|
Net income |
| $ | 313,081 |
|
| $ | 476,923 |
|
| $ | 130,695 |
|
Earnings per share—Basic |
| $ | 2.67 |
|
| $ | 4.08 |
|
| $ | 1.13 |
|
Earnings per share—Diluted |
| $ | 2.65 |
|
| $ | 4.03 |
|
| $ | 1.12 |
|
Weighted-average shares outstanding—Basic |
|
| 117,194 |
|
|
| 116,836 |
|
|
| 115,663 |
|
Weighted-average shares outstanding—Diluted |
|
| 118,233 |
|
|
| 118,367 |
|
|
| 116,267 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Year ended September 30, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Hedge gain (loss) arising during the period, net of tax of $1.7 million, $0.2 million and $0.1 million in 2019, 2018 and 2017, respectively. | 5,251 | 1,445 | (758 | ) | |||||||
| Net hedge gain (loss) reclassified into earnings, net of tax of $0.1 million in 2019, 2018 and 2017, respectively. | (549 | ) | 483 | 459 | |||||||
| Realized and unrealized gain (loss) on hedging instruments | 4,702 | 1,928 | (299 | ) | |||||||
| Foreign currency translation adjustment, net of tax of $0 for all periods | (24,755 | ) | (11,767 | ) | 16,593 | ||||||
| Unrealized gain (loss) on marketable securities, net of tax of $0 for all periods | 530 | (269 | ) | (22 | ) | ||||||
| Amortization of net actuarial pension loss included in net income, net of tax of $0.7 million in in 2019, 2018, respectively, and $1.0 million and 2017 | 1,691 | 1,629 | 2,392 | ||||||||
| Pension net gain (loss) arising during the period net of tax of $3.6 million, $1.5 million, and $3.6 million in 2019, 2018, and 2017, respectively | (8,743 | ) | (3,787 | ) | 8,636 | ||||||
| Change in unamortized pension loss during the period related to changes in foreign currency | 1,450 | 588 | (1,254 | ) | |||||||
| Other comprehensive income (loss) | (25,125 | ) | (11,678 | ) | 26,046 | ||||||
| Comprehensive income (loss) | $ | (52,585 | ) | $ | 40,309 | $ | 32,285 | ||||
|
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net income |
| $ | 313,081 |
|
| $ | 476,923 |
|
| $ | 130,695 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
| |||
Hedge gain (loss) arising during the period, net of tax of $5.8 million, $0.4 million, and $1.7 million in 2022, 2021, and 2020, respectively |
|
| 17,556 |
|
|
| 1,248 |
|
|
| (13,242 | ) |
Foreign currency translation adjustment, net of tax of $0 for each period |
|
| (92,768 | ) |
|
| 1,613 |
|
|
| 22,076 |
|
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period |
|
| — |
|
|
| (307 | ) |
|
| 188 |
|
Amortization of net actuarial pension gain included in net income, net of tax of $0.4 million, $1.2 million, and $0.9 million in 2022, 2021, and 2020, respectively |
|
| 1,010 |
|
|
| 2,930 |
|
|
| 2,983 |
|
Pension net gain (loss) arising during the period net of tax of $6.1 million, $0.7 million, and $0.7 million in 2022, 2021, and 2020, respectively |
|
| 15,027 |
|
|
| 1,891 |
|
|
| (2,791 | ) |
Change in unamortized pension gain (loss) related to changes in foreign currency, net of tax of $0.6 million, $0.0 million, and $0.7 million in 2022, 2021, and 2020, respectively |
|
| 1,581 |
|
|
| 135 |
|
|
| (1,878 | ) |
Other comprehensive income (loss) |
|
| (57,594 | ) |
|
| 7,510 |
|
|
| 7,336 |
|
Comprehensive income |
| $ | 255,487 |
|
| $ | 484,433 |
|
| $ | 138,031 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended September 30, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Stock-based compensation | 86,400 | 82,939 | 76,708 | ||||||||
| Depreciation and amortization | 77,824 | 87,408 | 86,742 | ||||||||
| Provision (benefit) from deferred income taxes | 1,708 | (56,556 | ) | (28,289 | ) | ||||||
| Other non-cash costs, net | (4,148 | ) | 534 | 2,272 | |||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions: | |||||||||||
| Accounts receivable | 29,446 | 20,396 | 12,832 | ||||||||
| Accounts payable and accrued expenses | 16,200 | 5,251 | 20,315 | ||||||||
| Accrued compensation and benefits | (12,098 | ) | (6,988 | ) | (34,846 | ) | |||||
| Deferred revenue | 45,875 | 56,141 | 5,808 | ||||||||
| Accrued income taxes, net of income tax receivable | 232 | 10,323 | (798 | ) | |||||||
| Other current assets and prepaid expenses | (2,829 | ) | (10,642 | ) | 690 | ||||||
| Other noncurrent assets and liabilities | 73,995 | 6,959 | (12,470 | ) | |||||||
| Net cash provided by operating activities | 285,145 | 247,752 | 135,203 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property and equipment | (64,411 | ) | (36,041 | ) | (25,444 | ) | |||||
| Purchases of short- and long-term marketable securities | (33,027 | ) | (24,311 | ) | (19,726 | ) | |||||
| Proceeds from maturities of short- and long-term marketable securities | 31,976 | 18,140 | 18,785 | ||||||||
| Acquisitions of businesses, net of cash acquired | (86,737 | ) | (3,000 | ) | (4,960 | ) | |||||
| Purchases of investments | (7,500 | ) | (1,000 | ) | — | ||||||
| Settlement of net investment hedges | 9,675 | — | — | ||||||||
| Proceeds from sales of investments | — | — | 15,218 | ||||||||
| Purchase of intangible asset | — | (3,000 | ) | — | |||||||
| Net cash used by investing activities | (150,024 | ) | (49,212 | ) | (16,127 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under credit facility | 205,000 | 250,000 | 150,000 | ||||||||
| Repayments of borrowings under credit facility | (180,000 | ) | (320,000 | ) | (190,000 | ) | |||||
| Repurchases of common stock | (114,994 | ) | (1,100,000 | ) | (50,991 | ) | |||||
| Proceeds from issuance of common stock | 12,975 | 1,015,654 | 10,778 | ||||||||
| Payments of withholding taxes in connection with vesting of stock-based awards | (44,366 | ) | (45,374 | ) | (26,654 | ) | |||||
| Credit facility origination costs | — | (2,851 | ) | (184 | ) | ||||||
| Contingent consideration | (1,575 | ) | (8,275 | ) | (11,054 | ) | |||||
| Net cash used by financing activities | (122,960 | ) | (210,846 | ) | (118,105 | ) | |||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,565 | ) | (7,810 | ) | 1,066 | ||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 9,596 | (20,116 | ) | 2,037 | |||||||
| Cash, cash equivalents and restricted cash, beginning of year | 261,093 | 281,209 | 279,172 | ||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 270,689 | $ | 261,093 | $ | 281,209 | |||||
| Supplemental disclosure of non-cash financing activities: | |||||||||||
| Fair value of contingent consideration recorded for acquisition | $ | — | $ | 2,100 | $ | — | |||||
|
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 313,081 |
|
| $ | 476,923 |
|
| $ | 130,695 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 87,694 |
|
|
| 85,239 |
|
|
| 80,817 |
|
Amortization of right-of-use lease assets |
|
| 34,346 |
|
|
| 37,295 |
|
|
| 38,687 |
|
Stock-based compensation |
|
| 174,863 |
|
|
| 177,289 |
|
|
| 115,149 |
|
Loss (gain) on investment |
|
| 31,854 |
|
|
| (68,829 | ) |
|
| — |
|
Gain on divestiture of business |
|
| (29,808 | ) |
|
| — |
|
|
| — |
|
Other non-cash items, net |
|
| (4,560 | ) |
|
| (1,381 | ) |
|
| (3,167 | ) |
Provision (benefit) from deferred income taxes |
|
| 42,963 |
|
|
| (158,105 | ) |
|
| (24,641 | ) |
Changes in operating assets and liabilities, excluding the effects of acquisitions: |
|
|
|
|
|
|
|
|
| |||
Accounts receivable |
|
| (165,006 | ) |
|
| (119,418 | ) |
|
| (32,365 | ) |
Accounts payable and accrued expenses |
|
| 6,957 |
|
|
| 25,096 |
|
|
| (5,135 | ) |
Accrued compensation and benefits |
|
| (6,645 | ) |
|
| 16,775 |
|
|
| 10,282 |
|
Deferred revenue |
|
| 57,586 |
|
|
| 58,702 |
|
|
| 17,046 |
|
Income taxes |
|
| (15,329 | ) |
|
| 13,979 |
|
|
| (26,616 | ) |
Other current assets and prepaid expenses |
|
| (40,643 | ) |
|
| (14,206 | ) |
|
| 36,189 |
|
Operating lease liabilities |
|
| (13,610 | ) |
|
| (7,129 | ) |
|
| (11,110 | ) |
Other noncurrent assets and liabilities |
|
| (38,417 | ) |
|
| (153,421 | ) |
|
| (92,023 | ) |
Net cash provided by operating activities |
|
| 435,326 |
|
|
| 368,809 |
|
|
| 233,808 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| |||
Additions to property and equipment |
|
| (19,496 | ) |
|
| (24,713 | ) |
|
| (20,196 | ) |
Purchases of short- and long-term marketable securities |
|
| — |
|
|
| (7,562 | ) |
|
| (33,869 | ) |
Proceeds from sales of short- and long-term marketable securities |
|
| — |
|
|
| 56,170 |
|
|
| 1,521 |
|
Proceeds from maturities of short- and long-term marketable securities |
|
| — |
|
|
| 9,861 |
|
|
| 30,521 |
|
Acquisitions of businesses, net of cash acquired |
|
| (282,943 | ) |
|
| (718,030 | ) |
|
| (483,478 | ) |
Proceeds from sales of investments |
|
| 46,906 |
|
|
| — |
|
|
| — |
|
Purchases of investments |
|
| — |
|
|
| (4,000 | ) |
|
| — |
|
Purchase of intangible assets |
|
| (6,451 | ) |
|
| (550 | ) |
|
| (11,050 | ) |
Settlement of net investment hedges |
|
| 24,857 |
|
|
| 965 |
|
|
| (9,421 | ) |
Divestiture of business, net |
|
| 32,518 |
|
|
| — |
|
|
| — |
|
Other investing activities |
|
| 3,408 |
|
|
| — |
|
|
| — |
|
Net cash used in investing activities |
|
| (201,201 | ) |
|
| (687,859 | ) |
|
| (525,972 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |||
Proceeds from issuance of Senior Notes |
|
| — |
|
|
| — |
|
|
| 1,000,000 |
|
Borrowings under credit facility |
|
| 264,000 |
|
|
| 600,000 |
|
|
| 455,000 |
|
Repayments of Senior Notes |
|
| — |
|
|
| — |
|
|
| (500,000 | ) |
Repayments of borrowings under credit facility |
|
| (355,000 | ) |
|
| (168,000 | ) |
|
| (610,125 | ) |
Repurchases of common stock |
|
| (125,000 | ) |
|
| (30,000 | ) |
|
| — |
|
Proceeds from issuance of common stock |
|
| 21,207 |
|
|
| 21,575 |
|
|
| 18,382 |
|
Debt issuance costs |
|
| — |
|
|
| — |
|
|
| (17,107 | ) |
Debt early redemption premium |
|
| — |
|
|
| — |
|
|
| (15,000 | ) |
Payments of withholding taxes in connection with stock-based awards |
|
| (68,991 | ) |
|
| (52,957 | ) |
|
| (33,740 | ) |
Payments of principal for financing leases |
|
| (297 | ) |
|
| (354 | ) |
|
| — |
|
Net cash (used in) provided by financing activities |
|
| (264,081 | ) |
|
| 370,264 |
|
|
| 297,410 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| (24,203 | ) |
|
| (127 | ) |
|
| 25 |
|
Net change in cash, cash equivalents, and restricted cash |
|
| (54,159 | ) |
|
| 51,087 |
|
|
| 5,271 |
|
Cash, cash equivalents, and restricted cash, beginning of period |
|
| 327,047 |
|
|
| 275,960 |
|
|
| 270,689 |
|
Cash, cash equivalents, and restricted cash, end of period |
| $ | 272,888 |
|
| $ | 327,047 |
|
| $ | 275,960 |
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
| |||
Withholding taxes in connection with stock-based awards, accrued |
| $ | — |
|
| $ | 120 |
|
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
| Balance as of September 30, 2016 | 114,968 | $ | 1,150 | $ | 1,598,548 | $ | (657,079 | ) | $ | (99,953 | ) | $ | 842,666 | ||||||||||
| Common stock issued for employee stock-based awards | 1,586 | 15 | (15 | ) | — | — | — | ||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (544 | ) | (5 | ) | (26,649 | ) | — | — | (26,654 | ) | |||||||||||||
| Compensation expense from stock-based awards | — | — | 76,708 | — | — | 76,708 | |||||||||||||||||
| Common stock issued for employee stock purchase plan | 269 | 3 | 10,775 | — | — | 10,778 | |||||||||||||||||
| Excess tax benefits from stock-based awards | — | — | 644 | — | — | 644 | |||||||||||||||||
| Net income | — | — | — | 6,239 | — | 6,239 | |||||||||||||||||
| Repurchases of common stock | (946 | ) | (10 | ) | (50,981 | ) | — | — | (50,991 | ) | |||||||||||||
| Unrealized loss on cash flow hedges, net of tax | — | — | — | — | (299 | ) | (299 | ) | |||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 16,593 | 16,593 | |||||||||||||||||
| Unrealized loss on marketable securities, net of tax | — | — | — | — | (22 | ) | (22 | ) | |||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | 9,774 | 9,774 | |||||||||||||||||
| Balance as of September 30, 2017 | 115,333 | $ | 1,153 | $ | 1,609,030 | $ | (650,840 | ) | $ | (73,907 | ) | $ | 885,436 | ||||||||||
| ASU 2016-09 Adoption | — | — | 681 | (556 | ) | — | 125 | ||||||||||||||||
| Common stock issued for employee stock-based awards | 1,830 | 18 | (18 | ) | — | — | — | ||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (664 | ) | (6 | ) | (45,368 | ) | — | — | (45,374 | ) | |||||||||||||
| Common stock issued | 10,582 | 106 | 995,394 | — | — | 995,500 | |||||||||||||||||
| Common stock issued for employee stock purchase plan | 292 | 2 | 15,652 | — | — | 15,654 | |||||||||||||||||
| Compensation expense from stock-based awards | — | — | 82,939 | — | — | 82,939 | |||||||||||||||||
| Net income | — | — | — | 51,987 | — | 51,987 | |||||||||||||||||
| Repurchases of common stock | (9,392 | ) | (93 | ) | (1,099,907 | ) | — | — | (1,100,000 | ) | |||||||||||||
| Unrealized gain on cash flow hedges, net of tax | — | — | — | — | 1,928 | 1,928 | |||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (11,767 | ) | (11,767 | ) | |||||||||||||||
| Unrealized loss on marketable securities, net of tax | — | — | — | — | (269 | ) | (269 | ) | |||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | (1,570 | ) | (1,570 | ) | |||||||||||||||
| Balance as of September 30, 2018 | 117,981 | $ | 1,180 | $ | 1,558,403 | $ | (599,409 | ) | $ | (85,585 | ) | $ | 874,589 | ||||||||||
| ASU 2016-16 Adoption | — | — | — | 72,261 | — | 72,261 | |||||||||||||||||
| ASC 606 Adoption | — | — | — | 363,218 | — | 363,218 | |||||||||||||||||
| Common stock issued for employee stock-based awards | 1,495 | 15 | (15 | ) | — | — | — | ||||||||||||||||
| Shares surrendered by employees to pay taxes related to stock-based awards | (504 | ) | (5 | ) | (44,361 | ) | — | — | (44,366 | ) | |||||||||||||
| Common stock issued | — | — | (140 | ) | — | — | (140 | ) | |||||||||||||||
| Common stock issued for employee stock purchase plan | 275 | 3 | 17,612 | — | — | 17,615 | |||||||||||||||||
| Compensation expense from stock-based awards | — | — | 86,400 | — | — | 86,400 | |||||||||||||||||
| Net loss | — | — | — | (27,460 | ) | — | (27,460 | ) | |||||||||||||||
| Repurchases of common stock | (4,348 | ) | (44 | ) | (114,950 | ) | — | — | (114,994 | ) | |||||||||||||
| Unrealized loss on cash flow hedges, net of tax | — | — | — | — | (385 | ) | (385 | ) | |||||||||||||||
| Unrealized gain on net investment hedges, net of tax | — | — | — | — | 5,087 | 5,087 | |||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (24,755 | ) | (24,755 | ) | |||||||||||||||
| Unrealized gain on marketable securities, net of tax | — | — | — | — | 530 | 530 | |||||||||||||||||
| Change in pension benefits, net of tax | — | — | — | — | (5,602 | ) | (5,602 | ) | |||||||||||||||
| Balance as of September 30, 2019 | 114,899 | $ | 1,149 | $ | 1,502,949 | $ | (191,390 | ) | $ | (110,710 | ) | $ | 1,201,998 | ||||||||||
|
| Common Stock |
|
| Additional |
|
| Retained Earnings |
|
| Accumulated Other |
|
| Total |
| |||||||||
|
| Shares |
|
| Amount |
|
| Paid-In |
|
| (Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| ||||||
Balance as of September 30, 2019 |
|
| 114,899 |
|
| $ | 1,149 |
|
| $ | 1,502,949 |
|
| $ | (191,390 | ) |
| $ | (110,710 | ) |
| $ | 1,201,998 |
|
ASU 2016-02 (ASC 842) adoption |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,572 | ) |
|
| — |
|
|
| (1,572 | ) |
Common stock issued for employee stock-based awards |
|
| 1,392 |
|
|
| 14 |
|
|
| (14 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Shares surrendered by employees to pay taxes related to stock-based awards |
|
| (455 | ) |
|
| (4 | ) |
|
| (33,736 | ) |
|
| — |
|
|
| — |
|
|
| (33,740 | ) |
Common stock issued for employee stock purchase plan |
|
| 289 |
|
|
| 2 |
|
|
| 18,380 |
|
|
| — |
|
|
| — |
|
|
| 18,382 |
|
Compensation expense from stock-based awards |
|
| — |
|
|
| — |
|
|
| 115,149 |
|
|
| — |
|
|
| — |
|
|
| 115,149 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 130,695 |
|
|
| — |
|
|
| 130,695 |
|
Unrealized loss on net investment hedges, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,242 | ) |
|
| (13,242 | ) |
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 22,076 |
|
|
| 22,076 |
|
Unrealized gain on available-for-sale securities, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 188 |
|
|
| 188 |
|
Change in pension benefits, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,686 | ) |
|
| (1,686 | ) |
Balance as of September 30, 2020 |
|
| 116,125 |
|
| $ | 1,161 |
|
| $ | 1,602,728 |
|
| $ | (62,267 | ) |
| $ | (103,374 | ) |
| $ | 1,438,248 |
|
Common stock issued for employee stock-based awards |
|
| 1,490 |
|
|
| 15 |
|
|
| (15 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Shares surrendered by employees to pay taxes related to stock-based awards |
|
| (466 | ) |
|
| (4 | ) |
|
| (53,073 | ) |
|
| — |
|
|
| — |
|
|
| (53,077 | ) |
Common stock issued for employee stock purchase plan |
|
| 240 |
|
|
| 2 |
|
|
| 21,573 |
|
|
| — |
|
|
| — |
|
|
| 21,575 |
|
Compensation expense from stock-based awards |
|
| — |
|
|
| — |
|
|
| 177,289 |
|
|
| — |
|
|
| — |
|
|
| 177,289 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 476,923 |
|
|
| — |
|
|
| 476,923 |
|
Repurchases of common stock |
|
| (226 | ) |
|
| (2 | ) |
|
| (29,998 | ) |
|
| — |
|
|
| — |
|
|
| (30,000 | ) |
Unrealized gain on net investment hedges, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,248 |
|
|
| 1,248 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,613 |
|
|
| 1,613 |
|
Unrealized loss on available-for-sale securities, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (307 | ) |
|
| (307 | ) |
Change in pension benefits, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,956 |
|
|
| 4,956 |
|
Balance as of September 30, 2021 |
|
| 117,163 |
|
| $ | 1,172 |
|
| $ | 1,718,504 |
|
| $ | 414,656 |
|
| $ | (95,864 | ) |
| $ | 2,038,468 |
|
Common stock issued for employee stock-based awards |
|
| 1,737 |
|
|
| 18 |
|
|
| (18 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Shares surrendered by employees to pay taxes related to stock-based awards |
|
| (597 | ) |
|
| (6 | ) |
|
| (68,985 | ) |
|
| — |
|
|
| — |
|
|
| (68,991 | ) |
Common stock issued for employee stock purchase plan |
|
| 215 |
|
|
| 2 |
|
|
| 21,205 |
|
|
| — |
|
|
| — |
|
|
| 21,207 |
|
Compensation expense from stock-based awards |
|
| — |
|
|
| — |
|
|
| 174,863 |
|
|
| — |
|
|
| — |
|
|
| 174,863 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 313,081 |
|
|
| — |
|
|
| 313,081 |
|
Repurchases of common stock |
|
| (1,046 | ) |
|
| (11 | ) |
|
| (124,989 | ) |
|
| — |
|
|
| — |
|
|
| (125,000 | ) |
Unrealized gain on net investment hedges, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,556 |
|
|
| 17,556 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (92,768 | ) |
|
| (92,768 | ) |
Change in pension benefits, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,618 |
|
|
| 17,618 |
|
Balance as of September 30, 2022 |
|
| 117,472 |
|
| $ | 1,175 |
|
| $ | 1,720,580 |
|
| $ | 727,737 |
|
| $ | (153,458 | ) |
| $ | 2,296,034 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PTC Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Business
PTC Inc. was incorporated in 1985 and is headquartered in Boston, Massachusetts. PTC is a global software and services company that deliversprovides a technology platformportfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and solutions to help companies design, manufacture, operate, and service things for a smart, connected world.
Basis of Presentation
Our fiscal year-end is September 30. The consolidated financial statements include PTC Inc. (the parent company) and its wholly ownedwholly-owned subsidiaries, including those operating outside the U.S.United States. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
We prepare our financial statements under generally accepted accounting principles in the U.S.United States. that require management to make estimates and assumptions that affect the amounts reported and the related disclosures. Actual results could differ from these estimates.
On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). Results for reporting periods beginning on or after October 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (ASC 605). In connection with the adoption of ASC 606, we changed our presentation of the statement of operations to reflect revenue and associated costs as license, support and cloud services, and professional services. For the prior year period, all components of subscription licenses (including support) are included in license revenue. Prior to our adoption of ASC 606, revenues from subscription licenses and support thereon were not separated and were previously included in subscription revenue in our consolidated statement of operations since we did not have VSOE of fair value for support on subscription sales. In addition, revenue and costs associated with our cloud services, which are immaterial and were previously reported in subscription revenue, are classified as support and cloud services for all periods presented.
Foreign Currency Translation
For our non-U.S. operations where the functional currency is the local currency, we translate assets and liabilities at exchange rates in effect at the balance sheet date and record translation adjustments in stockholders’ equity. For our non-U.S. operations where the U.S. dollar is the functional currency, we remeasure monetary assets and liabilities using exchange rates in effect at the balance sheet date and non-monetary assets and liabilities at historical rates and record resulting exchange gains or losses in foreign currency net losses in the Consolidated Statements of Operations. We translate income
Revenue Recognition
Nature of Products and Services
Our sources of revenue include: (1) subscription,subscriptions, (2) perpetual license,licenses, (3) support for perpetual licenses and (4) professional services. Revenue is derived from the licensing of computer software products and from related support and/or professional services contracts. Effective October 1, 2018, we record revenues in accordance with the guidance provided by ASC 606, Revenue from Contracts with Customers. In accordance with ASC 606,Revenue from Contracts with Customers, revenue is recognized when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, we apply the following five steps:
F-9
We enter into contracts that include combinations of products,licenses, support and professional services, each of which are accounted for as separate performance obligations with differing revenue recognition patterns referenced below.
Performance Obligation | When Performance Obligation is Typically Satisfied | |
Term-based subscriptions | ||
On-premises software licenses | Point in Time: Upon the later of when the software is made available or the subscription term commences | |
Support and cloud-based offerings (including SaaS) | Over Time: Ratably over the contractual term; commencing upon the later of when the software is made available or the subscription term commences | |
Perpetual software licenses | Point in Time: when the software is made available | |
Support for perpetual software licenses | Over Time: Ratably over the contractual term | |
Professional services | Over |
Through 2018, we recorded revenues for software related deliverables in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance withASC 605-25, Revenue Recognition, Multiple-Element Arrangements. Under those standards, revenue is recordedwhen the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB shipping point or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable. We exercise judgment and use estimates in connection with determining the amounts of software license and services revenues to be recognized in each accounting period.
Our contracts with customers for subscriptions typically include commitments to transfer term-based, on-premiseon-premises software licenses bundled with support and/or cloud services. On-premiseOn-premises software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription. For subscription arrangements which include cloud services and on-premises licenses, we assess whether the cloud component is highly interrelated with on-premisethe on-premises term-based software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premiseon-premises term software and, as a result, cloud services are accounted for as a distinct performance obligation from the software and support components of the subscription.
Judgment is required to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to us, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied. WeWhere subscriptions include on-premises software and support only, we determined that 50% to 55%approximately 55% of the estimated standalone selling price for subscriptions that contain distinct license and support
Our multi-year, non-cancellable on-premiseon-premises subscription contracts provide customers with an annual right to exchange software within the original subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we use the most likely amount method to determine the amount of variable consideration. In both circumstances, the variable consideration included in the transaction price is constrained to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As ofSeptember 30, 2019,2022 and 2021, the total refund liability was $22.9 $34.2million and $40.3 million, respectively, primarily associated with the annual right to exchange on-premiseon-premises subscription software.
We have elected certain practical expedients associated with the adoption of the newour revenue standard.recognition policy. We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services is one year or less. Additionally, we recognize revenue equal to the amount we have a right to invoice when the amount corresponds directly with the value to the customer of our performance to date.
Cash Equivalents
Our cash equivalents are invested in money market accounts and time deposits of financial institutions. We have established guidelines relative to credit ratings, diversification and maturities that are intended to maintain safety and liquidity. Cash equivalents include highly liquid investments with maturity periods of three months or less when purchased.
Marketable Securities
As of September 30, 2022, our investment portfolio consistsconsisted of certificates of deposit, commercial paper, corporate notes/bonds and government securities that havehad a maximum maturity of three years. In December 2020, we sold all our marketable securities to partially fund the Arena acquisition, resulting in proceeds of $56.2 million. Neither gross realized gains nor gross realized losses related to the sale were material.
Equity Securities
On July 22, 2021, a company in which we were a preferred equity investor, Matterport, Inc., completed a business combination with a public company. The longercarrying value of our investment, which was classified as a non-marketable equity investment, was approximately $8.7 million prior to the durationbusiness combination. Our preferred shares were converted into common shares of these securities,Matterport. As of September 30, 2022, PTC held no shares in Matterport, as we sold all previously held shares during the more susceptible they arethree months ended March 31, 2022. The shares sold included those held as of September 30, 2021, as well as additional shares which PTC earned during the second quarter of FY'22 based on contingent earn-outs achieved in January 2022. Shares related to changesthe original investment were restricted from sale until January 2022 (six months after Matterport became a public company). At expiration of this lock-out, we sold all shares held from the original investment for $39.1 million at an average price of $9.1 per share. In February 2022, we sold all remaining shares for $3.6 million at an average share price of $7.6 per share. Due to the decline in market interest ratesthe price per share during the first six months of fiscal 2022, we recognized a net loss of $34.8 million in Other income, net on the Consolidated Statements of Operations. No additional gains or losses have been recognized for 2022 and bond yields. Allthe aggregate realized gain from the original investment of $8.7 million was $34.0 million.
The fair value of the Matterport shares as of September 30, 2021 was $77.5 million and was determined using the closing price of Matterport's common stock as of September 30, 2021, less a temporary discount for lack of marketability. For the year ended September 30, 2021, we recorded an unrealized losses are due to changesgain of $68.8 million on the appreciation of the value of the shares in market interest rates, bond yields and/or credit ratings.
We review our investments to identify and evaluatealso have non-marketable equity investments that have an indication of possible impairment. We concluded that, at September 30, 2019, the unrealized losses were temporary.
F-11
Table of approximately $3.7 million.Contents
Concentration of Credit Risk and Fair Value of Financial Instruments
The amounts reflected in the Consolidated Balance Sheets for cashCash and cash equivalents, accountsAccounts receivable and accountsAccounts payable approximate their fair value due to their short maturities. Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments, trade accounts receivable and foreign currency derivative instruments. Our cash,Cash, cash equivalents, and foreign currency derivatives are placed with financial institutions with high credit standings. Our credit risk for derivatives is also mitigated due to the short-term nature of the contracts. Our customer base consists of large numbers ofmany geographically diverse customers dispersed across many industries. No individual
Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Generally accepted accounting principles prescribe a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Effective October 1, 2020, we adopted ASC 326, Financial Instruments—Credit Losses, which replaced the incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $0.7$0.4 million, $0.3 million and $0.5 million as of September 30, 2019, $0.6 million as of September 30, 2018, $1.1 million as of September 30, 20172022, 2021 and $1.0 million as of September 30, 2016.2020, respectively. Uncollectible trade accounts receivable written-off, net of recoveries, were $0.2$0.4 million, $1.0$0.1 million and $1.5$0.2 million in 2019, 20182022, 2021 and 2017,2020, respectively. BadNet bad debt expense was $0.3 million, $0.5 million and $1.5$0.5 million in 2019, 20182022, net bad debt recovery was $0.2 million in 2021 and 2017, respectively,net bad debt expense was $0.0 million in 2020, and is included in generalGeneral and administrative expenses in the accompanying Consolidated Statements of Operations.
F-12
Derivatives
Generally accepted accounting principles require all derivatives, whether designated in a hedging relationship or not, to be recorded on the balance sheet at fair value. Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China and Canada.India. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. dollar value of anticipated transactions and balances denominated in foreign currency,currencies resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts and options, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes. For a description of our non-designated hedge and cash flownet investment hedge activitiesactivity see Note 17.Derivative Financial Instruments.
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three months. Generally, we do not designate thesefour months. The majority of our foreign currency forward contracts are not designated as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains or losses on the underlying foreign-denominated balance are offset by the loss or gain on the forward contract and are included in foreign currency losses,Other income, net.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollars using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulatedAccumulated other comprehensive loss on the Consolidated Balance Sheet. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulatedAccumulated other comprehensive loss on the Consolidated Balance Sheet. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheet and the maximum duration of foreign exchange forward contracts is approximately three months.
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these Unrealized gain (loss) on net investment hedges in accumulatedAccumulated other comprehensive loss and subsequently reclassify them to foreignForeign currency translation adjustment in accumulatedAccumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counter-partiescounterparties by trading among several counter-parties,counterparties, and we review our counter-parties’counterparties’ credit at least quarterlquarterly.
Leases
We adopted ASC 842, y.Leases effective October 1, 2019. ASC 842 requires a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or in the period of adoption. We elected to use the period of adoption (October 1, 2019) transition method and therefore did not recast prior periods.
F-13
We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets and Operating lease obligations on our Consolidated Balance Sheets. Our operating leases are primarily for office space, cars, servers, and office equipment. We made an election not to separate lease components from non-lease components for office space, servers and office equipment. We combine fixed payments for non-lease components with lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities. Finance leases are included in Property and equipment, Accrued expenses and Other current liabilities, and Other liabilities on our Consolidated Balance Sheets.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term as that of the lease payments at the commencement date. The right-of-use assets include any lease payments made and exclude lease incentives received. Operating lease expense is recognized on a straight-line basis over the lease term.
Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base non-cancellable lease term when determining the lease assets and liabilities.
Certain lease agreements contain variable payments, which are expensed as incurred and not included in the lease assets and liabilities. These variable payments include insurance, taxes, consumer price index payments, and payments for maintenance and utilities.
Our operating leases expire at various dates through 2037.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Computer hardware and software are typically amortized over three to five years, and furniture and fixtures over three to eight years.twelve years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. Property and equipment under capital leases are amortized over the lesser of the lease termsterm or their estimated useful lives. Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. When an item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income.
Software Development Costs
We incur costs to develop computer software to be licensed or otherwise marketed to customers. Our research and development expenses consist principally of salaries and benefits, costs of computer equipment, and facility expenses. Research and development costs are expensed as incurred, except for costs of internally developed or externally purchased software that qualify for capitalization. Development costs for software to be sold externally incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized and, upon general release, are amortized using the greater of either the straight-line method over the expected life of the related products or based upon the pattern in which economic benefits related to such assets are realized. The straight-line method is used if it
F-14
Business Combinations
We allocate the purchase price of acquisitions to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. Goodwill is measured as the excess of the purchase price over the value of net identifiable assets acquired. While best estimates and assumptions are used to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. Any adjustments to estimated fair value are recorded to goodwill, provided that we are within the measurement period (up to one year from the acquisition date) and that we continue to collect information to determine estimated fair value. Subsequent to the measurement period or our final determination of estimated fair value, whichever comes first, adjustments are recorded in the Consolidated Statements of Operations.
Goodwill, Acquired Intangible Assets and Long-lived Assets
Goodwill is the amount by which the purchase price in a business acquisition exceeds the fair valuesvalue of net identifiable assets on the date of purchase.
Goodwill is evaluated for impairment annually as of the end of the third quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Factors we consider important, on an overall company basis and reportable-segmentsegment basis, when applicable, that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value.
Our annual goodwill impairment test is based on either a quantitative or qualitative (Step 0) orassessment. A quantitative (Step 1) assessment and is designed to determine whether we believe it is more likely than not that the fair values of our reporting units exceed their carrying values. A Step 0 assessment includes a review of qualitative factors including company specific (financial performance and long-range plans), industry, and macroeconomic factors, and a consideration of the fair value of each reporting unit at the last valuation date. A Step 1 assessment is a quantitative analysis that compares the fair value of the reporting unit to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of goodwill and its impliedestimated fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures, working capital, terminal values based on revenue multiples, and discount rates for each reporting unit. We estimate these amounts by evaluating historical trends,trends; current budgets and operating plansplans; and industry data.
We completed our annual goodwill impairment review as of June 29,201930, 2022, which consisted of a qualitative assessment of our Software Products segment and a quantitative assessment of our Professional Services segment in conjunction with the sale of a portion of that business to ITC Infotech. Our qualitative assessment for Software Products included company-specific (e.g., financial performance and long-range plans), industry, and macroeconomic factors, as well as consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date (June 27, 2020). Based on our qualitative assessment, we believe it is more likely than not that the fair value of our Software Products reporting unit exceeds its carrying value and no further impairment testing is required. Our quantitative assessment for the Professional Services segment compared the fair value of the reporting unit to its carrying value. We estimated the fair value of the reporting unit using a discounted cash flow valuation model. This model requires estimates of future revenues, profits, capital expenditures, working capital, and a terminal value based on a Step 0 assessmentresidual cash flow valuation model. We estimated this amount by evaluating historical trends, current budgets and concluded thatoperating plans, including consideration of the completed transaction with ITC Infotech. Based on a comparison of the estimated fair value to the carrying value of the Professional Services reporting unit as of June 30, 2022, no impairment charge was required asrequired. Through September 30, 2022, there were no events or changes in circumstances that indicated that the carrying values of that date.
F-15
Long-lived assets primarily include property and equipment and acquired intangible assets with finite lives (including purchased software, customer lists and trademarks). Purchased software is amortized over periods up to 1116 years, customer lists are amortized over periods up to 1213 years and trademarks are amortized over periods up to 12 years. We review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. An impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset or asset group. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses incurred were $3.6$8.6 million, $2.9$7.1 million and $2.5$3.8 million in 2019, 20182022, 2021 and 2017,2020, respectively and are included in sales and marketing expenses in the accompanying Consolidated Statements of Operations.
Income Taxes
Our income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effects of these differences are reported as deferred tax assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the taxTax provision (benefit) for income taxes in the Consolidated Statements of Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of netNet income (loss) and otherOther comprehensive income (loss), which includes foreign currency translation adjustments, changes in unrecognized actuarial gains and losses (net of tax) related to pension benefits, unrealized gains and losses on hedging instruments and unrealized gains and losses on marketable securities. For the purposes of comprehensive income disclosures, weWe do not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as we intend to reinvest permanently undistributed earnings of our foreign subsidiaries. Accumulated other comprehensive loss is reported as a component of stockholders’ equityStockholders’ Equity and, as of September 30, 2019 and 2018,2022, was comprised of the following: cumulative translation adjustment losses of $91.2$160.2 million, and $66.4 million, respectively, unrecognized actuarial losses related to pension benefits of $34.9$5.4 million ($24.8 million net of tax) and $27.0 million ($19.23.9 million net of tax), respectively, unrecognized gain on marketable securitiesand accumulated net gains from net investment hedges of $0.1$16.9 million and unrecognized loss of $0.4 million, respectively. Cash flow hedges were discontinued in 2019 and in 2018 unrecognized gain on cash flow hedging instruments was $0.4 million ($0.410.6 million net of tax). In 2019 we started a net investment hedge program and had accumulated net gainAs of $6.8September 30, 2021, Accumulated other comprehensive loss was comprised of the following: cumulative translation adjustment losses of $67.5 million, unrecognized actuarial losses related to pension benefits of $30.2 million ($5.121.5 million net of tax), and accumulated net losses from net investment hedges of $6.5 million ($6.5 million net of tax).
Earnings (loss) per Share (EPS)
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options, unrecognized compensation expense and any tax benefits as additional proceeds. Due toAnti-dilutive shares excluded from the net loss generatedcalculations of diluted EPS were immaterial in the yearyears ended September 30, 2019, approximately 1.0 million restricted stock units have been excluded from the computation2022 and 2021.
F-16
Table of diluted EPS in that year as the effect would have been anti-dilutive.
The following table presents the calculation for both basic and diluted EPS:
(in thousands, except per share data) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net income |
| $ | 313,081 |
|
| $ | 476,923 |
|
| $ | 130,695 |
|
Weighted average shares outstanding |
|
| 117,194 |
|
|
| 116,836 |
|
|
| 115,663 |
|
Dilutive effect of employee stock options, restricted shares and restricted stock units |
|
| 1,039 |
|
|
| 1,531 |
|
|
| 604 |
|
Diluted weighted average shares outstanding |
|
| 118,233 |
|
|
| 118,367 |
|
|
| 116,267 |
|
Earnings per share—Basic |
| $ | 2.67 |
|
| $ | 4.08 |
|
| $ | 1.13 |
|
Earnings per share—Diluted |
| $ | 2.65 |
|
| $ | 4.03 |
|
| $ | 1.12 |
|
| (in thousands, except per share data) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 51,987 | $ | 6,239 | ||||
| Weighted average shares outstanding | 117,724 | 116,390 | 115,523 | ||||||||
| Dilutive effect of employee stock options, restricted shares and restricted stock units | — | 1,768 | 1,833 | ||||||||
| Diluted weighted average shares outstanding | 117,724 | 118,158 | 117,356 | ||||||||
| Basic earnings (loss) per share | $ | (0.23 | ) | $ | 0.45 | $ | 0.05 | ||||
| Diluted earnings (loss) per share | $ | (0.23 | ) | $ | 0.44 | $ | 0.05 | ||||
Stock-Based Compensation
We measure the compensation cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. See Note 12. Equity Incentive PlanPlans for a description of the types of stock-basedequity awards granted, the compensation expense related to such awards and detail of equity-basedsuch awards outstanding. See Note 8. Income Taxes for detail of the tax benefit related to stock-based compensation recognized in the Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
Intangibles—Goodwill and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In applying the principles of ASC 606, more judgment and estimates are required within the revenue recognition process than is required under previous U.S. GAAP, including identifying performance obligations, estimating the amount of variable consideration to include in the transaction price, and estimating the value of each performance obligation to allocate the total transaction price to each separate performance obligation.
Refer to Note 3. Revenue from Contracts with Customers for further detail about the impact of the adoption of ASC 606 and further disclosures.
Financial Instruments—Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326), which, amendsalong with subsequent amendments, replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and simplifies existing guidance in order to allow companies to more accurately present the economic effectsrequires consideration of risk management activities in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018 (our fiscal 2020) including interim reporting periods within those annual reporting periods,a broader range of reasonable and early adoption is permitted.supportable information when recording credit loss estimates. We are currently evaluating the impact ofadopted the new guidancestandard effective October 1, 2020, with no impact on our consolidated financial statements.
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) on Simplifying the Accounting for Income Taxes. The decisions reflected in ASU 2019-12 update 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 new standard became effective for us in the first quarter of 2022 ending December 31, 2021 and did not have a material impact on our consolidated financial statements.
F-17
Business Combinations
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) on Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to 1) recognition of an acquired contract asset and liability, and 2) payment terms and their effect on subsequent revenue recognized by the acquirer. We adopted ASU 2021-08 early as of the third quarter of 2022 and applied it to our acquisition of Intland Software, which was completed in the quarter. The adoption of ASU 2021-08 did not have a material impact on our consolidated financial statements. Refer to Note 6. Acquisitions and Disposition of Business for additional discussion regarding the accounting for the acquisition of Intland Software.
Pending Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. ASU 2020-04 is effective for all entities upon issuance through December 31, 2022. We are still evaluating the impact, but do not expect the standard to have a material impact on our consolidated financial statements.
F-18
3. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
| (in thousands) | As Reported | As Adjusted | |||||
| September 30, 2019 | October 1, 2018 | ||||||
| Contract asset | $ | 21,038 | $ | 25,037 | |||
| Deferred revenue | $ | 396,632 | $ | 356,263 | |||
(in thousands) |
| September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Contract asset |
| $ | 21,096 |
|
| $ | 12,934 |
|
Deferred revenue |
| $ | 520,333 |
|
| $ | 497,677 |
|
As of September 30, 2019,2022, $16.9 million of our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in otherOther current assets. The remainder is included in Other assets and expected to be transferred within the next 24 months. As of September 30, 2021, $8.2 million of our contract asset balance was included in Other current assets.
Approximately $17.8$7.0 million of the October 1, 2018September 30, 2021 contract asset balance was transferred to receivables during the year ended September 30, 20192022 as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions toThe net increase in contract assets of $8.2million includes an increase of approximately $13.8$15.2 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the year ended September 30, 2019.
During the year ended September 30, 2019, $333.72022, we recognized $491.6 million of revenue that was included in the deferredDeferred revenue opening balance was recognized, respectively. Thereas of September 30, 2021 and there were additional deferrals of $374.1$507.3 million, which were primarily related to new billings. Adjusted openingIn addition, deferred revenue increased by $6.9 million as a result of the acquisition of Intland Software. For subscription contracts, we generally invoice customers annually. The balance of total short- and long-term receivables as of October 1, 2018 under ASC 606September 30, 2022 was $503.7$871.0 million, compared to total short- and long-term receivables$744.6 million as of September 30, 2019 under ASC 606 of $412.5 million.
Costs to Obtain or Fulfill a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs (primarily commissions) are amortized proportionately related to revenue over five5 years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of September 30, 2019,2022 and September 30, 2021, deferred costs of $27.7$40.7 million and $40.2 million, respectively, were included in otherOther current assets and $64.8$77.0 million and $81.1 million, respectively, were included in other assets (non-current).
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. TheAs of September 30, 2022, the amounts include additional performance obligations of $520.3 million recorded in deferred revenue and $1,092.7 million that are not yet recorded in the consolidated balance sheets.As of September 30, 2019, amounts allocated to these additional contractual obligations are $1,021 million, of which weConsolidated Balance Sheets. We expect to recognize approximately 90%57% of the total $1,613.0 million over the next 2412 months, with the remaining amount thereafter.
Disaggregation of Revenue
| Year Ended September 30, | ||||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | |||||||||||||
Revenue (in thousands) | 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Subscription license | $ | 253,698 | ||||||||||||||
| Subscription support & cloud services | 348,452 | |||||||||||||||
| Total subscription | 602,150 | $ | 667,597 | $ | 482,027 | $ | 279,246 | |||||||||
| Perpetual support | 415,248 | 411,030 | 496,826 | 574,680 | ||||||||||||
| Total recurring revenue | 1,017,398 | 1,078,627 | 978,853 | 853,926 | ||||||||||||
| Perpetual license | 70,702 | 72,191 | 109,634 | 133,390 | ||||||||||||
| Total software revenue | 1,088,100 | 1,150,818 | 1,088,487 | 987,316 | ||||||||||||
| Professional services | 167,531 | 160,676 | 153,337 | 176,723 | ||||||||||||
| Total revenue | $ | 1,255,631 | $ | 1,311,494 | $ | 1,241,824 | $ | 1,164,039 | ||||||||
(in thousands) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Total recurring revenue |
| $ | 1,736,188 |
|
| $ | 1,616,328 |
|
| $ | 1,281,949 |
|
Perpetual license |
|
| 34,065 |
|
|
| 33,013 |
|
|
| 32,668 |
|
Professional services |
|
| 163,094 |
|
|
| 157,818 |
|
|
| 143,798 |
|
Total revenue |
| $ | 1,933,347 |
|
| $ | 1,807,159 |
|
| $ | 1,458,415 |
|
F-19
For further disaggregation of revenue by geographic region and product group see Note 18. Segment and Geographic Information.
The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:
| (in thousands) | September 30, | ||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | |||||||||
| 2019 | 2019 | 2018 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 269,579 | $ | 269,579 | $ | 259,946 | |||||
| Short-term marketable securities | 27,891 | 27,891 | 25,836 | ||||||||
Accounts receivable (1) | 372,743 | 107,921 | 129,297 | ||||||||
| Prepaid expenses | 52,701 | 54,384 | 48,997 | ||||||||
Other current assets (2) | 59,707 | 199,513 | 169,708 | ||||||||
| Total current assets | 782,621 | 659,288 | 633,784 | ||||||||
| Property and equipment, net | 105,531 | 105,531 | 80,613 | ||||||||
| Goodwill | 1,238,179 | 1,238,179 | 1,182,457 | ||||||||
| Acquired intangible assets, net | 169,949 | 169,949 | 200,202 | ||||||||
| Long-term marketable securities | 29,544 | 29,544 | 30,115 | ||||||||
Deferred tax assets (3) | 198,634 | 233,026 | 165,566 | ||||||||
Other assets (4) | 140,130 | 36,391 | 36,285 | ||||||||
| Total assets | $ | 2,664,588 | $ | 2,471,908 | $ | 2,329,022 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 42,442 | $ | 42,442 | $ | 53,473 | |||||
Accrued expenses and other current liabilities (5) | 104,028 | 78,007 | 74,388 | ||||||||
| Accrued compensation and benefits | 88,769 | 88,769 | 101,784 | ||||||||
Accrued income taxes (3) | 17,407 | 21,336 | 18,044 | ||||||||
Deferred revenue (6) | 385,509 | 569,171 | 487,590 | ||||||||
| Total current liabilities | 638,155 | 799,725 | 735,279 | ||||||||
| Long-term debt | 669,134 | 669,134 | 643,268 | ||||||||
Deferred tax liabilities (3) | 41,683 | 14,644 | 5,589 | ||||||||
Deferred revenue (6) | 11,123 | 9,577 | 11,852 | ||||||||
| Other liabilities | 102,495 | 102,495 | 58,445 | ||||||||
| Total liabilities | 1,462,590 | 1,595,575 | 1,454,433 | ||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock | — | — | — | ||||||||
| Common stock | 1,149 | 1,149 | 1,180 | ||||||||
| Additional paid-in capital | 1,502,949 | 1,502,949 | 1,558,403 | ||||||||
| Accumulated deficit | (191,390 | ) | (524,169 | ) | (599,409 | ) | |||||
| Accumulated other comprehensive loss | (110,710 | ) | (103,596 | ) | (85,585 | ) | |||||
| Total stockholders’ equity | 1,201,998 | 876,333 | 874,589 | ||||||||
| Total liabilities and stockholders’ equity | $ | 2,664,588 | $ | 2,471,908 | $ | 2,329,022 | |||||
| (in thousands) | September 30, | ||||||||||||||
| As Reported ASC 606 | ASC 605 | As Reported ASC 605 | As Reported ASC 605 | ||||||||||||
| 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Revenue: | |||||||||||||||
License (1) | $ | 324,400 | $ | 666,770 | $ | 529,265 | $ | 356,326 | |||||||
Support and cloud services (1) | 763,700 | 484,048 | 559,222 | 630,990 | |||||||||||
| Total software revenue | 1,088,100 | 1,150,818 | 1,088,487 | 987,316 | |||||||||||
| Professional services | 167,531 | 160,676 | 153,337 | 176,723 | |||||||||||
| Total revenue | 1,255,631 | 1,311,494 | 1,241,824 | 1,164,039 | |||||||||||
| Cost of revenue: | |||||||||||||||
| Cost of license revenue | 51,936 | 50,231 | 47,737 | 66,841 | |||||||||||
| Cost of support and cloud services revenue | 133,478 | 132,987 | 135,106 | 110,931 | |||||||||||
| Total cost of software revenue | 185,414 | 183,218 | 182,843 | 177,772 | |||||||||||
| Cost of professional service revenue | 139,964 | 134,936 | 143,659 | 150,730 | |||||||||||
Total cost of revenue: (2) | 325,378 | 318,154 | 326,502 | 328,502 | |||||||||||
| Gross margin | 930,253 | 993,340 | 915,322 | 835,537 | |||||||||||
| Operating expenses: | |||||||||||||||
Sales and marketing (3) | 417,449 | 441,958 | 414,764 | 372,702 | |||||||||||
| Research and development | 246,888 | 246,888 | 249,786 | 236,028 | |||||||||||
| General and administrative | 127,919 | 127,919 | 143,045 | 144,991 | |||||||||||
| Amortization of acquired intangible assets | 23,841 | 23,841 | 31,350 | 32,108 | |||||||||||
| Restructuring and other charges, net | 51,114 | 51,114 | 3,764 | 7,942 | |||||||||||
| Total operating expenses | 867,211 | 891,720 | 842,709 | 793,771 | |||||||||||
| Operating income | 63,042 | 101,620 | 72,613 | 41,766 | |||||||||||
| Interest expense | (43,047 | ) | (43,047 | ) | (41,673 | ) | (42,400 | ) | |||||||
| Other income (expense), net | 305 | 131 | (2,284 | ) | (772 | ) | |||||||||
| Income before income taxes | 20,300 | 58,704 | 28,656 | (1,406 | ) | ||||||||||
Provision (benefit) for income taxes (4) | 47,760 | 55,725 | (23,331 | ) | (7,645 | ) | |||||||||
| Net income (loss) | $ | (27,460 | ) | $ | 2,979 | $ | 51,987 | $ | 6,239 | ||||||
Restructuring and other charges, net includes restructuring charges (credits) and, headquarters relocation charges.
In 2019, we recorded restructuring2022, Restructuring and other charges, of $51.1net totaled $36.2 million, of which $48.6$32.4 million is attributable to workforce realignment and facility closures (including $0.2 million related to prior facility restructuring actions) and $2.5charges, $5.1 million is attributable to headquarters relocation charges.other charges for professional fees included in restructuring related to our SaaS transformation, offset by a $1.3 million credit attributable to sublease income and the reversal of lease liabilities related to exited lease facilities. We made cash payments related to restructuring charges of $24.7 $40.8million ($23.634.0 million related to the 2019employee charges, $2.5 million in payments for other professional fees included in restructuring and $1.1 million related to the 2016 restructuring)our SaaS transformation, and $4.3 million in net payments for variable costs related to restructured facilities).
In January 2019, we relocated our worldwide headquarters2021, Restructuring and other charges, net totaled $2.2 million, of which $2.1 million was attributable to the Boston Seaport District. Our prior headquarters lease will not expire until November 2022, and we are seeking to sublease that space. As a result, we will bear overlapping rent obligations for those premises and, in 2019, we recorded restructuring
In 2020, Restructuring and other charges, net totaled $32.7 million, of which $26.4 million was attributable to restructuring charges, $5.6 million was attributable to impairment and accretion expense related to exited lease facilities, and $0.7 million was attributable to accelerated depreciation related to the 2015 restructuring). At September 30, 2018, accrued restructuring totaled $2.4 million related to the 2016 restructuring.
Restructuring Charges
In the first quarter of 2022, we committed to a plan to restructure our workforce and consolidate select facilities to align our customer facing and product-related functions with the SaaS industry best practices and accelerate the opportunity for our on-premises customers to move to the cloud. The restructuring plan resulted in charges of $33.1 million in 2022, primarily associated with the termination of benefits for approximately 330 employees.
In the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. The restructuring plan resulted in charges of $30.8 million through fiscal year 2020 for termination benefits associated with approximately 250 employees. In the year ended September 30, 2022 and 2021, we recorded a credit of $0.1 million and a charge of $0.2 million, respectively, related to this restructuring plan.
F-20
The following table summarizes restructuring charges reserveaccrual activity for the three years ended September 30, 2019:2022:
(in thousands) |
| Employee severance |
|
| Facility closures |
|
| Consolidated total |
| |||
Balance, September 30, 2019 |
| $ | 298 |
|
| $ | 30,788 |
|
| $ | 31,086 |
|
ASC 842 adoption |
|
| — |
|
|
| (16,462 | ) |
|
| (16,462 | ) |
Charges (credits) to operations, net |
|
| 30,690 |
|
|
| (4,263 | ) |
|
| 26,427 |
|
Cash disbursements |
|
| (27,256 | ) |
|
| (4,246 | ) |
|
| (31,502 | ) |
Other non-cash |
|
| — |
|
|
| 164 |
|
|
| 164 |
|
Foreign exchange impact |
|
| 260 |
|
|
| 14 |
|
|
| 274 |
|
Balance, September 30, 2020 |
|
| 3,992 |
|
|
| 5,995 |
|
|
| 9,987 |
|
Charges to operations, net |
|
| 1,887 |
|
|
| 249 |
|
|
| 2,136 |
|
Cash disbursements |
|
| (3,925 | ) |
|
| (2,756 | ) |
|
| (6,681 | ) |
Foreign exchange impact |
|
| 27 |
|
|
| 17 |
|
|
| 44 |
|
Balance, September 30, 2021 |
|
| 1,981 |
|
|
| 3,505 |
|
|
| 5,486 |
|
Charges (credits) to operations, net |
|
| 32,971 |
|
|
| (561 | ) |
|
| 32,410 |
|
Cash disbursements |
|
| (34,023 | ) |
|
| (2,355 | ) |
|
| (36,378 | ) |
Foreign exchange impact |
|
| (583 | ) |
|
| — |
|
|
| (583 | ) |
Balance, September 30, 2022 |
| $ | 346 |
|
| $ | 589 |
|
| $ | 935 |
|
| (in thousands) | Employee Severance and Related Benefits | Facility Closures and Other Costs | Consolidated Total | ||||||||
| Balance, September 30, 2016 | $ | 35,177 | $ | 1,431 | $ | 36,608 | |||||
| Charges to operations | 2,373 | 5,569 | 7,942 | ||||||||
| Cash disbursements | (35,069 | ) | (2,005 | ) | (37,074 | ) | |||||
| Other non-cash charges | — | (704 | ) | (704 | ) | ||||||
| Foreign currency impact | (745 | ) | 217 | (528 | ) | ||||||
| Balance, September 30, 2017 | 1,736 | 4,508 | 6,244 | ||||||||
| Charges (credits) to operations | (509 | ) | (494 | ) | (1,003 | ) | |||||
| Cash disbursements | (1,247 | ) | (1,509 | ) | (2,756 | ) | |||||
| Foreign currency impact | 20 | (90 | ) | (70 | ) | ||||||
| Balance, September 30, 2018 | — | 2,415 | 2,415 | ||||||||
| Charges (credits) to operations | 15,704 | 32,908 | 48,612 | ||||||||
| Cash disbursements | (15,402 | ) | (9,319 | ) | (24,721 | ) | |||||
| Other non-cash charges | — | 4,812 | 4,812 | ||||||||
| Foreign currency impact | (4 | ) | (28 | ) | (32 | ) | |||||
| Balance, September 30, 2019 | $ | 298 | $ | 30,788 | $ | 31,086 | |||||
As of September 30, 2022, the accrual for facility closures and related costs was included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets and as of September 30, 2019, $11.92021, $2.6 million iswas included in accruedAccrued expenses and other current liabilities and $18.9$0.9 million iswas included in otherOther liabilities in the Consolidated Balance Sheets. The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
5. Property and Equipment
Property and equipment consisted of the following:
(in thousands) |
| September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Computer hardware and software |
| $ | 364,762 |
|
| $ | 352,704 |
|
Furniture and fixtures |
|
| 29,744 |
|
|
| 30,568 |
|
Leasehold improvements |
|
| 95,383 |
|
|
| 94,959 |
|
Gross property and equipment |
|
| 489,889 |
|
|
| 478,231 |
|
Accumulated depreciation and amortization |
|
| (391,788 | ) |
|
| (377,994 | ) |
Net property and equipment |
| $ | 98,101 |
|
| $ | 100,237 |
|
| (in thousands) | September 30, | ||||||
| 2019 | 2018 | ||||||
| Computer hardware and software | $ | 313,967 | $ | 324,765 | |||
| Furniture and fixtures | 28,445 | 20,737 | |||||
| Leasehold improvements | 97,657 | 47,272 | |||||
| Gross property and equipment | 440,069 | 392,774 | |||||
| Accumulated depreciation and amortization | (334,538 | ) | (312,161 | ) | |||
| Net property and equipment | 105,531 | 80,613 | |||||
Depreciation expense was $26.7$27.1 million, $29.4$26.1 million and $28.0$24.7 million in 2019, 20182022, 2021 and 2017,2020, respectively.
6. Acquisitions
Acquisition and transaction-related costs were $3.1$13.2 million, $0.5$15.0 million and $1.6$8.6 million in 2019, 20182022, 2021 and 2017,2020, respectively. Acquisition-relatedAcquisition and transaction-related costs include direct costs of completing an acquisitionpotential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees severance, and retention bonuses)severance). In addition, subsequent adjustments to our initial estimated amountsamount of contingent consideration primarily net present value changes,associated with specific acquisitions are included within acquisition-relatedacquisition and transaction-related charges. Other transactional charges include third-party costs related to structuring unusual transactions, such as the divestiture of a portion of our business. These costs are classified in generalGeneral and administrative expenses in the accompanying Consolidated Statements of Operations.
Our results of operations include the results of acquired businesses beginning on their respective acquisition date. For all acquisitions made in 2019,2022, our results of operations, if presented on a pro forma basis, would not differ materially from our reported results.
F-21
Intland Software
On November 19, 2018,April 29, 2022, we acquired Frustum Inc. for $69.5Intland Software, GmbH, and Eger Invest GmbH (together, “Intland Software”) pursuant to a Share Sale and Purchase Agreement. Intland Software developed and marketed the Codebeamer™ Application Lifecycle Management (ALM) family of software products. The purchase price of the acquisition was $278.1 million, (netnet of cash acquired, of $0.7 million). Wewhich was financed the acquisition with borrowingscash on hand and $264 million borrowed under our existing credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, FrustumIntland Software had approximately 12150 employees and historical annualized revenues were not material. on the close date.
The acquisition of Frustum did not add material revenue in 2019.
The purchase price allocation resulted in $53.7$240.9 million of goodwill, $17.9$38.8 million of customer relationships, $19.1 million of purchased software, $1.3 million of trademarks, $20.1 million of deferred tax liabilities, $0.7 million of income tax payables, $6.9 million of deferred revenue, $6.5 million of accounts receivable, and $2.1$0.8 million of other net liabilities. The purchase price allocation includes the finalization of measurement period adjustments, which resulted in a $0.9 million increase in goodwill from $240.0 million as of Q3'22, driven by completion of working capital adjustments.
The acquired technology iscustomer relationships, purchased software, and trademarks are being amortized over a useful lifelives of 1511 years, 10 years, and 10 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The
Arena
On January 15, 2021, we acquired Arena Holdings, Inc. (“Arena”) pursuant to an Agreement and Plan of Merger dated as of December 12, 2020 by and among PTC, Arena, Astronauts Merger Sub, Inc., and the third quarter of 2019, we completed two acquisitions for $17.3Representative named therein. We paid approximately $715 million, (netnet of cash acquired of $0.3 million). At the time of acquisitions, the combined companies$11.1 million, for Arena, which amount was financed with cash on hand and $600 million borrowed under our existing credit facility. Arena had approximately 95170 employees and historical annualized revenues were not material. These acquisitions did not add materialon the close date. The acquisition of Arena added revenue of approximately $29.8 million in 2019.
The acquisitions wereacquisition of Arena was accounted for as a business combinations.combination. Assets acquired and liabilities assumed have beenwere recorded at their estimated fair values as of the acquisition dates.date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
F-22
The purchase price allocation resulted in $12.6$562.8 million of goodwill, $3.4$155.0 million of customer relationships, $38.3 million of purchased software, $4.2 million of trademarks, $41.3 million of deferred tax liabilities, $15.5 million of deferred revenue, $11.4 million of accounts receivable, and $1.3$0.4 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 13 years, 9 years, and 12 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill was allocated to our servicessoftware products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by participation in expected future growth of the PLM SaaS market and expansion into the mid-market for PLM, where SaaS solutions are becoming the standard.
PLM Services Business Disposition
On June 1, 2022, we sold a portion of our PLM services business to ITC Infotech India Limited pursuant to a Strategic Partner Agreement dated as of April 20, 2022 by and between PTC and ITC Infotech. Consideration received from ITC Infotech for the sale was approximately $60.4 million, consisting of $32.5 million cash paid on closing and $28.0 million of services to be provided by ITC Infotech to PTC for no additional charge.
We recognized a gain on the sale of $29.8 million, which is included within Other income, net. The recognized gain consists of $60.4 million of consideration received, less net assets of the business of $30.6 million. Net assets include $33.0 million of goodwill allocated to the business, less $2.4 million of liabilities associated with approximately 160 employees who transferred to ITC Infotech. Goodwill was allocated to the sold business based on a relative fair value allocation of total goodwill of the Professional Services segment.
Additional future contingent consideration of up to $20 million may be received by PTC based on certain performance milestones. We have elected to defer the recognition of gains associated with contingent consideration until they become realizable.
7. Goodwill and Acquired Intangible Assets
We have two operating and reportable segments: (1) Solutions Group, (2) IoT Group and (3) Professional Services. Effective with the beginning of the first quarter of 2018, we changed our operating and reportable segments from 3 to 2: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.
As of September 30, 2019,2022, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,725.2 million and attributable to our Professional Services segment was $1,362.4 million and $45.7 million, respectively.$11.2 million. As of September 30, 2018,2021, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $2,525.7 million and attributable to our Professional Services segment was $1,352.4 million and $30.2 million, respectively.
F-23
Goodwill and acquired intangible assets consisted of the following:
| (in thousands) | September 30, 2019 | September 30, 2018 | |||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||
| Goodwill (not amortized) | $ | 1,238,179 | $ | 1,182,457 | |||||||||||||||||||
| Intangible assets with finite lives (amortized) (1): | |||||||||||||||||||||||
| Purchased software | $ | 377,359 | $ | 278,144 | $ | 99,215 | $ | 362,679 | $ | 254,059 | $ | 108,620 | |||||||||||
| Capitalized software | 22,877 | 22,877 | — | 22,877 | 22,877 | — | |||||||||||||||||
| Customer lists and relationships | 355,931 | 288,828 | 67,103 | 357,586 | 270,272 | 87,314 | |||||||||||||||||
| Trademarks and trade names | 18,891 | 15,260 | 3,631 | 19,054 | 14,786 | 4,268 | |||||||||||||||||
| Other | 3,910 | 3,910 | — | 4,003 | 4,003 | — | |||||||||||||||||
| $ | 778,968 | $ | 609,019 | $ | 169,949 | $ | 766,199 | $ | 565,997 | $ | 200,202 | ||||||||||||
| Total goodwill and acquired intangible assets | $ | 1,408,128 | $ | 1,382,659 | |||||||||||||||||||
(in thousands) |
| September 30, 2022 |
|
| September 30, 2021 |
| ||||||||||||||||||
|
| Gross |
|
| Accumulated |
|
| Net Book |
|
| Gross |
|
| Accumulated |
|
| Net Book |
| ||||||
Goodwill (not amortized) |
|
|
|
|
|
|
| $ | 2,353,654 |
|
|
|
|
|
|
|
| $ | 2,191,887 |
| ||||
Intangible assets with finite lives (amortized)(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Purchased software |
| $ | 502,859 |
|
| $ | 355,857 |
|
| $ | 147,002 |
|
| $ | 483,771 |
|
| $ | 338,542 |
|
| $ | 145,229 |
|
Capitalized software |
|
| 22,877 |
|
|
| 22,877 |
|
|
| — |
|
|
| 22,877 |
|
|
| 22,877 |
|
|
| — |
|
Customer lists and relationships |
|
| 594,970 |
|
|
| 369,390 |
|
|
| 225,580 |
|
|
| 574,516 |
|
|
| 350,648 |
|
|
| 223,868 |
|
Trademarks and trade names |
|
| 27,546 |
|
|
| 17,410 |
|
|
| 10,136 |
|
|
| 26,906 |
|
|
| 17,036 |
|
|
| 9,870 |
|
Other |
|
| 3,766 |
|
|
| 3,766 |
|
|
| — |
|
|
| 4,000 |
|
|
| 4,000 |
|
|
| — |
|
|
| $ | 1,152,018 |
|
| $ | 769,300 |
|
| $ | 382,718 |
|
| $ | 1,112,070 |
|
| $ | 733,103 |
|
| $ | 378,967 |
|
Total goodwill and acquired intangible assets |
|
|
|
|
|
|
| $ | 2,736,372 |
|
|
|
|
|
|
|
| $ | 2,570,854 |
| ||||
(1) The weighted-average useful lives of purchased software, customer lists and relationships, and trademarks and trade names with a remaining net book value are 911 years, 1011 years, and 1112 years, respectively.
The changes in the carrying amounts of goodwill from October 1, 2018September 30, 2021 to September 30, 20192022 are due to the impact of acquisitions and to foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies.
Changes in goodwill presented by reportable segment were as follows:
(in thousands) |
| Software |
|
| Professional |
|
| Total |
| |||
Balance, September 30, 2020 |
| $ | 1,583,316 |
|
| $ | 42,470 |
|
| $ | 1,625,786 |
|
Arena acquisition |
|
| 563,620 |
|
|
| — |
|
|
| 563,620 |
|
Other acquisitions |
|
| 181 |
|
|
| 400 |
|
|
| 581 |
|
Foreign currency translation adjustments |
|
| 1,851 |
|
|
| 49 |
|
|
| 1,900 |
|
Balance, September 30, 2021 |
| $ | 2,148,968 |
|
| $ | 42,919 |
|
| $ | 2,191,887 |
|
Intland Software acquisition |
|
| 240,971 |
|
|
| — |
|
|
| 240,971 |
|
Other acquisitions |
|
| 691 |
|
|
| — |
|
|
| 691 |
|
Divestiture of business |
|
| — |
|
|
| (32,992 | ) |
|
| (32,992 | ) |
Foreign currency translation adjustments |
|
| (46,611 | ) |
|
| (292 | ) |
|
| (46,903 | ) |
Balance, September 30, 2022 |
| $ | 2,344,019 |
|
| $ | 9,635 |
|
| $ | 2,353,654 |
|
| (in thousands) | Software Products | Professional Services | Total | ||||||||
| Balance, September 30, 2017 | $ | 1,152,917 | $ | 29,855 | $ | 1,182,772 | |||||
| Acquisition | 4,350 | — | 4,350 | ||||||||
| Foreign currency translation adjustments | (4,547 | ) | (118 | ) | (4,665 | ) | |||||
| Balance, September 30, 2018 | $ | 1,152,720 | $ | 29,737 | $ | 1,182,457 | |||||
| Frustum acquisition | 53,673 | — | 53,673 | ||||||||
| Other acquisitions | — | 12,645 | 12,645 | ||||||||
| Foreign currency translation adjustments | (10,329 | ) | (267 | ) | (10,596 | ) | |||||
| Balance, September 30, 2019 | $ | 1,196,064 | $ | 42,115 | $ | 1,238,179 | |||||
(in thousands) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Amortization of acquired intangible assets |
| $ | 34,970 |
|
| $ | 29,396 |
|
| $ | 28,713 |
|
Cost of software revenue |
|
| 25,578 |
|
|
| 29,769 |
|
|
| 27,391 |
|
Total amortization expense |
| $ | 60,548 |
|
| $ | 59,165 |
|
| $ | 56,104 |
|
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Amortization of acquired intangible assets | $ | 23,841 | $ | 31,350 | $ | 32,108 | |||||
| Cost of software revenue | 27,307 | 26,706 | 26,621 | ||||||||
| Total amortization expense | $ | 51,148 | $ | 58,056 | $ | 58,729 | |||||
The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of September 30, 20192022 is $49.0 million for 2020, $43.8 million for 2021, $30.8 million for 2022, $19.0$56.4 million for 2023, $8.4$48.3 million for 2024, $42.1 million for 2025, $38.7 million for 2026, $36.2 million for 2027 and $18.9$161.0 million thereafter.
8. Income Taxes
Our income (loss) before income taxes consisted of the following:
(in thousands) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Domestic |
| $ | 97,460 |
|
| $ | 41,199 |
|
| $ | (73,865 | ) |
Foreign |
|
| 299,638 |
|
|
| 350,556 |
|
|
| 208,571 |
|
Total income before income taxes |
| $ | 397,098 |
|
| $ | 391,755 |
|
| $ | 134,706 |
|
F-24
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Domestic | $ | (112,077 | ) | $ | (114,591 | ) | $ | (140,150 | ) | ||
| Foreign | 132,377 | 143,247 | 138,744 | ||||||||
| Total income (loss) before income taxes | $ | 20,300 | $ | 28,656 | $ | (1,406 | ) | ||||
(in thousands) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Current: |
|
|
|
|
|
|
|
|
| |||
Federal |
| $ | 767 |
|
| $ | 4,774 |
|
| $ | 2,187 |
|
State |
|
| 6,675 |
|
|
| 1,609 |
|
|
| 1,266 |
|
Foreign |
|
| 33,612 |
|
|
| 66,554 |
|
|
| 25,199 |
|
|
|
| 41,054 |
|
|
| 72,937 |
|
|
| 28,652 |
|
Deferred: |
|
|
|
|
|
|
|
|
| |||
Federal |
|
| 25,730 |
|
|
| (152,311 | ) |
|
| (26,811 | ) |
State |
|
| (3,177 | ) |
|
| (27,228 | ) |
|
| (4,063 | ) |
Foreign |
|
| 20,410 |
|
|
| 21,434 |
|
|
| 6,233 |
|
|
|
| 42,963 |
|
|
| (158,105 | ) |
|
| (24,641 | ) |
Provision (benefit) for income taxes |
| $ | 84,017 |
|
| $ | (85,168 | ) |
| $ | 4,011 |
|
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Current: | |||||||||||
| Federal | $ | 13,130 | $ | 3,009 | $ | 2,423 | |||||
| State | (945 | ) | 2,003 | 340 | |||||||
| Foreign | 33,867 | 28,213 | 17,881 | ||||||||
| 46,052 | 33,225 | 20,644 | |||||||||
| Deferred: | |||||||||||
| Federal | 22,911 | (12,594 | ) | 4,911 | |||||||
| State | 1,759 | (445 | ) | 877 | |||||||
| Foreign | (22,962 | ) | (43,517 | ) | (34,077 | ) | |||||
| 1,708 | (56,556 | ) | (28,289 | ) | |||||||
| Total provision (benefit) for income taxes | $ | 47,760 | $ | (23,331 | ) | $ | (7,645 | ) | |||
(in thousands) |
| Year ended September 30, |
| |||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||
Statutory federal income tax rate |
| $ | 83,391 |
|
|
| 21 | % |
| $ | 82,268 |
|
|
| 21 | % |
| $ | 28,288 |
|
|
| 21 | % |
Change in valuation allowance |
|
| — |
|
|
| — |
|
|
| (134,695 | ) |
|
| (34 | )% |
|
| (16,489 | ) |
|
| (12 | )% |
State income taxes, net of federal tax benefit |
|
| 6,518 |
|
|
| 2 | % |
|
| (28,768 | ) |
|
| (8 | )% |
|
| (2,998 | ) |
|
| (2 | )% |
Federal research and development credits |
|
| (7,477 | ) |
|
| (2 | )% |
|
| (5,764 | ) |
|
| (2 | )% |
|
| (5,483 | ) |
|
| (4 | )% |
Uncertain tax positions |
|
| 2,418 |
|
|
| 1 | % |
|
| 3,398 |
|
|
| 1 | % |
|
| 3,072 |
|
|
| 2 | % |
Foreign tax credit |
|
| (9,078 | ) |
|
| (2 | )% |
|
| (35,368 | ) |
|
| (9 | )% |
|
| — |
|
|
| — |
|
Foreign rate differences |
|
| (8,982 | ) |
|
| (2 | )% |
|
| (34,584 | ) |
|
| (9 | )% |
|
| (22,074 | ) |
|
| (16 | )% |
Foreign tax on U.S. provision |
|
| 9,078 |
|
|
| 2 | % |
|
| 5,931 |
|
|
| 2 | % |
|
| 4,523 |
|
|
| 3 | % |
Excess tax benefits from restricted stock |
|
| (8,278 | ) |
|
| (2 | )% |
|
| (6,141 | ) |
|
| (2 | )% |
|
| (1,743 | ) |
|
| (1 | )% |
Audits and settlements |
|
| — |
|
|
| — |
|
|
| 33,370 |
|
|
| 9 | % |
|
| — |
|
|
| — |
|
U.S. permanent items |
|
| 15,304 |
|
|
| 3 | % |
|
| 18,389 |
|
|
| 5 | % |
|
| 6,590 |
|
|
| 5 | % |
Base Erosion Anti-Abuse Tax (BEAT) |
|
| — |
|
|
| — |
|
|
| 2,936 |
|
|
| 1 | % |
|
| (1,759 | ) |
|
| (1 | )% |
GILTI, net of foreign tax credits |
|
| 2,705 |
|
|
| 1 | % |
|
| 18,217 |
|
|
| 4 | % |
|
| 14,899 |
|
|
| 11 | % |
Foreign-Derived Intangible Income (FDII) |
|
| (6,848 | ) |
|
| (2 | )% |
|
| (4,428 | ) |
|
| (1 | )% |
|
| (2,461 | ) |
|
| (2 | )% |
Sale of a portion of the PLM services business |
|
| 6,844 |
|
|
| 2 | % |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other, net |
|
| (1,578 | ) |
|
| (1 | )% |
|
| 71 |
|
|
| — |
|
|
| (354 | ) |
|
| (1 | )% |
Provision (benefit) for income taxes |
| $ | 84,017 |
|
|
| 21 | % |
| $ | (85,168 | ) |
|
| (22 | )% |
| $ | 4,011 |
|
|
| 3 | % |
| (in thousands) | Year ended September 30, | |||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||
| Statutory federal income tax rate | $ | 4,263 | 21 | % | $ | 7,021 | 25 | % | $ | (492 | ) | (35 | )% | |||||||
| Change in valuation allowance | 66,417 | 327 | % | (181,047 | ) | (632 | )% | 17,334 | 1,233 | % | ||||||||||
| Transition impact of U.S. Tax Act | — | — | % | 126,122 | 440 | % | — | — | % | |||||||||||
| Federal rate change | — | — | % | 69,648 | 243 | % | — | — | % | |||||||||||
| State income taxes, net of federal tax benefit | 607 | 3 | % | 2,401 | 8 | % | 627 | 45 | % | |||||||||||
| Federal research and development credits | (3,731 | ) | (18 | )% | (3,058 | ) | (11 | )% | (2,182 | ) | (155 | )% | ||||||||
| Uncertain tax positions | 2,611 | 13 | % | (4,646 | ) | (16 | )% | (3,840 | ) | (273 | )% | |||||||||
| Foreign rate differences | (26,952 | ) | (133 | )% | (38,743 | ) | (135 | )% | (27,932 | ) | (1,987 | )% | ||||||||
| Foreign tax on U.S. provision | 6,547 | 32 | % | 2,736 | 10 | % | 2,737 | 195 | % | |||||||||||
| Excess tax benefits from restricted stock | (5,940 | ) | (29 | )% | (11,641 | ) | (41 | )% | — | — | % | |||||||||
| Audits and settlements | 51 | — | % | 2,352 | 8 | % | — | — | % | |||||||||||
| U.S. permanent items | 2,483 | 12 | % | 5,408 | 19 | % | 6,030 | 429 | % | |||||||||||
| BEAT | 1,759 | 9 | % | — | — | % | — | — | % | |||||||||||
| GILTI, net of foreign tax credits | 6,170 | 31 | % | — | — | % | — | — | % | |||||||||||
Foreign-Derived Intangible Income (FDII) | (6,409 | ) | (32 | )% | — | — | % | — | — | % | ||||||||||
| Other, net | (116 | ) | (1 | )% | 116 | 1 | % | 73 | 4 | % | ||||||||||
| Benefit for income taxes | $ | 47,760 | 235 | % | $ | (23,331 | ) | (81 | )% | $ | (7,645 | ) | (544 | )% | ||||||
Additionally in 2022, our results include tax expense relating to the book over tax basis difference in goodwill disposed of as part of the sale of a portion of the PLM services business. As a result of the net effect of these items in 2022, our effective tax rate did not differ significantly from the U.S. federal income tax rate.
In 2021, our tax rate includes a benefit due to the release of 21% due in large part,the valuation allowance on the majority of our U.S. net deferred tax assets.
In 2020, we recorded benefits for the reduction of the U.S. valuation allowance as a result of the Onshape acquisition. A further reduction to the valuation allowance was also recorded to reflect the impact from the scheduling of the reversal of existing temporary differences resulting in deferred tax liabilities that cannot be offset against deferred tax assets requiring an increase to the U.S. valuation allowance, U.S. tax reform (as described below) and foreign withholding taxes, an obligationassets.
F-25
At September 30, 20192022 and 2018,2021, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $23.4$17.3 million ($17.45.1 million in accruedAccrued income taxes, $0.4$5.6 million in otherOther current liabilities and $5.6$6.6 million in otherOther liabilities) and $24.2$15.7 million ($18.05.0 million in accruedAccrued income taxes, $1.8$0.8 million in otherOther current liabilities and $4.4$9.9 million in otherOther liabilities), respectively. At September 30, 20192022 and 2018,2021, prepaid taxes recorded in prepaidPrepaid expenses on the accompanying Consolidated Balance Sheets were $5.3$25.8 million and $4.8$15.4 million, respectively. We made net income tax payments of $38.9$55.0 million, $22.6$56.0 million and $35.4$52.6 million in 2019, 20182022, 2021 and 2017,2020, respectively.
The significant temporary differences that created deferred tax assets and liabilities are shown below:
(in thousands) |
| September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Deferred tax assets: |
|
|
|
|
|
| ||
Net operating loss carryforwards |
| $ | 40,419 |
|
| $ | 65,383 |
|
Foreign tax credits |
|
| 14,527 |
|
|
| 36,287 |
|
Capitalized research and development |
|
| 23,274 |
|
|
| 27,546 |
|
Pension benefits |
|
| 7,639 |
|
|
| 14,097 |
|
Prepaid expenses |
|
| 15,886 |
|
|
| 12,540 |
|
Deferred revenue |
|
| 2,146 |
|
|
| 2,274 |
|
Stock-based compensation |
|
| 19,486 |
|
|
| 15,822 |
|
Other reserves not currently deductible |
|
| 14,689 |
|
|
| 16,796 |
|
Amortization of intangible assets |
|
| 130,825 |
|
|
| 147,385 |
|
Research and development and other tax credits |
|
| 78,862 |
|
|
| 74,846 |
|
Lease liabilities |
|
| 46,672 |
|
|
| 51,471 |
|
Fixed assets |
|
| 78,249 |
|
|
| 53,025 |
|
Capital loss carryforward |
|
| 3,955 |
|
|
| 35,156 |
|
Other |
|
| 1,256 |
|
|
| 2,269 |
|
Gross deferred tax assets |
|
| 477,885 |
|
|
| 554,897 |
|
Valuation allowance |
| $ | (22,283 | ) |
|
| (52,085 | ) |
Total deferred tax assets |
|
| 455,602 |
|
|
| 502,812 |
|
Deferred tax liabilities: |
|
|
|
|
|
| ||
Acquired intangible assets not deductible |
| $ | (118,360 | ) |
|
| (108,746 | ) |
Lease assets |
|
| (36,940 | ) |
|
| (37,273 | ) |
Pension prepayments |
|
| (2,622 | ) |
|
| (2,834 | ) |
Deferred revenue |
|
| (35,193 | ) |
|
| (2,662 | ) |
Depreciation |
|
| (6,937 | ) |
|
| (7,121 | ) |
Unbilled accounts receivable |
|
| - |
|
|
| (6,391 | ) |
Deferred income |
|
| (5,991 | ) |
|
| (21,744 | ) |
Prepaid commissions |
|
| (13,356 | ) |
|
| (16,990 | ) |
Other |
|
| (8,508 | ) |
|
| (5,427 | ) |
Total deferred tax liabilities |
|
| (227,907 | ) |
|
| (209,188 | ) |
Net deferred tax assets |
| $ | 227,695 |
|
| $ | 293,624 |
|
| (in thousands) | September 30, | ||||||
| 2019 | 2018 | ||||||
| Deferred tax assets: | |||||||
| Net operating loss carryforwards | $ | 26,462 | $ | 31,329 | |||
| Foreign tax credits | — | 2,201 | |||||
| Capitalized research and development | 34,560 | 20,999 | |||||
| Pension benefits | 14,838 | 12,296 | |||||
| Prepaid expenses | 41,739 | 30,614 | |||||
| Deferred revenue | 9,899 | 33,886 | |||||
| Stock-based compensation | 12,306 | 11,622 | |||||
| Other reserves not currently deductible | 20,986 | 13,588 | |||||
| Amortization of intangible assets | 168,376 | 96,841 | |||||
| Research and development and other tax credits | 49,995 | 55,760 | |||||
| Fixed assets | 45,450 | 4,364 | |||||
| Capital loss carryforward | 31,248 | 33,024 | |||||
| Deferred interest | 10,864 | 13,057 | |||||
| Other | 1,623 | 1,152 | |||||
| Gross deferred tax assets | 468,346 | 360,733 | |||||
| Valuation allowance | (177,663 | ) | (141,950 | ) | |||
| Total deferred tax assets | 290,683 | 218,783 | |||||
| Deferred tax liabilities: | |||||||
| Acquired intangible assets not deductible | (42,554 | ) | (41,139 | ) | |||
| Pension prepayments | (2,532 | ) | (2,362 | ) | |||
| Deferred revenue | (19,312 | ) | (6,978 | ) | |||
| Unbilled accounts receivable | (31,005 | ) | — | ||||
| Deferred income | (19,040 | ) | (6,641 | ) | |||
| Prepaid commissions | (17,423 | ) | — | ||||
| Other | (1,866 | ) | (1,686 | ) | |||
| Total deferred tax liabilities | (133,732 | ) | (58,806 | ) | |||
| Net deferred tax assets | $ | 156,951 | $ | 159,977 | |||
For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2019,2022, we had U.S. federal tax effected NOL carryforwards from acquisitions of $8.8$22.5 million, thatof which $1.6 million expire in 2023 to 2029.2034. The
F-26
As of September 30, 2019,2022, we had Federalfederal R&D credit carryforwards of $26.2$60.9 million, which expire beginning in 20282025 and ending in 2039,2042, and Massachusetts R&D credit carryforwards of $22.1$26.1 million, which expire beginning in 20202023 and ending in 2034. A full valuation allowance is recorded against the carryforwards.
We also have tax effected NOL carryforwards in non-U.S. jurisdictions totaling $64.4$7.2 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $3.2$4.0 million that expire beginning in 20292030 and ending in 2035.2041. Additionally, we have interest andtax effected amortization carryforwards of $86.9$118.5 million and $825.9 million, respectively, in a foreign jurisdiction. There are limitations imposed on the utilizationuse of such attributes that could restrict the recognition of any tax benefits.
As of September 30, 2019,2022, we have a valuation allowance of $146.1$17.8 million against net deferred tax assets in the U.S.United States and a valuation allowance of $31.6$4.5 million against net deferred tax assets in certain foreign jurisdictions. The $17.8 million U.S. valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our net operatingcapital loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such net operatingcapital losses that could restrict the recognition of any tax benefits.
The changes to the valuation allowance were primarily due to the following:
(in thousands) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Valuation allowance, beginning of year |
| $ | 52,085 |
|
| $ | 205,423 |
|
| $ | 177,663 |
|
Net release of valuation allowance(1) |
|
| — |
|
|
| (134,235 | ) |
|
| — |
|
Net increase (decrease) in deferred tax assets with a full valuation allowance(2) |
|
| (29,802 | ) |
|
| (19,103 | ) |
|
| 27,760 |
|
Valuation allowance, end of year |
| $ | 22,283 |
|
| $ | 52,085 |
|
| $ | 205,423 |
|
| (in millions) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Valuation allowance beginning of year | $ | 142.0 | $ | 279.7 | $ | 235.5 | |||||
Net release of valuation allowance (1) | (1.8 | ) | (2.8 | ) | (9.1 | ) | |||||
Net increase (decrease) in deferred tax assets with a full valuation allowance (2) | 37.5 | (134.9 | ) | 53.3 | |||||||
| Valuation allowance end of year | $ | 177.7 | $ | 142.0 | $ | 279.7 | |||||
Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 20192022, 2021 and 2020 we recorded interest expense of $0.1$0.2 million, $2.2 million and in 2018 and 2017, we reduced interest expense by $0.6 million and $0.9$0.3 million, respectively. In 2019, 20182022 and 2017,2020 we had 0no penalty expenses in our income tax provision. In 2021 we had $2.0 million tax penalty expense in our income tax provision. As of both September 30, 20192022 and 2018,2021, we had accrued $0.5$0.9 million and $0.7 million of net estimated interest expense, related to income tax accruals.respectively. We had 0no accrued tax penalties as of September 30, 2019, 20182022, 2021 or 2017.2020.
|
| Year ended September 30, |
| |||||||||
Unrecognized tax benefits (in thousands) |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Unrecognized tax benefit, beginning of year |
| $ | 21,166 |
|
| $ | 16,107 |
|
| $ | 11,484 |
|
Tax positions related to current year: |
|
|
|
|
|
|
|
|
| |||
Additions |
|
| 3,144 |
|
|
| 4,844 |
|
|
| 2,173 |
|
Tax positions related to prior years: |
|
|
|
|
|
|
|
|
| |||
Additions |
|
| 785 |
|
|
| 30,130 |
|
|
| 2,452 |
|
Reductions |
|
| (1,172 | ) |
|
| (478 | ) |
|
| (2 | ) |
Settlements |
|
| — |
|
|
| (29,437 | ) |
|
| — |
|
Unrecognized tax benefit, end of year |
| $ | 23,923 |
|
| $ | 21,166 |
|
| $ | 16,107 |
|
| Year ended September 30, | ||||||||||||
Unrecognized tax benefits (in millions) | 2019 | 2018 | 2017 | |||||||||
| Unrecognized tax benefit beginning of year | $ | 9.8 | $ | 14.8 | $ | 15.5 | ||||||
| Tax positions related to current year: | ||||||||||||
| Additions | 1.5 | 1.5 | 0.9 | |||||||||
| Tax positions related to prior years: | ||||||||||||
| Additions | 1.4 | — | 1.0 | |||||||||
| Reductions | — | (4.7 | ) | (1.6 | ) | |||||||
| Settlements | (1.2 | ) | — | (1.0 | ) | |||||||
| Statute expirations | — | (1.8 | ) | — | ||||||||
| Unrecognized tax benefit end of year | $ | 11.5 | $ | 9.8 | $ | 14.8 | ||||||
If all of our unrecognized tax benefits as of September 30, 20192022 were to become recognizable in the future, we would record a benefit to the income tax provision of $11.5$23.9 million (which would be partially offset by an increase in the U.S. valuation allowance of $5.4 $5.2million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $0.5$5 million as audits close and statutes of limitations expire.
F-27
Our results for the fourth quarteryear ended September 30, 2021 include a charge of 2016, we received an assessment$37.3 million related to the effects of a tax matter in the Republic of Korea (South Korea) of $34.4 million, and the resulting impact on U.S. income taxes of $2.9 million, and additional payments of approximately $12$20 million from the tax authoritiesto South Korea in Korea. The assessment relates to various tax issues, primarily foreign withholding taxes. We have appealed and intend to vigorously defend our positions. We believe that upon completion of a multi-level appeal process it is more likely than not that our positions will be sustained. Accordingly, we have not recorded a tax reserve for this matter. We paid this assessment in the first quarter of 2017 and have recorded the amount in other assets, pending resolutionsettlement of the appeal process. If the South Korean tax authorities were to prevail the potential additional exposure through 2019 would be approximately $13 million.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the U.S.United States. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2019,2022, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
Major Tax Jurisdiction | Open Years | |
United States | 2018 through 2022 | |
Germany | 2015 through | |
France | 2019 through | |
Japan | 2017 through | |
Ireland | 2018 through | |
Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are utilizedused in later periods.
We incurred expenses related to stock-based compensation in 2019, 20182022, 2021 and 20172020 of $86.4$174.9 million, $82.9$177.3 million and $76.7$115.1 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $16.6$27.1 million, $28.3$39.9 million and $1.3$13.4 million in 2019, 20182022, 2021 and 2017,2020, respectively. Upon the settlementvesting of the stock-based awards, (i.e., exercise or vesting), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision. In 20192022, 2021 and 2018,2020, net windfall tax benefits of $6.7$5.2 million, $9.9 million and $13.2$1.3 million were recorded to the tax provision. Prior to the adoption of ASU 2016-09, windfall tax benefits were recorded to APIC when they resulted in a reduction in taxes payable. In 2017 we recorded windfall tax benefits of $0.6 million to APIC.
Prior to the passage of the U.S. Tax Cuts and Jobs Act the Companyin December of 2017 (the Tax Act), we asserted that substantially all of the undistributed earnings of itsour foreign subsidiaries were considered indefinitely investedreinvested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the U.S.United States unless repatriation can be done substantially tax-free, with the exception of a foreign holding company formed in 2018 and our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material.
F-28
9. Debt
As of September 30, 20192022 and 2018,2021, we had the following long-term borrowingdebt obligations:
(in thousands) |
| September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
4.000% Senior notes due 2028 |
| $ | 500,000 |
|
| $ | 500,000 |
|
3.625% Senior notes due 2025 |
|
| 500,000 |
|
|
| 500,000 |
|
Credit facility revolver(1) |
|
| 359,000 |
|
|
| 450,000 |
|
Total debt |
|
| 1,359,000 |
|
|
| 1,450,000 |
|
Unamortized debt issuance costs for the senior notes(2) |
|
| (8,372 | ) |
|
| (10,529 | ) |
Total debt, net of issuance costs(3) |
| $ | 1,350,628 |
|
| $ | 1,439,471 |
|
| (in thousands) | September 30, | ||||||
| 2019 | 2018 | ||||||
| 6.000% Senior notes due 2024 | $ | 500,000 | $ | 500,000 | |||
| Revolving credit facility | 173,125 | 148,125 | |||||
| Total debt | 673,125 | 648,125 | |||||
Unamortized debt issuance costs for the Senior notes (1) | (3,991 | ) | (4,857 | ) | |||
Total debt, net of issuance costs (2) | $ | 669,134 | $ | 643,268 | |||
Senior Unsecured Notes In As of September 30, 2022, the We were in compliance with all the covenants for all of our Terms of the 2028 and 2025 Notes Interest on the 2028 and 2025 notes is payable semi-annually on We may, on one or more occasions, redeem the Credit Agreement In February 2020, we entered into a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, for F-29 The credit facility consists of a $1 billion revolving credit facility, which may be increased by up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments. As of September 30, PTC and certain eligible foreign subsidiaries are eligible borrowers under the credit facility. Any borrowings by PTC Inc. under the credit facility would be guaranteed by PTC Inc.’s material domestic subsidiaries that become parties to the subsidiary guaranty, if any. As of the filing of this Form 10-K, there are no subsidiary guarantors of the obligations under the credit facility. Any borrowings by eligible foreign subsidiary borrowers would be guaranteed by PTC Inc. and any subsidiary guarantors. As of the filing of this Form 10-K, Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of September 30, The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding F-30 Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility. In 2020, we incurred In 10. Commitments and Contingencies Legal and Regulatory Matters With respect to 401(k) Plan On September 17, 2020, three individual plaintiffs filed a putative class action lawsuit against PTC, the Investment Committee for the PTC Inc. 401(k) Plan (the “Plan”), and the PTC Board of Directors (collectively, the “PTC Defendants”) in the U.S. District Court for the District of Massachusetts alleging that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 in the oversight of the Plan. On September 22, 2021, the plaintiffs and the PTC Defendants reached an agreement in principle to settle the lawsuit for a gross settlement amount of $1.725 million. The Court issued an Order of final approval of the settlement on October 18, 2022. The settlement amount will be funded by PTC’s insurer and paid into the Qualified Settlement Fund for the benefit of the class members. Other Legal Proceedings In addition to the matter listed above, we are subject to legal proceedings and claims against us in the ordinary course of business. F-31 Guarantees and Indemnification Obligations We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business. We warrant that our software products will perform in all material respects in accordance with our standard published specifications 11. Stockholders’ Equity Preferred Stock We may issue up to 5.0 million shares of our preferred stock in one or more series. 0.5 million of these shares are designated as Series A Junior Participating Preferred Stock. Our Board of Directors is authorized to fix the rights and terms for any series of preferred stock without additional shareholder approval. Common Stock Our Articles of Organization authorize us to issue up to 500 million shares of our common stock.Our Board of Directors has authorized us to repurchase up to In 12. Equity Incentive Plans We have two equity incentive plans – our 2000 Equity Incentive Plan Our 2000 Equity Incentive Plan Our ESPP The following table shows total stock-based compensation expense recorded in our Consolidated Statements of Operations: (in thousands) Year ended September 30, 2022 2021 2020 Cost of license revenue $ 272 $ 100 $ 47 Cost of support and cloud services revenue 11,022 9,900 �� 6,910 Cost of professional services revenue 11,481 9,263 7,012 Sales and marketing 49,467 53,712 37,351 Research and development 41,944 34,272 27,005 General and administrative 60,677 70,042 36,824 Total stock-based compensation expense $ 174,863 $ 177,289 $ 115,149 Stock-based compensation expense in 2022, 2021 and 2020 includes $6.4 million, $7.3 million, and $5.8 million respectively, related to our ESPP. 2000 Equity Incentive Plan Accounting and Stock-Based Compensation Expense The fair value of RSUs granted in 2022, 2021 and 2020 was based on the fair market value of our stock on the date of grant for service- and certain performance- based RSUs and based on a Monte Carlo simulation model for relative total shareholder return (rTSR) performance RSUs. The weighted average fair value per share of RSUs granted in 2022, 2021 and 2020 was $114.31, $111.48 and $77.57, respectively. We account for forfeitures as they occur, rather than estimate expected forfeitures. As of September 30, 2022, total unrecognized compensation cost related to unvested RSUs expected to vest was approximately $201.5 million and the weighted average remaining recognition period for unvested RSUs was 17 months. As of September 30, 2022, 2.8 million shares of common stock were available for grant under the equity incentive plan and 2.8 million shares of common stock were reserved for issuance upon vesting of RSUs granted and outstanding. Restricted stock unit activity for the year ended September 30, 2022 Shares Weighted Aggregate Balance of outstanding RSUs at October 1, 2021 3,217 $ 92.46 Granted(1) 1,659 $ 114.31 Vested (1,736 ) $ 92.70 Forfeited or not earned (386 ) $ 100.05 Balance of outstanding RSUs at September 30, 2022 2,754 $ 105.07 $ 288,068 F-33 (in thousands) Twelve months ended September 30, 2022 Performance-based RSUs(1) 106 Service-based RSUs(2) 1,353 Relative Total Shareholder Return RSUs(3) 76 As of September 30, 2022, weighted average remaining vesting term for outstanding awards is 1.0 year. The weighted-average fair value of the rTSR RSUs was $136.43per target RSU on the grant date. The fair value of the rTSR RSUs was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the historical volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s rTSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate. The significant assumptions used in the Monte Carlo simulation model were as follows: Average volatility of peer group 34.67 % Risk-free interest rate 0.81 % Dividend yield — % Total value on vest date of RSUs vested are as follows: (in thousands) Year ended September 30, Value of stock option and stock-based award activity 2022 2021 2020 Total value of restricted stock unit awards at vest $ 199,738 $ 171,316 $ 103,265 In 13. Employee Benefit Plan We offer a savings plan to eligible U.S. employees. The plan is F-34 14. Pension Plans We maintain several international defined benefit pension plans primarily covering certain employees of Computervision, which we acquired in 1998, and CoCreate, which we acquired in 2008, and covering employees in Japan. Benefits are based upon length of service and average compensation with vesting after onetofiveyears of service. The pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment. We adjust our pension liability related to our plans due to changes in actuarial assumptions and performance of plan investments, as shown below. Effective in 1998, benefits under one of the international plans were frozen indefinitely.May 2016,February 2020, we issued $500$500 million in aggregate principal amount of 6.0%4.0% senior, unsecured long-term debt at par value, due in 2024. We used2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes).net proceeds from the saletotal estimated fair value of the 2028 and 2025 senior notes to repay a portionwas approximately $436.3 million and $468.7 million respectively, based on quoted prices for the notes on that date.outstanding revolving loan under our current credit facility. senior notes as of September 30, 2022.NovemberFebruary 15 and MayAugust 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions. We were in compliance with all of the covenants as of September 30, 2019.senior2028 and 2025 notes at any time in whole or from time to time in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the senior notes at a purchase price equal to 101%101% of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the senior notes inupon such event may be limited by law, by the indenture associated with the senior notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the senior notes as required by the indenture, it would constitute an event of default under the indenture which, in turn, may also constitute an event of default under other obligations.As of September 30, 2019, the total estimated fair value of the Notes was approximately $526.3 million, which is based on quoted pricesthe notes on that date.Credit AgreementWe maintain a new secured multi-currency bank credit facility with a syndicate of 16 banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent.banks. We use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements.2019, the fair value of2022, unused commitments under our credit facility approximates its book value.In November 2019, we amended and restatedwere approximately $641.0 million. The maturity date of the credit facility to increase theis February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment from $700 million to $1 billion and amend other provisions. The revolving loan commitmentdoes not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium. TheAs of September 30, 2022, the fair value of our credit facility matures on September 13, 2023, when all remaining amounts outstanding will be due and payable in full.approximates its book value.0no funds were borrowed by an eligible foreign subsidiary borrower. In addition, owned property (including equity interests) of PTC and certain of its material domestic subsidiaries' owned property is subject to first priority perfected liens in favor of the lenders under this credit facility. 100%100% of the voting equity interests of certain of PTC’s domestic subsidiaries and 65%65% of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.2019,2022, the annual rate for borrowingborrowings outstanding was 3.44%4.14%. Interest rates on borrowings outstanding under the credit facility range from 1.25%1.25% to 1.75%1.75% above an adjusted LIBO rate (or an agreed successor rate) for Euro currency borrowings or would range from 0.25%0.25% to 0.75%0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5%0.5%, or an adjusted LIBO rate plus 1%1%) for base rate borrowings, in each case based upon PTC’s total leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates for those currencies, based on PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175%0.175% to 0.30%0.30% per annum, based upon PTC’s total leverage ratio.$100$100 million for any purpose and an additional $200$200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:•Total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter;••Senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and•Interest coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated trailing four quarters of cash basis interest expense, of not less than 3.00 to 1.00 as of the last day of any fiscal quarter.a total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter;•a senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter; and•an interest coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated trailing our quarters of cash basis interest expense, of not less than 3.00 to 1.00 as of the last day of any fiscal quarter.As of September 30, 2019,2022, our total leverage ratio was 1.731.79 to 1.00, our senior secured leverage ratio was 0.470.49 to 1.00, and our interest coverage ratio was 9.7614.21 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.We$2.9$2.0 million in financing costs in connection with the September 2018February 2020 credit facility and $1.0 million in connection with a November 2019 amendment and restatement.to our prior credit facility. These origination costs are recorded as deferred debt issuance costs and are included in otherOther assets. We incurred $6.9 million in financing costs in connection with the Senior Notes in 2016. These origination costs are recorded as a direct reduction from the carrying amount of the related debt liability. Financing costs are expensed over the remaining term of the obligations.2019, 20182022, 2021 and 2017,2020, we paid $40.8incurred interest expense of $54.3 million, $39.8$50.5 million, and $38.9$76.4 million, respectively, and paid $48.5 million, $45.2 million and $60.6 million, respectively, of interest on our debt. Additionally, in the third quarter of 2020, we paid $15.0 million in penalties for the early redemption of the 2024 notes. The average interest rate on borrowings outstanding during 2019, 20182022, 2021 and 20172020 was approximately 5.4%3.4%, 5.2%3.3% and 4.9%4.3%, respectively.Leasing ArrangementsWe lease office facilities under operating leases expiring at various dates through 2037. Certain leases require us to pay for taxes, insurance, maintenance and other operating expenses in addition to rent. Lease expense was $39.3 million, $36.9 million and $35.8 million in 2019, 2018 and 2017, respectively. At September 30, 2019, our future minimum lease payments under noncancellable operating leases are as follows (in thousands): Year ending September 30, 2020 $ 31,868 2021 33,094 2022 25,624 2023 19,279 2024 16,909 Thereafter 186,037 Total minimum lease payments $ 312,811 Amounts above include future minimum lease payments for our corporate headquarters facility located in Boston, Massachusetts. On September 7, 2017, we entered into a lease agreement with SCD L2 Seaport Square LLC for approximately 250,000 square feet located at 121 Seaport Boulevard, Boston, Massachusetts. Upon completion of construction of the new facility, we moved our headquarters from Needham to Boston. The term of the lease runs from January 1, 2019 through June 30, 2037. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot leased per year thereafter ($0.3 million per year). Base rent, which first becomes payable on July 1, 2020 is included in the operating lease obligations above. In addition to the base rent, PTC is required to pay its pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional rent, equal to approximately 63% of total building operating costs and real estate taxes, is estimated to be approximately $7.1 million for the first year we begin paying rent and is not included in the operating lease payments above. The lease provides for up to approximately $25 million in landlord funding for leasehold improvements ($100 per square foot). We capitalized these leasehold improvements as the assets were placed in service and amortized them to expense over the shorter of the lease term or their expected useful life. The $25 million of funding by the landlord is not included in the table above and reduces rent expense over the lease term.As of September 30, 20192022 and 2018,2021, we had letters of credit and bank guarantees outstanding of $15.1$15.0 million (of which $1.1$0.5 million was collateralized) and $15.5$16.3 million (of which $1.1$0.5 million was collateralized), respectively, primarily related to our corporate headquarters lease.Korean Tax AuditIn July 2016, we received an assessment from the tax authorities in Korea related to an ongoing tax audit of approximately $12 million. We estimate potential additional exposure of $13 million through 2019. See Note 8. Income Taxes for additional information.Legal ProceedingsWe are subject various legal proceedings and claims, we record an accrual for a contingency when it is probable that arisea liability has been incurred and the amount of the loss can be reasonably estimated.WeAs of September 30, 2022, we estimate that the range of possible outcomes for such matters is immaterial and we do not believe that resolving the legal proceedings and claims that we are currently subject tothem will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a particular reporting period could be adversely affected.AccrualsWith respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amountContentsPursuant toUnder such agreements, with our business partners or customers, we typically indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products, as well asproducts. Indemnification may also cover other types of claims, including claims relating to certain data breaches. Except for intellectual property damage or personal injury resulting from the performance of services by us orinfringement indemnification, these agreements typically limit our subcontractors. The maximum potential amount of future payments we could be requiredliability with respect to make under theseother indemnification agreements is unlimited.claims. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we accordingly believe the estimated fair value of liabilities under these agreements is immaterial.in effect atduring the time of deliveryterm of the licensed products for a specified period of time.license/subscription. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards.standards and, in the case of fixed price services, the agreed-upon specifications. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.$1,500 million$1 billion of our common stock forin the period October 1, 20172020 through September 30, 2020 period.2023. We use cash from operations and borrowings under our credit facility to make such repurchases. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.2019,2022 and 2021 we repurchased 1.41.05 million shares for $115 million. In addition, in 2019 and 2018, we repurchased 3.0$125 million and 8.2 million shares, respectively, under an accelerated share repurchase ("ASR") agreement. On July 20, 2018, we entered into an accelerated share repurchase (“ASR”) agreement with a major financial institution (“Bank”). The ASR allowed us to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Under the ASR, we agreed to purchase $1 billion of our common stock, in total, with an initial delivery to us in July 2018 of 8.2 million shares (“Initial Shares”), which represented the number of shares at the current market price equal to 80% of the total fixed purchase price of $1 billion. The remainder of the total purchase price of $200 million reflected the value of the stock held by the Bank pending final settlement and, accordingly, was recorded as a reduction to additional paid-in capital in 2018. In addition, we initiated and completed an ASR repurchase of 1.20.23 million shares for $100$30 million, respectively. We did not repurchase any shares in the third quarter of 2018. In 2017, we repurchased 0.9 million shares at cost of $51.0 million.2020.As part of a strategic alliance, in the fourth quarter of 2018, Rockwell Automation made a $1 billion equity investment in PTC, by acquiring 10,582,010 shares at a price of $94.50 per share. and our 2016 Employee Stock Purchase Plan (ESPP). (2000 Plan) provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units and stock appreciation rights to employees, directors, officers and consultants. We award restricted stock units (RSUs) as the principal equity incentiveawards, including certain performance-based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unitRSU represents the contingent right to receive 1one share of our common stock.Beginning in the first quarter of 2018, we account for forfeitures as they occur, rather than estimate expected forfeitures.The following table shows total stock-based compensation expense recorded from our stock-based awards as reflected in our Consolidated Statements of Operations: (in thousands) Year ended September 30, 2019 2018 2017 Cost of license revenue $ 509 $ 144 $ (148 ) Cost of support and cloud services revenue 5,004 4,302 6,643 Cost of professional services revenue 6,426 7,079 6,116 Sales and marketing 32,026 24,893 15,373 Research and development 22,019 13,488 13,968 General and administrative 20,416 33,033 34,756 Total stock-based compensation expense $ 86,400 $ 82,939 $ 76,708 Stock-based compensation expense in 2019, 2018 and 2017 includes $6.2 million, $4.3 million, and $3.2 million respectively, related to our employee stock purchase plan (ESPP).As of September 30, 2019, total unrecognized compensation cost related to unvested restricted stock units expected to vest was approximately $159.2 million and the weighted average remaining recognition period for unvested awards was 22 months.As of September 30, 2019, 6.9 million shares of common stock were available for grant under the 2000 Plan and 3.2 million shares of common stock were reserved for issuance upon the exercise of stock options and vesting of restricted stock units granted and outstanding. initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10%10% of their base salary, up to a maximum of $25,000$25,000 per year and subject to any other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85%85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.Restricted stock unit activity for the year ended September 30, 2019(in thousands except grant date fair value data) Shares WeightedAverage Grant Date Fair Value Aggregate Intrinsic Value as of September 30, 2019 Balance of outstanding restricted stock units October 1, 2018 3,284 $ 65.93 Granted (1) 1,836 $ 82.77 Vested (1,494 ) $ 55.11 Forfeited or not earned (394 ) $ 66.20 Balance of outstanding restricted stock units September 30, 2019 3,232 $ 80.52 $ 220,358
(in thousands, except grant date fair value data)
Average
Grant Date
Fair Value
Intrinsic Value(1)(1) Restricted stockRSUs granted includes approximately 141,00037 shares from prior period TSRrTSR awards that were earned upon achievement of the performance criteria and vested in November 2019.2021 and 87 shares from prior period performance-based awards that were earned upon achievement of the performance criteria and vested in November 2021. (Number of Units in thousands) Restricted Stock Units Restricted stock unit grants Performance-based RSUs (1) Service-based RSUs (2)Year ended September 30, 2019 376 1,319 Substantially all theThe performance-based RSUs wereare primarily made up of RSUs granted to our executive officers. Approximately 160,000 sharesexecutives and are eligible to vest based upon annual increasing performance measures measured over a three-year period. RSUs not earned for a period may be earned in the third period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2019, 20202022, November 15, 2023, and 2021,November 15, 2024, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. An additional 213,000 performance-basedUp to a maximum of two times the number of RSUs are eligible tocan be earned based upon(up to a 2019 performance measure, which RSUs will be forfeited to the extent the performance measure is not achieved. These RSUs would have vest, to the extent earned, in threemaximum aggregate of 152 substantially equal installments on November 15, 2019, 2020 and 2021. These RSUs were not earned and were forfeited.RSUs).(2)The service-based RSUs were granted to employees, including our executive officers and our directors.officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.(3) (in thousands) Year ended September 30, Value of stock option and stock-based award activity 2019 2018 2017 Total fair value of restricted stock unit awards vested $ 131,659 $ 127,525 $ 78,573 2019,2022, shares issued upon vesting of restricted stock units were net of 0.50.6 million shares retained by us to cover employee tax withholdings of $44.4$69.0 million. In 2018,2021, shares issued upon vesting of restricted stock units were net of 0.70.5 million shares retained by us to cover employee tax withholdings of $45.4$53.1 million. In 2017,2020, shares issued upon vesting of restricted stock and restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $26.7$33.7 million.intended to qualifyqualified under Section 401(k) of the Internal Revenue Code. Participating employees may defer a portion of their pre-tax compensation, as defined, but not more than statutory limits. We contribute 50%50% of the amount contributed by the employee, up to a maximum of 3%3% of the employee’s earnings. Our matching contributions vest at a rate of 25% per year of service, with full vesting after 4 years of service.immediately. We made matching contributions of $6.0$7.8 million, $5.8$7.8 million and $5.6$6.7 million in 2019, 20182022, 2021 and 2017,2020, respectively.
The following table presents the actuarial assumptions used in accounting for the pension plans:
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Weighted average assumptions used to determine benefit obligations at September 30 measurement date: |
|
|
|
|
|
|
|
|
| |||
Discount rate |
|
| 3.7 | % |
|
| 1.0 | % |
|
| 1.1 | % |
Rate of increase in future compensation |
|
| 3.6 | % |
|
| 2.8 | % |
|
| 2.8 | % |
Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30: |
|
|
|
|
|
|
|
|
| |||
Discount rate |
|
| 1.0 | % |
|
| 1.1 | % |
|
| 0.9 | % |
Rate of increase in future compensation |
|
| 2.8 | % |
|
| 2.8 | % |
|
| 2.8 | % |
Rate of return on plan assets |
|
| 5.0 | % |
|
| 5.0 | % |
|
| 5.4 | % |
| 2019 | 2018 | 2017 | ||||||
| Weighted average assumptions used to determine benefit obligations at September 30 measurement date: | ||||||||
| Discount rate | 0.9 | % | 1.9 | % | 1.8 | % | ||
| Rate of increase in future compensation | 2.8 | % | 3.0 | % | 2.8 | % | ||
| Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30: | ||||||||
| Discount rate | 1.9 | % | 1.8 | % | 1.3 | % | ||
| Rate of increase in future compensation | 3.0 | % | 2.8 | % | 2.8 | % | ||
| Rate of return on plan assets | 5.4 | % | 5.4 | % | 5.4 | % | ||
The weighted long-term rate of return assumption, is 5.4%. These rates of return, together with the assumptions used to determine the benefit obligations as of September 30, 20192022 in the table above, will be used to determine our 20202023 net periodic pension cost,income, which we expect to be approximately $1.9$0.4 million.
As of September 30, 2022, the weighted average interest crediting rate used in our only cash balance pension plan is 4.1%.
All non-service net periodic pension costs are presented in Other income, net on the Consolidated Statement of Operations. The actuarially computed components of net periodic pension cost recognized in our Consolidated Statements of Operations for each year are shown below:
(in thousands) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Interest cost of projected benefit obligation |
| $ | 550 |
|
| $ | 692 |
|
| $ | 527 |
|
Service cost |
|
| 1,016 |
|
|
| 1,127 |
|
|
| 1,426 |
|
Expected return on plan assets |
|
| (3,712 | ) |
|
| (3,643 | ) |
|
| (3,878 | ) |
Amortization of prior service cost |
|
| (4 | ) |
|
| (5 | ) |
|
| (5 | ) |
Recognized actuarial loss |
|
| 1,425 |
|
|
| 4,139 |
|
|
| 3,854 |
|
Settlement gain |
|
| (82 | ) |
|
| — |
|
|
| — |
|
Net periodic pension (benefit) cost |
| $ | (807 | ) |
| $ | 2,310 |
|
| $ | 1,924 |
|
F-35
| (in thousands) | Year ended September 30, | ||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Interest cost of projected benefit obligation | $ | 1,199 | $ | 1,260 | $ | 815 | |||||
| Service cost | 1,372 | 1,535 | 1,696 | ||||||||
| Expected return on plan assets | (3,728 | ) | (4,180 | ) | (3,327 | ) | |||||
| Amortization of prior service cost | (5 | ) | (5 | ) | (5 | ) | |||||
| Recognized actuarial loss | 2,390 | 2,293 | 3,385 | ||||||||
| Settlement loss | (30 | ) | 9 | — | |||||||
| Net periodic pension cost | $ | 1,198 | $ | 912 | $ | 2,564 | |||||
The following tables display the change in benefit obligation and the change in the plan assets and funded status of the plans as well as the amounts recognized in our Consolidated Balance Sheets:
(in thousands) |
| Year ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Change in benefit obligation: |
|
|
|
|
|
| ||
Projected benefit obligation, beginning of year |
| $ | 96,512 |
|
| $ | 97,832 |
|
Service cost |
|
| 1,016 |
|
|
| 1,127 |
|
Interest cost |
|
| 550 |
|
|
| 692 |
|
Actuarial loss (gain) |
|
| (22,616 | ) |
|
| 1,100 |
|
Foreign exchange impact |
|
| (12,949 | ) |
|
| (1,562 | ) |
Participant contributions |
|
| 96 |
|
|
| 109 |
|
Benefits paid |
|
| (2,343 | ) |
|
| (2,786 | ) |
Divestiture of business |
|
| (1,184 | ) |
|
| — |
|
Settlements |
|
| (953 | ) |
|
| — |
|
Projected benefit obligation, end of year |
| $ | 58,129 |
|
| $ | 96,512 |
|
Change in plan assets and funded status: |
|
|
|
|
|
| ||
Plan assets at fair value, beginning of year |
| $ | 78,385 |
|
| $ | 72,063 |
|
Actual return on plan assets |
|
| 2,348 |
|
|
| 7,383 |
|
Employer contributions |
|
| 3,007 |
|
|
| 3,049 |
|
Participant contributions |
|
| 96 |
|
|
| 109 |
|
Foreign exchange impact |
|
| (12,959 | ) |
|
| (1,433 | ) |
Settlements |
|
| (953 | ) |
|
| — |
|
Benefits paid |
|
| (2,343 | ) |
|
| (2,786 | ) |
Plan assets at fair value—end of year |
|
| 67,581 |
|
|
| 78,385 |
|
Projected benefit obligation, end of year |
|
| 58,129 |
|
|
| 96,512 |
|
Underfunded status |
| $ | (9,782 | ) |
| $ | (18,982 | ) |
Overfunded status |
| $ | 19,234 |
|
| $ | 855 |
|
Accumulated benefit obligation, end of year |
| $ | 57,310 |
|
| $ | 95,090 |
|
Amounts recognized in the balance sheet: |
|
|
|
|
|
| ||
Non-current asset |
| $ | 19,234 |
|
| $ | 855 |
|
Non-current liability |
| $ | (9,434 | ) |
| $ | (18,615 | ) |
Current liability |
| $ | (348 | ) |
| $ | (367 | ) |
Amounts in accumulated other comprehensive loss: |
|
|
|
|
|
| ||
Unrecognized actuarial loss |
| $ | 5,408 |
|
| $ | 30,213 |
|
| (in thousands) | Year ended September 30, | ||||||
| 2019 | 2018 | ||||||
| Change in benefit obligation: | |||||||
| Projected benefit obligation—beginning of year | $ | 87,864 | $ | 87,168 | |||
| Service cost | 1,372 | 1,535 | |||||
| Interest cost | 1,199 | 1,260 | |||||
| Actuarial loss | 12,059 | 2,157 | |||||
| Foreign exchange impact | (4,674 | ) | (1,669 | ) | |||
| Participant contributions | 154 | 212 | |||||
| Benefits paid | (1,836 | ) | (1,637 | ) | |||
| Settlements | (1,155 | ) | (1,162 | ) | |||
| Projected benefit obligation—end of year | $ | 94,983 | $ | 87,864 | |||
| Change in plan assets and funded status: | |||||||
| Plan assets at fair value—beginning of year | $ | 70,141 | $ | 70,494 | |||
| Actual return on plan assets | 3,512 | 1,025 | |||||
| Employer contributions | 2,576 | 2,459 | |||||
| Participant contributions | 154 | 212 | |||||
| Foreign exchange impact | (3,513 | ) | (1,250 | ) | |||
| Settlements | (1,155 | ) | (1,162 | ) | |||
| Benefits paid | (1,836 | ) | (1,637 | ) | |||
| Plan assets at fair value—end of year | 69,879 | 70,141 | |||||
| Projected benefit obligation—end of year | 94,983 | 87,864 | |||||
| Underfunded status | $ | (25,104 | ) | $ | (17,723 | ) | |
| Accumulated benefit obligation—end of year | $ | 92,280 | $ | 85,103 | |||
| Amounts recognized in the balance sheet: | |||||||
| Non-current liability | $ | (24,868 | ) | $ | (17,502 | ) | |
| Current liability | $ | (236 | ) | $ | (221 | ) | |
| Amounts in accumulated other comprehensive loss: | |||||||
| Unrecognized actuarial loss | $ | 34,920 | $ | 27,027 | |||
As of September 30, 2019 as a component2022 and 2021, two of net periodicour pension costplans had project benefit obligations and accumulated benefit obligations in 2020.
The following table shows the change in accumulated other comprehensive loss:
(in thousands) |
| Year ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Accumulated other comprehensive loss, beginning of year |
| $ | 30,213 |
|
| $ | 37,175 |
|
Recognized during year - net actuarial losses |
|
| (1,421 | ) |
|
| (4,135 | ) |
Occurring during year - settlement gain |
|
| 82 |
|
|
| — |
|
Occurring during year - net actuarial gains |
|
| (21,253 | ) |
|
| (2,640 | ) |
Foreign exchange impact |
|
| (2,213 | ) |
|
| (187 | ) |
Accumulated other comprehensive loss, end of year |
| $ | 5,408 |
|
| $ | 30,213 |
|
In 2022 our actuarial gains were impacted by the change in discount rate from 1.0% in 2021 to 3.7% in 2022. In 2021, our net actuarial gains were driven by the asset performance.
| (in thousands) | Year ended September 30, | ||||||
| 2019 | 2018 | ||||||
| Accumulated other comprehensive loss- beginning of year | $ | 27,027 | $ | 24,738 | |||
| Recognized during year - net actuarial (losses) | (2,385 | ) | (2,288 | ) | |||
| Occurring during year - settlement loss | 30 | (9 | ) | ||||
| Occurring during year - net actuarial losses (gains) | 12,274 | 5,312 | |||||
| Foreign exchange impact | (2,026 | ) | (726 | ) | |||
| Accumulated other comprehensive loss- end of year | $ | 34,920 | $ | 27,027 | |||
The following table shows the percentage of total plan assets for each major category of plan assets:
| September 30, | ||||||
| Asset category: | 2019 | 2018 | ||||
| Equity securities | 32 | % | 35 | % | ||
| Fixed-income securities | 46 | % | 46 | % | ||
| Commodities | 2 | % | 1 | % | ||
| Insurance company funds | 12 | % | 12 | % | ||
| Cash | 8 | % | 6 | % | ||
| 100 | % | 100 | % | |||
|
| September 30, |
| |||||
Asset category |
| 2022 |
|
| 2021 |
| ||
Equity securities |
|
| 33 | % |
|
| 35 | % |
Fixed income securities |
|
| 33 | % |
|
| 34 | % |
Commodities |
|
| 1 | % |
|
| 11 | % |
Insurance company funds |
|
| 10 | % |
|
| 12 | % |
Options |
|
| 2 | % |
|
| 1 | % |
Cash |
|
| 21 | % |
|
| 7 | % |
|
|
| 100 | % |
|
| 100 | % |
F-36
We periodically review the pension plans’ investments in the various asset classes. For the CoCreate plan in Germany, assets are actively allocated between equity and fixed income securities to achieve target return. For the other international plans, assets are allocated 100%100% to fixed income securities. The fixed income securities for the other international plans primarily include investments held with insurance companies with fixed returns. The plans’ investment managers are provided specific guidelines under which they are to invest the assets assigned to them. In general, investment managers are expected to remain fully invested in their asset class with further limitations on risk as related to investments in a single security, portfolio turnover and credit quality.
The German CoCreate plan's investment policy prohibits the use of derivatives associated with leverage and speculation or investments in securities issued by PTC, except through index-related strategies and/or commingled funds. An investment committee oversees management of the pension plans’ assets. Plan assets consist primarily of investments in mutual funds invested in equity and fixed income securities.
In 2019, 20182022, 2021 and 20172020 our actual return on plan assets was $3.5$2.3 million, $1.0$7.4 million and $6.3$(3.0) million, respectively.
Based on actuarial valuations and additional voluntary contributions, we contributed $2.6$3.0 million, $2.5$3.0 million and $2.0$2.6 million in 2019, 20182022, 2021 and 2017,2020, respectively, to the plans.
As of September 30, 2019,2022, benefit payments expected to be paid over the next ten years are outlined in the following table:as follows:
| (in thousands) | Future Benefit Payments | |||
| Year ending September 30, | ||||
| 2020 | $ | 2,918 | ||
| 2021 | 3,008 | |||
| 2022 | 3,648 | |||
| 2023 | 3,519 | |||
| 2024 | 4,401 | |||
| 2025 to 2029 | 22,173 | |||
(in thousands) |
| Future Benefit Payments |
| |
2023 |
| $ | 3,410 |
|
2024 |
|
| 4,068 |
|
2025 |
|
| 3,793 |
|
2026 |
|
| 3,830 |
|
2027 |
|
| 4,216 |
|
2028 to 2032 |
|
| 20,680 |
|
Fair Value of Plan Assets
The International Planinternational plan assets are comprised primarily of investments in a trust and an insurance company. The underlying investments in the trust are primarily publicly-traded European DJ EuroStoxx50 equities and European governmental fixed income securities. They are classified as Level 1 because the underlying units of the trust are traded in open public markets. The fair value of the underlying investments in equity securities and fixed income are based upon publicly-traded exchange prices.
| (in thousands) | September 30, 2019 | |||||||||||||||
| Plan assets: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Fixed income securities: | ||||||||||||||||
| Government | $ | 26,996 | $ | — | $ | — | $ | 26,996 | ||||||||
| European corporate investment grade | 4,816 | — | — | 4,816 | ||||||||||||
| European large capitalization stocks | 22,648 | — | — | 22,648 | ||||||||||||
| Commodities | 1,086 | — | — | 1,086 | ||||||||||||
Insurance company funds (1) | — | 8,494 | — | 8,494 | ||||||||||||
| Cash | 5,839 | — | — | 5,839 | ||||||||||||
| $ | 61,385 | $ | 8,494 | $ | — | $ | 69,879 | |||||||||
| (in thousands) | September 30, 2018 | |||||||||||||||
| Plan assets: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Fixed income securities: | ||||||||||||||||
| Government | $ | 29,754 | $ | — | $ | — | $ | 29,754 | ||||||||
| European corporate investment grade | 2,499 | — | — | 2,499 | ||||||||||||
| European large capitalization stocks | 24,502 | — | — | 24,502 | ||||||||||||
| Commodities | 724 | — | — | 724 | ||||||||||||
Insurance company funds (1) | — | 8,413 | — | 8,413 | ||||||||||||
| Cash | 4,249 | — | — | 4,249 | ||||||||||||
| $ | 61,728 | $ | 8,413 | $ | — | $ | 70,141 | |||||||||
(in thousands) |
| September 30, 2022 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Government |
| $ | 20,430 |
|
| $ | — |
|
| $ | — |
|
| $ | 20,430 |
|
Corporate investment grade |
|
| 2,038 |
|
|
| — |
|
|
| — |
|
|
| 2,038 |
|
Large capitalization stocks |
|
| 22,379 |
|
|
| — |
|
|
| — |
|
|
| 22,379 |
|
Commodities |
|
| 599 |
|
|
| — |
|
|
| — |
|
|
| 599 |
|
Insurance company funds(1) |
|
| — |
|
|
| 6,823 |
|
|
| — |
|
|
| 6,823 |
|
Options |
|
| 1,430 |
|
|
| — |
|
|
| — |
|
|
| 1,430 |
|
Cash |
|
| 13,882 |
|
|
| — |
|
|
| — |
|
|
| 13,882 |
|
Total plan assets |
| $ | 60,758 |
|
| $ | 6,823 |
|
| $ | — |
|
| $ | 67,581 |
|
F-37
(in thousands) |
| September 30, 2021 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Government |
| $ | 24,013 |
|
| $ | — |
|
| $ | — |
|
| $ | 24,013 |
|
Corporate investment grade |
|
| 2,924 |
|
|
| — |
|
|
| — |
|
|
| 2,924 |
|
Large capitalization stocks |
|
| 27,078 |
|
|
| — |
|
|
| — |
|
|
| 27,078 |
|
Commodities |
|
| 8,558 |
|
|
| — |
|
|
| — |
|
|
| 8,558 |
|
Insurance company funds(1) |
|
| — |
|
|
| 9,105 |
|
|
| — |
|
|
| 9,105 |
|
Options |
|
| 1,122 |
|
|
| — |
|
|
| — |
|
|
| 1,122 |
|
Cash |
|
| 5,585 |
|
|
| — |
|
|
| — |
|
|
| 5,585 |
|
Total plan assets |
| $ | 69,280 |
|
| $ | 9,105 |
|
| $ | — |
|
| $ | 78,385 |
|
(1) These investments are comprised primarily of funds invested with an insurance company in Japan with a guaranteed rate of return. The insurance company invests these assets primarily in government and corporate bonds.
15. Fair Value Measurements
Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.
The principal market in which we execute our foreign currency forward contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are usually large financial institutions. Our foreign currency forward contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of September 30, 20192022 and 20182021 were as follows:
(in thousands) |
| September 30, 2022 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash equivalents(1) |
| $ | 102,313 |
|
| $ | — |
|
| $ | — |
|
| $ | 102,313 |
|
Convertible note |
|
| — |
|
|
| — |
|
|
| 2,000 |
|
|
| 2,000 |
|
Forward contracts |
|
| — |
|
|
| 9,058 |
|
|
| — |
|
|
| 9,058 |
|
|
| $ | 102,313 |
|
| $ | 9,058 |
|
| $ | 2,000 |
|
| $ | 113,371 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Forward contracts |
|
| — |
|
|
| 2,908 |
|
|
| — |
|
|
| 2,908 |
|
|
| $ | — |
|
| $ | 2,908 |
|
| $ | — |
|
| $ | 2,908 |
|
(in thousands) |
| September 30, 2021 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash equivalents(1) |
| $ | 114,375 |
|
| $ | — |
|
| $ | — |
|
| $ | 114,375 |
|
Convertible note |
|
| — |
|
|
| — |
|
|
| 2,000 |
|
|
| 2,000 |
|
Equity securities |
|
| — |
|
|
| — |
|
|
| 77,540 |
|
|
| 77,540 |
|
Forward contracts |
|
| — |
|
|
| 5,363 |
|
|
| — |
|
|
| 5,363 |
|
|
| $ | 114,375 |
|
| $ | 5,363 |
|
| $ | 79,540 |
|
| $ | 199,278 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Forward contracts |
|
| — |
|
|
| 3,318 |
|
|
| — |
|
|
| 3,318 |
|
|
| $ | — |
|
| $ | 3,318 |
|
| $ | — |
|
| $ | 3,318 |
|
| (in thousands) | September 30, 2019 | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Financial assets: | |||||||||||||||
Cash equivalents (1) | $ | 108,020 | $ | — | $ | — | $ | 108,020 | |||||||
| Marketable securities: | |||||||||||||||
| Commercial paper | — | 999 | — | 999 | |||||||||||
| Corporate notes/bonds | 56,436 | — | — | 56,436 | |||||||||||
| Forward contracts | — | 3,064 | — | 3,064 | |||||||||||
| $ | 164,456 | $ | 4,063 | $ | — | $ | 168,519 | ||||||||
| Financial liabilities: | |||||||||||||||
| Forward contracts | — | 2,771 | — | 2,771 | |||||||||||
| $ | — | $ | 2,771 | $ | — | $ | 2,771 | ||||||||
| (in thousands) | September 30, 2018 | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Financial assets: | |||||||||||||||
Cash equivalents (1) | $ | 93,058 | $ | — | $ | — | $ | 93,058 | |||||||
| Marketable securities: | |||||||||||||||
| Certificates of deposit | — | 219 | — | 219 | |||||||||||
| Corporate notes/bonds | 54,737 | — | — | 54,737 | |||||||||||
| U.S. government agency securities | — | 995 | — | 995 | |||||||||||
| Forward contracts | — | 2,889 | — | 2,889 | |||||||||||
| $ | 147,795 | $ | 4,103 | $ | — | $ | 151,898 | ||||||||
| Financial liabilities: | |||||||||||||||
| Contingent consideration related acquisitions | $ | — | $ | — | $ | 1,575 | $ | 1,575 | |||||||
| Forward contracts | — | 3,419 | — | 3,419 | |||||||||||
| $ | — | $ | 3,419 | $ | 1,575 | $ | 4,994 | ||||||||
F-38
Level 3 Investments
Convertible Note
In the fourth quarter of 2021, we invested $2.0 million in a non-marketable convertible note. This debt security is classified as available-for-sale and is included in Other assets on the Consolidated Balance Sheet. There were no changes in the fair value of Levelthis level 3 investment in the twelve months ended September 30, 2022.
Non-Marketable Equity Investments
The carrying value of our non-marketable equity investments is recorded in Other assets on the Consolidated Balance Sheets and totaled $1.0 million as of September 30, 2022 and $2.2 million as of September 30, 2021. In 2022, PTC sold a non-marketable equity investment for $4.2 million, which had been held at a cost of $1.2 million. The $3.0 million gain recognized on the sale is included in Other income, net for the twelve months ended September 30, 2022
Equity Securities
As of September 30, 2022, PTC held no remaining shares in Matterport, Inc., a publicly traded company, as we sold all previously held shares during the three months ended March 31, 2022. The shares sold included those held as of September 30, 2021, as well as additional shares which PTC earned during the second quarter of FY'22 based on contingent The following table presents changes in fair value (in thousands) September 30, 2022 Fair Values Balance, October 1, 2021 $ 77,540 Realized loss (38,468 ) Sale of investment (39,072 ) Balance, September 30, 2022 $ — 16. Marketable Securities We did not hold any marketable securities as of September 30, F-39 Non-Designated Hedgesconsideration liability associated with our acquisitions was as follows:(in thousands) Contingent Consideration Kepware Other Total Balance at September 30, 2017 $ 8,400 $ — $ 8,400 Contingent consideration at acquisition — 2,100 2,100 Payment of contingent consideration (8,400 ) (525 ) (8,925 ) Balance at September 30, 2018 $ — $ 1,575 $ 1,575 Payment of contingent consideration — (1,575 ) (1,575 ) Balance at September 30, 2019 $ — $ — $ — Payments made againstearn-outs achieved in January 2022. Shares related to the original fair valueinvestment were restricted from sale until January 2022 (six months after Matterport became a public company). At expiration of this lock-out, we sold all shares held from the liabilities recordedoriginal investment for $39.1 million at an average price of $9.1 per share. In February 2022, we sold all remaining shares held for $3.6 million at an average share price of $7.6 per share. Due to the acquisition date ($1.6 million, $8.3 million and $11.0decline in the price per share during the first six months of fiscal 2022, we recognized a loss of $34.8 million in 2019, 2018 and 2018, respectively) are included in financing activities inOther income, net on the Consolidated StatementStatements of Cash Flows. Payments related toOperations. No additional gains or losses were recognized in 2022 and the aggregate realized gain from the original investment of $8.7 million was $34.0 million.after the respective acquisition dates are recorded in operating activities.In connection withof our acquisition of Kepware, the former shareholders were eligible to receive additional consideration of up to $18.0 million, which was contingent on the achievement of certain Financial Performance, Product Integration and Business Integration targets (as definedLevel 3 investment in the Stock Purchase Agreement) within 24 monthsMatterport, Inc. shares from AprilOctober 1, 2016. The estimated undiscounted range of outcomes for the contingent consideration was $16.9 million2021 to $18.0 million at the acquisition date. As of September 30, 2018, we had made $18.0 million in payments and had 0 liability remaining.2022:The amortized cost and fair value of2019 and 2018 were as follows:(in thousands) September 30, 2019 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Commercial paper 999 — — 999 Corporate notes/bonds 56,318 146 (28 ) 56,436 $ 57,317 $ 146 $ (28 ) $ 57,435 (in thousands) September 30, 2018 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Certificates of deposit $ 220 $ — $ (1 ) $ 219 Corporate notes/bonds 55,140 — (403 ) 54,737 U.S. government agency securities 1,004 — (9 ) 995 $ 56,364 $ — $ (413 ) $ 55,951 The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2019 and 2018.(in thousands) September 30, 2019 Less than twelve months Greater than twelve months Total Fair Value Gross unrealized loss Fair Value Gross unrealized loss Fair Value Gross unrealized loss Corporate notes/bonds $ 12,419 $ (14 ) $ 16,369 $ (14 ) $ 28,788 $ (28 ) (in thousands) September 30, 2018 Less than twelve months Greater than twelve months Total Fair Value Gross unrealized loss Fair Value Gross unrealized loss Fair Value Gross unrealized loss Certificates of deposit $ 219 $ (1 ) $ — $ — $ 219 $ (1 ) Corporate notes/bonds 24,067 (70 ) 30,670 (333 ) 54,737 (403 ) US government agency securities — — 995 (9 ) 995 (9 ) $ 24,286 $ (71 ) $ 31,665 $ (342 ) $ 55,951 $ (413 ) The following table presents2022 or 2021. In December 2020, we sold all our available-for-sale marketable securities by contractual maturity date, asto partially fund the Arena acquisition, resulting in proceeds of September 30, 2019 and 2018.$56.2 million. Neither gross realized gains nor gross realized losses related to the sale were material.(in thousands) September 30, 2019 September 30, 2018 Amortized cost Fair value Amortized cost Fair value Due in one year or less $ 27,725 $ 27,735 $ 25,792 $ 25,670 Due after one year through three years 29,592 29,700 30,572 30,281 $ 57,317 $ 57,435 $ 56,364 $ 55,951 17. Derivative Financial Instruments
As of September 30, 20192022 and 2018,2021, we had outstanding forward contracts for derivatives not designated as hedging instruments with notional amounts equivalent to the following:
|
| September 30, |
| |||||
Currency Hedged (in thousands) |
| 2022 |
|
| 2021 |
| ||
Canadian / U.S. Dollar |
| $ | 2,731 |
|
| $ | 4,894 |
|
Euro / U.S. Dollar |
|
| 316,869 |
|
|
| 387,466 |
|
British Pound / U.S. Dollar |
|
| 7,368 |
|
|
| 23,141 |
|
Israeli Shekel / U.S. Dollar |
|
| 12,052 |
|
|
| 10,475 |
|
Japanese Yen / U.S. Dollar |
|
| 25,566 |
|
|
| 46,450 |
|
Swiss Franc / U.S. Dollar |
|
| 25,559 |
|
|
| 18,039 |
|
Swedish Krona / U.S. Dollar |
|
| 35,713 |
|
|
| 34,196 |
|
Singapore Dollar / U.S. Dollar |
|
| 3,637 |
|
|
| 3,498 |
|
Chinese Renminbi / U.S. Dollar |
|
| 23,965 |
|
|
| 23,297 |
|
New Taiwan Dollar / U.S. Dollar |
|
| 13,906 |
|
|
| 3,369 |
|
Russian Ruble/ U.S. Dollar |
|
| — |
|
|
| 2,614 |
|
Korean Won/ U.S. Dollar |
|
| 4,919 |
|
|
| — |
|
Danish Krone/ U.S. Dollar |
|
| 3,192 |
|
|
| 2,380 |
|
Australian Dollar/ U.S. Dollar |
|
| 3,269 |
|
|
| 2,086 |
|
All other |
|
| 4,432 |
|
|
| 2,016 |
|
Total |
| $ | 483,178 |
|
| $ | 563,921 |
|
| (in thousands) | September 30, | |||||||
| Currency Hedged | 2019 | 2018 | ||||||
| Canadian / U.S. Dollar | $ | 9,408 | $ | 7,334 | ||||
| Euro / U.S. Dollar | 308,282 | 297,730 | ||||||
| British Pound / U.S. Dollar | 3,756 | 7,074 | ||||||
| Israeli Sheqel / U.S. Dollar | 10,272 | 9,778 | ||||||
| Japanese Yen / U.S. Dollar | 37,462 | 37,456 | ||||||
| Swiss Franc / U.S. Dollar | 12,001 | 11,944 | ||||||
| Swedish Krona / U.S. Dollar | 20,636 | 18,207 | ||||||
| Chinese Yuan offshore / U.S. Dollar | 43,387 | 116 | ||||||
| Singapore Dollar / U.S. Dollar | 34,585 | 1,314 | ||||||
| Chinese Renminbi / U.S. Dollar | 9,079 | 9,010 | ||||||
| All other | 9,487 | 5,993 | ||||||
| Total | $ | 498,355 | $ | 405,956 | ||||
The following table shows the effect of our non-designated hedges, inall of which were forward contracts, on the Consolidated Statements of Operations for the years ended September 30, 2019, 20182022, 2021 and 2017 (in thousands):2020:
| Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income | Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged) | ||||||||||||
| Year ended September 30, | ||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| Forward Contracts | Other income (expense), net | $ | (6,716 | ) | $ | (9,720 | ) | $ | 870 | |||||
(in thousands) |
|
|
| Year ended September 30, |
| |||||||||
|
| Location of gain (loss) |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net realized and unrealized gain (loss), excluding the underlying foreign currency exposure being hedged |
| Other income, net |
| $ | 11,950 |
|
| $ | (3,758 | ) |
| $ | 3,518 |
|
| (in thousands) | September 30, | |||||||
| Currency Hedged | 2019 | 2018 | ||||||
| Euro / U.S. Dollar | $ | — | $ | 8,495 | ||||
| Japanese Yen / U.S. Dollar | — | 2,193 | ||||||
| SEK / U.S. Dollar | — | 1,708 | ||||||
| Total | $ | — | $ | 12,396 | ||||
| Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI-Effective Portion | Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion | Gain or (Loss) Reclassified from OCI into Income-Effective Portion | Location of Gain or (Loss) Recognized-Ineffective Portion | Gain or (Loss) Recognized-Ineffective Portion | |||||||||||||||||||||||||||||||||||
| Year ended September 30, | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||
| Forward Contracts | $ | 187 | $ | 1,652 | $ | (866 | ) | Software Revenue | $ | 627 | $ | (552 | ) | $ | (524 | ) | Other Income (Expense) | $ | — | $ | 21 | $ | (49 | ) | ||||||||||||||||
As of September 30, 20192022 and 2018,2021, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
| September 30, |
| ||||||||||||||
Currency Hedged (in thousands) | 2019 | 2018 |
| 2022 |
|
| 2021 |
| ||||||||
| Euro / U.S. Dollar | $ | 183,396 | $ | — |
| $ | 110,466 |
|
| $ | 128,103 |
| ||||
| Total | $ | 183,396 | $ | — | ||||||||||||
The following table shows the effect of our derivative instruments designated as net investment hedges, inall of which were forward contracts, on the Consolidated Statements of Operations for the years ended September 30, 20192022, 2021, and 2018 (in thousands):2020:
| Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI-Effective Portion | Location of Gain or (Loss) Reclassified from OCI -Effective Portion | Gain or (Loss) Reclassified from OCI-Effective Portion | Location of Gain or (Loss) Excluded from Effectiveness Testing | Gain or (Loss) Recognized-Excluded Portion | |||||||||||||||||||||||||||||||||||
| Year ended September 30, | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||
| Forward Contracts | $ | (2,925 | ) | $ | — | $ | — | Accumulated other comprehensive loss | $ | (7,630 | ) | $ | — | $ | — | Other income (expense), net | $ | 4,598 | $ | — | $ | — | ||||||||||||||||||
(in thousands) |
|
|
| Year ended September 30, |
| |||||||||
|
| Location of gain (loss) |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Gain (loss) recognized in OCI—effective portion |
| OCI |
| $ | (1,478 | ) |
| $ | 695 |
|
| $ | (5,483 | ) |
Gain (loss) reclassified from OCI—effective portion |
| OCI |
| $ | (17,466 | ) |
| $ | 2,723 |
|
| $ | 109 |
|
Gain recognized—portion excluded from effectiveness testing |
| Other income, net |
| $ | 1,862 |
|
| $ | 1,249 |
|
| $ | 3,506 |
|
As of September 30, 2019,2022, we estimate that all amounts reported in accumulatedAccumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
F-40
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
(in thousands) |
| Fair Value of Derivatives |
|
| Fair Value of Derivatives |
| ||||||||||
|
| September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Derivative assets:(1) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Forward contracts |
| $ | 1,960 |
|
| $ | 1,641 |
|
| $ | 7,098 |
|
| $ | 3,722 |
|
Derivative liabilities:(2) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Forward contracts |
| $ | — |
|
| $ | — |
|
| $ | 2,908 |
|
| $ | 3,318 |
|
| (in thousands) | September 30, | ||||||||||||||
| Fair Value of Derivatives Designated As Hedging Instruments | Fair Value of Derivatives Not Designated As Hedging Instruments | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
Derivative assets (a): | |||||||||||||||
| Forward Contracts | $ | 1,674 | $ | 440 | $ | 1,390 | $ | 2,449 | |||||||
Derivative liabilities (b): | |||||||||||||||
| Forward Contracts | $ | — | $ | — | $ | 2,771 | $ | 3,419 | |||||||
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements whichthat allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of September 30, 2019:2022:
(in thousands) |
| Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
|
|
| Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
| ||||||||||||
As of September 30, 2022 |
| Gross Amount of Recognized Assets |
|
| Gross Amounts Offset in the Consolidated Balance Sheets |
|
| Net Amounts of Assets Presented in the Consolidated Balance Sheets |
|
| Financial Instruments |
|
| Cash Collateral Received |
|
| Net Amount |
| ||||||
Forward Contracts |
| $ | 9,058 |
|
| $ | — |
|
| $ | 9,058 |
|
| $ | (2,908 | ) |
| $ | — |
|
| $ | 6,150 |
|
| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2019 | Gross Amount of Recognized Assets | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts of Assets Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||
| Forward Contracts | $ | 3,064 | $ | — | $ | 3,064 | $ | (2,771 | ) | $ | — | $ | 293 | |||||||||||
(in thousands) |
| Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
|
|
| Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
| ||||||||||||
As of September 30, 2022 |
| Gross Amount of Recognized Liabilities |
|
| Gross Amounts Offset in the Consolidated Balance Sheets |
|
| Net Amounts of Liabilities Presented in the Consolidated Balance Sheets |
|
| Financial Instruments |
|
| Cash Collateral Pledged |
|
| Net Amount |
| ||||||
Forward Contracts |
| $ | 2,908 |
|
| $ | — |
|
| $ | 2,908 |
|
| $ | (2,908 | ) |
| $ | — |
|
| $ | — |
|
| (in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | ||||||||||||||||||||||
| September 30, 2019 | Gross Amount of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||||||||
| Forward Contracts | $ | 2,771 | $ | — | $ | 2,771 | $ | (2,771 | ) | $ | — | $ | — | |||||||||||
Net gains and losses on foreign currency exposures, including realized and unrealized gains and losses on forward contracts, included in foreign currencyOther income, net, losses, were netlosses of $3.2$0.9 million, $7.0$8.0 million and $5.7$1.7 million for 2019, 2018in 2022, 2021 and 2017,2020, respectively. Net realized and unrealized gains and losses on forward contracts included in foreign currencyOther income, net losses were a net loss of $8.4 million in 2019 and $7.5 million in 2018, and a net gain of $1.8$16.4 million and $7.0 million in 2017.2022 and 2020, and net loss of $4.9 million in 2021.
F-41
18. Segment and Geographic Information
We operate within a single industry segment -- segment—computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have 2two operating and reportable segments: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales &and marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
The revenue and profit attributable to our operating segments are summarized below. We do not produce or report asset information by reportable segment; therefore, it is not reported.
(in thousands) |
| Year ended September 30, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Software Products |
|
|
|
|
|
|
|
|
| |||
Revenue |
| $ | 1,770,253 |
|
| $ | 1,649,341 |
|
| $ | 1,314,617 |
|
Operating costs(1) |
|
| 494,035 |
|
|
| 451,734 |
|
|
| 393,803 |
|
Profit |
|
| 1,276,218 |
|
|
| 1,197,607 |
|
|
| 920,814 |
|
|
|
|
|
|
|
|
|
|
| |||
Professional Services |
|
|
|
|
|
|
|
|
| |||
Revenue |
|
| 163,094 |
|
|
| 157,818 |
|
|
| 143,798 |
|
Operating costs(2) |
|
| 140,470 |
|
|
| 135,981 |
|
|
| 128,678 |
|
Profit |
|
| 22,624 |
|
|
| 21,837 |
|
|
| 15,120 |
|
|
|
|
|
|
|
|
|
|
| |||
Total segment revenue |
|
| 1,933,347 |
|
|
| 1,807,159 |
|
|
| 1,458,415 |
|
Total segment costs |
|
| 634,505 |
|
|
| 587,715 |
|
|
| 522,481 |
|
Total segment profit |
|
| 1,298,842 |
|
|
| 1,219,444 |
|
|
| 935,934 |
|
|
|
|
|
|
|
|
|
|
| |||
Unallocated operating expenses:(3) |
|
|
|
|
|
|
|
|
| |||
Sales and marketing expenses |
|
| 435,780 |
|
|
| 464,067 |
|
|
| 398,100 |
|
General and administrative expenses |
|
| 130,870 |
|
|
| 120,954 |
|
|
| 114,386 |
|
Intangibles amortization |
|
| 60,548 |
|
|
| 59,165 |
|
|
| 56,104 |
|
Restructuring and other charges, net |
|
| 36,234 |
|
|
| 2,211 |
|
|
| 32,716 |
|
Stock-based compensation |
|
| 174,863 |
|
|
| 177,289 |
|
|
| 115,149 |
|
Other unallocated operating expenses(4) |
|
| 13,185 |
|
|
| 15,010 |
|
|
| 8,616 |
|
Total operating income |
|
| 447,362 |
|
|
| 380,748 |
|
|
| 210,863 |
|
|
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
| (54,268 | ) |
|
| (50,478 | ) |
|
| (76,428 | ) |
Other income, net |
|
| 4,004 |
|
|
| 61,485 |
|
|
| 271 |
|
Income before income taxes |
| $ | 397,098 |
|
| $ | 391,755 |
|
| $ | 134,706 |
|
| (in thousands) | Year ended September 30, | ||||||||||||||
| As reported ASC 606 | ASC 605 | As reported ASC 605 | As reported ASC 605 | ||||||||||||
| 2019 | 2019 | 2018 | 2017 | ||||||||||||
| Software Products | |||||||||||||||
| Revenue | $ | 1,088,100 | $ | 1,150,818 | $ | 1,088,487 | $ | 987,316 | |||||||
Operating Costs (1) | 377,464 | 375,268 | 387,989 | 366,716 | |||||||||||
| Profit | 710,636 | 775,550 | 700,498 | 620,600 | |||||||||||
| Professional Services | |||||||||||||||
| Revenue | 167,531 | 160,676 | 153,337 | 176,723 | |||||||||||
Operating costs (2) | 133,846 | 128,818 | 136,964 | 145,051 | |||||||||||
| Profit (loss) | 33,685 | 31,858 | 16,373 | 31,672 | |||||||||||
| Total segment revenue | 1,255,631 | 1,311,494 | 1,241,824 | 1,164,039 | |||||||||||
| Total segment costs | 511,310 | 504,086 | 524,953 | 511,767 | |||||||||||
| Total segment profit (loss) | 744,321 | 807,408 | 716,871 | 652,272 | |||||||||||
| Unallocated operating expenses: | |||||||||||||||
| Sales and marketing expenses | 385,423 | 409,932 | 389,871 | 357,329 | |||||||||||
| General and administrative expenses | 104,393 | 104,393 | 108,159 | 108,363 | |||||||||||
| Intangibles amortization | 51,147 | 51,147 | 58,056 | 58,729 | |||||||||||
| Restructuring and other charges, net | 51,114 | 51,114 | 3,764 | 7,942 | |||||||||||
| Stock-based compensation | 86,400 | 86,400 | 82,939 | 76,708 | |||||||||||
Other unallocated operating expenses (3) | 2,802 | 2,802 | 1,469 | 1,435 | |||||||||||
| Total operating income | 63,042 | 101,620 | 72,613 | 41,766 | |||||||||||
| Interest expense | (43,047 | ) | (43,047 | ) | (41,673 | ) | (42,400 | ) | |||||||
| Other (expense) income, net | 305 | 131 | (2,284 | ) | (772 | ) | |||||||||
| Income (loss) before income taxes | $ | 20,300 | $ | 58,704 | $ | 28,656 | $ | (1,406 | ) | ||||||
F-42
For 2022, 2021 and (in thousands) Year ended September 30, 2022 2021 2020 Digital Thread - Core $ 1,318,857 $ 1,257,817 $ 1,025,709 Digital Thread - Growth 279,566 273,949 215,353 Digital Thread - FSG 251,621 233,268 210,101 Digital Thread (Total) 1,850,044 1,765,034 1,451,163 Velocity 83,303 42,125 7,252 Total revenue $ 1,933,347 $ 1,807,159 $ 1,458,415 Product lifecycle management (PLM) 1,137,016 1,012,120 807,016 Computer-aided design (CAD) 796,331 795,039 651,399 Total revenue $ 1,933,347 $ 1,807,159 $ 1,458,415 We license products to customers worldwide. Our sales and marketing operations outside the United States are conducted principally through our international sales subsidiaries throughout Europe and the (in thousands) Year ended September 30, 2022 2021 2020 Revenue: Americas(1) $ 895,095 $ 766,021 $ 649,383 Europe(2) 714,216 722,977 543,779 Asia Pacific 324,036 318,161 265,253 Total revenue $ 1,933,347 $ 1,807,159 $ 1,458,415 F-43 Our operating leases expire at various dates through 2037 and are primarily for office space, automobiles, servers, and office equipment. Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts (the Boston lease). The Boston lease is for approximately 250,000 square feet and runs through June 30, 2037. Base rent for the first year of the lease was $11.0 million and increases by $1 per square foot per year thereafter ($0.3 million per year). Base rent first became payable on July 1, 2020. In addition to the base rent, we are required to pay our pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Annual Additional Rent is estimated to be approximately $7.1 million. The lease provides for $25 million in landlord funding for leasehold improvements ($100 per square foot). The leasehold improvement funding provision was fully utilized by us and was reflected as a derecognition adjustment to the right-of-use asset. In February 2019, we The (in thousands) Year ended September 30, 2022 Operating lease cost $ 34,346 Short-term lease cost 2,653 Variable lease cost 10,095 Sublease income (4,600 ) Total lease cost $ 42,494 Supplemental cash flow and (in thousands) Year ended September 30, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 38,709 Financing cash flows from operating leases $ 297 Right-of-use assets obtained in exchange for new lease obligations: Operating leases $ 15,431 Financing leases $ — Supplemental balance sheet information related to the leases as of September 30, As of September 30, 2022 Weighted-average remaining lease term - operating leases 11.8 years Weighted-average remaining lease term - financing leases 2 years Weighted-average discount rate - operating leases 5.4 % Weighted-average discount rate - financing leases 3.0 % Maturities of (in thousands) Operating Leases 2022 $ 31,612 2023 26,907 2024 23,495 2025 19,487 2026 16,662 Thereafter 143,236 Total future lease payments 261,399 Less: imputed interest (71,824 ) Total $ 189,575 F-44 As of September 30, 2022 we had operating leases that had not yet commenced. The leases will commence in FY'23 with a lease term of 10 years and Exited (Restructured) Facilities As of September 30, 2022, we have net liabilities of $0.3 million related to excess facilities (compared to $3.6 million at September 30, 2021), representing lease obligations classified as short term. In determining the amount of right-of-use assets for restructured facilities, we are In the year ended September 30, 2022, we made payments of $2.0 million related to lease costs for exited facilities. F-45fair value adjustments for deferred services costs. Unallocated departments include depreciation of $20.6 million, $22.7 million and $21.2 million in 2019, 2018 and 2017, respectively.We report2020, we reported revenue by the following 2three product groups: (in thousands) Year ended September 30, As reported ASC 606 ASC 605 As reported ASC 605 As reported ASC 605 2019 2019 2018 2017 Solutions $ 1,099,811 $ 1,135,891 $ 1,102,546 $ 1,060,692 IoT 155,820 175,603 139,278 103,348 Total revenue $ 1,255,631 $ 1,311,494 $ 1,241,824 $ 1,164,039 Asia-Pacific regions.Asia Pacific region. Intercompany sales and transfers between geographic areas are accounted for at prices that are designed to be representative of unaffiliated party transactions. Our material long-lived assets primarily reside in the United States in 2022, 2021 and 2020. Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.(1)Includes revenue in the United States totaling $864.7 million, $741.3 million, and $621.8 million for 2022, 2021 and 2020, respectively. (in thousands) Year ended September 30, As reported ASC 606 ASC 605 As reported ASC 605 As reported ASC 605 2019 2019 2018 2017 Revenue: Americas (1)$ 537,548 $ 565,362 $ 511,237 $ 500,879 Europe (2)464,666 494,864 485,851 435,183 Asia Pacific $ 253,417 $ 251,268 $ 244,736 $ 227,977 Total revenue $ 1,255,631 $ 1,311,494 $ 1,241,824 $ 1,164,039 Includes revenue in Germany totaling $318.5 million, $290.7million, and $198.7 million for 2022, 2021 and 2020, respectively.(1)Includes revenue in the United States totaling $514.4 million (ASC 606) and $541.7 million (ASC 605), $487.3 million and $475.5 million for 2019, 2018 and 2017, respectively.(2)Includes revenue in Germany totaling $185.4 million(ASC 606) and $197.2 million (ASC 605), $193.3 million and $164.7 million for 2019, 2018 and 2017, respectively.(3)Substantially all of the Americas long-lived tangible assets are located in the United States.19. Subsequent EventsAcquisitionOn November Leasesacquired Onshape, creatorssubleased a portion of the first Software as a Service (SaaS) product development platform that unites robust CAD with powerful data managementBoston location through June 30, 2022, and collaboration tools, forreceived approximately $470$9.1 million netin sublease income over the term of cash acquired. the sublease. In March 2022, we extended the sublease through June 30, 2023 and we will receive $2.9 million in sublease income over the term of the extension.acquisition is expected to accelerate our ability to attract new customers with a SaaS-based product offering and positioncomponents of lease cost reflected in the company to capitalize on an industry transition to SaaS.Borrowings and Credit FacilityWe borrowed $455 million under our existing credit facility to acquire Onshape, bringing our total outstanding indebtedness to approximately $1.1 billion. Subsequently, we amended the credit facility to increase the revolving loan commitment from $700 million to $1 billion and make other administrative amendments.Equity GrantsIn November 2019, we granted shares valued at approximately $16.8 million to our employees, including our executives ($3.3 million), in payment of amounts earned under our annual Corporate Incentive Plan.In November 2019, we granted time-based restricted stock units (RSUs) valued at approximately $49.2 million to employees. The time-based RSUs will generally vest in three substantially equal annual installments on November 15, 2020, 2021 and 2022.SELECTED CONSOLIDATED FINANCIAL DATAYou should read the following selected consolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report.The Consolidated StatementsStatement of Operations data for the yearsyear ended September 30, 2019, 2018,2022 were as follows:2017 andright-of use assets information for the Consolidated Balance Sheets datayear ended September 30, 2022 was as follows:2019 and 2018 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report. The Consolidated Statements2022 was as follows:Operations data for the years ended September 30, 2016 and 2015 and the Consolidated Balance Sheets datalease liabilities as of September 30, 2017, 20162022 are as follows:2015we will make future lease payments of approximately $11.6 million.derived from our audited consolidated financial statements thatrequired to estimate such factors as future vacancy rates, the time required to sublet properties, and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are notbased on the net present value of estimated sublease income. As of September 30, 2022, There was no committed sublease income included in this Annual Report. The historical results are not necessarily indicativethe right-of-use assets for exited facilities and there was no uncommitted sublease income. As a result of resultschanges in any future period.FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATAour sublease income assumptions and an incremental obligation to exit a portion of our former headquarters facility early in the year ended (1)September 30, 2022, we recorded a facility impairment charge of $1.3 million.(in thousands, except per share data) 2019 2019 2018 2017 2016 2015 As reported ASC 606 ASC 605 As reported ASC 605 As reported ASC 605 As reported ASC 605 As reported ASC 605 Revenue $ 1,255,631 $ 1,311,494 $ 1,241,824 $ 1,164,039 $ 1,140,533 $ 1,255,242 Gross margin 930,253 993,340 915,322 835,537 814,868 920,508 Operating income (loss) (2)63,042 101,620 72,613 41,766 (37,014 ) 41,616 Net income (loss) (2) (3)(27,460 ) 2,979 51,987 6,239 (54,465 ) 47,557 Earnings (loss) per share—Basic (2) (3)(0.23 ) 0.03 0.45 0.05 (0.48 ) 0.41 Earnings (loss) per share—Diluted (2) (3)(0.23 ) 0.03 0.44 0.05 (0.48 ) 0.41 Total assets 2,664,588 2,471,908 2,329,022 2,360,384 2,345,729 2,209,913 Working capital (deficit) 144,466 (140,437 ) (101,495 ) (12,353 ) (11,930 ) 87,419 Long-term liabilities 824,435 795,850 719,154 796,039 848,544 732,482 Stockholders’ equity 1,201,998 876,333 874,589 885,436 842,666 860,171 (1)The consolidated financial position and results of operations data reflect our acquisitions of Kepware on January 12, 2016 for $99.4 million in cash, Vuforia on November 3, 2015 for $64.8 million in cash, ColdLight on May 7, 2015 for $98.6 million in cash, Axeda on August 11, 2014 for $165.9 million in cash, ThingWorx on December 30, 2013 for $111.5 million in cash as well as certain other less significant businesses during these periods. Results of operations for the acquired businesses have been included in the Consolidated Statements of Operations since their acquisition dates.(2)Operating income and net income in 2016 includes pre-tax restructuring charges of $76.3 million. Operating income and net income in 2015 includes a pre-tax U.S pension settlement loss of $66.3 million, a $28.2 million charge related to a legal accrual and pre-tax restructuring charges of $43.4 million.(3)In 2015, net income includes an $18.7 million tax benefit related to settlement of our U.S pension plan.QUARTERLY FINANCIAL INFORMATION (UNAUDITED)(in thousands except per share data) September 30, 2019 June 29, 2019 March 30, 2019 December 29, 2018 As reported ASC 606 ASC 605 As reported ASC 606 ASC 605 As reported ASC 606 ASC 605 As reported ASC 606 ASC 605 Revenue $ 335,004 $ 334,828 $ 295,486 $ 322,410 $ 290,451 $ 315,499 $ 334,689 $ 338,757 Gross margin 249,587 251,070 212,781 241,177 210,547 237,532 257,337 263,561 Operating income 46,551 37,640 9,305 32,370 (22,858 ) (1,572 ) 30,044 33,182 Net income 9,826 (15,944 ) (14,758 ) 11,705 (45,513 ) (12,030 ) 20,985 19,248 Earnings per share: Basic $ 0.09 $ (0.14 ) $ (0.13 ) $ 0.10 $ (0.37 ) $ (0.10 ) $ 0.18 $ 0.16 Diluted $ 0.08 $ (0.14 ) $ (0.13 ) $ 0.10 $ (0.37 ) $ (0.10 ) $ 0.18 $ 0.16 (in thousands except per share data) September 30, 2018 June 30, 2018 March 31, 2018 December 30, 2017 Revenue $ 312,521 $ 314,777 $ 307,833 $ 306,644 Gross margin 234,395 233,144 224,175 223,609 Operating income 11,541 21,547 22,210 17,316 Net income (loss) 13,191 16,997 7,922 13,877 Earnings (loss) per share: Basic $ 0.11 $ 0.15 $ 0.07 $ 0.12 Diluted $ 0.11 $ 0.14 $ 0.07 $ 0.12 A-2