2018ANNUAL REPORTUnlock the value createdby the convergence of thephysical and digital worlds... 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, 2018
Commission File Number: 0-18059
PTC Inc.
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of
incorporation or organization)
04-2866152
(I.R.S. Employer
Identification Number)
140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value per share
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant
to Section 12(g) of the Act:
None
(Title of Class)
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 posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to post such
files). YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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 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 $8,976,658,598 on April 1, 2018 based on the
last reported sale price of our common stock on the Nasdaq Global Select Market on March 29, 2018. There were 116,337,920 shares of our
common stock outstanding on that day and 118,675,240 shares of our common stock outstanding on November 15, 2018.
Portions of the definitive Proxy Statement in connection with the 2019 Annual Meeting of Stockholders (2019 Proxy Statement) are
DOCUMENTS INCORPORATED BY REFERENCE
incorporated by reference into Part III.
PTC Inc.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2018
Table of Contents
Page
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
Exhibit Index
Signatures
APPENDIX A
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Selected Consolidated Financial Data
1
6
15
15
15
15
15
16
16
52
54
54
54
55
55
55
55
55
55
57
57
58
61
F-1
F-3
F-8
A-1
Forward-Looking Statements
Statements in this Annual Report about our anticipated financial results and growth, as well as about
the development of our products and markets, are forward-looking statements that are based on our
current plans and assumptions. Important information about factors that may cause our actual results to
differ materially from these statements is discussed in Item 1A. “Risk Factors” and generally throughout this
Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
ITEM 1.
Business
PART I
PTC is a global software and services company that delivers solutions to enable our industrial
customers' digital transformations, helping them to better design, manufacture, operate, and service
their products.
Our Internet of Things (IoT) solutions are focused on Smart Connected Operations (SCO), Smart
Connected Products (SCP), and Smart Connect Systems, that enable companies to connect factories
and plants, smart products, and enterprise systems, bridging the physical and digital worlds, to transform
their businesses. Our Solutions portfolio of innovative Computer-Aided Design (CAD) and Product
Lifecycle Management (PLM) solutions enable manufacturers to create, innovate, operate, and service
products.
PTC
IoT
Solutions
Internet of Things
(IoT)
Augmented Reality
(AR)
Computer Aided
Design (CAD)
Product Lifecycle
Management (PLM)
Industrial Innovation
Platform enabling
connectivity, rapid
application
development, and
purpose-built
solutions
Industrial AR
solutions to increase
efficiency and
technical
proficiency of skilled
workers in
manufacturing and
service settings
Effective and
collaborative
product design
across the globe
Efficient and
consistent
management of
product information
from concept to
retirement across
the enterprise
processes and
distributed teams
Our Principal Products and Services
We generate revenue through the sale of software licenses, subscriptions (which include license
access, support and cloud services for a period of time), support (which includes technical support and
software updates when and if available), and services (which include consulting and implementation
and training). We report revenue by line of business (subscription, support, perpetual license and
professional services), by geographic region, and by segment (Software Products and Professional
Services).
IoT
Our IoT products and solutions are focused on Smart Connected Operations such as plants and
factories, Smart Connected Products, and Smart Connected Systems. With these products and solutions,
industrial companies can drive their digital transformations across the enterprise, transforming how they
run their plants and factories, how they service their products, and how they better leverage information
across their enterprise to increase productivity, improve factory and plant efficiency, reduce operational
risk, and achieve better system interoperability. Our solutions enable our customers to bridge their
physical and digital worlds.
1
Our principal IoT products are described below.
Our ThingWorx® industrial innovation platform delivers tools, technologies,
and solutions that empower companies to rapidly develop and deploy
powerful industrial IoT applications, enabling customers to transform their
operations, products and services and unlock new business models.
ThingWorx enables customers to reduce the time, cost, and risk required
to build and deploy IoT applications; connect devices, systems, and
applications; manage connected products; and analyze industrial IoT
data. Our ThingWorx solutions include cloud-based tools that allow
customers to easily and more securely connect products and devices to
the cloud, and intelligently process and store product and sensor data.
Additionally, ThingWorx offers sophisticated artificial intelligence and
machine learning technology that enables customers to simplify and
automate complex analytical processes that enhance industrial IoT
solutions through real-time insights, predictions and recommendations
from information collected from smart, connected products.
Our KEPServerEX® solution provides communications connectivity to
industrial automation environments, enabling users to connect, manage,
monitor, and control disparate devices and software applications,
providing users with a single source of real-time industrial sensor and
machine data to improve operations, accelerate troubleshooting,
perform preventative maintenance, and improve productivity.
Our Vuforia Studio™ solution is a powerful, easy-to-use, cloud dependent
tool that enables industrial enterprises to rapidly author and publish
augmented reality experiences. These augmented reality experiences
overlay important digital information from IoT onto the view of the
physical things on which the user is working, including for example 3D
step-by-step operating or repair instructions or a dashboard of analytics
data.
Solutions
Our principal Solutions products are described below.
CAD
Our CAD products enable users 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 CAD products are described below.
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Our Creo® interoperable suite of product design software provides a
scalable set of packages for design engineers to meet a variety of
specialized needs. Creo provides capabilities for design flexibility,
advanced assembly design, piping and cabling design, advanced
surfacing, comprehensive virtual prototyping and other essential design
functions. Our Creo solutions include augmented and virtual reality
through a native cloud dependent integration with our Vuforia® solution.
With every seat of Creo, our customers can create and publish AR
experiences and share their design instantly to collaborate with anyone
in the world on any device.
In 2019, we will launch a version of Creo that will include the Discovery
Live real-time simulation technology from ANSYS. This solution will offer
customers a unified modeling and simulation environment and provide
design engineers with an interactive design experience that will enable
them to create higher quality products, while reducing product and
development costs.
PLM
Our PLM products are designed to address common challenges that companies face over the life
of their products, from concept to retirement. Our PLM products enable efficient and consistent product
data management from inception through design, as well as communication and collaboration across
the entire enterprise, including product development, manufacturing and the supply chain.
Our principal PLM products are described below.
Our Windchill® suite of PLM software provides product lifecycle
management capabilities - from design to service. Windchill offers a
single repository for all product information. As such, it is designed to
create a “single source of truth” for all product-related content such as
CAD models, documents, technical illustrations, embedded software,
calculations and requirement specifications for all phases of the product
lifecycle to help companies streamline enterprise-wide communication
and make informed decisions.
Additionally, our Windchill product family includes solutions that allow
manufacturers, distributors and retailers to collaborate across product
development and the supply chain, including sourcing and
procurement, to identify an optimal set of parts, materials and suppliers.
This functionality provides automated cost modeling and visibility into
supply chain risk information to balance cost and quality, and enables
customers to design products that meet compliance requirements and
performance targets.
With Windchill 11.1, we introduced augmented reality (AR) capabilities to
Windchill customers. This cloud dependent functionality enables
customers to build a digital product definition and publish the
representation of the resulting product in AR. Using AR in the product
development process enables companies to connect the digital model
to the physical product to determine real-time behavior, conduct
product design reviews in real-world environments, and share the
product definition with disparate stakeholders.
3
Our ThingWorx Navigate™ solution, a ThingWorx-based PLM offering
launched in 2016, is a collection of focused, role-based applications that
provides complete, contextual, up-to-date and accurate product
information from Windchill and other systems of record. Leveraging
ThingWorx technology, ThingWorx Navigate applications can easily be
tailored and deployed to roles across an enterprise, and extended to
include data from other systems of record and even data from smart,
connected products.
Our Integrity™ solution provides a set of Application Lifecycle
Management and Model Based Systems Engineering capabilities that
enable users to manage system models, software configurations, test
plans and defects. With Integrity, engineering teams can improve
productivity and quality, streamline compliance, and gain greater
product visibility, ultimately enabling them to bring more innovative
products to market.
Our Servigistics® suite enables more effective service parts
management, enabling customers to continuously improve their
products and services and increase customer satisfaction.
Other Solutions
Customer Success Solutions and Services
Our Customer Success solutions and services help customers unleash the full value of our software
offerings. These include advisory services designed to provide strategic insights for operational,
organizational and technological IoT transformation; implementation services; adoption services that
include digital learning solutions and change enablement services; success management services that
leverage data and systems to monitor and improve the customer experience; cloud services; and
customer support resources and tools. Our principal Customer Success offerings are described below.
Global Support
We offer global support plans for our software products. Participating customers receive
updates that we make generally available to our support customers and also have direct access
to our global technical support team of certified engineers for issue resolution. We also provide
self-service support tools that allow our customers access to extensive technical support
information. When products are purchased as a subscription, support is included as part of the
subscription.
Professional Services
We offer consulting, implementation, training and cloud services through our Global
Professional Services Organization, with approximately 900 professionals worldwide, as well as
through third-party resellers and other strategic partners. Our services help customers improve
product development performance through technology enabled process improvement and
multiple deployment paths. Our cloud services customers receive hosting and 24/7 application
management.
Strategic Partners
Building an ecosystem of strategic partners will become increasingly important as we expand the
capabilities of our core solutions, and IoT offerings and as we expand our addressable markets by
leveraging our partner sales distribution channels. With this in mind, in 2018, we entered into the three
strategic partner relationships below to jointly develop, market and sell integrated products and services.
We partnered with Rockwell Automation to align our respective smart factory technologies to
address the market for smart, connected operations, with particular focus on the plant and factory
setting. As part of this strategic alliance, we will align our ThingWorx® IoT, Kepware® industrial
connectivity, and Vuforia® augmented reality (AR) platforms with Rockwell Automation’s
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FactoryTalk® MES, FactoryTalk Analytics, and Industrial Automation platforms, and we both will offer these
solutions in the market. During the term of the contract, Rockwell Automation has exclusive rights to
resell certain of our solutions to certain customers and geographic regions. In connection with this
strategic alliance, Rockwell Automation made a $1 billion equity investment in PTC.
We partnered with Microsoft to make the ThingWorx® Industrial Innovation Platform available on the
Microsoft Azure cloud platform as our preferred cloud platform. By partnering with Microsoft, we are
able to leverage the two companies’ complementary technologies and together pursue opportunities in
industrial sectors. This integration enables us to deliver a combined and connected solution for industrial
IoT and digital product lifecycle management that enable companies to bring new products to market
faster, enhance customer service, and introduce new revenue streams, while reducing operating costs.
We partnered with ANSYS to enable us to embed Ansys' Discovery Live real-time simulation within
Creo, enabling us to offer a fully-integrated CAD and real-time simulation solution.
Our Markets and How We Address Them
We compete in the Industrial IoT (IIoT) and augmented reality markets and the CAD and PLM
markets. The markets we serve present different growth opportunities for us. We see greater opportunity
for market growth for our IIoT and Augmented Reality solutions for 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% to 30% of our sales of products and services are through third-party
resellers and other strategic partners. 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 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, and marketing directly to end users and developers.
Additional financial information about our segments and international and domestic operations
may be found in Note Q. Segment 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 that address one or more specific
functional areas covered by our solutions. In our IIoT business, we compete with large established
companies like Amazon, IBM Corporation, Cisco, Oracle, SAP, and General Electric. There are also a
number of small companies that compete in the market for IoT products. We believe our ThingWorx IoT
platform is complementary to the offerings of many of our competitors and we have partnered with
many of the named competitors. For enterprise CAD and PLM solutions, we compete with companies
including Dassault Systèmes SA and Siemens AG; for discrete desktop CAD products, we compete with
Autodesk, Siemens and Dassault Systèmes. For PLM solutions, we also compete with Oracle Corporation
and SAP AG 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-based 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.
5
Our proprietary rights are subject to risks and uncertainties described under Item 1A. “Risk Factors”
below. You should read that discussion, which is incorporated into this section by reference.
Deferred Revenue and Backlog (Unbilled Deferred Revenue)
Information about Deferred Revenue and Backlog (Unbilled Deferred Revenue) is discussed in
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Executive Overview” below. You should read that discussion, which is incorporated into this section by
reference.
Employees
As of September 30, 2018, we had 6,110 employees, including 2,084 in product development; 1,676
in customer support, training, consulting, cloud services and product distribution; 1,642 in sales and
marketing; and 708 in general and administration. Of these employees, 2,151 were located in the United
States and 3,959 were located outside the United States.
Website Access to Reports and Code of Business Conduct and Ethics
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.
Our Code of Ethics for Senior Executive Officers is embedded in our Code of Business Conduct and
Ethics, which is also available on our website. Additional information about this code and amendments
and waivers thereto can be found below in Part III, Item 10 of this Annual Report.
Information about our executive officers is incorporated by reference from our 2019 Proxy
Statement.
Executive Officers
PTC was incorporated in Massachusetts in 1985 and is headquartered in Needham, Massachusetts.
Corporate Information
ITEM 1A.
Risk Factors
The following are important factors we have identified that could affect our future results. 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-
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. Operational Considerations
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 a number of factors, including:
6
• a high percentage of our orders historically have been generated in the third month of each
fiscal quarter and any failure to receive, complete or process orders at the end of any quarter
could cause us to fall short of our revenue and bookings targets;
• our adoption of Accounting Standards Update 2014-09, Revenue from Contracts with
Customers: Topic 606 in 2019 will create significant quarterly revenue volatility;
• a significant percentage of our orders comes from transactions with large customers, which tend
to have long lead times that are less predictable;
• our mix of license, subscription and service revenues can vary from quarter to quarter, creating
variability in our financial results;
• one or more industries that we serve may have weak or negative growth;
• our operating expenses are largely fixed in the short term and are based on expected revenues,
so any failure to achieve our revenue targets could cause us to miss our earnings targets as well;
• because a significant portion of our revenue and expenses are generated from outside the
U.S., shifts in foreign currency exchange rates could adversely affect our reported results;
and
• we may incur significant expenses in a quarter in connection with corporate development
initiatives, restructuring efforts or the investigation, defense or settlement of legal actions
that would increase our operating expenses and reduce our earnings for the quarter in
which those expenses are incurred.
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 particular quarter
until that quarter has closed. Any failure to meet our quarterly revenue or earnings targets could
adversely impact the market price of our securities.
We now offer our solutions as subscriptions, which has adversely affected, and may continue to adversely
affect, our revenue and earnings in the transition period and make predicting our revenue and earnings
more difficult.
We began offering most of our solutions under a subscription option in 2015, in addition to a
perpetual license option. Under a subscription, customers pay a periodic fee for the right to use our
software and receive support, or to use our cloud services and have us manage the application for a
specified period. Through 2018, under a subscription, revenue is recognized ratably over the term of the
subscription while under a perpetual license, revenue is generally recognized upon purchase. A
significant number of our customers have elected to purchase our solutions as subscriptions rather than
under perpetual licenses. As a result, our license revenues have declined. Our support revenue (which
comprises a significant portion of our revenue) has also decreased due to support services being
included in the subscription offering and to customers converting their support contracts into
subscriptions. We discontinued sales of perpetual licenses for most of our products in the Americas and
Western Europe as of January 1, 2018 and intend to discontinue sales of such perpetual licenses in all
remaining geographic regions as of January 2019, which will likely accelerate these effects on our
revenue. As described in Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Revenue Sources and Recognition, and in Note B. Summary of Significant Accounting Policies
in the Notes to Consolidated Financial Statements, we adopted ASC 606 effective October 1, 2018, which
will change how we account for revenue transactions and will affect the timing of our revenue period to
period.
We may not be able to predict subscription renewal rates and their impact on our future revenue and
operating results.
Although our subscription solutions are designed to increase the number of customers that purchase
our solutions as subscriptions and create a recurring revenue stream that increases and is more
predictable over time, our customers are not required to renew their subscriptions for our solutions and
they may elect not to renew when or as we expect. Customer renewal rates may decline or fluctuate
due to a number of factors, including offering pricing, competitive offerings, customer satisfaction, and
reductions in customer spending levels or customer activity due to economic downturns, the adverse
impact of import tariffs, or other market uncertainty. If our customers do not renew their subscriptions
when or as we expect, or if they renew on less favorable terms, our revenues and earnings may decline.
7
Our long range financial targets are predicated on bookings and revenue growth and operating margin
improvements that we may fail to achieve, which could reduce our expected earnings and cause us to
fail to meet the expectations of analysts or investors and cause the price of our securities to decline.
We are projecting long-term bookings, revenue and earnings growth. Our projections are based on
the expected growth potential in the IoT and AR markets, as well as more modest growth in our core CAD
and PLM markets. We may not achieve the expected bookings and revenue growth if the markets we
serve do not grow at expected rates, if customers do not purchase, renew, or expand subscriptions as we
expect, if we are not able to deliver solutions desired by customers and potential customers, and/or if
acquired businesses do not generate the revenue growth that we expect.
Our long-term operating margin improvement targets are predicated on operating leverage as
long-range revenue increases and on improved operating efficiencies, particularly within our sales
organization, and on service margin improvements. Services margins are significantly lower than license
and support margins. Future projected improvements in our operating margin as a percent of revenue
are based in part on our ability to improve services margins by reducing the amount of direct services
that we perform through expansion of our service partner program and improving the profitability of
services that we perform. If our services revenue increases as a percentage of total revenue and/or if we
are unable to improve our services margins, our overall operating margin may not increase to the levels
we expect or may decrease. Additionally, if we do not achieve lower sales and marketing expenses as a
percentage of revenue through productivity initiatives, we may not achieve our operating margin
targets. If operating margins do not improve, our earnings could be adversely affected and the price of
our securities could decline.
Our significant investment in our IoT business may not generate the revenues we expect, which could
adversely affect our business and financial results.
We have made significant investments in recent years in our IoT business, including
acquisitions totaling approximately $550 million.
The Internet of Things is a relatively new market and there are a significant number of competitors
in the market. If the market does not expand as rapidly as we or others expect or if customers adopt
competitive solutions rather than our solutions, our IoT business may not generate the revenues we
expect. Further, our customers and potential customers often begin the process of implementing IoT
with a proof-of-concept evaluation, in some cases with multiple different technology vendors. Our
success in this emerging market will depend on our ability to engage with customers to ensure that their
investment moves beyond planning to broader deployment and yields value at their desired speed
and expected costs.
Further, one market for our IoT business is as a platform provider to a broad ecosystem of
application and solutions providers. This market relies on an extensive and differentiated partner
ecosystem to enable us to access markets and customers beyond our traditional markets, customers
and buyers. We may be unable to expand our partner ecosystem as we expect and developers may
not adopt our IoT solutions as we expect, which would adversely affect our ability to realize revenue
from our investments in this business.
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 economic factors.
A large amount of our sales are to customers in the discrete manufacturing sector. If this economic
sector does not grow, or if it contracts, our customers in this sector may, as they have in the past, reduce
or defer purchases of our products and services, which adversely affects our business. Further, U.S.
manufacturers have been adversely affected by tariffs recently imposed on certain imported goods,
which could cause them to reduce their purchases of our software, which would adversely affect our
revenue and earnings.
Changes in accounting principles and guidance, or their interpretation or implementation, may materially
adversely affect our reported results of operations or financial position.
We prepare our consolidated financial statements in accordance with accounting principles
generally accepted in the U.S. These principles are subject to interpretation by the U.S. Securities and
Exchange Commission and various bodies formed to create and interpret appropriate accounting
8
principles and guidance. A change in these principles or guidance, or in their interpretations, may have
a significant effect on our reported results, as well as our processes and related controls.
For example, in May 2014, the Financial Accounting Standards Board issued Accounting Standards
Update 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606). This new standard is both
technical and complex. ASC 606 became effective for us on October 1, 2018. We are adopting ASC 606
using the modified retrospective transition method. The adoption of this new standard will have a material
impact on our consolidated financial statements, including the way we account for arrangements
involving our term-based subscription licenses, deferred revenue and sales commissions. In connection
with the adoption of ASC 606, we are implementing new processes, systems and internal controls. Such
changes and any difficulties implementing such changes could materially adversely affect our reported
financial results, our ability to comply with regulatory reporting requirements, and the effectiveness of our
internal controls over financial reporting.
For a discussion of the potential impact that the implementation of ASC 606 is expected to have on
our consolidated financial statements and related disclosures, see Note B. Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
We face significant competition, which may reduce our profits and limit or reduce our market share.
The market for product development solutions and IoT solutions is rapidly changing and
characterized by vigorous competition, both by entry of competitors with innovative technologies and by
consolidation of companies with complementary products and technologies. This competition could
result in price reductions for our products and services, reduced margins, loss of customers and loss of
market share. Our primary competition comes from:
•
•
larger companies that offer competitive solutions;
larger, more well-known enterprise software providers with less product overlap, but greater
financial, technical, sales and marketing, and other resources; and
• other vendors of various competitive point solutions or IoT platforms.
In addition, barriers to entry into certain segments of the software industry have declined and the
ability of customers to adopt software solutions has increased with the ability to offer software in the cloud
and the increasing prevalence of subscription license models and customer acceptance of both those
models. Because of these and other factors, competitive conditions in the industry are likely to intensify in
the future.
Increased competition could result in price reductions, reduced revenue and profit margin and loss
of market share, any of which would likely harm 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, 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 computer systems. The potential consequences of a security
breach or system disruption (particularly through cyber-attack or cyber-intrusion, including by computer
hackers, foreign governments and cyber terrorists) have increased in scope as the number, intensity and
sophistication of attempted attacks and intrusions from around the world have increased. Despite efforts
to create security barriers to such threats, it is impossible for us to eliminate this risk, 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 event or issue and that such an event or
issue may occur. In addition, we offer cloud services to our customers and some of our 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 by such hackers. A significant breach of the security and/
or integrity of our products or systems, or those of our third-party service providers, could prevent our
products from functioning properly, could enable access to sensitive, proprietary or confidential
information, including that of our customers, or could disrupt our business operations or those of our
customers. This could require us to incur significant costs of investigation, remediation, harm our
reputation, cause customers to stop buying our products, and cause us to face lawsuits and potential
liability, which could have a material adverse effect on our financial condition and results of operations.
9
We may be unable to hire or retain personnel with the technical skills necessary to further develop our
software products, which could adversely affect our ability to compete.
Our success depends upon our ability to attract and retain highly skilled technical personnel to
develop our products. Competition for such personnel in our industry is intense, especially for personnel
with augmented and virtual reality and analytics expertise as there are comparatively fewer persons with
those skills. If we are unable to attract and retain technical personnel with the requisite skills, our product
development efforts could be delayed, which could adversely affect our ability to compete and thereby
adversely affect our revenues and profitability.
Our sales and operations are globally dispersed, which exposes us to additional compliance risks, which
could adversely affect our business and financial results.
We sell and deliver software and services, and maintain support operations, in a large number of
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
ensure compliance with laws of those countries and those of the U.S. governing our activities in non-U.S.
countries.
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). The FCPA and UK Bribery Act prohibit us and
business partners or agents acting on our behalf from offering or providing anything of value to persons
considered to be foreign officials under those laws for the purposes of obtaining or retaining business. The
UK Bribery Act also prohibits commercial bribery and accepting bribes. Our compliance risks with these
laws are heightened due to the global nature of our business, our go-to-market approach for our IoT
business that relies heavily on expanding our 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 employees and
representatives of which may be considered foreign officials for purposes of the FCPA and the UK Bribery
Act, and the fact global enforcement of anti-corruption laws, data privacy laws, and other 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 of our policies or U.S. or
other applicable laws or that we may inadvertently violate such laws. Investigations of alleged violations
of those laws 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 and reputation loss, which could adversely affect our
financial results and/or stock price.
Our international businesses present economic and operating risks, which could adversely affect our
business and financial results.
We expect that our international operations will continue to expand and to account for a significant
portion of our total revenue. Because we transact business in various foreign currencies, the volatility of
foreign exchange rates has had and may in the future have a material adverse effect on our revenue,
expenses and operating results.
Other risks inherent in our international operations include, but are not limited to, the following:
•
•
•
•
•
difficulties in staffing and managing foreign sales and development operations;
possible future limitations upon foreign-owned businesses;
increased financial accounting and reporting burdens and complexities;
inadequate local infrastructure; and
greater difficulty in protecting our intellectual property.
10
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 suf fer
delays in product development, reduced sales or other operational difficulties and our business, results of
operations and financial condition could be materially adversely affected.
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, as well as improper disclosure of confidential or proprietary information. 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.
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, our operating results will be adversely affected.
Moreover, business combinations involve a number of risks and uncertainties that can adversely
affect our operations and operating results, including:
• difficulties managing an acquired company’s technologies or lines of business or entering
new markets where we have limited or no prior experience or where competitors may
have stronger market positions;
• unanticipated operating difficulties in connection with the acquired entities, including
potential declines in revenue of the acquired entity;
•
failure to achieve the expected return on our investments, which could adversely affect
our business or operating results and impair the assets that we recorded as a part of an
acquisition, including intangible assets and goodwill;
• diversion of management and employee attention;
•
loss of key personnel;
11
• 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 if we
incur additional debt to pay for an acquisition; and
if we were to issue a significant amount of equity securities in connection with future
acquisitions, existing stockholders would be diluted and earnings per share would likely
decrease.
Our financial condition could be adversely affected if significant errors or defects are found in our
software.
Sophisticated software can sometimes contain errors, defects, security vulnerabilities or other
performance problems. If such items are discovered in our products, we may need to expend significant
financial, technical and management resources, or divert some of our development resources, in order to
resolve or work around those items, and we may not be able to correct them in a timely manner or
provide an adequate response to our customers.
Errors, defects, security vulnerabilities or other performance problems in our products could also
cause us to lose revenue, lose customers and lose market share, and could subject us to liability. Such
items could also damage our business reputation and cause us to lose new business opportunities.
We may have exposure to additional tax liabilities and our effective tax rate may increase or fluctuate,
which could increase our income tax expense and reduce our net income.
As a 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 can be adversely affected by several factors, many of which are outside of
our control, including:
• changes in tax laws, regulations, and interpretations in multiple jurisdictions in which we
operate;
• assessments, and any related tax interest or penalties, by taxing authorities;
• changes in the relative proportions of revenues and income before taxes in the various
jurisdictions in which we operate that have differing statutory tax rates;
• changes to the financial accounting rules for income taxes;
• unanticipated changes in tax rates; and
• changes to a valuation allowance on net deferred tax assets, if any.
On September 7, 2017, we entered into a lease for a new worldwide headquarters in the Boston Seaport
District, beginning in January 2019. Because our current headquarters lease will not expire until
November 2022, we are seeking to exit our current headquarters lease or sublease that space, but have
not yet done so. If we are unable to do so, or unable to do so for an amount at least equal to our rent
obligations under the current headquarters lease, we will bear overlapping rent obligations for those
premises and will be required to record a charge related to any rent shortfall, which could adversely
affect our financial condition.
Under our current headquarters lease, we pay approximately $7.4 million in annual base rent plus
operating expenses (together "rent obligations," an aggregate annual total of approximately
$12.0 million). We will begin paying rent under our new headquarters lease on July 1, 2020. Our rent
under the new lease when we begin paying rent will be an annual base rent amount of $11.3 million plus
our pro rata portions of building operating expenses and real estate taxes (approximately 63% of such
amounts, estimated to be approximately $7.1 million in 2020). The base rent will increase by $0.3 million
12
each year over the term of the lease. Accordingly, we will be required to pay rent for both locations from
July 1, 2020 until November 30, 2022 unless we can successfully negotiate an exit to our current lease or
sublease our current premises. We may be unable to negotiate a financially desirable termination of our
current lease or to sublease our current premises for an amount at least equal to our rent obligations
under the current lease, which would require us to bear the overlapping rent obligations and to record a
charge related to such shortfall, and could adversely affect our cash flow and financial condition. A
charge for such shortfall will be recorded in the earlier of the period that we cease using the existing
space (which will likely occur in the second quarter of our fiscal 2019) or the period we exit the lease
contract.
II. Other Considerations
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, 2018, our total debt outstanding
was approximately $728 million, approximately $228 million of which was under our $700 million secured
credit facility (which matures in September 2023) and $500 million of which was associated with the 6%
Senior Notes issued May 2016, which mature in May 2024 and are unsecured (see Liquidity and Capital
Resources-Outstanding Notes in Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this Annual Report). All amounts outstanding under the credit facility and
the notes will be due and payable in full on their respective maturity dates. As of November 15, 2018, we
had unused commitments under our credit facility of approximately $472 million. PTC Inc. (the parent
company) 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 high level of debt could intensify. Specifically, our high level of debt
could:
• make it more difficult for us to satisfy our debt obligations and other ongoing business obligations,
which may result in defaults;
•
•
•
result in an event of default if we fail to comply with the financial and other covenants contained
in the agreements governing our debt instruments, which could result in all of our debt becoming
immediately due and payable or require us to negotiate an amendment to financial or other
covenants that could cause us to incur additional fees and expenses;
limit our ability to obtain additional financing to fund future working capital, capital expenditures,
acquisitions or other general corporate requirements;
reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions
and other general corporate purposes and limit our ability to obtain additional financing for these
purposes;
•
increase our vulnerability to the impact of adverse economic and industry conditions;
• expose us to the risk of increased interest rates as certain of our borrowings, including borrowings
under the credit facility, are at variable rates of interest;
•
limit our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our
business, the industries in which we operate, and the overall economy;
• place us at a competitive disadvantage compared to other, less leveraged competitors; and
•
increase our cost of borrowing.
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.
We may not be able to generate sufficient 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.
13
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 of
which are beyond our control. We may be unable to maintain a level of cash flows from operating
activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
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% 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 these 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 sufficient working capital or liquidity to satisfy any repayment
obligations in the event of an acceleration of those obligations. In addition, if we are not in compliance
with the financial and operating covenants under the credit facility at the time 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.
We may be unable to meet our goal of returning 40% of free cash flow to shareholders through share
repurchases, which could decrease your expected return on investment in PTC stock.
Our capital allocation strategy includes a long-term goal of returning approximately 40% of free cash
flow (cash flow from operations less capital expenditures) to shareholders through share repurchases.
Meeting this goal requires us to generate consistent free cash flow and have available capital in the
years ahead in an amount sufficient to enable us to continue investing in organic and inorganic growth
as well as to return a significant portion of the cash generated to stockholders in the form of share
repurchases. We may not meet this goal if we do not generate the free cash flow we expect, if we use
our available cash to satisfy other priorities, if we have insufficient funds available to make such
repurchases, or if we are unable to borrow funds under our credit facility to make such repurchases.
Additionally, our cash flow fluctuates over the course of the year and over multiple years, so,
although our goal is to return 40% of free cash flow to shareholders, that is an average over a longer term
and the number of shares repurchased and amount of free cash flow returned in any given period will
vary and may be more or less than 40% in any such period. Finally, the number of shares repurchased for
a given amount of cash will vary based on PTC’s stock price, so the number of shares repurchased will not
be a consistent or predictable number or percentage of outstanding stock.
14
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. The trading prices and valuations of these 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.
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 our proxy
statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G
filed with the SEC with respect to our common stock.
Our 2024 6% Notes are not listed on any national securities exchange or included in any automated
quotation system, which could make it harder to resell the notes at a favorable time and price.
Our 2024 6% Notes are not listed on any national securities exchange or included in any automated
quotation system. As a result, an active market for the notes may not exist or be maintained, which
would adversely affect the market price and liquidity of the notes. In that case, holders may not be able
to sell their notes at a particular time or at a favorable price.
The market for non-investment grade debt historically has been subject to severe disruptions that
have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for the
notes may experience similar disruptions and any such disruptions may adversely affect the liquidity in
that market or the prices at which the notes may be sold.
ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
Properties
We currently have 76 primary 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 1,698,000 square feet of leased facilities used in operations, approximately
837,000 square feet are located in the U.S., including 321,000 square feet at our headquarters facility
located in Needham, Massachusetts, and approximately 297,000 square feet are located in India, where
a significant amount of our research and development is conducted. In addition, we entered into a new
lease in September 2017 for 250,000 square feet in the Boston Seaport District. We expect to relocate our
headquarters to this location in the second quarter of 2019. We believe that our facilities are adequate
for our present and foreseeable needs.
ITEM 3.
Legal Proceedings
None.
ITEM 4.
Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our common stock is traded on the Nasdaq Global Select Market under the symbol "PTC."
On September 30, 2018, the close of our fiscal year, and on November 13, 2018, our common stock
was held by 1,138 and 1,137 shareholders of record, respectively.
15
The table below shows the shares of our common stock we repurchased in the fourth quarter of
2018.
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
July 1, 2018 - July 28,
2018
July 29, 2018 - August
25, 2018
August 26, 2018 -
September 30, 2018
Total
8,244,873
$97.03
8,244,873
$400,000,000 (2)(3)
—
—
$—
$—
—
—
$400,000,000 (2)(3)
$400,000,000 (2)(3)
8,244,873
$97.03
8,244,873
$400,000,000 (2)(3)
(1) Periods are our fiscal months within the fiscal quarter.
(2) Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock for
the period October 1, 2017 through September 30, 2020, which program we initially announced on
September 19, 2017 and expanded in July 2018.
(3) In July 2018, we made a payment of $1,000 million to repurchase shares pursuant to an accelerated
share repurchase agreement (ASR) with a major financial institution (Bank). Of that amount, 8,244,873
shares valued at $800 million were repurchased in July 2018, with the remaining $200 million held back by
the Bank pending final settlement of the ASR.
ITEM 6.
Selected Financial Data
Our five-year summary of selected financial data and quarterly financial data for the past two years
is located on pages A-1 and A-2 at the end of this Form 10-K and incorporated herein by reference.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements in this Annual Report about anticipated financial results and growth, as well as about the
development of our products and markets, 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 operating measures (including “license and
subscription bookings” and other subscription-related measures) and non-GAAP financial measures. Our
operating measures and non-GAAP financial measures, including the reasons we use those measures, are
described below in Results of Operations - Operating Measures and Results of Operations - Non-GAAP
Financial Measures, respectively. You should read those sections to understand those operating and
non-GAAP financial measures.
Revenue Sources and Recognition
We sell subscription and perpetual licenses to our software, support for perpetual licenses, cloud
services and professional services.
Subscription revenue is comprised of time-based licenses whereby customers use our software and
receive related support for a specified term, and for which through 2018 revenue is recognized ratably
over the term of the contract. Perpetual licenses are a perpetual right to use the software, for which
revenue is generally recognized up front upon shipment to the customer. Support revenue is comprised
16
of contracts to maintain new and/or previously purchased perpetual licenses, for which revenue is
recognized ratably over the term of the contract. Our subscription revenue includes an immaterial
amount of Software as a Service (SaaS) and cloud services for which revenue is generally recognized
ratably over the term of the contract. Consulting and training professional services engagements
typically result from sales of new licenses, and for which revenue is recognized over the term of the
engagement. Our revenue recognition practices are described below in “Critical Accounting Policies
and Estimates” and in Note B. Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements in this Annual Report.
Beginning with 2019, we will recognize revenue under the Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers: Topic 606 (ASC 606) revenue recognition standard, which differs
significantly from the previous accounting rules. Under ASC 606, all performance obligations under the
product that can be separately identified are, and revenue is recognized for each performance
obligation. Accordingly, our on-premise subscription contracts will be unbundled into multiple
performance obligations (i.e., license, cloud and support). The license portion of such subscription
contracts (approximately 50% to 55%) will be recognized upfront and the cloud and support portions
(approximately 45% to 50%) of such subscription contracts will be recognized ratably over the term. The
effects of our adoption of ASC 606, including expected adjustments to retained earnings related to billed
and unbilled deferred revenue, are described below in “Recent Accounting Pronouncements” and in
Note B. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in
this Annual Report.
Executive Overview
Our revenue results for the year reflect the adoption of subscription licensing by our customers and
the compounding effect of the subscription business model as subscription revenue recurs and new
subscription revenue is added in the year. Subscription revenue, software revenue and total revenue
were all up over fiscal 2017, despite an 800 basis point increase in subscription mix year over year.
Recurring software revenue represented approximately 90% of our software revenue in 2018, up from 86%
a year ago. Our revenue results also drove our operating margin improvements for the year. Despite
increases in sales and marketing and research and development expenses, operating margins and EPS
were up over the prior year.
Our CAD and PLM businesses performed well in the year, our IoT business continued to grow as we
added new customers and existing customers expanded their implementations, and interest in our
augmented reality solutions increased. We made important strides in extending our market reach and
further differentiating our technology with strategic relationships we entered into in 2018, including those
with Rockwell Automation, Microsoft and ANSYS.
17
Revenue
Subscription
Support
Total recurring revenue
Perpetual license
Total subscription, support and license
revenue
Professional services
Total revenue
Year Ended September 30,
2018
2017
Change
Constant
Currency
Change
$
(in millions)
$
482.0
496.8
978.9
109.6
1,088.5
153.3
279.2
574.7
853.9
133.4
987.3
176.7
$
1,241.8
$
1,164.0
73 %
(14)%
15 %
(18)%
10 %
(13)%
7 %
69 %
(16)%
12 %
(20)%
8 %
(16)%
4 %
The increase in total revenue, subscription revenue and EPS reflects our transformation into a
subscription software company. As our mix of subscription sales relative to perpetual license sales has
increased, perpetual license revenue and support revenue have declined.
Our 2018 revenue results include the impact of a settlement of a customer dispute concerning a
professional services receivable. The settlement, reached in September 2018, included partial payment
of the receivable and new software purchases. The net revenue write-down recorded in the fourth
quarter of 2018 was $9.3 million, comprised of a $14.5 million services revenue write-down, partially offset
by subscription revenue of $5.2 million. Additionally, professional services revenue has declined in
accordance with our strategy to migrate more services engagements to our partners and to deliver
products that require less consulting and training services.
The increase in subscription revenue relative to perpetual license revenue has resulted in an increase
in our recurring software revenue, with approximately 90% of our software revenue and 79% of our total
revenue in 2018 from recurring software revenue streams, compared to 86% and 73% in 2017 and 82% and
68% in 2016.
18
Earnings Measures
Operating Margin
Earnings Per Share
Non-GAAP Operating Margin(1)
Non-GAAP EPS(1)
Year Ended September 30,
2018
2017
Change
5.9%
0.44
18.4%
1.45
$
$
3.5%
0.05
16.1%
1.17
$
$
68%
780%
14%
24%
(1) Non-GAAP measures are reconciled to GAAP results under Results of Operations - Non-GAAP Measures below.
GAAP and non-GAAP operating income in 2018 reflect maturity of our subscription program. An
increase in gross margin is associated with higher subscription revenue and a lower mix of professional
services revenue, which has lower margins than our software revenue. The increase in gross margins was
partially offset by higher sales and marketing and research and development costs.
Our GAAP and non-GAAP earnings reflect a combination of revenue growth due to the strength of
our subscription model and strong new bookings, as well as continued cost and expense discipline.
We ended 2018 with cash, cash equivalents and marketable securities of $316 million, down from
$330 million at the end of 2017. We generated $248 million of cash from operations in 2018 compared to
$135 million in 2017. In the fourth quarter of 2018, Rockwell Automation made a $1 billion equity
investment in PTC as part of a strategic partnership. Using the cash proceeds from this investment, PTC
entered into a $1,000 million accelerated share repurchase. We also used cash from operations to
repurchase another $100 million of common stock and to repay a net $70 million of borrowings under our
credit facility in 2018. At September 30, 2018, the balance outstanding under our credit facility was $148
million and total debt outstanding was $648 million.
Operating Measures
We provide these measures to help investors understand the progress of our subscription transition.
These measures are not necessarily indicative of revenue for the period or any future period.
License and Subscription Bookings
License and subscription bookings for 2018 were $466 million, up 11% over 2017 (up 9% on a constant
currency basis) and up 16% over 2016. Over the past two years, CAD, core PLM and IoT have delivered
bookings CAGRs at the high end of market growth rates, as CAD and PLM customers have converted
existing license contracts to subscriptions and customers have adopted and expanded IoT
implementations.
Subscription ACV
Subscription ACV increased 24% over 2017 to $177 million due to continued adoption of our
subscription offerings around the globe.
19
Annualized Recurring Revenue (ARR)
ARR was approximately $1,012 million as of the fourth quarter of 2018, an increase of 12% compared
to the fourth quarter of 2017 and the seventh consecutive quarter of double-digit year-over-year growth.
Deferred Revenue and Backlog (Unbilled Deferred Revenue)
Deferred revenue primarily relates to software agreements invoiced to customers for which the
revenue has not yet been recognized. Unbilled deferred revenue (backlog) is the aggregate of booked
orders for license, support and subscription (including multi-year subscription contracts with start dates
after October 1, 2018 that are subject to a limited annual cancellation right, of which approximately $50
million was cancellable at September 30, 2018) for which the associated revenue has not been
recognized and the customer has not yet been invoiced. 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 Revenue and Backlog to enable investors to understand
the significant contractual commitments we have to customers, 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.
Deferred revenue
Unbilled deferred revenue
Total
September 30,
2018
2017
2016
(Dollar amounts in millions)
$
$
499
$
459
$
911
633
1,410
$
1,092
$
414
369
783
Of the unbilled deferred revenue balance at September 30, 2018, we expect to invoice customers
approximately $560 million within the next twelve months. Unbilled deferred revenue grew 44% year over
year due to the high volume of new subscription bookings. Many of our subscription bookings are for
multiple years and are typically billed annually at the start of each annual subscription period. The
average contract duration was approximately 2 years for new subscription contracts in 2018 and 2017.
We expect that the amount of deferred revenue and unbilled deferred revenue will fluctuate from
quarter to quarter due to the specific timing, duration and size of customer subscription and support
agreements, varying billing cycles of such agreements, the specific timing of customer renewals, foreign
currency fluctuations, the timing of when deferred revenue is recognized as revenue and the timing of
our fiscal quarter ends.
20
The effects of our adoption of ASC 606, including expected adjustments to retained earnings related
to billed and unbilled deferred revenue, are described below in “Recent Accounting Pronouncements”
and in Note B. Summary of Significant Accounting Policies in the Notes to Consolidated Financial
Statements.
Future Expectations, Strategies and Risks
Our transition to a subscription model has been a headwind for revenue and earnings in 2018 with an
increase in our subscription mix of 800 basis points as compared to fiscal 2017. We expect a further
increase in our subscription mix of 1100 to 1300 basis points, which will result in a further headwind for
revenue and earnings in fiscal 2019. We expect the effect of the transition to moderate in fiscal 2020. A
higher mix of subscription bookings is expected to benefit us over the long term, but results in lower
revenue and lower earnings in the near term. We expect that IoT and AR adoption rates will continue to
expand and will be the most significant driver to growth.
With the growth opportunity in Industrial Internet of Things and Augmented Reality, and other
strategic initiatives we’ve undertaken, as well as our continued commitment to operating margin
improvement, we are realigning our workforce in the beginning of 2019 to shift investment to support
these strategic, high growth opportunities. This realignment will result in a restructuring charge of
approximately $18 million in 2019, which consists principally of termination benefits, substantially all of
which we expect will be paid in 2019. As this is a realignment of resources rather than a cost-savings
initiative, we don’t expect this realignment will result in significant cost savings, and the effect of the
realignment is reflected in our 2019 guidance.
In 2019, we will be moving into a new worldwide headquarters in the Boston Seaport District and we
will be vacating our current headquarters space. Because our current headquarters lease will not expire
until November 2022, we are seeking to sublease that space, but have not yet done so. If we are unable
to sublease our current headquarters space for an amount at least equal to our rent obligations under
the current headquarters lease, we will bear overlapping rent obligations for those premises and will be
required to record a charge related to such rent shortfall. We currently pay approximately $12 million in
annual base rent and operating expenses for our current headquarters. We expect to record a charge
for any such shortfall in the earlier of the period that we cease using the space (which will likely occur in
the second quarter of our fiscal 2019) or the period we sign sublease contracts. Additionally, we will incur
other costs associated with the move which will be recorded as incurred.
We are adopting the new revenue recognition standard, ASC 606, effective October 1, 2018. ASC
606 will, among other things, materially impact the timing of our revenue recognition. Refer to Note B.
Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form
10-K for additional information about the impact of adopting this guidance.
Our results have been impacted, and we expect will continue to be impacted, by our ability to close
large transactions. The amount of bookings and revenue, particularly license and subscriptions,
attributable to large transactions, and the number of such transactions, may vary significantly from
quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Such
transactions may have long lead times as they often follow a lengthy product selection and evaluation
process and, for existing customers, are influenced by contract expiration cycles. This may cause volatility
in our results.
21
As we move into 2019, our three overriding goals continue to be:
Sustainable
Growth
Expand
Subscription
Licensing
Cost Controls and
Margin Expansion
Our goals are predicated on continuing to drive bookings
growth both in the high-growth IoT market and in our core
CAD and PLM markets.
Our goal is to increase the percentage of licenses sold as
subscriptions to increase our recurring revenue. Effective
January 1, 2018, new software licenses for our core
solutions and ThingWorx solutions were available only by
subscription in the Americas and Western Europe, and,
effective January 1, 2019, new software licenses for those
solutions will be available only by subscription worldwide.
Kepware will continue to be available under perpetual
licensing.
Our goal is to drive continued margin expansion over the
long term. We continue to proactively manage our cost
structure and invest in what we believe are high return
opportunities in our business. We expect to deliver
continued operating margin expansion in 2019 and
beyond, as we realize the compounding benefit of our
maturing subscription business.
22
Results of Operations
The following table shows the financial measures that we consider the most significant indicators of
the performance of our business. In addition to providing operating income, operating margin, and
diluted earnings per share as calculated under generally accepted accounting principles (“GAAP”), it
shows non-GAAP operating income, non-GAAP operating margin, and non-GAAP diluted earnings per
share for the reported periods. These non-GAAP financial measures exclude the effect of a professional
services revenue write-down and subscription revenue associated with the settlement of a previously
disclosed disputed customer receivable, fair value adjustments related to acquired deferred revenue,
acquired deferred costs, stock-based compensation expense, amortization of acquired intangible assets
expense, acquisition-related and pension plan termination costs, restructuring charges, certain identified
gains or charges included in non-operating other income (expense) and the related tax effects of the
preceding items, as well as the tax items identified. These non-GAAP financial measures provide investors
another view of our operating results that is aligned with management budgets and with performance
criteria in our incentive compensation plans. Management uses, and investors should use, non-GAAP
financial measures only in conjunction with our GAAP results.
Year ended September 30,
Percent change
2017 to 2018
Percent change
2016 to 2017
2018
2017
Actual
Constant
Currency
2016
Actual
Constant
Currency
(Dollar amounts in millions, except per share data)
Subscription
Support
Total recurring revenue
Perpetual license
Total subscription, support and license
revenue
Professional services
Total revenue
Total cost of revenue
Gross margin
Operating expenses
$ 482.0
$ 279.2
496.8
978.9
109.6
1,088.5
153.3
574.7
853.9
133.4
987.3
176.7
1,241.8
1,164.0
326.2
915.6
842.4
329.0
835.0
794.1
Total costs and expenses
1,168.6
1,123.1
Operating income (loss)
$
73.2
$
40.9
Non-GAAP operating income (1)
$ 230.0
$ 188.4
Operating margin
Non-GAAP operating margin (1)
Diluted earnings (loss) per share (2)
Non-GAAP diluted earnings per share (2)
5.9%
18.4%
3.5%
16.1%
$
$
0.44
1.45
$
$
0.05
1.17
Cash flow from operations (3)
$ 247.8
$ 135.2
73 %
(14)%
15 %
(18)%
10 %
(13)%
7 %
(1)%
10 %
6 %
4 %
79 %
22 %
69 % $ 118.3
(16)%
651.8
12 %
770.1
(20)%
173.5
8 %
943.6
(16)%
196.9
4 % 1,140.5
325.7
814.9
851.9
2 % 1,177.5
136 %
(12)%
11 %
(23)%
5 %
(10)%
2 %
1 %
2 %
(7)%
(5)%
57 % $ (37.0)
211 %
16 % $ 172.7
9 %
135 %
(12)%
11 %
(23)%
5 %
(11)%
2 %
(4)%
214 %
7 %
(3.2)%
15.1 %
$ (0.48)
$ 1.19
$ 183.3
(1) See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP
measures.
(2) We have a full valuation allowance against our U.S. net deferred tax assets and a valuation
allowance against net deferred tax assets in certain foreign jurisdictions. As we are profitable on a
non-GAAP basis, the 2018 and 2017 non-GAAP tax provisions are calculated assuming there is no
valuation allowance. Income tax adjustments reflect the tax effects of non-GAAP adjustments which
are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed
above. We recorded the impact of the Tax Cuts and Jobs Act in our 2018 GAAP earnings, resulting in
a non-cash benefit of approximately $12 million. We have excluded this benefit from our non-GAAP
results.
23
(3) Cash flow from operations for 2018 includes $3 million of restructuring payments. Cash flow from
operations for 2017 includes $37 million of restructuring payments, a $12 million payment related to a
Korea tax audit and $3 million of legal settlement payments. Cash flow from operations for 2016
includes $55 million of restructuring payments and a $28 million payment of a legal accrual recorded
in 2015 related to the settlement of an investigation in China.
Impact of Foreign Currency Exchange on Results of Operations
Approximately two thirds of our revenue and half of our expenses are transacted in currencies other
than the U.S. dollar. Currency translation affects our reported results, which are in U.S. Dollars. If actual
reported results were converted into U.S. dollars based on the corresponding prior year’s foreign currency
exchange rates, 2018 and 2017 revenue would have been lower by $32 million and higher by $1 million,
respectively, and expenses would have been lower by $20 million and higher by $3 million, respectively.
The net impact on year-over-year results would have been a decrease in operating income of $12 million
in 2018 and a decrease in operating income of $2 million in 2017. The results of operations, revenue by
line of business 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.
Revenue
Revenue is reported below by line of business (subscription, support, perpetual license and
professional services), by product area (Solutions and IoT) and by geographic region (Americas, Europe,
Asia Pacific). Results include combined revenue from direct sales and our channel.
Revenue by Line of Business
Software
As our mix of subscription sales relative to perpetual license sales has increased, perpetual license
revenue and support revenue have declined and are expected to continue to decline as customers
purchase our solutions as subscriptions and convert existing perpetual licenses with support contracts to
subscriptions. As our subscription business matures, recurring software revenue growth is expected to
continue due to the compounding benefit of a subscription business model.
Professional Services
Professional services revenue was down 13% (16% constant currency) in 2018 compared to 2017.
Professional services revenue in 2018 reflects a $14.5 million write-down related to a settlement of a
customer dispute concerning a receivable. These results are in line with our expectation that professional
services revenue will trend flat-to-down over time due to our strategy to expand margins by migrating
24
more services engagements to our partners and delivering products that require less consulting and
training services.
Revenue by Product
Solutions Products
Software revenue
Professional services
Total revenue
IoT Products
Software revenue
Professional services
Total revenue
Solutions
Year ended September 30,
Percent Change
Percent Change
2018
Actual
Constant
Currency
2017
Actual
Constant
Currency
2016
(Dollar amounts in millions)
$
964.6
137.9
$ 1,102.5
$
123.9
15.4
$
139.3
8 %
(17)%
4 %
32 %
60 %
35 %
5 % $
893.7
(20)%
167.1
1 % $ 1,060.7
31 % $
93.7
57 %
9.6
33 % $
103.3
3 %
(12)%
— %
29 %
22 %
28 %
3 % $
871.2
(12)%
189.0
— % $ 1,060.2
29 % $
72.4
21 %
7.9
28 % $
80.3
Software revenue grew 8% in 2018 compared to 2017 as a result of strong CAD, PLM and global
channel license and subscription bookings over the past several years, offset by a significant increase in
the subscription mix in the current period. Subscription sales have increased in part due to our support
conversion programs that we have been offering over the past few years whereby customers may
convert existing perpetual licenses and support to a new subscription. Recurring software revenue grew
12% in 2018 over 2017, and has grown double-digits for seven consecutive quarters. As our transition
matures, recurring software revenue growth is expected to continue due to the compounding benefit of
a subscription business model.
Professional services revenue in 2018 includes a $14.5 million write-down related to a settlement of a
previously disclosed customer dispute concerning a receivable. In addition, professional services revenue
in 2018 declined compared to 2017 due to our strategy to limit the amount of professional services we
provide.
IoT
Software revenue in 2018 increased by 32% compared to 2017 due to increases in license and
subscription bookings over the past several years, offset by an 800 basis points increase in the subscription
mix. Recurring software revenue grew 42% in 2018 over 2017 due to strong IoT bookings growth over the
past several years. Software revenue includes $5.2 million of new subscription revenue related to the
settlement of a customer dispute concerning a professional services receivable, which settlement
included new subscription purchases.
Professional services revenue increased in 2018 compared to 2017 in part due to implementation and
adoption services we provide to our IoT customers as part of our efforts to help their IoT initiatives be
successful.
25
Revenue by Geographic Region
Total revenue grew in all regions for 2018 compared to 2017.
Year ended September 30,
Percent Change
Percent Change
2018
Actual
Constant
Currency
2017
Actual
Constant
Currency
2016
(Dollar amounts in millions)
Americas
Software revenue
$ 468.3
8 %
8 % $ 433.7
Professional services revenue
42.9
(36)%
(36)%
67.2
$ 511.2
2 %
2 % $ 500.9
5 %
(8)%
3 %
4 % $ 414.7
(9)%
72.9
2 % $ 487.6
Total Revenue
Europe
Software revenue
Professional services revenue
Total Revenue
Asia Pacific
Software revenue
Professional services revenue
Total Revenue
$ 402.9
83.0
$ 485.9
$ 217.3
27.4
$ 244.7
13 %
5 %
12 %
10 %
(11)%
7 %
7 % $ 356.5
6 %
7 % $ 335.6
(1)%
78.7
(11)%
(11)%
88.7
5 % $ 435.2
3 %
4 % $ 424.3
8 % $ 197.1
(13)%
30.9
5 % $ 228.0
2 %
(13)%
— %
— % $ 193.3
(13)%
35.4
(2)% $ 228.7
Americas
Americas software revenue has benefited from strong license and subscription bookings growth over
the past two years (10% CAGR). New license and subscriptions bookings were up 20% in 2018 compared
to 2017, despite an 800 basis point increase in the subscription mix.
Europe
Europe constant currency year-over-year revenue growth reflects solid bookings growth over the
past two years (8% CAGR). The increase in revenue in Europe in 2018 compared to 2017 was due to the
strong bookings in 2017, when this region delivered 28% constant currency growth in bookings. Bookings
in Europe declined 10% in 2018 compared to 2017 and were adversely affected in 2018 due to a $7 million
deal which closed early in the fourth quarter of 2017 instead of the first quarter of 2018.
Year-over-year changes in foreign currency exchange rates, particularly the Euro, impacted
European revenue favorably in 2018 by $28.2 million and unfavorably by $3.9 million in 2017.
Asia Pacific
26
Asia Pacific software revenue growth in the mid-teens reflects solid bookings performance in the
broader region over the past two years (5% CAGR), despite the headwinds experienced in Japan in 2017.
Year-over-year changes in foreign currency exchange rates favorably impacted revenue by $4.2
million and $1.6 million in 2018 and 2017, respectively.
Gross Margin
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
Gross margin
$
915.6
10% $
835.0
2% $
814.9
Non-GAAP gross margin
964.0
10%
876.5
3%
853.2
Gross margin as a % of revenue:
License and subscription gross margin
Support gross margin
Professional Services
Gross margin as a % of total revenue
Non-GAAP gross margin as a % of total
non-GAAP revenue
84%
82%
6%
74%
77%
79%
84%
15%
72%
75%
76%
87%
14%
71%
75%
The increase in total gross margin in 2018 compared to 2017 is due to total revenue growth and lower
costs of professional services. Total revenue in 2018 grew 7% over 2017. Margins for license and
subscription are beginning to expand as the subscription model matures and revenue that has been
deferred begins to contribute to current periods. Support gross margins are down for 2018 compared to
2017 primarily due to the 14% decrease in support revenue associated with an increase in our subscription
mix and the conversion of existing customers from support contracts to subscription. Support revenue
comprised 40% of our total revenue in 2018 compared to 50% in 2017 and 57% in 2016. Professional
services gross margin is down due to the $14.5 million revenue write-down related to a settlement of a
customer dispute concerning a receivable. Without this revenue write-down, professional services gross
margin would have been 15%.
27
Costs and Expenses
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
Cost of license and subscription revenue
$
Cost of support revenue
Cost of professional services revenue
Sales and marketing
Research and development
General and administrative
Amortization of acquired intangible assets
Restructuring charges
94.1
88.6
143.5
414.5
249.8
143.0
31.4
3.8
9 %
(4)%
(5)%
11 %
6 %
(1)%
(2)%
(53)%
$
86.0
92.2
150.8
372.9
236.1
145.1
32.1
7.9
23 %
8 %
(11)%
1 %
3 %
— %
(3)%
(90)%
$
69.7
85.7
170.2
367.5
229.3
145.6
33.2
76.3
Total costs and expenses
Total headcount at end of period
$ 1,168.6
6,110
4 % (1) $ 1,123.1
(5)% (1) $ 1,177.5
1 %
6,041
4 %
5,800
(1) On a constant currency basis from the prior period, total costs and expenses increased 2% from 2017 to 2018 and decreased
4% from 2016 to 2017.
2018 compared to 2017
Costs and expenses in 2018 compared to 2017 increased primarily as a result of the following:
• an increase of approximately $45 million in compensation and related costs primarily due to
annual salary merit and headcount increases, an increase in commissions expense and an
increase in stock-based compensation expense due to over-achievement of certain
operating performance targets; and
• an increase of $8.6 million in cloud services hosting costs; of which $3.7 million is included in
cost of license and subscription revenue.
The increases above were partially offset by:
• a decrease of $8.9 million in restructuring charges.
2017 compared to 2016
Costs and expenses in 2017 compared to 2016 decreased primarily as a result of the following:
•
substantial completion of restructuring activities in 2016, for which restructuring charges
totaled $76.3 million in 2016 compared to $7.9 million in 2017; and
28
• a decrease in professional services costs primarily due to a decrease in headcount as we
migrated more service engagements to our partners and we delivered products that required
less consulting and training services.
The decreases above were partially offset by increases due to:
• an increase of $18.1 million in total cost of license, subscription and support compensation
costs primarily driven by increased headcount;
• an increase of $8.7 million in cloud services hosting costs due to an increase in SaaS revenue
and related expenses and an increase in applications hosted in the cloud that support our IT
infrastructure.
• an increase of $5.0 million in total research and development compensation costs primarily
driven by increased headcount; and
• annual merit salary increases.
Cost of License and Subscription Revenue
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
Cost of license and subscription revenue
$
94.1
9% $
86.0
23% $
69.7
% of total revenue
% of total license and subscription revenue
8%
16%
7%
21%
6%
24%
Our cost of license and subscription includes cost of license, which consists of fixed and variable
costs associated with reproducing and distributing software and documentation, as well as royalties paid
to third parties for technology embedded in or licensed with our software products, and amortization of
intangible assets associated with acquired products, and cost of subscription, which includes our cost of
cloud services and software as a service revenue, including hosting fees. Costs associated with providing
post-contract support such as providing software updates and technical support for both our subscription
offerings and our perpetual licenses are included in cost of support revenue. Cost of license and
subscription revenue as a percent of license and subscription revenue can vary depending on the
subscription mix percentage, the product mix sold, the effect of fixed and variable royalties, headcount
and the level of amortization of acquired software intangible assets.
Costs in 2018 compared to 2017 increased primarily as a result of a $3.7 million increase in cloud
services hosting costs and a $2.5 million increase in total compensation, benefit and travel expense due
to increases in salaries.
Costs in 2017 compared to 2016 increased primarily as a result of a $15.0 million increase in total
compensation, benefit and travel expense due to increased headcount, primarily associated with
supporting our Cloud products, and a $3.4 million increase in cloud services hosting costs.
Cost of Support Revenue
Cost of support
% of total revenue
% of total support revenue
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
$
88.6
(4)% $
92.2
8 % $
85.7
7%
18%
8%
16%
8%
13%
Cost of support revenue consists of costs such as salaries, benefits, and computer equipment and
facilities associated with customer support and the release of support updates (including related royalty
costs) associated with providing support for both our perpetual licenses and subscription licenses.
Costs and expense in 2018 compared to 2017 decreased primarily due to a decrease in headcount
resulting in 3% ($1.9 million) lower total compensation, benefit and travel costs.
29
Costs and expense in 2017 compared to 2016 increased primarily due to a 5% ($3.1 million) increase
in total compensation, benefit and travel costs.
Cost of Professional Services Revenue
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
Cost of professional services revenue
$
143.5
(5)% $
150.8
(11)% $
170.2
% of total revenue
% of total professional services revenue
12%
94%
13%
85%
15%
86%
Our cost of professional services revenue includes costs such as salaries, benefits, information
technology costs and facilities expenses for our training and consulting personnel, and third-party
subcontractor fees.
In 2018 compared to 2017, total compensation, benefit and travel expenses were decreased by $6.8
million primarily due to an 8% decrease in headcount.
In 2017 compared to 2016, total compensation, benefit costs and travel expenses decreased by
$18.8 million. The cost of third-party consulting services was $4.7 million lower in 2017 compared to 2016.
As a result of decreases in professional services revenue in 2018, 2017 and 2016, we have reduced
headcount, resulting in lower compensation-related costs. This is in line with our strategy to have our
strategic services partners perform services for customers directly, which has decreased revenue and
costs and improved services margins.
Sales and Marketing
Sales and marketing expenses
% of total revenue
$
414.5
11% $
372.9
1% $
367.5
33%
32%
32%
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
Our sales and marketing expenses primarily include salaries and benefits, sales commissions,
advertising and marketing programs, travel, information technology costs and facility expenses.
Costs and expense in 2018 compared to 2017 increased primarily due to a $38.6 million increase in
total compensation, benefit costs and travel expenses as a result of increases in headcount, salary
increases, higher commissions costs and higher stock-based compensation.
In 2017 compared to 2016, event costs increased $3.1 million due to our LiveWorx event held in May
2017. Our compensation, benefits and travel costs were $3.5 million lower in 2017 compared to 2016
primarily due to lower commissions, which were higher in 2016 as a result of significantly higher than
planned subscription bookings.
30
Research and Development
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
Research and development expenses
$
249.8
6% $
236.1
3 % $
229.3
% of total revenue
20%
20%
20%
Our research and development expenses consist principally of salaries and benefits, information
technology costs and facility expenses. Major research and development activities include developing
new releases and updates of our software that enhance functionality and add features.
In 2018 compared to 2017, total compensation, benefit and travel expenses were higher by 6%
($12.0 million) due to an increase in headcount and salary increases.
In 2017 compared to 2016, total compensation, benefit and travel expenses were higher by 3% ($5.0
million) due to an increase in headcount and a $1.6 million increase in cloud services hosting costs as
some product testing has moved to a cloud environment.
General and Administrative (G&A)
General and administrative
% of total revenue
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
$
143.0
(1)% $
145.1
— % $
145.6
12%
12%
13%
Our G&A expenses include the costs of our corporate, finance, information technology, human
resources, legal and administrative functions, as well as acquisition-related and other transactional
charges, bad debt expense and outside professional services, including accounting and legal fees.
Acquisition-related costs include direct costs of acquisitions and expenses related to acquisition
integration activities, including transaction fees, due diligence costs, retention bonuses and severance,
and professional fees, including legal and accounting costs, related to the acquisition. In addition,
subsequent adjustments to our initial estimated amount of contingent consideration associated with
specific acquisitions are included in acquisition-related charges. Other transactional charges include
third-party costs related to structuring unusual transactions.
In 2018 compared to 2017, the cost of professional fees decreased $3.3 million, offset by an increase
of $2.1 million in compensation due to headcount and merit increases.
In 2017 compared to 2016, total compensation, benefit and travel costs increased by $7.0 million
primarily because of merit increases and increased severance costs, as well as higher stock-based
compensation due to a higher attainment of performance-based awards, an award modification, and
the launch of the employee stock purchase plan (ESPP) in the fourth quarter of 2016. Offsetting the
increases, acquisition-related charges decreased $4.9 million because there were no significant
acquisitions in the year, and tax and audit fees decreased $1.8 million during the year.
Amortization of Acquired Intangible Assets
Year ended September 30,
2018
Percent
Change
2017
Percent
Change
2016
(Dollar amounts in millions)
Amortization of acquired intangible assets
$
31.4
(2)% $
32.1
(3)% $
33.2
% of total revenue
3%
3%
3%
Amortization of acquired intangible assets reflects the amortization of acquired non-product related
intangible assets, primarily customer and trademark-related intangible assets, recorded in connection
31
with completed acquisitions. Amortization of intangible assets typically follows the economic benefit
pattern of the acquired intangible assets.
The decrease in amortization of acquired intangible assets from 2016 to 2017 and from 2017 to 2018
is due to certain intangibles becoming fully amortized as well as the impact of foreign currency
exchanges.
Restructuring and Other Charges, net
Restructuring charges (credits), net
Headquarters relocation charges
Restructuring and Other Charges, Net
% of total revenue
Year ended September 30,
2018
2017
2016
(Dollar amounts in millions)
$
$
(1.0)
$
4.8
3.8
—%
$
$
$
7.9
—
7.9
1%
76.3
—
76.3
7%
In fiscal 2016, we committed to a plan to restructure our global workforce and consolidate select
facilities to reduce our cost structure and to realign our investments with our identified growth
opportunities. The restructuring was substantially completed in 2017 and resulted in a total restructuring
charge of $84.5 million.
In 2018, we recorded restructuring credits of $1.0 million related to prior year restructuring actions
and made cash payments related to restructuring charges of $2.8 million. At September 30, 2018,
accrued restructuring totaled $2.4 million, of which we expect to pay $1.5 million within the next twelve
months.
Restructuring charges for 2017 were $7.9 million, including $5.6 million of facility related charges and
$2.4 million of employee termination-related costs. In 2017 we made cash payments related to
restructuring charges of $37.1 million.
Headquarters relocation charges represent accelerated depreciation expense recorded in
anticipation of our relocation to a new worldwide headquarters in the Boston Seaport district in 2019 and
exiting our current headquarters facility. Because our current headquarters lease will not expire until
November 2022, we are seeking to sublease that space but have not yet done so. If we are unable to
sublease our current headquarters space for an amount at least equal to our rent obligations under the
current headquarters lease (approximately $12 million per year), we will bear overlapping rent obligations
for those premises and will be required to record additional headquarters relocation charges related to
any rent shortfall. A charge for such shortfall will be recorded in the earlier of the period that we cease
using the existing space (which will likely occur in the second quarter of our fiscal 2019) or the period we
sign sublease contracts. Additionally, we will incur other costs associated with the move which will be
recorded as incurred.
Interest Expense
Year ended September 30,
2018
2017
2016
(Dollar amounts in millions)
Interest expense
$
(41.7)
(42.4)
(29.9)
The decrease in interest expense in 2018 compared to 2017 is primarily due to the write-off deferred
financing fees of $1.2 million in March 2017 when we modified our credit facility and reduced the loan
commitment to $600 million from $900 million, offset by an increase in interest expense of $0.4 million.
The increase in interest expense in 2017 compared to 2016 was due to a full year of interest being
incurred on the $500 million 6% senior notes (the 2024 6% Notes) which were issued in the third quarter of
2016, and higher average interest rates on our revolving credit facility in 2017 compared to 2016.
The average interest rate on our total borrowings was 5.2% in 2018, 4.9% in 2017 and 3.0% in 2016.
32
Interest Income and Other Expense, net
Foreign currency losses, net
Interest income
Other income (expense), net
Year ended September 30,
2018
2017
2016
$
$
(Dollar amounts in millions)
(7.0) $
(5.7) $
3.8
0.3
(2.9) $
3.2
2.5
0.1
$
(1.9)
3.4
(1.8)
(0.3)
Foreign currency net losses include costs of hedging contracts, certain realized and unrealized
foreign currency transaction gains or losses, and foreign exchange gains or losses resulting from the
required period-end currency re-measurement of the assets and liabilities of our subsidiaries that use the
U.S. dollar as their functional currency. Because a large portion of our revenue and expenses is
transacted in foreign currencies, we engage in hedging transactions involving the use of foreign currency
forward contracts to reduce our exposure to fluctuations in foreign exchange rates. Changes in the
balance year over year are due to required period-end currency re-measurement of the assets and
liabilities of our subsidiaries that use the U.S. Dollar as their functional currency. Hedging costs increased
$2.0 million in 2018 compared to 2017 and $1.3 million in 2017 compared to 2016.
Interest income represents earnings on the investment of our available cash balances.
Other income (expense), net is primarily made up other non-operating gains and losses. In January
2017, we sold a cost method investment for a gain of $3.7 million.
Income Taxes
Tax Provision and Effective Income Tax Rate
Pre-tax income (loss)
Tax benefit
Effective income tax rate
Year ended September 30,
2018
2017
2016
(Dollar amounts in millions)
$
28.7
$
(1.4)
$
(23.3)
(81)%
(7.6)
544%
(67.2)
(12.7)
19%
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and
Jobs Act, (the "Tax Act"), which significantly changed existing U.S. tax laws by a reduction of the
corporate tax rate, the implementation of a new system of taxation for non-U.S. earnings, the imposition
of a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries, and by
the expansion of the limitations on the deductibility of executive compensation and interest expense. As
we have a September 30 fiscal year-end, a blended U.S. statutory federal rate of approximately 24.5%
applies for our fiscal year ending September 30, 2018 and 21% for subsequent fiscal years. The Tax Act
also provides that net operating losses generated in years ending after December 31, 2017 (our fiscal
2018) will be carried forward indefinitely and can no longer be carried back, and that net operating
losses generated in years beginning after December 31, 2017 can only reduce taxable income by up to
80% when utilized in a future period.
We have provided no federal income taxes payable as a result of the deemed repatriation of
undistributed earnings as the tax will be offset by a combination of current year losses and existing
attributes which had a full valuation allowance recorded against the related deferred tax assets. We
recorded a state income taxes payable on the deemed repatriation of $2.1 million. We also recorded a
deferred tax benefit of $14.1 million for the impact of the Tax Act on our net U.S. deferred income tax
balances. This was primarily attributable to the reduction of the federal tax rate on the net deferred tax
liability in the U.S., and the ability to realize net operating losses from the reversal of existing deferred tax
assets which can now be carried forward indefinitely and can therefore be netted against deferred tax
liabilities for indefinite lived intangible assets.
The changes included in the Tax Act are broad and complex. The Securities Exchange Commission
has issued rules that allow for a measurement period of up to one year after the enactment date of the
33
Tax Act to finalize the recording of the related tax impacts. We have finalized our accounting for the
effects of the legislation with the exception of any additional guidance that may impact our provisional
amounts recorded for the transition tax. We are not able to make reasonable estimates at this time of the
effects of certain provisions of the Tax Act that will apply to us beginning in our fiscal year ending
September 30, 2019, including the Global Intangible Low Tax Income tax (the "GILTI" tax) and any
associated impact on our U.S. valuation allowance. We currently anticipate finalizing and recording any
resulting adjustments in the quarter ending December 29, 2018.
In 2018 our effective tax rate was lower than the statutory federal income tax rate due to U.S. tax
reform, as described above. In 2018, 2017 and 2016, our effective tax rate was materially impacted by
our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. A
significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2018,
2017 and 2016, the foreign rate differential predominantly relates to these Irish earnings. Additionally, we
have a full valuation allowance against deferred tax assets in the U.S., primarily related to net operating
loss, tax credit carryforwards, capitalized research and development expense and deferred revenue. As
a result, we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in
2018 ,2017 and 2016 includes the continuing rate benefit from a business realignment completed on
September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign
subsidiaries. The realignment allows us to more efficiently manage the distribution of our products to
European customers. In 2018, this realignment resulted in a tax benefit of approximately $24 million and in
2017 and 2016, a benefit of approximately $28 million in each year. In 2017 and 2016, the change in
valuation allowance primarily relates to U.S. losses not benefited, partially offset by the release of
valuation allowances in foreign subsidiaries of $9.0 million and $3.1 million, respectively. We recorded
foreign withholding taxes, an obligation of the U.S. parent of $2.7 million in 2018 and $2.0 million in 2017
and 2016, respectively.
Valuation Allowance
We have concluded, based on the weight of available evidence, that a full valuation allowance
continues to be 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.
Tax Audits and Examinations
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.
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax
authorities 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,
pending resolution of the appeal process.
Our Future Effective Income Tax Rate
Our future effective income tax rate may be materially impacted by the amount of income taxes
associated with our foreign earnings, which are taxed at rates different from the U.S. federal statutory
income tax rate, as well as the timing and extent of the realization of deferred tax assets and changes in
the tax law. Further, our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due
to items arising from discrete events, including settlements of tax audits and assessments, the resolution or
identification of tax position uncertainties, and acquisitions of other companies.
Operating Measures
Subscription Bookings and Subscription ACV
34
Given the difference in revenue recognition between the sale of a perpetual software license
(revenue is recognized at the time of sale) and a subscription (revenue is recognized ratably over the
subscription term), we use bookings for internal planning, forecasting and reporting of new license and
subscription sales and cloud services transactions.
In order to normalize between perpetual and subscription licenses, we define subscription bookings
as the subscription annualized contract value (subscription ACV) of new subscription bookings multiplied
by a conversion factor of 2. We arrived at the conversion factor of 2 by considering many variables,
including pricing, support, length of term, and renewal rates. In 2018 and 2017, the average subscription
contract term was approximately two years.
We define subscription ACV as the total value of a new subscription booking divided by the term of
the contract (in days), multiplied by 365. If the term of the subscription contract is less than a year, and is
not associated with an existing contract, the ACV is equal to the total contract value. Beginning in the
third quarter of 2018, minimum ACV commitments under our Strategic Alliance Agreement with Rockwell
Automation are included in subscription ACV if the period-to-date minimum ACV commitment exceeds
actual ACV sold under the Agreement.
We define license and subscription bookings as subscription bookings plus perpetual license
bookings plus any monthly software rental bookings during the period.
Because subscription bookings is a metric we use to approximate the value of subscription sales if
sold as perpetual licenses, it does not represent the actual revenue that will be recognized with respect
to subscription sales or that would be recognized if the sales had been perpetual licenses.
Annualized Recurring Revenue (ARR)
Annualized Recurring Revenue (ARR) for a given quarter is calculated by dividing the non-GAAP
subscription and support software revenue for the quarter by the number of days in the quarter and
multiplying by 365. ARR should be viewed independently of revenue and deferred revenue as it is an
operating measure and is not intended to be combined with or to replace either of those items. ARR is
not a forecast and does not include perpetual license or professional services revenues.
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:
•
•
•
•
•
•
non-GAAP revenue—GAAP revenue
non-GAAP gross margin—GAAP gross margin
non-GAAP operating income—GAAP operating income
non-GAAP operating margin—GAAP operating margin
non-GAAP net income—GAAP net income
non-GAAP diluted earnings per share—GAAP diluted earnings per share
The non-GAAP financial measures exclude fair value adjustments related to acquired deferred
revenue and deferred costs, stock-based compensation 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 discrete charges included
in non-operating other expense, net and the related tax effects of the preceding items, and any other
identified tax items.
These items are normally included in the comparable measures calculated and presented in
accordance with GAAP. Our management excludes these items when evaluating our ongoing
performance and/or predicting our earnings trends, and therefore excludes them when presenting non-
GAAP financial measures. Management uses non-GAAP financial measures in conjunction with our GAAP
results, as should investors.
Settlement Revenue Exclusions. In Q4'18, we settled a previously disclosed dispute with respect to a
customer receivable. The settlement included partial payment of the receivable and new software
purchases. The net revenue write-down recorded in Q4'18 was $9.3 million, comprised of a $14.5 million
professional services revenue write-down, partially offset by new subscription revenue of $5.2 million. We
35
excluded the professional services revenue write-down because the write-down related to revenue that
was recorded in periods prior to fiscal 2017 and is not reflective of current operating performance and
excluded the new subscription revenue because it mitigated the impact of the professional services
revenue write-down.
Fair value of acquired deferred revenue is a purchase accounting adjustment recorded to reduce
acquired deferred revenue to the fair value of the remaining obligation, so our GAAP revenue after an
acquisition does not reflect the full amount of revenue that would have been reported if the acquired
deferred revenue was not written down to fair value. We believe excluding these adjustments to revenue
from these contracts (and associated costs in fair value adjustment to deferred services cost) is useful to
investors as an additional means to assess revenue trends of our business.
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-related and other transactional charges included in general and administrative costs 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-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.
U.S. pension plan termination-related costs include charges related to our plan that we began
terminating in the second quarter of 2014. Costs associated with termination of the plan are not
considered part of our regular operations.
Legal accrual includes amounts accrued to settle regulatory and other matters related to our SEC
and DOJ FCPA investigation in China. We view these matters as non-ordinary course events and exclude
the amounts when reviewing our operating performance.
Restructuring charges include severance costs and excess facility restructuring charges resulting from
reductions of personnel driven by modifications to our business strategy. These costs may vary in size
based on our restructuring plan.
Headquarters relocation charges include non-cash accelerated depreciation expense recorded in
anticipation of exiting our current 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.
Non-operating credit facility refinancing costs are non-operating charges we record as a result of
the refinancing of our credit facility. We assess our internal operations excluding these costs and believe
it facilitates comparisons to the performance of other companies in our industry.
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, and 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 view as non-ordinary course.
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 affords investors a view of our operating results that may be more easily compared to
the results of peer companies.
36
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
comparable measures prepared in accordance with GAAP. The following tables reconcile each of these
non-GAAP financial measures to its most closely comparable GAAP measure on our financial statements.
GAAP revenue
Settlement revenue exclusion
Fair value of acquired deferred revenue
Non-GAAP revenue
GAAP gross margin
Settlement revenue exclusion
Fair value of acquired deferred revenue
Fair value to acquired deferred costs
Stock-based compensation
Amortization of acquired intangible assets included in cost of revenue
Non-GAAP gross margin
GAAP operating income (loss)
Settlement revenue exclusion
Fair value of acquired deferred revenue
Fair value to acquired deferred costs
Stock-based compensation
Amortization of acquired intangible assets included in cost of revenue
Amortization of acquired intangible assets
Acquisition-related and other transactional charges included in general
and administrative expenses
U.S. pension plan termination-related costs
Legal accrual
Restructuring charges (credits), net
Headquarters relocation charge
Non-GAAP operating income
GAAP net income (loss)
Settlement revenue exclusion
Fair value of acquired deferred revenue
Fair value to acquired deferred costs
Stock-based compensation
Amortization of acquired intangible assets included in cost of revenue
Amortization of acquired intangible assets
Acquisition-related and other transactional charges included in general
and administrative expenses
U.S. pension plan termination-related costs
Legal accrual
Restructuring charges (credits), net
Headquarters relocation charge
Non-operating credit facility refinancing costs
Income tax adjustments (1)
Non-GAAP net income
GAAP diluted earnings (loss) per share
Settlement revenue exclusion
37
Year ended September 30,
2018
2017
2016
(in millions, except per share amounts)
$
1,241.8
$
1,164.0
$
1,140.5
9.3
1.3
1,252.4
915.6
9.3
1.3
(0.4)
11.5
26.7
964.0
73.2
9.3
1.3
(0.4)
82.9
26.7
31.4
1.9
—
—
(1.0)
4.8
230.0
52.0
9.3
1.3
(0.4)
82.9
26.7
31.4
1.9
—
—
(1.0)
4.8
—
(37.6)
171.2
0.44
0.08
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
2.7
1,166.8
835.0
—
2.7
(0.4)
12.6
26.6
876.5
40.9
—
2.7
(0.4)
76.7
26.6
32.1
1.6
0.3
—
7.9
—
188.4
6.2
—
2.7
(0.4)
76.7
26.6
32.1
1.6
0.3
—
7.9
—
1.2
(17.4)
137.6
0.05
—
$
$
—
3.5
1,144.0
814.9
—
3.5
(0.5)
10.8
24.6
853.2
(37.0)
—
3.5
(0.5)
66.0
24.6
33.2
3.5
—
3.2
76.3
—
172.7
(54.5)
—
3.5
(0.5)
66.0
24.6
33.2
3.5
—
3.2
76.3
—
2.4
(19.8)
137.8
(0.48)
—
Fair value of acquired deferred revenue
Stock-based compensation
Total amortization of acquired intangible assets
Acquisition-related and other transactional charges included in general
and administrative expenses
Legal accrual
Headquarters relocation charge
Restructuring charges (credits), net
Non-operating credit facility refinancing costs
Income tax adjustments (1)
Non-GAAP diluted earnings per share (2)
0.01
0.70
0.49
0.02
—
0.04
(0.01)
—
(0.32)
0.02
0.65
0.50
0.01
—
—
0.07
0.01
(0.15)
$
1.45
$
1.17
$
Year ended September 30,
0.03
0.57
0.50
0.03
0.03
—
0.66
0.02
(0.17)
1.19
Operating margin impact of non-GAAP adjustments:
2018
2017
2016
GAAP operating margin
Settlement revenue exclusion
Fair value of acquired deferred revenue
Stock-based compensation
Total amortization of acquired intangible assets
Acquisition-related and other transactional charges included in general
and administrative expenses
Legal accrual
Headquarters relocation charge
Restructuring charges (credits), net
Non-GAAP operating margin
5.9 %
0.6 %
0.1 %
6.7 %
4.7 %
0.1 %
— %
0.4 %
(0.1)%
18.4 %
3.5%
—%
0.2%
6.6%
5.0%
0.1%
—%
—%
0.7%
16.1%
(3.2)%
— %
0.3 %
5.8 %
5.1 %
0.3 %
0.3 %
— %
6.7 %
15.1 %
(1) We have a full valuation allowance against our U.S. net deferred tax assets and a valuation
allowance against net deferred tax assets in certain foreign jurisdictions. As we are profitable on a
non-GAAP basis, the 2018, 2017 and 2016 non-GAAP tax provisions are being calculated assuming
there is no valuation allowance. Income tax adjustments reflect the tax effects of non-GAAP
adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-
GAAP adjustments listed above. We recorded the impact of the Tax Cuts and Jobs Act in 2018 GAAP
earnings, resulting in a non-cash benefit of approximately $12 million. We have excluded these
benefits from our non-GAAP results. Additionally, we recorded a tax benefit in 2016 for the write-off of
a deferred tax liability that resulted from the change in tax status of a foreign subsidiary. This tax
benefit has been excluded from non-GAAP tax expense.
(2) Diluted earnings per share impact of non-GAAP adjustments is calculated by dividing the dollar
amount of the non-GAAP adjustment by the diluted weighted average shares outstanding for the
respective year.
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 B. 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:
•
revenue recognition;
38
• accounting for income taxes;
• valuation of assets and liabilities acquired in business combinations;
• valuation of goodwill;
• accounting for pensions; and
•
legal contingencies.
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.
Revenue Recognition
Our sources of revenue include: (1) subscription, (2) support, (3) perpetual license and (4)
professional services. 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 with ASC 605-25, Revenue Recognition, Multiple-Element
Arrangements. Under those standards, revenue is recorded when 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 primary judgments involve the following:
• determining whether collection is probable;
• assessing whether the fee is fixed or determinable;
• determining whether service arrangements, including modifications and customization of the
underlying software, are not essential to the functionality of the licensed software and thus would
result in the revenue for license and service elements of an agreement being recorded
separately; and
• determining the fair value of services and support elements included in multiple-element
arrangements, which is the basis for allocating and deferring revenue for such services and
support.
Our software is distributed primarily through our direct sales force. In addition, we have an indirect
distribution channel through alliances with resellers. Revenue arrangements with resellers are generally
recognized on a sell-through basis; that is, when we deliver the product to the end-user customer. We
record consideration given to a reseller as a reduction of revenue to the extent we have recorded
revenue from the reseller. We do not offer contractual rights of return, stock balancing, or price protection
to our resellers, and actual product returns from them have been insignificant to date. As a result, we do
not maintain reserves for reseller product returns.
At the time of each sale transaction, we must make an assessment of the collectability of the
amount due from the customer. Revenue is only recognized at that time if management deems that
collection is probable. In making this assessment, we consider customer credit-worthiness and historical
payment experience. At that same time, we assess whether fees are fixed or determinable and free of
contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we
consider the payment terms of the transaction, including transactions with payment terms that extend
beyond our customary payment terms, and our collection experience in similar transactions without
making concessions, among other factors. We have periodically provided financing to credit-worthy
customers with payment terms up to 24 months. If the fee is determined not to be fixed or determinable,
revenue is recognized only as payments become due from the customer, provided that all other revenue
39
recognition criteria are met. Our software license arrangements generally do not include customer
acceptance provisions. However, if an arrangement includes an acceptance provision, we record
revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of
the acceptance period.
Generally, our contracts are accounted for individually. However, when contracts are closely
interrelated and dependent on each other, it may be necessary to account for two or more contracts as
one to reflect the substance of the group of contracts.
Subscription
Subscription revenue includes revenue from two primary sources: (1) subscription-based licenses, and
(2) cloud services.
Subscription-based licenses include the right for a customer to use our on-premise licenses and
receive related support for a specified term and revenue is recognized ratably over the term of the
arrangement since we do not have vendor-specific objective evidence (“VSOE”) of fair value for our
coterminous support. When sold in arrangements with other elements, VSOE of fair value is established for
the subscription-based licenses through the use of a substantive renewal clause within the customer
contract for a combined annual fee that includes the term-based license and related support.
Cloud services revenue (which in 2018, 2017 and 2016 represented less than 5% of our total revenue)
includes fees for hosting and application management of customers’ perpetual or subscription-based
licenses (hosting services) and fees for Software as a Service (SaaS) arrangements. When hosting services
are sold as part of a multi-element transaction, revenue is allocated to hosting services based on VSOE,
and recognized ratably over the contractual term beginning on the commencement dates of each
contract, which is the date the services are made available to the customer. VSOE is established for
hosting services either through a substantive stated renewal option or stated contractual overage rates,
as these rates represent the value the customer is willing to pay on a standalone basis. We also offer
cloud services under SaaS arrangements whereby customers access our software in the cloud. Under
SaaS arrangements, customers cannot take possession of the software. Cloud services include set-up
fees, which are recognized ratably over the contract term or the expected customer life, whichever is
longer.
Support
Support contracts generally include rights to unspecified upgrades (when and if available),
telephone and internet-based support, updates and bug fixes. Support revenue is recognized ratably
over the term of the support contract on a straight-line basis.
Perpetual License
Under perpetual license arrangements, we generally recognize license revenue up front upon
shipment to the customer. We use the residual method to recognize revenue from perpetual license
software arrangements that include one or more elements to be delivered at a future date when
evidence of the fair value of all undelivered elements exists, and the elements of the arrangement qualify
for separate accounting as described below. Under the residual method, the fair value of the
undelivered elements (i.e., support and services) based on our VSOE of fair value is deferred and the
remaining portion of the total arrangement fee is allocated to the delivered elements (i.e., perpetual
software license). If evidence of the fair value of one or more of the undelivered elements does not exist,
all revenues are deferred and recognized when delivery of all of those elements has occurred or when
fair values can be established. We determine VSOE of the fair value of services and support revenue
based upon our recent pricing for those elements when sold separately. For certain transactions, VSOE is
determined based on a substantive renewal clause within a customer contract. Our current pricing
practices are influenced primarily by product type, purchase volume, sales channel and customer
location. We review services and support sold separately on a periodic basis and update, when
appropriate, our VSOE of fair value for such elements to ensure that it reflects our recent pricing
experience.
Professional Services
Our software arrangements often include implementation, consulting and training services that are
sold under consulting engagement contracts or as part of the software license arrangement. When we
determine that such services are not essential to the functionality of the licensed software, we record
revenue separately for the license and service elements of these arrangements, provided that
40
appropriate evidence of fair value exists for the undelivered services (i.e. VSOE of fair value). We consider
various factors in assessing whether a service is not essential to the functionality of the software, including
if the services may be provided by independent third parties experienced in providing such services (i.e.
consulting and implementation) in coordination with dedicated customer personnel, and whether the
services result in significant modification or customization of the software’s functionality. When
professional services qualify for separate accounting, professional services revenues under time and
materials billing arrangements are recognized as the services are performed. Professional services
revenues under fixed-priced contracts are generally recognized as the services are performed using a
proportionate performance model with hours or costs as the input method of attribution.
When we provide professional services that are considered essential to the functionality of the
software, the arrangement does not qualify for separate accounting of the license and service elements,
and the license revenue is recognized together with the consulting services using the percentage-of-
completion method of contract accounting. Under such arrangements, consideration is recognized as
the services are performed as measured by an observable input. In these circumstances, we separate
license revenue from service revenue for income statement presentation by allocating VSOE of fair value
of the consulting services as service revenue, and the residual portion as license revenue. Under the
percentage-of-completion method, we estimate the stage of completion of contracts with fixed or “not
to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours
or costs at completion. Adjustments to estimates to complete are made in the periods in which facts
resulting in a change become known. When total cost estimates exceed revenues, we accrue for the
estimated losses when identified. The use of the proportionate performance and percentage-of-
completion methods of accounting require significant judgment relative to estimating total contract costs
or hours (hours being a proxy for costs), including assumptions relative to the length of time to complete
the project, the nature and complexity of the work to be performed and anticipated changes in salaries
and other costs.
Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting
services are included in professional services revenue, with the offsetting expense recorded in cost of
professional services revenue.
Training services include on-site and classroom training. Training revenues are recognized as the
related training services are provided.
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 tax liability.
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, 2018, we have a valuation allowance of $108.6 million against net deferred tax
assets in the U.S. and a valuation allowance of $33.3 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 be 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 operating loss carryforwards, the majority of which do not expire. There
41
are limitations imposed on the utilization of such net operating 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. We maintain our assertion to permanently reinvest these earnings
outside the U.S. unless repatriation can be done with no significant tax cost, 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.
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:
•
future expected cash flows from software license sales, customer support agreements, customer
contracts and related customer relationships and acquired developed technologies and
trademarks and trade names;
• expected costs to develop the in-process research and development into commercially viable
products and estimating cash flows from the projects when completed;
•
the acquired company’s brand awareness and market position, as well as assumptions about the
period of time the acquired brand will continue to be used by the combined company; and
• discount rates used to determine the present value of estimated future cash flows.
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. 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 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
42
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 related valuation
allowances, whichever comes first, changes to these uncertain tax positions and tax 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.
Valuation of Goodwill
Our goodwill totaled $1,182.5 million and $1,182.8 million as of September 30, 2018 and 2017,
respectively. 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. We have two operating and reportable segments: (1) Software Products and
(2) Professional Services.
As of September 30, 2018, goodwill and acquired intangible assets in the aggregate attributable to
our Software Products and Professional Services segment was $1,352.4 million and $30.2 million,
respectively. As of September 30, 2017, goodwill and acquired intangible assets in the aggregate
attributable to our Software Products and Professional Services segment was $1,410.0 million and $30.6
million, respectively. We test goodwill for impairment in the third quarter of our fiscal year, or on an interim
basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value
of a reporting segment below its carrying value. Factors we consider important (on an overall company
basis and reportable segment basis, as applicable) that could trigger an impairment review include
significant underperformance relative to historical or projected future operating results, significant
changes in our use of the acquired assets or a significant change in the strategy for our business,
significant negative industry or economic trends, a significant decline in our stock price for a sustained
period, or a reduction of our market capitalization relative to net book value.
We completed our annual goodwill impairment review as of June 30, 2018 based on a qualitative
assessment. Our qualitative assessment included company specific (financial performance and long-
range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting
unit, which was approximately double its carrying value or higher at July 2, 2016, the last valuation date.
Based on our qualitative assessment, we believe it is more likely than not that the fair values of our
reporting units exceed their carrying values and no further impairment testing is required.
Accounting for Pensions
We sponsor several international pension plans. We make assumptions that are used in calculating
the expense and liability of these plans. These key assumptions include the expected long-term rate of
return on plan assets and the discount rate used to determine the present value of benefit obligations. In
selecting the expected long-term rate of return on assets, we consider the average future rate of
earnings expected on the funds invested to provide for the benefits under the pension plan. This includes
considering the plans' asset allocations and the expected returns likely to be earned over the life of the
plans. The discount rate reflects the estimated rate at which an amount that is invested in a portfolio of
high-quality debt instruments would provide the future cash flows necessary to pay benefits when they
come due. The actuarial assumptions used by us may differ materially from actual results due to
changing market and economic conditions or longer or shorter life spans of the participants. Our actual
results could differ materially from those we estimated, which could require us to record a greater amount
of pension expense in future years and/or require higher than expected cash contributions.
43
Accounting and reporting for these plans requires the use of country-specific assumptions for
discount rates and expected rates of return on assets. We apply a consistent methodology in determining
the key assumptions that, in addition to future experience assumptions such as mortality rates, are used
by our actuaries to determine our liability and expense for each of these plans. The discount rate for
Germany was selected with reference to a spot-rate yield curve based on the yields of AA-rated Euro-
denominated corporate bonds. In addition, our actuarial consultants determine the expense and
liabilities of the plan using other assumptions for future experience, such as mortality rates. In determining
our pension cost for 2018, 2017, and 2016, we used weighted average discount rates of 1.8%, 1.3% and
2.2%, respectively, and weighted average expected returns on plan assets of 5.4%, 5.4% and 5.7%,
respectively. In 2018, 2017 and 2016, our actual return (loss) on plan assets was $1.0 million, $6.3 million
and $1.7 million, respectively. If actual returns are below our expected rates of return, it will impact the
amount and timing of future contributions and expense for these plans.
As of September 30, 2018 and 2017, our plans in total were underfunded, representing the difference
between our projected benefit obligation and fair value of plan assets, by $17.7 million and $16.7 million,
respectively. The projected benefit obligation as of September 30, 2018 was determined using a
weighted average discount rate of 1.9%. The most sensitive assumptions used in calculating the expense
and liability of our pension plans are the discount rate and the expected return on plan assets. Total
GAAP net periodic pension cost was $0.9 million in 2018 and we expect it to be approximately $1.2 million
in 2019. A 50 basis point change to our discount rate and expected return on plan assets assumptions
would have changed our pension expense for the year ended September 30, 2018 by approximately $1
million. A 50 basis point decrease in our discount rate assumptions would increase our projected benefit
obligation as of September 30, 2018 by approximately $7 million.
Legal Contingencies
We are periodically subject to various legal claims and involved in various legal proceedings. We
routinely review the status of each significant matter and assess our potential financial exposure. If the
potential loss from any matter is considered probable and the amount can be reasonably estimated, we
record a liability for the estimated loss. Significant judgment is required in both the determination of
probability and the determination as to whether the amount of an exposure is reasonably estimable.
Because of inherent uncertainties related to these legal matters, we base our loss accruals on the best
information available at the time. Further, estimates of this nature are highly subjective, and the final
outcome of these matters could vary significantly from the amounts that have been included in the
accompanying Consolidated Financial Statements. As additional information becomes available, we
reassess our potential liability and may revise our estimates. Such revisions could have a material impact
on future quarterly or annual results of operations.
Liquidity and Capital Resources
Cash and cash equivalents
Marketable securities
Total
Activity for the year included the following:
Cash provided by operating activities
Cash used by investing activities
Cash provided (used) by financing activities
Cash and cash equivalents
September 30,
2018
2017
2016
(in thousands)
259,946
$
280,003
$
55,951
50,315
315,897
$
330,318
$
277,935
49,616
327,551
247,811
$
135,234
$
(49,212)
(210,846)
(16,127)
(118,105)
183,261
(237,156)
51,606
$
$
$
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
44
maturities of three months or less. In addition, we hold investments in marketable securities totaling
approximately $56.0 million with an average maturity of 14 months. At September 30, 2018, cash and
cash equivalents totaled $259.9 million, compared to $280.0 million at September 30, 2017, reflecting
$247.8 million in operating cash flow, $1,015.7 million of proceeds from issuance of common stock, of
which $1 billion was related to an investment in PTC by Rockwell Automation and the remainder of which
relates to common stock issued under our employee stock purchase plan. The proceeds from the
Rockwell Automation investment were used in part for repurchases of $1,100.0 million in common stock.
In addition, we made $70.0 million of net repayments under our credit facility, $45.4 million was used to
pay withholding taxes on stock-based awards that vested in the period, $36.0 million was used for capital
expenditures, $8.9 million was used for the payment of contingent consideration, $6.0 million was used to
purchase business and intangible assets, and $6.2 million was used to purchase marketable securities, net
of proceeds from maturities.
Cash provided by operating activities
Cash provided by operating activities was $247.8 million in 2018 compared to $135.2 million in 2017
and $183.3 million in 2016. The increase in 2018 is primarily due to higher cash collection of accounts
receivable of $129.0 million, an increase in net income of $45.7 million, lower restructuring payments
($34.3 million year over year) and a $12 million payment related to a Korean tax audit made in 2017.
The decrease in 2017 compared to 2016 was primarily due to an increase in bonus and commission
payments of approximately $33 million, lower cash collections from accounts receivable of $27 million
(due to higher 2016 collections of receivables with extended payment terms and a higher subscription
mix in 2017), higher interest payments of approximately $26 million, and a $12 million payment related to
a Korean tax audit, partially offset by a $35 million increase in cash flows from accounts payable and
accrued expenses due to renegotiations with vendors and more effective utilization of available
payment terms, $18 million of lower restructuring payments and $28 million paid in 2016 to resolve the
regulatory investigation with respect to our China business.
Restructuring payments totaled $2.8 million in 2018, compared to $37.1 million in 2017 and $55.0
million in 2016. Cash paid for income taxes was $22.6 million, $35.4 million, and $25.5 million in 2018, 2017,
and 2016, respectively.
Cash used by investing activities
Year ended September 30,
2018
2017
2016
(in thousands)
Acquisitions of businesses, net of cash acquired
$
(3,000) $
(4,960) $
(165,802)
Additions to property and equipment
Purchases of short- and long-term marketable securities
Proceeds from maturities of short- and long-term marketable
securities
Proceeds from sales of investments
Purchase on intangible asset
Purchases of investments
(36,041)
(24,311)
18,140
—
(3,000)
(1,000)
(25,444)
(19,726)
18,785
15,218
—
—
(26,189)
(44,605)
—
—
—
(560)
$
(49,212) $
(16,127) $
(237,156)
The 2018 increase in property, plant and equipment payments is primarily attributable to
expenditures made for construction of our new worldwide headquarters in the Boston Seaport District.
We also used net $6 million to purchase additional marketable securities, $3 million to acquire developed
software, $3 million for a small business acquisition and $1 million for a small investment in a technology
company.
In 2017, we spent approximately $5 million on acquisitions and sold a minority investment in preferred
stock for approximately $15 million.
In 2016, we acquired Kepware for $99.4 million, net of cash acquired, and Vuforia for $64.8 million,
net of cash acquired. In 2016, we initiated an ongoing investment strategy whereby a portion of
45
available cash balances were used to purchase investment grade securities with maturities up to three
years.
Our expenditures for property and equipment consist primarily of computer equipment, software,
office equipment and facility improvements.
Cash provided (used) by financing activities
Year ended September 30,
2018
2017
2016
(in thousands)
Borrowings under debt agreements
$
250,000
$
150,000
$
Repayments of borrowings under credit facility
Repurchases of common stock
Proceeds from issuance of common stock
(320,000)
(1,100,000)
1,015,654
(190,000)
(50,991)
10,778
670,000
(580,000)
—
21
Payments of withholding taxes in connection with vesting of stock-
based awards
Excess tax benefits from stock-based awards
Credit facility origination costs
Contingent consideration
(45,374)
(26,654)
(20,939)
(2,851)
(8,275)
(184)
(11,054)
$
(210,846) $
(118,105) $
(6,855)
(10,621)
51,606
In 2018, we resumed our stock repurchase program and used $1,100.0 million to repurchase our
common stock. For the repurchases made in 2018, we used $1 billion from an equity investment in PTC
made by Rockwell Automation and $100 million in cash provided by operating activities. Proceeds from
issuance of common stock of $1,015.7 million includes $1 billion from the Rockwell Automation investment
in PTC and $15.7 million of proceeds from our employee stock purchase plan. In 2018, we repaid $70.0
million under our credit facility. In 2018, credit facility origination costs included costs associated with the
modification of our credit facility.
Credit Agreement
In September 2018, we amended and restated our existing credit facility to increase the revolving
loan commitment from $600 million to $700 million and amend other provisions. The credit facility is a
multi-currency credit facility with a syndicate of sixteen banks for which JPMorgan Chase Bank, N.A. acts
as Administrative Agent. Outstanding revolving loan amounts may be repaid in whole or in part, without
penalty or premium, prior to the September 13, 2023 maturity date, when all remaining amounts
outstanding will be due and payable in full.
We use the credit facility for general corporate purposes, including acquisitions of businesses, share
repurchases and working capital requirements. As of September 30, 2018, we had $148.1 million in
revolving loans outstanding under the credit facility, the fair value of which approximated its book value.
As of September 30, 2018, we have approximately $552 million undrawn, of which $535 million would be
available to borrow, the availability of which is reduced by letters of credit and certain other long-term
liabilities.
Any borrowings by PTC Inc. or certain of our foreign subsidiaries under the credit facility would be
guaranteed, respectively, by our material domestic subsidiaries that become parties to the subsidiary
guaranty, if any, and/or by PTC Inc. Borrowings are also secured by first priority liens on property of PTC
and certain of our material domestic subsidiaries, including 100% of the voting equity interests of certain
of our domestic subsidiaries and 65% of our material first-tier foreign subsidiaries. Loans under the credit
facility bear interest at variable rates that reset every 30 to 180 days depending on the rate and period
selected by us and based upon our total leverage ratio. During 2018, the weighted average annual
interest rate for all borrowings outstanding was 5.17% and, as of September 30, 2018, the rate on the
credit facility was 3.8%. We also pay a quarterly commitment fee on the undrawn portion of the credit
facility ranging from 0.175% to 0.30% per year based on our total leverage ratio.
The credit facility imposes customary covenants that limit our ability to incur liens or guarantee
obligations, pay dividends and make other distributions, make investments and engage in certain other
transactions. In addition, we and our material domestic subsidiaries may not invest in, or loan to, our
46
foreign subsidiaries in aggregate amounts exceeding $100 million for any purpose and an additional $200
million for acquisitions of businesses. We also must maintain the following financial ratios:
Total Leverage Ratio
Ratio of consolidated total indebtedness to the consolidated
trailing four quarters EBITDA, not to exceed 4.50 to 1.00 as of the
last day of any fiscal quarter.
Ratio as of
September 30, 2018
2.36
to
1.00
Interest Coverage Ratio
Ratio of consolidated trailing four quarters EBITDA to
consolidated trailing four quarters cash basis interest expense,
to be not less than 3.00 to 1.00.
6.18
to
1.00
Senior Secured Leverage Ratio
Ratio of senior consolidated total indebtedness (which excludes
unsecured indebtedness) to consolidated trailing four quarters
EBITDA as of the last day of any fiscal quarter, not to exceed
3.00 to 1.00.
0.58
to
1.00
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, 2018, we were in
compliance with all financial and operating covenants of the credit facility.
Outstanding Notes
On May 12, 2016, we issued $500 million of 6.00% Senior Notes due 2024 (the “2024 6% Notes”) in a
registered offering and used the net proceeds to repay indebtedness under our senior credit facility. As of
September 30, 2018, unamortized deferred financing fees associated with the offering and presented as
a direct reduction from the carrying amount of the 2024 6% Notes were $4.9 million.
The 2024 6% Notes are unsecured, mature on May 15, 2024, and bear interest at a rate of 6.00% per
annum, payable semi-annually (November and May). At any time before May 15, 2019, (i) we may
redeem up to 40% of the aggregate principal amount of the 2024 6% Notes with the net cash proceeds
of certain public equity offerings at a price equal to 106.00% of the aggregate principal amount
redeemed plus accrued and unpaid interest, provided that at least 60% of the 2024 6% Notes that were
originally issued remain outstanding immediately thereafter, and (ii) we may redeem some or all of the
2024 6% Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid
interest and a make-whole premium. On or after May 15, 2019, we may redeem some or all of the 2024
6% Notes at redemption prices specified in the 2024 6% Notes plus accrued and unpaid interest. In
addition, if we undergo a change of control, we will be required to make an offer to purchase all the
2024 6% Notes at a price equal to 101% of the principal amount of the 2024 6% Notes plus accrued and
unpaid interest.
The notes were issued under an indenture that contains customary covenants. Subject to certain
exceptions, our ability to incur certain additional debt is limited unless, after giving pro forma effect to
such incurrence and the application of the proceeds thereof, the ratio of our EBITDA to our Consolidated
Fixed Charges (as both terms are defined in the indenture) is not greater than 2.00 to 1.00. The indenture
also restricts our ability to incur liens, pay dividends or make certain other distributions, sell assets or
engage in sale/leaseback transactions. Any failure to comply with these and other covenants included
in the indenture could constitute an event of default that could result in the acceleration of the payment
of the aggregate principal amount of 2024 6% Notes then outstanding and accrued interest. As of
September 30, 2018, we were in compliance with all such covenants.
47
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 $1,500 million of our common stock for the
October 1, 2017 through September 30, 2020 period. We intend to 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.
In 2018, we repurchased 9.4 million shares. The repurchases were made under two accelerated
repurchase (ASR) agreements. We completed the $100 million ASR repurchase in the third quarter of
2018. We entered into a $1,000 million ASR in July 2018. Shares valued at $800 million in the aggregate
were delivered to us upon entry into the ASR. The remaining $200 million represents the amount held
back by the bank counterparty pending final settlement of the ASR, which is expected to occur in the
second or third quarter of 2019. Upon settlement of the ASR, the total shares repurchased by us will equal
$1,000 million divided by the average daily volume weighted-average price of our common stock during
the term of the ASR program less a fixed per share discount. We used the $1 billion in proceeds from the
Rockwell Automation equity investment in PTC and $100 million of cash from operations to make the
repurchases.
In 2017, we repurchased 0.9 million shares at cost of $51.0 million. In 2016, we did not repurchase any
shares due to our transition to a subscription business model and the near-term impact on free cash flow
and EBITDA.
Expectations for Fiscal 2019
Our transition to a subscription licensing model has had, and will continue to have, an adverse
impact on revenue, operating margin and EPS relative to periods in which we primarily sold perpetual
licenses until the expected transition of our customer base to subscription is completed. This also affects
consolidated EBITDA as calculated under our credit facility and, as a result of the Total Leverage Ratio
under the facility, limits the amount we can borrow under the facility. Notwithstanding the effect of the
subscription transition and those limitations, we believe that existing cash and cash equivalents, together
with cash generated from operations and amounts available under the credit facility, will be sufficient to
meet our working capital and capital expenditure requirements (which we expect to be $40 million in
2019) through at least the next twelve months and to meet our known long-term capital requirements.
Our expected uses of cash could change, our cash position could be reduced and we could incur
additional debt obligations if we purchase our outstanding shares or retire debt or engage in strategic
transactions, any of which could be commenced, suspended or completed at any time. Any such
purchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors. We also evaluate possible strategic transactions on an ongoing
basis and at any given time may be engaged in discussions or negotiations with respect to possible
strategic transactions. The amounts involved in any share or debt repurchases or strategic transactions
may be material.
We ended 2018 with a cash balance of $260 million and marketable securities of $56 million. A
significant portion of our cash is generated and held outside of the United States. At September 30, 2018,
we had cash and cash equivalents of $29.6 million in the United States, $88.5 million in Europe, $95.6
million in the Pacific Rim (including India), $14.8 million in Japan and $31.4 million in other non-
U.S. countries. All of the marketable securities are held in Europe. We have substantial cash requirements
in the United States, but we believe that the combination of our existing U.S. cash and cash equivalents,
marketable securities, and future U.S. operating cash flows and cash available under our credit facility,
will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.
48
At September 30, 2018, our contractual obligations were as follows:
Contractual Obligations
Contractual Obligations
Debt (1)
Operating leases (2)
Purchase obligations (3)
Pension liabilities (4)
Unrecognized tax benefits (5)
Total
Payments due by period
Total
Less than
1 year
1-3 years
3-5 years
(in millions)
More than
5 years
$
863.2
$
37.1
$
74.2
$
222.0
$
352.7
115.5
17.7
9.8
38.7
88.5
2.6
66.9
26.7
5.6
46.6
0.2
6.4
530.0
200.5
—
3.2
$
1,358.9
$
166.9
$
173.4
$
275.2
$
733.7
(1) Includes required principal repayments and interest and commitment fees on our 2024 6% Notes and
our revolving credit facility based on the balance outstanding as of September 30, 2017 and the
interest rates in effect as of September 30, 2018, 6.0% for our 2024 6% Notes and 3.8% for our revolving
credit facility. The credit facility matures on September 13, 2023, when all remaining amounts
outstanding will be due and payable in full. Principal and interest on any additional borrowing that
may be required to refinance the credit facility upon its maturity are not included in the contractual
obligations above.
(2) The future minimum lease payments above include minimum future lease payments for excess
facilities under non-cancelable operating leases. These leases qualify for operating lease accounting
treatment and, as such, are not included on our balance sheet. See Note I. Commitments and
Contingencies of Notes to Consolidated Financial Statements in this Annual Report for additional
information regarding our operating leases. On September 7, 2017, we entered into a lease for
approximately 250,000 square feet located at 121 Seaport Boulevard, Boston, Massachusetts. The
term of the lease is expected to run from January 1, 2019 through June 30, 2037, subject to adjustment
based on the initial occupancy date. 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, subject to adjustment based on the lease commencement date, is
included in the operating lease obligations above. In addition to the base rent, PTC must 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 $5.9 million for the first year we begin paying rent and is not included
in the operating lease payments above.
(3) 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 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 have been excluded. The purchase obligations included above are in addition to amounts
included in current liabilities and prepaid expenses recorded on our September 30, 2018 consolidated
balance sheet.
(4) These obligations relate to our international pension plans and are not subject to fixed payment
terms. Payments have been estimated based on the plans’ current funded status, planned employer
contributions and actuarial assumptions. In addition, we may, at our discretion, make additional
voluntary contributions to the plans. See Note M. Pension Plans of Notes to Consolidated Financial
Statements in this Annual Report for further discussion.
(5) As of September 30, 2018, we had recorded total unrecognized tax benefits of $9.8 million. This liability
is not subject to fixed payment terms and the amount and timing of payments, if any, which we will
make related to this liability, are not known. See Note G. Income Taxes of Notes to Consolidated
Financial Statements in this Annual Report for additional information.
As of September 30, 2018, we had letters of credit and bank guarantees outstanding of
approximately $15.5 million (of which $1.1 million was collateralized), primarily related to our corporate
headquarters lease in Needham, Massachusetts.
49
Off-Balance Sheet Arrangements
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
the extent of our ownership interest therein) into our financial statements. We have not entered into any
transactions with unconsolidated entities whereby we have subordinated retained interests, derivative
instruments or other contingent arrangements that expose us to material continuing risks, contingent
liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to us.
Recent Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be required to comply with
certain changes in accounting rules and regulations. Refer to Note B. Summary of Significant Accounting
Policies to the Condensed Consolidated Financial Statements in this Form 10-K for all recently issued
accounting pronouncements. We are currently evaluating the impact of the new guidance on our
consolidated financial statements. Outlined below are the recent accounting pronouncements that we
believe will have the most significant impact on us.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax
accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the
transfer occurs. The guidance is effective for annual reporting periods beginning after December 15,
2017 (our fiscal 2019) including interim reporting periods within those annual reporting periods and early
adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated
financial statements. We expect to record a net deferred tax asset of approximately $72 million upon
adoption, primarily relating to deductible amortization of intangible assets in Ireland. Post adoption, our
effective tax rate will no longer include the benefit of this amortization, which is reflected in our effective
tax rate reconciliation under the current guidance.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing
guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability
among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance
sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for
annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those
annual periods. Early adoption is permitted and modified retrospective application is required. We are
currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606
(ASC 606). ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The
FASB has also issued additional standards to provide clarification and implementation guidance on ASC
606.
The core principle of ASC 606 is to recognize revenue when promised goods or services are
transferred to a customer in an amount that reflects the consideration that is expected to be received for
those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition
through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance
obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to
the performance obligations in the contract; 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, it is possible more judgment and estimates may be required within the revenue recognition
process than is required under existing 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.
ASC 606 is effective for us in the first quarter of our fiscal 2019. Companies may adopt ASC 606 using
either the retrospective method, under which each prior reporting period is presented under ASC 606,
50
with the option to elect certain permitted practical expedients, or the modified retrospective method,
under which a company adopts ASC 606 from the beginning of the year of initial application with no
restatement of comparative periods, with the cumulative effect of initially applying ASC 606 recognized
at the date of initial application, and with certain additional required disclosures. We are adopting ASC
606 using the modified retrospective method.
While we are continuing to assess the impact of the new standard, we currently believe the most
significant impact relates to accounting for our subscription arrangements that include term-based on-
premise software licenses bundled with support and/or cloud services. Under current GAAP, the revenue
attributable to these subscription licenses bundled with support is recognized ratably over the term of the
arrangement because VSOE does not exist for the undelivered support element as it is not sold
separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable
the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new
standard we will be required to recognize as revenue a portion of the subscription fee upon delivery of
the software license. For subscriptions arrangements that also include cloud services, the company
assessed whether the cloud component was highly interrelated with the on-premise term software
license. Other than a limited population of subscriptions, the cloud component is currently not deemed
to be interrelated with the on-premise term software and as a result, cloud services will be accounted for
as a separate distinct performance obligation. We do have a limited number of subscriptions that
incorporate substantial cloud services where cloud services are not distinct from the on-premise term
license in the context of the contracts as they are considered highly interrelated and represent a single
performance obligation, for which the revenue will continue to be recognized over time. We currently
expect revenue related to our perpetual license revenue and related support contracts, professional
services and cloud offerings to remain substantially unchanged. Due to the complexity of certain of our
contracts, the actual revenue recognition treatment required under the new standard may be
dependent on contract-specific terms and, therefore, may vary in some instances.
Upon implementation of the new standard in fiscal 2019, we expect to make revisions to contract
terms with our customers for new orders that will result in shortening the initial, non-cancellable term of our
multi-year subscriptions to one year. This change will result in annual contractual periods for the majority
of our software subscriptions, the license portion of which will be recognized at the beginning of each
annual contract period upon delivery of the licenses and the support portion of which will be recognized
ratably over the one year contractual period. As a result, we anticipate one year of subscription revenue
will be recognized for each contract each year; however, more of the revenue will be recognized in the
quarter that the contract period begins and less will be recognized in the subsequent three quarters of
the contract than under the current accounting rules.
Under the modified retrospective method, we will evaluate each contract that is ongoing on the
adoption date as if that contract had been accounted for under ASC 606 from contract inception. Some
license revenue related to subscription arrangements that would have been recognized in future periods
under current GAAP will be recast under ASC 606 as if the revenue had been recognized in prior periods.
Under this transition method, we will not adjust historical reported revenue amounts. Instead, the revenue
that would have been recognized under this method prior to the adoption date will be an adjustment to
retained earnings and will not be recognized as revenue in future periods as previously planned. Because
we expect that license revenue associated with subscription contracts will be recognized up front instead
of over time under ASC 606, we expect approximately $350 million to $380 million will be adjusted to
retained earnings upon adoption related to billed and unbilled deferred revenue. During the first year of
adoption, we will disclose the amount of this retained earnings adjustment and intend to provide
supplemental disclosure of how this revenue would have been recognized under the current rules.
Another significant provision under ASC 606 includes the capitalization and amortization of costs
associated with obtaining and fulfilling a contract. Currently, substantially all of these costs are expensed
in the period incurred. Under ASC 606, direct and incremental costs to acquire a contract are capitalized
and amortized using a systematic basis over the pattern of transfer of the goods and services to which
the asset relates. Under ASC 606, we estimate approximately $70 million of commission costs will be
capitalized and amortized over the period the capitalized assets are expected to contribute to future
cash flows.
Furthermore, we have made and will continue to make investments in systems and processes to
enable timely and accurate reporting under the new standard. We are implementing operational and
internal control structural changes.
51
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 flow 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 2018, 2017, and 2016, approximately two-thirds of our
revenue and half of our expenses were transacted in currencies other than the U.S. dollar. 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 European exchange rates and a 10 Yen change in
the Yen to USD exchange rate would impact operating income by approximately $16 million and $6
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 primarily are denominated in Canadian Dollars and European
currencies, and have maturities of less than three months.
Generally, we do not designate foreign currency forward contracts 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
losses on forward contracts and foreign denominated receivables and payables are included in foreign
currency net losses.
52
As of September 30, 2018 and 2017, we had outstanding forward contracts for derivatives not
designated as hedging instruments with notional amounts equivalent to the following:
Currency Hedged
Canadian / U.S. Dollar
Euro / U.S. Dollar
British Pound / U.S. Dollar
Israeli Sheqel / U.S. Dollar
Japanese Yen / Euro
Japanese Yen / U.S. Dollar
Swiss Franc / U.S. Dollar
Swiss Franc / Euro
Swedish Krona / U.S. Dollar
Chinese Yuan offshore / Euro
Singapore Dollar / U.S. Dollar
Chinese Renminbi/U.S. Dollar
All other
Total
September 30,
2018
2017
(in thousands)
$
7,334
$
297,730
7,074
9,778
—
37,456
11,944
—
18,207
—
1,314
9,010
6,109
12,809
244,000
907
8,820
17,694
3,198
605
7,157
4,627
10,423
1,186
—
7,093
$
405,956
$
318,519
As of September 30, 2018 and 2017, we had outstanding forward contracts designated as cash flow
hedges with notional amounts equivalent to the following:
Currency Hedged
Euro / U.S. Dollar
Japanese Yen / U.S. Dollar
SEK / U.S. Dollar
Total
Debt
September 30,
2018
2017
(in thousands)
8,495
$
2,193
1,708
64,831
22,675
14,091
12,396
$
101,597
$
$
In addition to amounts due under our 2024 6% Notes as described above, as of September 30, 2018,
we had $148.1 million outstanding under our variable-rate credit facility. 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, 2018, the annual rate on
the credit facility loans was 3.8%. If there was a hypothetical 100 basis point change in interest rates, the
annual net impact to earnings and cash flows would be $1.5 million. This hypothetical change in cash
flows and earnings has been calculated based on the borrowings outstanding at September 30, 2017
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, 2018, 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-Pacific and in diversified domestic and international money market mutual
funds. At September 30, 2018, we had cash and cash equivalents of $29.6 million in the United States,
$88.5 million in Europe, $95.6 million in the Pacific Rim (including India), $14.8 million in Japan and $31.4
million in other non-U.S. countries. Given the short maturities and investment grade quality of the portfolio
holdings at September 30, 2018, a hypothetical 10% change in interest rates would not materially affect
the fair value of our cash and cash equivalents.
53
Our invested cash is subject to interest rate fluctuations and, for non-U.S. operations, foreign currency
risk. In a declining interest rate environment, we would experience a decrease in interest income. The
opposite holds true in a rising interest rate environment. Over the past several years, the U.S. Federal
Reserve Board, European Central Bank and Bank of England have changed certain benchmark interest
rates, which have led to declines and increases in market interest rates. These changes in market interest
rates have resulted in fluctuations in interest income earned on our cash and cash equivalents. Interest
income will continue to fluctuate based on changes in market interest rates and levels of cash available
for investment. Our consolidated cash balances were impacted favorably by $7.8 million and $1.1 million
in 2018 and 2017, respectively and unfavorably by $6.8 million in 2016, due to changes in foreign
currencies relative to the U.S. dollar, particularly the Euro and the Japanese Yen.
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, 2018.
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:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our 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. Projections of any evaluation of effectiveness to future periods are subject to the risk that
54
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, 2018 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, 2018, our internal control over
financial reporting was effective.
The effectiveness of our internal control over financial reporting as of September 30, 2018 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, 2018 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B.
Other Information
None.
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 in the sections captioned “Proposal 1: Election of Directors,” “Corporate Governance,” "Our
Executive Officers," “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Transactions With
Related Persons” appearing in our 2019 Proxy Statement. Such information is incorporated into this
Item 10 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 2019 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 12.
Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management and Related
Information required by this item may be found under the headings “Information about PTC
Common Stock Ownership” and "Equity Compensation Plan Information" in our 2019 Proxy Statement.
Such information is incorporated herein by reference.
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” in our
2019 Proxy Statement. Such information is incorporated herein by reference.
ITEM 14.
Principal Accounting Fees and Services
55
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 2019 Proxy Statement. Such information is incorporated herein by
reference.
56
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
(a) Documents Filed as Part of Form 10-K
1.
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2018 and 2017
Consolidated Statements of Operations for the years ended September 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2018,
2017 and 2016
Consolidated Statements of Cash Flows for the years ended September 30, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2018, 2017 and
2016
Notes to Consolidated Financial Statements
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.
F-1
F-3
F-4
F-5
F-6
F-7
F-8
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.
Form 10-K Summary
None
57
Exhibit
Number
Exhibit
EXHIBIT INDEX
3.1 — Restated Articles of Organization of PTC Inc. adopted August 4, 2015 (filed as exhibit 3.1 to our Annual Report
on Form 10-K for the fiscal year ended September 30, 2015 (File No. 0-18059) and incorporated herein by
reference).
3.2 — By-Laws, as amended and restated, of PTC Inc. (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended March 29, 2014 (File No. 0-18059) and incorporated herein by reference).
4.1 — Indenture, dated as of May 12, 2016, by and between the Company and The Bank of New York Mellon, as
Trustee (filed as Exhibit 4.1 to our Current Report on Form 8-K filed on May 18, 2016 (File No. 0-18059) and
incorporated herein by reference).
4.2 — First Supplemental Indenture, dated as of May 12, 2016, by and between the Company and The Bank of New
York Mellon, as Trustee (filed as Exhibit 4.2 to our Current Report on Form 8-K filed on May 18, 2016 (File No.
0-18059) and incorporated herein by reference).
4.3 — 6.000% Senior Notes due 2024 (filed as Exhibit 4.3 to our Current Report on Form 8-K filed on May 18, 2016 (File
No. 0-18059) and incorporated herein by reference).
10.1.1* — 2000 Equity Incentive Plan (filed as Exhibit 10.1.1 to our Annual Report on Form 10-K for the fiscal year ended
September 30, 2017 (File No. 0-18059) and incorporated herein by reference.
10.1.2* — Form of Restricted Stock Agreement (Non-Employee Director) (filed as Exhibit 10.2 to our Quarterly Report on
Form 10-Q for the fiscal quarter ended April 4, 2009 (File No. 0-18059) and incorporated herein by reference).
10.1.3* — Form of Restricted Stock Agreement (Employee) (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended July 2, 2005 (File No. 0-18059) and incorporated herein by reference).
10.1.4 — Form of Restricted Stock Unit Certificate (Non-U.S.) (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended July 2, 2005 (File No. 0-18059) and incorporated herein by reference).
10.1.5 — Form of Incentive Stock Option Certificate (filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended July 2, 2005 (File No. 0-18059) and incorporated herein by reference).
10.1.6* — Form of Nonstatutory Stock Option Certificate (filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended July 2, 2005 (File No. 0-18059) and incorporated herein by reference).
10.1.7* — Form of Stock Appreciation Right Certificate (filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended July 2, 2005 (File No. 0-18059) and incorporated herein by reference).
10.1.8* — Form of Restricted Stock Unit Certificate (Non-Employee Director) (filed as Exhibit 10.1.1 to our Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 2013 (File No. 0-18059) and incorporated herein by
reference).
10.1.9 — Form of Restricted Stock Unit Certificate (U.S.) (filed as Exhibit 10.1.9 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
10.1.10 — Form of Restricted Stock Unit Certificate (U.S.) (filed as Exhibit 10.1.10 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
10.1.11 — Form of Restricted Stock Unit Certificate (U.S.) (filed as Exhibit 10.1.11 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
10.1.12 — Form of Restricted Stock Unit Certificate (U.S. EVP) (filed as Exhibit 10.1.12 to our Annual Report on Form 10-K for
the fiscal year ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
58
10.1.13* — Form of Restricted Stock Unit Certificate (U.S. Section 16) (filed as Exhibit 10.1.13 to our Annual Report on Form
10-K for the fiscal year ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
10.1.14 — Form of Restricted Stock Unit Certificate (U.S. EVP) (filed as Exhibit 10.1.14 to our Annual Report on Form 10-K for
the fiscal year ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
10.1.15 — Form of Restricted Stock Unit Certificate (U.S.) (filed as Exhibit 10.1.15 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2016(File No. 0-18059) and incorporated herein by reference).
10.1.16* — Form of Restricted Stock Unit Certificate (U.S. Section 16) (filed as Exhibit 10.1.16 to our Annual Report on Form
10-K for the fiscal year ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
10.1.17* — Form of Restricted Stock Unit Certificate (U.S. Section 16) (filed as Exhibit 10.1.17 to our Annual Report on Form
10-K for the fiscal year ended September 30, 2012 (File No. 0-18059) and incorporated herein by reference).
10.2* — 2009 Executive Cash Incentive Performance Plan (filed as Exhibit 10.5 to our Annual Report on Form 10-K for the
fiscal year ended September 30, 2012 (File No. 0-18059) and incorporated herein by reference).
10.3* — 2016 Employee Stock Purchase Plan (filed as Exhibit 10.3 to our Annual Report on Form 10-K for the fiscal year
ended September 30, 2016 (File No. 0-18059) and incorporated herein by reference).
10.4* — Amended and Restated Executive Agreement with James Heppelmann, President and Chief Executive Officer,
dated May 7, 2010 (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April
3, 2010 (File No. 0-18059) and incorporated herein by reference).
10.5* — Amendment to Executive Agreement dated as of November 18, 2011 by and between PTC Inc. and James
Heppelmann to Amended and Restated Executive Agreement dated as of May 7, 2010 by and between PTC
and James Heppelmann (filed as Exhibit 10.2 to our Current Report on Form 8-K dated November 15, 2011 (File
No. 0-18059) and incorporated herein by reference).
10.6* — Amendment to Executive Agreement by and between PTC Inc. and James Heppelmann dated May 13, 2013
(filed as Exhibit 10.9 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 (File No.
0-18059) and incorporated herein by reference).
10.7* — Amendment to Executive Agreement by and between PTC Inc. and James Heppelmann dated August 4, 2015
(filed as Exhibit 10.1 to our Current Report on Form 8-K dated August 10, 2015 (File No. 0-18059) and
incorporated herein by reference).
10.8* — Form of Amended and Restated Executive Agreement by and between PTC Inc. and each of Barry Cohen
and Aaron von Staats (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter dated
April 3, 2010 (File No. 0-18059) and incorporated herein by reference).
10.9* —
Form of Amendment to Amended and Restated Executive Agreement entered into as of November 18, 2011
by and between PTC Inc. and each of Barry Cohen and Aaron von Staats (filed as Exhibit 10.3 to our Current
Report on Form 8-K dated November 15, 2011 (File No. 0-18059) and incorporated herein by reference).
10.10* — Executive Agreement dated April 16, 2014 between PTC Inc. and Matthew Cohen (filed as Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014 (File No. 0-18059) and incorporated
herein by reference).
10.11* — Executive Agreement dated February 11, 2015 between PTC Inc. and Andrew Miller (filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2015 (File No. 0-18059) and incorporated
herein by reference).
10.12* — Form of Amendment to Executive Agreement dated August 4, 2015 by and between PTC Inc. and each of
Andrew Miller, Barry Cohen, Matthew Cohen and Aaron von Staats (filed as Exhibit 10.2 to our Current Report
on Form 8-K dated August 10, 2015 (File No. 0-18059) and incorporated herein by reference).
10.13 — Executive Agreement dated May 15, 2017 between PTC Inc. and Kathleen Mitford.
59
10.14 — Lease dated December 14, 1999 by and between PTC Inc. and Boston Properties Limited Partnership (filed as
Exhibit 10.21 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 0-18059)
and incorporated herein by reference).
10.15 — Third Amendment to Lease Agreement dated as of October 27, 2010 by and between Boston Properties
Limited Partnership and PTC Inc. (filed as Exhibit 10.1 to our Current Report on Form 8-K dated November 8,
2010 (File No. 0-18059) and incorporated herein by reference).
10.16 — Amended and Restated Credit Agreement dated as of September 13, 2018 by and among PTC Inc., JPMorgan
Chase Bank, N.A., as Administrative Agent, and the lenders party thereto (filed as Exhibit 10 to our Current
Report on Form 8-K dated September 12, 2018 (File No. 0-18059) and incorporated herein by reference).
10.22 — Office Lease Agreement dated as of September 7, 2017 by and between PTC Inc. and SCD L2 Seaport Square
LLC (filed as Exhibit 10 to our Current Report on Form 8-K filed on September 7, 2017 (File No. 0-18059) and
incorporated herein by reference).
10.23 — First Amendment to Lease dated as of October 5, 2017 by and between PTC Inc. and SCD L2 Seaport Square
LLC (filed as Exhibit 10.23 to our Annual Report on Form 10-K for the period ended September 30, 2017 (File No.
0-18059) and incorporated herein by reference).
10.24 — Securities Purchase Agreement by and between PTC Inc. and Rockwell Automation, Inc., dated as of June 11,
2018 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on June 11, 2018 (File No. 0-18059) and
incorporated herein by reference).
10.25 — Amended and Restated Strategic Alliance Agreement by and between PTC Inc. and Rockwell Automation,
Inc. dated as of June 18, 2018.
10.26 — Registration Rights Agreement by and between the Company and Rockwell Automation, Inc., dated July 19,
2018 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on July 19, 2018 (File No. 0-18059) and
incorporated herein by reference).
21.1 — Subsidiaries of PTC Inc.
23.1 — Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm.
31.1 — Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13(a)-14(a) and 15d-14(a).
31.2 — Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13(a)-14(a) and 15d-14(a).
32** — Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.
101 — The following materials from PTC Inc.'s Annual Report on Form 10-K for the year ended September 30, 2018,
formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September
30, 2018 and 2017; (ii) Consolidated Statements of Operations for the years ended September 30, 2018, 2017
and 2016; (iii) Consolidated Statements of Comprehensive Income for the years ended September 30, 2018,
2017 and 2016; (iv) Consolidated Statements of Cash Flows for the years ended September 30, 2018, 2017 and
2016; (v) Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2018, 2017 and
2016; and (vi) Notes to Consolidated Financial Statements.
*
**
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.
60
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, 2018.
SIGNATURES
PTC Inc.
By:
/s/ JAMES HEPPELMANN
James Heppelmann
President and Chief Executive Officer
61
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, 2018.
(i) Principal Executive Officer:
Signature
Title
/s/ JAMES HEPPELMANN
James Heppelmann
President and Chief Executive Officer
(ii) Principal Financial and Accounting
Officer:
/s/ ANDREW MILLER
Andrew Miller
(iii) Board of Directors:
/s/ ROBERT SCHECHTER
Robert Schechter
/s/ JANICE CHAFFIN
Janice Chaffin
/s/ PHILLIP FERNANDEZ
Phillip Fernandez
Executive Vice President and Chief Financial
Officer
Chairman of the Board of Directors
Director
Director
/s/ DONALD GRIERSON
Director
Donald Grierson
/s/ JAMES HEPPELMANN
James Heppelmann
/s/ KLAUS HOEHN
Klaus Hoehn
/s/ PAUL LACY
Paul Lacy
/s/ CORINNA LATHAN
Corinna Lathan
/s/ BLAKE MORET
Blake Moret
Director
Director
Director
Director
Director
62
APPENDIX A
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders 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, 2018 and September 30, 2017, 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, 2018, 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, 2018, based on criteria established in Internal Control - Integrated
Framework (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, 2018 and September 30, 2017, and
the results of its operations and its cash flows for each of the three years in the period ended September
30, 2018 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, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
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’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 consolidated
financial 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.
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
F-1
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.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 2018
We have served as the Company’s auditor since 1992.
F-2
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net of allowance for doubtful accounts of $607 and $1,062 at
September 30, 2018 and 2017, respectively
Prepaid expenses
Other current assets
Total current assets
Property and equipment, net
Goodwill
Acquired intangible assets, net
Long-term marketable securities
Deferred tax assets
Other assets
Total assets
Current liabilities:
Accounts payable
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued expenses and other current liabilities
Accrued compensation and benefits
Accrued income taxes
Deferred revenue
Total current liabilities
Long-term debt, net of current portion
Deferred tax liabilities
Deferred revenue
Other liabilities
Total liabilities
Commitments and contingencies (Note I)
Stockholders’ equity:
September 30,
2018
2017
$
259,946
$
25,836
129,297
48,997
169,708
633,784
80,613
280,003
18,408
152,299
49,913
165,933
666,556
63,600
$
$
1,182,457
1,182,772
200,202
30,115
165,566
36,285
257,908
31,907
123,166
34,475
2,329,022
$
2,360,384
53,473
$
74,388
101,784
18,044
487,590
735,279
643,268
5,589
11,852
58,445
35,160
80,761
110,957
5,735
446,296
678,909
712,406
17,880
12,611
53,142
1,454,433
1,474,948
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued
—
—
Common stock, $0.01 par value; 500,000 shares authorized; 117,981 and 115,333
shares issued and outstanding at September 30, 2018 and 2017, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
1,180
1,558,403
(599,409)
(85,585)
874,589
1,153
1,609,030
(650,840)
(73,907)
885,436
$
2,329,022
$
2,360,384
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended September 30,
2018
2017
2016
$
482,027
$
279,246
$
Revenue:
Subscription
Support
Total recurring revenue
Perpetual license
Total subscription, support and license revenue
Professional services
Total revenue
Cost of revenue:
Cost of license and subscription revenue
Cost of support revenue
Total cost of software revenue
Cost of professional services revenue
Total cost of revenue
Gross margin
Operating expenses
Sales and marketing
Research and development
General and administrative
Amortization of acquired intangible assets
Restructuring and other charges, net
Total operating expenses
Operating income (loss)
Foreign currency losses, net
Interest income
Interest expense
Other income (expense), net
Income (loss) before income taxes
Benefit from income taxes
Net income (loss)
Earnings (loss) per share—Basic
Earnings (loss) per share—Diluted
Weighted average shares outstanding—Basic
Weighted average shares outstanding—Diluted
496,826
978,853
109,634
1,088,487
153,337
1,241,824
94,108
88,575
182,683
143,511
326,194
915,630
414,524
249,774
142,981
31,350
3,764
842,393
73,237
(6,982)
3,819
(41,673)
255
28,656
(23,331)
51,987
0.45
0.44
116,390
118,158
$
$
$
$
$
$
574,680
853,926
133,390
987,316
176,723
118,322
651,807
770,129
173,467
943,596
196,937
1,164,039
1,140,533
86,047
92,202
178,249
150,770
329,019
835,020
372,946
236,059
145,067
32,108
7,942
794,122
40,898
(5,686)
3,249
(42,400)
2,533
(1,406)
(7,645)
6,239
0.05
0.05
115,523
117,356
$
$
$
69,710
85,729
155,439
170,226
325,665
814,868
367,465
229,331
145,615
33,198
76,273
851,882
(37,014)
(1,889)
3,437
(29,882)
(1,844)
(67,192)
(12,727)
(54,465)
(0.48)
(0.48)
114,612
114,612
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
$
51,987
$
6,239
$
(54,465)
Year ended September 30,
2018
2017
2016
Other comprehensive income (loss), net of tax:
Unrealized hedge gain (loss) arising during the period, net of
tax of $0.2 million in 2018, $0.1 million in 2017 and $0 million in
2016, respectively
Net hedge (gain) loss reclassified into earnings, net of tax of
($0.1 million) in 2018, ($0.1 million) in 2017 and $0 million in
2016, respectively
Unrealized loss on hedging instruments
Foreign currency translation adjustment, net of tax of $0 for all
periods
Unrealized loss on marketable securities, net of tax of $0 for all
periods
Amortization of net actuarial pension loss included in net income,
net of tax of ($0.7 million), ($1.0 million), and ($0.7 million) in 2018,
2017 and 2016, respectively
Pension net gain (loss) arising during the period net of tax of $1.5
million, ($3.6 million), and $3.5 million in 2018, 2017, and 2016,
respectively
Change in unamortized pension loss during the period related to
changes in foreign currency
Other comprehensive income (loss)
(758)
(3,375)
1,445
483
1,928
459
(299)
(11,767)
16,593
(269)
(22)
2,131
(1,244)
408
(122)
1,629
2,392
1,609
(3,787)
8,636
588
(11,678)
(1,254)
26,046
(8,646)
(216)
(8,211)
Comprehensive income (loss)
$
40,309
$
32,285
$
(62,676)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended September 30,
2018
2017
2016
$
51,987
$
6,239
$
(54,465)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Stock-based compensation
Depreciation and amortization
Benefit from deferred income taxes
Other non-cash costs, net
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Accounts receivable
Accounts payable and accrued expenses
Accrued compensation and benefits
Deferred revenue
Accrued income taxes, net of income tax receivable
Other current assets and prepaid expenses
Other noncurrent assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property and equipment
Purchases of short- and long-term marketable securities
Proceeds from maturities of short- and long-term marketable securities
Acquisitions of businesses, net of cash acquired
Purchases of investments
Proceeds from sales of investments
Purchase of intangible asset
Net cash used by investing activities
Cash flows from financing activities:
Borrowings under credit facility and senior notes
Repayments of borrowings under credit facility
Repurchases of common stock
Proceeds from issuance of common stock
Payments of withholding taxes in connection with vesting of stock-based
awards
Credit facility origination costs
Contingent consideration
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of non-cash financing activities:
Fair value of contingent consideration recorded for acquisitions
$
$
82,939
87,408
(56,556)
534
20,396
5,251
(6,988)
56,141
10,323
(10,583)
6,959
247,811
(36,041)
(24,311)
18,140
(3,000)
(1,000)
—
(3,000)
(49,212)
250,000
(320,000)
(1,100,000)
1,015,654
(45,374)
(2,851)
(8,275)
(210,846)
(7,810)
(20,057)
280,003
76,708
86,742
(28,289)
2,272
12,832
20,315
(34,846)
5,808
(798)
721
(12,470)
135,234
(25,444)
(19,726)
18,785
(4,960)
—
15,218
—
65,996
86,554
(44,182)
966
52,617
(14,185)
60,944
16,232
6,749
4,591
1,444
183,261
(26,189)
(44,605)
—
(165,802)
(560)
—
—
(16,127)
(237,156)
150,000
(190,000)
(50,991)
10,778
(26,654)
(184)
(11,054)
(118,105)
1,066
2,068
277,935
670,000
(580,000)
—
21
(20,939)
(6,855)
(10,621)
51,606
6,807
4,518
273,417
277,935
259,946
$
280,003
$
2,100
$
— $
16,900
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Balance as of October 1, 2015
Common stock issued for employee stock-based awards
Shares surrendered by employees to pay taxes related to stock-based awards
Compensation expense from stock-based awards
Excess tax benefits from stock-based awards
Net loss
Unrealized loss on hedging instruments, net of tax
Foreign currency translation adjustment
Unrealized loss on available-for-sale securities, net of tax
Change in pension benefits, net of tax
Balance as of September 30, 2016
Common stock issued for employee stock-based awards
Shares surrendered by employees to pay taxes related to stock-based awards
Common stock issued for employee stock purchase plan
Compensation expense from stock-based awards
Excess tax benefits from stock-based awards
Net income
Repurchases of common stock
Unrealized loss on hedging instruments, net of tax
Foreign currency translation adjustment
Unrealized loss on available-for-sale securities, net of tax
Change in pension benefits, net of tax
Balance as of September 30, 2017
Common stock issued for employee stock-based awards
Shares surrendered by employees to pay taxes related to stock-based awards
Common stock issued
Common stock issued for employee stock purchase plan
Compensation expense from stock-based awards
ASU 2016-09 adoption
Net income
Repurchases of common stock
Unrealized loss on hedging instruments, net of tax
Foreign currency translation adjustment
Unrealized loss on available-for-sale securities, net of tax
Change in pension benefits, net of tax
Balance as of September 30, 2018
Common Stock
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
Shares
113,745
1,820
(597)
—
—
—
—
—
—
—
$
1,137
$
1,553,390
$
(602,614) $
(91,742) $
860,171
18
(5)
—
—
—
—
—
—
—
3
(20,934)
65,996
93
—
—
—
—
—
—
—
—
—
(54,465)
—
—
—
—
—
—
—
—
—
(1,244)
408
(122)
(7,253)
21
(20,939)
65,996
93
(54,465)
(1,244)
408
(122)
(7,253)
114,968
$
1,150
$
1,598,548
$
(657,079) $
(99,953) $
842,666
1,586
(544)
269
—
—
—
(946)
—
—
—
—
15
(5)
3
—
—
—
(10)
—
—
—
—
(15)
(26,649)
10,775
76,708
644
—
(50,981)
—
—
—
—
—
—
—
—
—
6,239
—
—
—
—
—
—
—
—
—
—
—
—
(299)
16,593
(22)
9,774
—
(26,654)
10,778
76,708
644
6,239
(50,991)
(299)
16,593
(22)
9,774
115,333
$
1,153
$
1,609,030
$
(650,840) $
(73,907) $
885,436
1,830
(664)
10,582
292
—
—
—
(9,392)
—
—
—
—
18
(6)
106
2
—
—
—
(93)
—
—
—
—
(18)
(45,368)
995,394
15,652
82,939
681
—
(1,099,907)
—
—
—
—
—
—
—
—
—
(556)
51,987
—
—
—
—
—
—
—
—
—
—
—
—
—
1,928
(11,767)
(269)
(1,570)
—
(45,374)
995,500
15,654
82,939
125
51,987
(1,100,000)
1,928
(11,767)
(269)
(1,570)
117,981
$
1,180
$
1,558,403
$
(599,409) $
(85,585) $
874,589
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PTC Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Description of Business and Basis of Presentation
Business
PTC Inc. was incorporated in 1985 and is headquartered in Needham, Massachusetts. PTC is a
global software and services company that delivers a technology platform 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 owned subsidiaries, including those operating outside the U.S. 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. that
require management to make estimates and assumptions that affect the amounts reported and the
related disclosures. Actual results could differ from these estimates.
Reclassifications
Effective at the beginning of fiscal 2018, in accordance with the adoption of ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting, excess tax benefits are now classified as an operating activity on the statement of cash flows
rather than as a financing activity. The prior period excess tax benefits have been reclassified for
comparability.
Effective with the beginning of the third quarter of 2017, we are reporting cost of license and
subscription revenue separately from cost of support revenue and are presenting cost of revenue in three
categories: 1) cost of license and subscription revenue, 2) cost of support revenue, and 3) cost of
professional services revenue. Cost of license and subscription includes the cost of perpetual and
subscription licenses; cost of support includes the cost of supporting both perpetual and subscription
licenses. Costs of revenue for previous periods in the accompanying Consolidated Statements of
Operations are presented on a basis consistent with the current period presentation.
Segments
In fiscal 2017, we had three operating and reportable segments: (1) the Solutions Group, which
included license, subscription, support and cloud services revenue for our core CAD, SLM and PLM
products; (2) the IoT Group, which included license, subscription, support and cloud services revenue for
our IoT, analytics and augmented reality solutions; and (3) Professional Services, which included
consulting, implementation and training revenue.
With a change in our organizational structure to streamline our operations, we merged our Solution
Group segment with our IoT Group segment and revised the information that our chief executive officer,
who is also our chief operating decision maker ("CODM"), regularly reviews for purposes of allocating
resources and assessing performance. As a result, effective with the beginning of the first quarter of fiscal
2018, we changed our operating and reportable segments from three to two: (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.
Revenue and operating income in Note Q. Segment Information have been reclassified to conform
to the current period presentation.
B. Summary of Significant Accounting Policies
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
nonmonetary assets and liabilities at historical rates and record resulting exchange gains or losses in
F-8
foreign currency net losses in the Consolidated Statements of Operations. We translate income statement
amounts at average rates for the period. Transaction gains and losses are recorded in foreign currency
net losses in the Consolidated Statements of Operations.
Revenue Recognition
Our sources of revenue include: (1) subscription, (2) support, (3) perpetual license and (4)
professional services. 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 with ASC 605-25, Revenue Recognition, Multiple-Element
Arrangements. Under those standards, revenue is recorded when 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 primary judgments involve the following:
• determining whether collection is probable;
• assessing whether the fee is fixed or determinable;
• determining whether service arrangements, including modifications and customization of the
underlying software, are not essential to the functionality of the licensed software and thus would
result in the revenue for license and service elements of an agreement being recorded
separately; and
• determining the fair value of services and support elements included in multiple-element
arrangements, which is the basis for allocating and deferring revenue for such services and
support.
Our software is distributed primarily through our direct sales force. In addition, we have an indirect
distribution channel through alliances with resellers. Revenue arrangements with resellers are generally
recognized on a sell-through basis; that is, when we deliver the product to the end-user customer. We
record consideration given to a reseller as a reduction of revenue to the extent we have recorded
revenue from the reseller. We do not offer contractual rights of return, stock balancing, or price protection
to our resellers, and actual product returns from them have been insignificant to date. As a result, we do
not maintain reserves for reseller product returns.
At the time of each sale transaction, we must make an assessment of the collectability of the
amount due from the customer. Revenue is only recognized at that time if management deems that
collection is probable. In making this assessment, we consider customer credit-worthiness and historical
payment experience. At that same time, we assess whether fees are fixed or determinable and free of
contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we
consider the payment terms of the transaction, including transactions with payment terms that extend
beyond our customary payment terms, and our collection experience in similar transactions without
making concessions, among other factors. We have periodically provided financing to credit-worthy
customers with payment terms up to 24 months. If the fee is determined not to be fixed or determinable,
revenue is recognized only as payments become due from the customer, provided that all other revenue
recognition criteria are met. Our software license arrangements generally do not include customer
acceptance provisions. However, if an arrangement includes an acceptance provision, we record
revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of
the acceptance period.
Generally, our contracts are accounted for individually. However, when contracts are closely
interrelated and dependent on each other, it may be necessary to account for two or more contracts as
one to reflect the substance of the group of contracts.
Subscription
Subscription revenue includes revenue from two primary sources: (1) subscription-based licenses, and
(2) cloud services.
Subscription-based licenses include the right for a customer to use our licenses on-premise and
receive related support for a specified term and revenue is recognized ratably over the term of the
arrangement since we do not have vendor-specific objective evidence (“VSOE”) of fair value for our
coterminous support. When sold in arrangements with other elements, VSOE of fair value is established for
F-9
the subscription-based licenses through the use of a substantive renewal clause within the customer
contract for a combined annual fee that includes the term-based license and related support.
Cloud services revenue (which in 2018, 2017 and 2016 represented less than 5% of our total revenue)
includes fees for hosting and application management of customers’ perpetual or subscription-based
licenses (hosting services) and fees for Software as a Service (SaaS) arrangements. When hosting services
are sold as part of a multi-element transaction, revenue is allocated to hosting services based on VSOE,
and recognized ratably over the contractual term beginning on the commencement dates of each
contract, which is the date the services are made available to the customer. VSOE is established for
hosting services either through a substantive stated renewal option or stated contractual overage rates,
as these rates represent the value the customer is willing to pay on a standalone basis. We also offer
cloud services under SaaS arrangements whereby customers access our software in the cloud. Under
SaaS arrangements, customers cannot take possession of the software. Cloud services include set-up
fees, which are recognized ratably over the contract term or the expected customer life, whichever is
longer.
Support
Support contracts generally include rights to unspecified upgrades (when and if available),
telephone and internet-based support, updates and bug fixes. Support revenue is recognized ratably
over the term of the support contract on a straight-line basis.
Perpetual License
Under perpetual license arrangements, we generally recognize license revenue up front upon
shipment to the customer. We use the residual method to recognize revenue from perpetual license
software arrangements that include one or more elements to be delivered at a future date when
evidence of the fair value of all undelivered elements exists, and the elements of the arrangement qualify
for separate accounting as described below. Under the residual method, the fair value of the
undelivered elements (i.e., support and services) based on our VSOE of fair value is deferred and the
remaining portion of the total arrangement fee is allocated to the delivered elements (i.e., perpetual
software license). If evidence of the fair value of one or more of the undelivered elements does not exist,
all revenues are deferred and recognized when delivery of all of those elements has occurred or when
fair values can be established. We determine VSOE of the fair value of services and support revenue
based upon our recent pricing for those elements when sold separately. For certain transactions, VSOE is
determined based on a substantive renewal clause within a customer contract. Our current pricing
practices are influenced primarily by product type, purchase volume, sales channel and customer
location. We review services and support sold separately on a periodic basis and update, when
appropriate, our VSOE of fair value for such elements to ensure that it reflects our recent pricing
experience.
Professional Services
Our software arrangements often include implementation, consulting and training services that are
sold under consulting engagement contracts or as part of the software license arrangement. When we
determine that such services are not essential to the functionality of the licensed software, we record
revenue separately for the license and service elements of these arrangements, provided that
appropriate evidence of fair value exists for the undelivered services (i.e. VSOE of fair value). We consider
various factors in assessing whether a service is not essential to the functionality of the software, including
if the services may be provided by independent third parties experienced in providing such services (i.e.
consulting and implementation) in coordination with dedicated customer personnel, and whether the
services result in significant modification or customization of the software’s functionality. When
professional services qualify for separate accounting, professional services revenues under time and
materials billing arrangements are recognized as the services are performed. Professional services
revenues under fixed-priced contracts are generally recognized as the services are performed using a
proportionate performance model with hours or costs as the input method of attribution.
When we provide professional services that are considered essential to the functionality of the
software, the arrangement does not qualify for separate accounting of the license and service elements,
and the license revenue is recognized together with the consulting services using the percentage-of-
completion method of contract accounting. Under such arrangements, consideration is recognized as
the services are performed as measured by an observable input. In these circumstances, we separate
license revenue from service revenue for income statement presentation by allocating VSOE of fair value
F-10
of the consulting services as service revenue, and the residual portion as license revenue. Under the
percentage-of-completion method, we estimate the stage of completion of contracts with fixed or “not
to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours
or costs at completion. Adjustments to estimates to complete are made in the periods in which facts
resulting in a change become known. When total cost estimates exceed revenues, we accrue for the
estimated losses when identified. The use of the proportionate performance and percentage-of-
completion methods of accounting require significant judgment relative to estimating total contract costs
or hours (hours being a proxy for costs), including assumptions relative to the length of time to complete
the project, the nature and complexity of the work to be performed and anticipated changes in salaries
and other costs.
Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting
services are included in professional services revenue, with the offsetting expense recorded in cost of
professional services revenue.
Training services include on-site and classroom training. Training revenues are recognized as the
related training services are provided.
Deferred Revenue
Billed deferred revenue primarily relates to software subscription and support agreements billed to
customers for which the services have not yet been provided. The liability associated with performing
these services is included in deferred revenue and, if not yet paid, the related customer receivable is
included in other current assets. Billed but uncollected support and subscription-related amounts
included in other current assets at September 30, 2018 and 2017 were $153.6 million and $160.9 million,
respectively. Deferred revenue consisted of the following:
Deferred subscription revenue
Deferred support revenue
Deferred perpetual license revenue
Deferred professional services revenue
Total deferred revenue
Cash Equivalents
September 30,
2018
2017
(in thousands)
288,012
$
196,684
1,475
13,272
193,376
256,999
1,773
6,759
499,443
$
458,907
$
$
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
Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds
and government securities that have a maximum maturity of three years. The longer the duration of
these securities, the more susceptible they are to changes in market interest rates and bond yields. All
unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.
We review our investments to identify and evaluate investments that have an indication of possible
impairment. We concluded that, at September 30, 2018, the unrealized losses were temporary.
Cost Method Investments
We generally account for non-marketable equity investments under the cost method. We monitor
non-marketable equity investments for events that could indicate that the investments are impaired, such
as deterioration in the investee's financial condition and business forecasts, and lower valuations in recent
or proposed financings. For an other-than-temporary impairment in the investment, we record a charge
to other expense for the difference between the estimated fair value and the carrying value. The
F-11
carrying value of our non-marketable equity investments are recorded in noncurrent assets and totaled
$1.7 million and $0.7 million as of September 30, 2018 and 2017, respectively. In 2017, we sold a cost
method investment in a private company for $13.7 million for a gain of approximately $3.7 million.
Concentration of Credit Risk and Fair Value of Financial Instruments
The amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, accounts
receivable and accounts 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 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 of geographically diverse customers dispersed across many industries. No individual
customer comprised more than 10% of our trade accounts receivable as of September 30, 2018 or 2017 or
comprised more than 10% of our revenue for the years ended September 30, 2018, 2017 or 2016.
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:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted
prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or
liabilities in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities; or
• Level 3: unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
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. 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 $0.6
million as of September 30, 2018, $1.1 million as of September 30, 2017, $1.0 million as of September 30,
2016 and $1.0 million as of September 30, 2015. Uncollectible trade accounts receivable written-off, net
of recoveries, were $1.0 million, $1.5 million and $0.3 million in 2018, 2017 and 2016, respectively. Bad debt
expense was $0.5 million, $1.5 million and $0.3 million in 2018, 2017 and 2016, respectively, and is included
in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Allowance for Sales Credits
We record an allowance for sales credits that is established based on the evaluation of historical
credits and is recorded as a reduction in accounts receivable and revenue. As of September 30, 2018,
the allowance for sale credits was $2.0 million.
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. Our foreign
F-12
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, resulting from changes in foreign currency exchange rates. We enter into derivative
transactions, specifically foreign currency forward contracts, 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 flow hedge
activities see Note P. 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 these foreign currency forward contracts as hedges for accounting purposes and changes
in the fair value of these instruments are recognized immediately in earnings. 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, net.
Cash Flow Hedges
Our foreign exchange risk management program objective is to identify foreign exchange exposures
and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign
exchange rate movements. We designate certain foreign exchange forward contracts as cash flow
hedges of Euro, Yen and SEK denominated intercompany forecast revenue transactions (supported by
third party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated
Balance Sheets and the maximum duration of foreign exchange forward contracts is 14 months.
Cash flow hedge relationships are designated at inception, and effectiveness is assessed
prospectively and retrospectively using regression analysis on a monthly basis. As the forward contracts
are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the
effective portion of changes in these cash flow hedges in accumulated other comprehensive income
and subsequently reclassify into earnings in the same period during which the hedged transactions are
recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes
in time value are included in the assessment of effectiveness. Our derivatives are not subject to any credit
contingent features. We manage credit risk with counter-parties by trading among several counter-
parties and we review our counter-parties’ credit at least quarterly.
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. 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 terms 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.
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
approximates the same amount of expense as that calculated using the ratio that current period gross
product revenues bear to total anticipated gross product revenues. No development costs for software
to be sold externally were capitalized in 2018, 2017 or 2016. In 2018 and 2017, we acquired capitalized
software of $0.8 million and $6.0 million, respectively. These assets are included in acquired intangible
assets in the accompanying Consolidated Balance Sheets.
F-13
Goodwill, Acquired Intangible Assets and Long-lived Assets
Goodwill is the amount by which the purchase price in a business acquisition exceeds the fair values
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-segment 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 qualitative (Step 0) or 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 implied 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, current budgets, operating plans and industry data.
We completed our annual goodwill impairment review as of July 1, 2018 based on a Step 0
assessment and concluded that no impairment charge was required as of that date.
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 11 years, customer lists are amortized over periods up to 12 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 $2.9 million,
$2.5 million and $2.1 million in 2018, 2017 and 2016, 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 tax provision in the Consolidated
Statements of Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other 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, we do not record tax provisions or benefits for the net changes in the foreign currency
F-14
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’ equity
and, as of September 30, 2018 and 2017, was comprised of cumulative translation adjustment losses of
$66.4 million and $54.6 million, respectively, unrecognized actuarial losses related to pension benefits of
$27.0 million ($19.2 million net of tax) and $24.7 million ($17.6 million net of tax), respectively, unrecognized
gain on hedging instruments of $0.4 million ($0.4 million net of tax) and unrecognized loss of $1.8 million
($1.5 million net of tax), respectively, and unrecognized losses on marketable securities of $0.4 million and
$0.1 million, respectively.
Earnings 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 to the net loss generated in the
year ended September 30, 2016, approximately 1.7 million restricted stock units have been excluded from
the computation 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:
Net income (loss)
Weighted average shares outstanding
Dilutive effect of employee stock options, restricted shares and
restricted stock units
Diluted weighted average shares outstanding
Basic earnings (loss) per share
Diluted earnings (loss) per share
Stock-Based Compensation
Year ended September 30,
2018
2017
2016
(in thousands, except per share data)
$
$
$
51,987
$
6,239
$
116,390
115,523
1,768
118,158
0.45
0.44
$
$
1,833
117,356
0.05
0.05
$
$
(54,465)
114,612
—
114,612
(0.48)
(0.48)
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 K.
Equity Incentive Plan for a description of the types of stock-based awards granted, the compensation
expense related to such awards and detail of equity-based awards outstanding. See Note G. Income
Taxes for detail of the tax benefit related to stock-based compensation recognized in the Consolidated
Statements of Operations.
Recently Adopted Accounting Pronouncements
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. We adopted ASU No. 2016-09 in the first
quarter of 2018.
Effective with the adoption, stock-based compensation excess tax benefits or deficiencies are
reflected in the Consolidated Statements of Operations as a component of the provision for income taxes
when the awards vest or are settled. Previously they were recognized in equity. Upon adoption, under the
modified retrospective transition method, we recognized the previously unrecognized excess tax benefits
of $37.0 million as increases in deferred tax assets for tax loss carryovers and tax credits, $36.9 million of
which were offset by an increase in our U.S. valuation allowance.
Additionally, excess tax benefits from stock-based awards will no longer be separately classified on
our Consolidated Statements of Cash Flows as a financing activity apart from other income tax, and will
F-15
be presented as an operating activity. As a result of the adoption of ASU 2016-09, the Consolidated
Statement of Cash Flows was adjusted as follows: a $0.6 million and $0.1 million increase to net cash
provided by operating activities for the periods ended September 30, 2017 and September 30, 2016,
respectively, and a $0.6 million and $0.1 million decrease to net cash used in financing activities for the
periods ended September 30, 2017 and September 30, 2016, respectively.
Finally, we have elected to account for forfeitures as they occur, rather than estimate expected
forfeitures, which resulted in a cumulative effect adjustment of $0.7 million to reduce retained earnings as
of October 1, 2017.
Pending Accounting Pronouncements
Derivative Financial Instruments
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting
for Hedging Activities", which amends and simplifies existing guidance in order to allow companies to
more accurately present the economic effects 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, and early adoption is permitted.
We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax
accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the
transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017
(our fiscal 2019) including interim reporting periods within those annual reporting periods and early
adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated
financial statements. We expect to record a net deferred tax asset of approximately $72 million upon
adoption, primarily relating to deductible amortization of intangible assets in Ireland. Post adoption, our
effective tax rate will no longer include the benefit of this amortization, which is reflected in our effective
tax rate reconciliation under the current guidance.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will replace the existing
guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability
among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance
sheet and to disclose important information about leasing arrangements. ASU 2016-02 is effective for
annual periods beginning after December 15, 2018 (our fiscal 2020) and interim periods within those
annual periods. Early adoption is permitted and modified retrospective application is required. We are
currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606
(ASC 606). ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The
FASB has also issued additional standards to provide clarification and implementation guidance on ASC
606.
The core principle of ASC 606 is to recognize revenue when promised goods or services are
transferred to a customer in an amount that reflects the consideration that is expected to be received for
those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition
through a five-step process: (1) identifying a contract with a customer; (2) identifying the performance
obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to
the performance obligations in the contract; 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, it is possible more judgment and estimates may be required within the revenue recognition
process than is required under existing 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.
F-16
ASC 606 is effective for us in the first quarter of our fiscal 2019. Companies may adopt ASC 606 using
either the retrospective method, under which each prior reporting period is presented under ASC 606,
with the option to elect certain permitted practical expedients, or the modified retrospective method,
under which a company adopts ASC 606 from the beginning of the year of initial application with no
restatement of comparative periods, with the cumulative effect of initially applying ASC 606 recognized
at the date of initial application, and with certain additional required disclosures. We are adopting ASC
606 using the modified retrospective method.
While we are continuing to assess the impact of the new standard, we currently believe the most
significant impact relates to accounting for our subscription arrangements that include term-based on-
premise software licenses bundled with support and/or cloud services. Under current GAAP, the revenue
attributable to these subscription licenses bundled with support is recognized ratably over the term of the
arrangement because VSOE does not exist for the undelivered support element as it is not sold
separately. Under the new standard, the requirement to have VSOE for undelivered elements to enable
the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the new
standard we will be required to recognize as revenue a portion of the subscription fee upon delivery of
the software license. For subscriptions arrangements that also include cloud services, the company
assessed whether the cloud component was highly interrelated with the on-premise term software
license. Other than a limited population of subscriptions, the cloud component is currently not deemed
to be interrelated with the on-premise term software and as a result, cloud services will be accounted for
as a separate distinct performance obligation. We do have a limited number of subscriptions that
incorporate substantial cloud services where cloud services are not distinct from the on-premise term
license in the context of the contracts as they are considered highly interrelated and represent a single
performance obligation, for which the revenue will continue to be recognized over time. We currently
expect revenue related to our perpetual license revenue and related support contracts, professional
services and cloud offerings to remain substantially unchanged. Due to the complexity of certain of our
contracts, the actual revenue recognition treatment required under the new standard may be
dependent on contract-specific terms and, therefore, may vary in some instances.
Upon implementation of the new standard in fiscal 2019, we expect to make revisions to contract
terms with our customers for new orders that will result in shortening the initial, non-cancellable term of our
multi-year subscriptions to one year. This change will result in annual contractual periods for the majority
of our software subscriptions, the license portion of which will be recognized at the beginning of each
annual contract period upon delivery of the licenses and the support portion of which will be recognized
ratably over the one year contractual period. As a result, we anticipate one year of subscription revenue
will be recognized for each contract each year; however, more of the revenue will be recognized in the
quarter that the contract period begins and less will be recognized in the subsequent three quarters of
the contract than under the current accounting rules.
Under the modified retrospective method, we will evaluate each contract that is ongoing on the
adoption date as if that contract had been accounted for under ASC 606 from contract inception. Some
license revenue related to subscription arrangements that would have been recognized in future periods
under current GAAP will be recast under ASC 606 as if the revenue had been recognized in prior periods.
Under this transition method, we will not adjust historical reported revenue amounts. Instead, the revenue
that would have been recognized under this method prior to the adoption date will be an adjustment to
retained earnings and will not be recognized as revenue in future periods as previously planned. Because
we expect that license revenue associated with subscription contracts will be recognized up front instead
of over time under ASC 606, we expect approximately $350 million to $380 million will be adjusted to
retained earnings upon adoption related to billed and unbilled deferred revenue. During the first year of
adoption, we will disclose the amount of this retained earnings adjustment and intend to provide
supplemental disclosure of how this revenue would have been recognized under the current rules.
Another significant provision under ASC 606 includes the capitalization and amortization of costs
associated with obtaining and fulfilling a contract. Currently, substantially all of these costs are expensed
in the period incurred. Under ASC 606, direct and incremental costs to acquire a contract are capitalized
and amortized using a systematic basis over the pattern of transfer of the goods and services to which
the asset relates. Under ASC 606, we estimate approximately $70 million of commission costs will be
capitalized and amortized over the period the capitalized assets are expected to contribute to future
cash flows.
F-17
Furthermore, we have made and will continue to make investments in systems and processes to
enable timely and accurate reporting under the new standard. We are implementing operational and
internal control structural changes.
C. Restructuring and Other Charges
Restructuring Charges (Credits)
In fiscal 2016, we initiated a plan to restructure our workforce and consolidate select facilities to
reduce our cost structure and to realign our investments with what we believe to be our higher growth
opportunities. The actions resulted in total restructuring charges of $84.5 million, primarily associated with
termination benefits associated with approximately 800 employees. This restructuring plan was
substantially completed in 2017.
In fiscal 2015, we committed to a plan to restructure our workforce and consolidate select facilities to
realign our global workforce to increase investment in our IoT business and to reduce our cost structure
through organizational efficiencies in the face of significant foreign currency depreciation relative to the
U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The actions resulted in
total restructuring charges of $42.1 million, primarily associated with termination benefits associated with
411 employees. This restructuring plan was substantially completed in 2016.
In 2018, we recorded restructuring credits of $1.0 million ($0.2 million related to the 2016 restructuring
and $0.8 million related to the 2015 restructuring). We made cash payments related to restructuring
charges of $2.8 million ($2.6 million related to the 2016 restructuring and $0.2 million related to the 2015
restructuring). At September 30, 2018, accrued restructuring totaled $2.4 million related to the 2016
restructuring.
In 2017, we recorded restructuring charges of $7.9 million ($8.2 million of which related to the 2016
restructuring offset by $0.3 million related to the 2015 restructuring). We made cash payments related to
restructuring charges of $37.1 million ($36.4 million of which related to the 2016 restructuring and $0.7
million related to the 2015 restructuring).
In 2016, we recorded restructuring charges of $76.3 million ($77.1 million of which related to the 2016
restructuring offset by $0.8 million credit related to the 2015 restructuring). We made cash payments
related to restructuring charges of $55.0 million ($42.1 million of which related to the 2016 restructuring,
$12.1 million related to the 2015 restructuring and $0.8 million related to prior restructuring plans).
The following table summarizes restructuring charges reserve activity for the three years ended
September 30, 2018:
Balance, October 1, 2015
Charges to operations
Cash disbursements
Foreign currency impact
Balance, September 30, 2016
Charges to operations
Cash disbursements
Other non-cash charges
Foreign currency impact
Balance, September 30, 2017
Charges (credits) to operations
Cash disbursements
Foreign currency impact
Balance, September 30, 2018
Employee Severance
and Related Benefits
Facility Closures
and Other Costs
Consolidated Total
$
14,086
$
1,168
$
(in thousands)
74,929
(53,966)
128
35,177
2,373
(35,069)
—
(745)
1,736
(509)
(1,247)
20
— $
1,344
(1,053)
(28)
1,431
5,569
(2,005)
(704)
217
4,508
(494)
(1,509)
(90)
2,415
$
$
F-18
15,254
76,273
(55,019)
100
36,608
7,942
(37,074)
(704)
(528)
6,244
(1,003)
(2,756)
(70)
2,415
Of the accrual for facility closures and related costs, as of September 30, 2018, $1.5 million is included
in accrued expenses and other current liabilities and $0.9 million is included in other liabilities in the
Consolidated Balance Sheets. The accrual for facility closures is net of assumed sublease income of $2.8
million. The accrual for employee severance and related benefits is included in accrued compensation
and benefits in the Consolidated Balance Sheets.
Other - Headquarters relocation charges
Headquarters relocation charges represent accelerated depreciation expense recorded in
anticipation of exiting our current headquarters facility. In 2019, we will be moving into a new worldwide
headquarters in the Boston Seaport District, and we will be vacating our current headquarters space.
Because our current headquarters lease will not expire until November 2022, we are seeking to sublease
that space, but have not yet done so. If we are unable to sublease our current headquarters space for
an amount at least equal to our rent obligations under the current headquarters lease (approximately
$12 million per year), we will bear overlapping rent obligations for those premises and will be required to
record additional headquarters relocation charges related to any rent shortfall. A charge for such
shortfall will be recorded in the earlier of the period that we cease using the space (which will likely occur
in the second quarter of our fiscal 2019) or the period we sign sublease contracts. Additionally, we will
incur other costs associated with the move which will be recorded as incurred. In 2018, we recorded $4.8
million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold
improvements in our current facility.
D. Property and Equipment
Property and equipment consisted of the following:
Computer hardware and software
Furniture and fixtures
Leasehold improvements
Gross property and equipment
Accumulated depreciation and amortization
Net property and equipment
September 30,
2018
2017
(in thousands)
324,765
$
20,737
47,272
392,774
(312,161)
80,613
$
286,380
21,145
47,658
355,183
(291,583)
63,600
$
$
Depreciation expense was $29.4 million, $28.0 million and $28.8 million in 2018, 2017 and 2016,
respectively.
E. Acquisitions
In 2016, we completed the acquisitions of Kepware (on January 12, 2016) and Vuforia (on
November 3, 2015). The results of operations of these acquired businesses have been included in our
consolidated financial statements beginning on their respective acquisition dates. Our results of
operations prior to these acquisitions, if presented on a pro forma basis, would not differ materially from
our reported results.
These acquisitions have been accounted for as business combinations. Assets acquired and
liabilities assumed have been recorded at their estimated fair values as of the respective acquisition
date. The fair values of intangible assets for Kepware were based on valuations using an income
approach, with estimates and assumptions provided by management of the acquired companies and
PTC. The fair values of intangible assets for Vuforia were based on valuations using a cost approach
which requires the use of significant estimates and assumptions, including estimating costs to reproduce
an asset. The process for estimating the fair values of identifiable intangible assets as well as the Kepware
contingent consideration liabilities requires the use of significant estimates and assumptions, including
estimating future cash flows and developing appropriate discount rates. The excess of the purchase
price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as
goodwill.
F-19
Acquisition-related costs were $0.5 million, $1.6 million and $3.5 million in 2018, 2017 and 2016,
respectively. Acquisition-related costs include direct costs of completing an acquisition (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). In addition,
subsequent adjustments to our initial estimated amounts of contingent consideration, primarily net
present value changes, are included within acquisition-related charges. These costs are classified in
general and administrative expenses in the accompanying Consolidated Statements of Operations.
2016 Acquisitions
Kepware
On January 12, 2016, we acquired all of the ownership interest in Kepware, Inc. for $99.4 million in
cash (net of cash acquired of $0.6 million) and, $16.9 million representing the fair value of contingent
consideration payable upon achievement of targets described below. We borrowed $100.0 million under
our existing credit facility in January of 2016 to fund the acquisition.
The acquisition of Kepware's KEPServerEX® communication platform enhanced our portfolio of
Internet of Things (IoT) technology, and accelerated our entry into the factory setting and industrial IoT. At
the time of the acquisition, Kepware had historical annualized revenues which were immaterial to our
financial results. Kepware added approximately $16 million to our 2016 revenue and approximately $15
million in costs and expenses.
The purchase price allocation resulted in $77.1 million of goodwill, which will be deductible for
income tax purposes. Intangible assets of $34.5 million includes purchased software of $28.7 million,
customer relationships of $5.2 million and trademarks of $0.6 million, which are being amortized over
useful lives of 10 years, 10 years and 6 years, respectively, based upon the pattern in which economic
benefits related to such assets are expected to be realized.
The resulting amount of goodwill reflects our expectations of the following benefits: 1) Kepware’s
protocol translators and connectivity platform strengthen the ThingWorx technology platform and
accelerate our entry into the factory setting and Industrial IoT (IIoT); 2) cross-selling opportunities for our
integrated technology platforms in the critical infrastructure markets to drive revenue growth; and 3)
Kepware’s 20 years of manufacturing experience strengthens our manufacturing talent and domain
expertise and provides support for our manufacturing strategy initiatives.
Vuforia
On November 3, 2015, pursuant to an Asset Purchase Agreement, we acquired the Vuforia business
from Qualcomm Connected Experiences, Inc., a subsidiary of Qualcomm Incorporated, for $64.8
million in cash (net of cash acquired of $4.5 million). We borrowed $50.0 million under our credit facility to
finance this acquisition.
The acquisition of Vuforia's augmented reality (AR) technology platform enhances our technology
portfolio and accelerates our strategy as a leading provider of technologies and solutions that blend the
digital and physical worlds. At the time of the acquisition, Vuforia had approximately 80 employees and
historical annualized revenues which were immaterial to our financial results. The purchase price
allocation resulted in $23.3 million of goodwill, which will be deductible for income tax purposes, $41.2
million of technology and $0.3 million of net tangible assets. The acquired technology is being amortized
over a useful life of 6 years. The resulting amount of goodwill reflects the value of the synergies created by
integrating Vuforia’s augmented technology platform into PTC’s IoT solutions.
F-20
The total purchase price for our 2016 acquisitions was allocated to assets and liabilities acquired as
follows:
Purchase price allocation:
Goodwill
Identifiable intangible assets
Cash
Other assets and liabilities, net
Total allocation of purchase price consideration
Less: cash acquired
Total purchase price allocation, net of cash acquired
Less: contingent consideration
Kepware
Vuforia
(in thousands)
$
77,081
$
34,500
590
4,729
116,900
(590)
116,310
(16,900)
Net cash used for acquisitions of businesses
$
99,410
$
F. Goodwill and Acquired Intangible Assets
23,316
41,200
4,466
261
69,243
(4,466)
64,777
—
64,777
In 2017, we had three 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 three to two: (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, 2018, goodwill and acquired intangible assets in the aggregate attributable to
our Software Products and Professional Services segment was $1,352.4 million and $30.2 million,
respectively. As of September 30, 2017, goodwill and acquired intangible assets in the aggregate
attributable to our Software Products and Professional Services segment was $1,410.0 million and $30.6
million, respectively.
Goodwill is tested for impairment annually, or on an interim basis if an event occurs or circumstances
change that would, more likely than not, reduce the fair value of the reporting segment below its
carrying value. We completed our annual goodwill impairment review as of June 30, 2018 and
concluded that no impairment charge was required as of that date. We completed our annual goodwill
impairment review as of June 30, 2018 based on a qualitative assessment. Our qualitative assessment
included company specific (financial performance and long-range plans), industry, and
macroeconomic factors, and consideration of the fair value of each reporting unit, which was
approximately double its carrying value or higher at July 2, 2016, the last valuation date. Based on our
qualitative assessment, we believe it is more likely than not that the fair values of our reporting units
exceed their carrying values and no further impairment testing is required. Through September 30, 2018,
there have not been any events or changes in circumstances that indicate that the carrying values of
goodwill or acquired intangible assets may not be recoverable.
F-21
Goodwill and acquired intangible assets consisted of the following:
Goodwill (not amortized)
Intangible assets with finite lives
(amortized) (1):
Purchased software
Capitalized software
Customer lists and relationships
Trademarks and trade names
Other
Total goodwill and acquired
intangible assets
September 30, 2018
September 30, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
(in thousands)
$
1,182,457
$
1,182,772
$
362,679
$
254,059
$
108,620
$
362,955
$
228,377
$
134,578
22,877
357,586
19,054
4,003
22,877
270,272
14,786
4,003
—
87,314
4,268
—
22,877
359,932
19,138
4,030
22,877
241,554
14,186
4,030
—
118,378
4,952
—
$
766,199
$
565,997
$
200,202
$
768,932
$
511,024
$
257,908
$
1,382,659
$
1,440,680
(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 9 years, 10 years, and 11 years,
respectively.
The changes in the carrying amounts of goodwill from October 1, 2017 to September 30, 2018 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:
Balance, September 30, 2016
Acquisition
Foreign currency translation adjustments
Balance, September 30, 2017
Acquisition
Foreign currency translation adjustments
Balance, September 30, 2018
Software
Products
Professional
Services
(in thousands)
Total
$
$
$
1,140,215
$
29,598
$
1,169,813
2,847
9,855
—
257
2,847
10,112
1,152,917
$
29,855
$
1,182,772
4,350
(4,547)
—
(118)
4,350
(4,665)
1,152,720
$
29,737
$
1,182,457
The aggregate amortization expense for intangible assets with finite lives recorded for the years
ended September 30, 2018, 2017 and 2016 was reflected in our Consolidated Statements of Operations
as follows:
Amortization of acquired intangible assets
Cost of software revenue
Total amortization expense
Year ended September 30,
2018
2017
2016
(in thousands)
31,350
$
32,108
$
26,706
26,621
58,056
$
58,729
$
$
$
33,198
24,604
57,802
The estimated aggregate future amortization expense for intangible assets with finite lives remaining
as of September 30, 2018 is $50.6 million for 2019, $47.8 million for 2020, $42.3 million for 2021, $29.1 million
for 2022, $17.1 million for 2023 and $13.2 million thereafter.
F-22
G. Income Taxes
Our income (loss) before income taxes consisted of the following:
Domestic
Foreign
Total income (loss) before income taxes
Year ended September 30,
2018
2017
2016
(in thousands)
$
$
(114,591) $
(140,150) $
(156,166)
143,247
138,744
28,656
$
(1,406) $
88,974
(67,192)
Our (benefit) provision for income taxes consisted of the following:
Year ended September 30,
2018
2017
2016
(in thousands)
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$
3,009
$
2,423
$
2,003
28,213
33,225
(12,594)
(445)
(43,517)
(56,556)
340
17,881
20,644
4,911
877
(34,077)
(28,289)
Total provision (benefit) for income taxes
$
(23,331) $
(7,645) $
2,417
571
28,467
31,455
965
515
(45,662)
(44,182)
(12,727)
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and
Jobs Act, (the "Tax Act"), which significantly changed existing U.S. tax laws by a reduction of the
corporate tax rate, the implementation of a new system of taxation for non-U.S. earnings, the imposition
of a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries, and the
expansion of the limitations on the deductibility of executive compensation and interest expense. As we
have a September 30 fiscal year-end, a blended U.S. statutory federal rate of approximately 24.5%
applies for our fiscal year ending September 30, 2018 and 21% for subsequent fiscal years. The Tax Act also
provides that net operating losses generated in years ending after December 31, 2017 (our fiscal 2018) will
be carried forward indefinitely and can no longer be carried back, and that net operating losses
generated in years beginning after December 31, 2017 can only reduce taxable income by up to 80%
when utilized in a future period.
We have provided no federal income taxes payable as a result of the deemed repatriation of
undistributed earnings as the tax will be offset by a combination of current year losses and existing
attributes which had a full valuation allowance recorded against the related deferred tax assets. We
recorded a state income taxes payable on the deemed repatriation of $2.1 million. We also recorded a
deferred tax benefit of $14.1 million for the impact of the Tax Act on our net U.S. deferred income tax
balances. This was primarily attributable to the reduction of the federal tax rate on the net deferred tax
liability in the U.S., and the ability to realize net operating losses from the reversal of existing deferred tax
assets which can now be carried forward indefinitely and can therefore be netted against deferred tax
liabilities for indefinite lived intangible assets.
The changes included in the Tax Act are broad and complex. The Securities Exchange Commission
has issued rules that allow for a measurement period of up to one year after the enactment date of the
Tax Act to finalize the recording of the related tax impacts. We have finalized our accounting for the
effects of the legislation with the exception of any additional guidance that may impact our provisional
amounts recorded for the transition tax. We are not able to make reasonable estimates at this time of the
effects of certain provisions of the Tax Act that will apply to us beginning in our fiscal year ending
September 30, 2019, including the Global Intangible Low Tax Income tax (the "GILTI" tax) and any
associated impact on our U.S. valuation allowance. We currently anticipate finalizing and recording any
resulting adjustments in the quarter ending December 29, 2018.
F-23
Taxes computed at the statutory federal income tax rates are reconciled to the provision (benefit)
for income taxes as follows (in thousands):
Statutory federal income tax rate
Change in valuation allowance
Transition impact of U.S. Tax Act
Federal rate change
State income taxes, net of federal tax benefit
Federal research and development credits
Resolution of uncertain tax positions
Foreign rate differences
Foreign tax on U.S. provision
Excess tax benefits from restricted stock
Audits and settlements
U.S. permanent items
Other, net
Benefit for income taxes
Year ended September 30,
2018
2017
2016
$
7,021
25 % $
(492)
(35)% $ (23,517)
(181,047)
(632)%
17,334
1,233 %
37,996
126,122
69,648
2,401
(3,058)
(4,646)
440 %
243 %
8 %
(11)%
(16)%
—
—
627
(2,182)
(3,840)
—
— %
45 %
(155)%
(273)%
—
—
(82)
(5,981)
—
(38,743)
(135)%
(27,932)
(1,987)%
(27,513)
2,736
(11,641)
2,352
5,408
116
10 %
(41)%
8 %
19 %
1 %
2,737
195 %
1,987
—
—
6,030
73
—
—
429 %
4 %
—
—
2,886
1,497
(35)%
57 %
—
— %
— %
(9)%
— %
(41)%
3 %
—
—
4 %
2 %
$ (23,331)
(81)% $
(7,645)
(544)% $ (12,727)
(19)%
In 2018 our effective tax rate was lower than the statutory federal income tax rate due to U.S. tax
reform, as described above. In 2018, 2017 and 2016, our effective tax rate was materially impacted by our
corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. A significant
amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2018, 2017 and
2016, the foreign rate differential predominantly relates to these Irish earnings. Additionally, we have a full
valuation allowance against deferred tax assets in the U.S., primarily related to net operating loss, tax
credit carryforwards, capitalized research and development expense and deferred revenue. As a result,
we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in 2018 ,2017
and 2016 includes the continuing rate benefit from a business realignment completed on September 30,
2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. The
realignment allows us to more efficiently manage the distribution of our products to European customers.
In 2018, this realignment resulted in a tax benefit of approximately $24 million and in 2017 and 2016, a
benefit of approximately $28 million in each year. In 2017 and 2016, the change in valuation allowance
primarily relates to U.S. losses not benefited, partially offset by the release of valuation allowances in
foreign subsidiaries of $9.0 million and $3.1 million, respectively. We recorded foreign withholding taxes, an
obligation of the U.S. parent of $2.7 million in 2018 and $2.0 million in 2017 and 2016, respectively.
At September 30, 2018 and 2017, income taxes payable and income tax accruals recorded on the
accompanying Consolidated Balance Sheets were $24.2 million ($18.0 million in accrued income taxes,
$1.8 million in other current liabilities and $4.4 million in other liabilities) and $16.2 million ($5.7 million in
accrued income taxes, $2.3 million in other current liabilities and $8.2 million in other liabilities),
respectively. At September 30, 2018 and 2017, prepaid taxes recorded in prepaid expenses on the
accompanying Consolidated Balance Sheets were $4.8 million and $7.1 million, respectively. We made
net income tax payments of $22.6 million, $35.4 million and $25.5 million in 2018, 2017 and 2016,
respectively.
F-24
The significant temporary differences that created deferred tax assets and liabilities are shown
below:
Deferred tax assets:
Net operating loss carryforwards
Foreign tax credits
Capitalized research and development expense
Pension benefits
Prepaid expenses
Deferred revenue
Stock-based compensation
Other reserves not currently deductible
Amortization of intangible assets
Other tax credits
Depreciation
Capital loss carryforward
Deferred interest
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Acquired intangible assets not deductible
Pension prepayments
Deferred revenue
U.S taxes on unremitted foreign earnings
Deferred income
Other
Total deferred tax liabilities
Net deferred tax assets
September 30,
2018
2017
(in thousands)
$
31,329
$
143,793
2,201
20,999
12,296
30,614
33,886
11,622
13,588
96,841
55,760
4,364
33,024
13,057
1,152
360,733
(141,950)
218,783
(41,139)
(2,362)
(6,978)
—
(6,641)
(1,686)
(58,806)
$
159,977
$
21,099
13,044
12,107
9,250
59,022
25,360
16,905
78,351
42,652
3,095
33,535
11,666
6,599
476,478
(279,683)
196,795
(70,570)
(2,093)
(6,214)
(11,440)
—
(1,192)
(91,509)
105,286
We have concluded, based on the weight of available evidence, that a full valuation allowance
continues to be 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.
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, 2018, we
had U.S. federal NOL carryforwards from acquisitions of $4.1 million that expire in 2023 to 2029. The
utilization of these NOL carryforwards is limited as a result of the change in ownership rules under Internal
Revenue Code Section 382.
As of September 30, 2018, we had Federal R&D credit carryforwards of $30.0 million, which expire
beginning in 2021 and ending in 2038, and Massachusetts R&D credit carryforwards of $22.4 million, which
expire beginning in 2019 and ending in 2033. We also had foreign tax credits of $2.2 million, which expire
beginning in 2026 and ending in 2027. A full valuation allowance is recorded against these carryforwards.
We also have NOL carryforwards in non-U.S. jurisdictions totaling $84.2 million, the majority of which
do not expire. We also have non-U.S. tax credit carryforwards of $5.0 million that expire beginning in 2029
and ending in 2035. Additionally, we have interest and amortization carryforwards of $104.5 million and
$709.3 million, respectively, in a foreign jurisdiction. There are limitations imposed on the utilization of such
attributes that could restrict the recognition of any tax benefits.
As of September 30, 2018, we have a valuation allowance of $108.6 million against net deferred tax
assets in the U.S. and a valuation allowance of $33.3 million against net deferred tax assets in certain
F-25
foreign jurisdictions. The valuation allowance recorded against net deferred tax assets of certain foreign
jurisdictions is established primarily for our net operating loss carryforwards, the majority of which do not
expire. However, there are limitations imposed on the utilization of such net operating losses that could
restrict the recognition of any tax benefits.
The changes to the valuation allowance were primarily due to the following:
Valuation allowance beginning of year
Net release of valuation allowance (1)
Net increase (decrease) in deferred tax assets with a full valuation
allowance (2)
Establish valuation allowance in foreign jurisdictions
Valuation allowance end of year
$
$
Year ended September 30,
2018
2017
(in millions)
2016
279.7
$
235.5
$
(2.8)
(134.9)
—
(9.1)
53.3
—
142.0
$
279.7
$
198.2
(3.1)
39.8
0.6
235.5
In 2018, 2017 and 2016, this is attributable to the release in foreign jurisdictions.
(1)
(2) This is primarily attributable to U.S. tax reform: the utilization of tax attributes used to offset the
transition tax, the revaluation of the U.S. net deferred tax assets and liabilities, the ability to realize net
operating losses from the reversal of existing deferred tax assets which can now be carried forward
indefinitely and can therefore be netted against deferred tax liabilities for indefinite lived intangible.
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 2018 and 2017, we reduced interest expense by
$0.6 million and $0.9 million, respectively, and in 2016, we recorded interest expense of $0.5 million. In
2018, 2017 and 2016, we had no tax penalty expense in our income tax provision. As of September 30,
2018 and 2017, we had accrued $0.5 million and $1.1 million, respectively, of net estimated interest
expense related to income tax accruals. We had no accrued tax penalties as of September 30, 2018,
2017 or 2016.
Unrecognized tax benefits
Unrecognized tax benefit beginning of year
Tax positions related to current year:
Additions
Tax positions related to prior years:
Additions
Reductions
Settlements
Statute expirations
Year ended September 30,
2018
2017
(in millions)
2016
$
14.8
$
15.5
$
14.1
1.5
—
(4.7)
—
(1.8)
0.9
1.0
(1.6)
(1)
—
1.0
0.4
—
—
—
Unrecognized tax benefit end of year
$
9.8
$
14.8
$
15.5
If all of our unrecognized tax benefits as of September 30, 2018 were to become recognizable in the
future, we would record a benefit to the income tax provision of $9.8 million (which would be partially
offset by an increase in the U.S. valuation allowance of $3.7 million). 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 $2 million as audits close and statutes of limitations expire.
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax
authorities 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
F-26
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 resolution of the appeal process.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities,
including the 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. As of September 30, 2018, we remained subject to
examination in the following major tax jurisdictions for the tax years indicated:
Major Tax Jurisdiction
Open Years
United States
Germany
France
Japan
Ireland
2015 through 2018
2011 through 2018
2015 through 2018
2013 through 2018
2014 through 2018
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 utilized in later periods.
We incurred expenses related to stock-based compensation in 2018, 2017 and 2016 of $82.9 million,
$76.7 million and $66.0 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 $28.3 million, $1.3 million and $0.7 million in 2018, 2017 and
2016, respectively. Upon the settlement 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 2018, windfall
tax benefits of $13.2 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
and 2016, we recorded windfall tax benefits of $0.6 million and $0.1 million to APIC, respectively.
In the first quarter of 2018, as a result of the adoption of ASU 2016-09, we recognized previously
unrecognized tax benefits of $37.0 million as increases in deferred tax assets for tax loss carryovers and tax
credits, primarily in the U.S. A corresponding increase to the valuation allowance of $36.9 million was
recorded to the extent that it was not more likely than not that these benefits would be realized.
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 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. 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-27
H. Debt
As of September 30, 2018 and 2017, we had the following long-term borrowing obligations:
6.000% Senior notes due 2024
Credit facility-revolver
Total debt
Unamortized debt issuance costs for the Senior notes (1)
Total debt, net of issuance costs (2)
September 30,
2018
2017
(in thousands)
500,000
$
148,125
648,125
(4,857)
500,000
218,125
718,125
(5,719)
643,268
$
712,406
$
$
(1) Unamortized debt issuance costs related to the credit facility were $3.8 million and $2.0 million as of September 30, 2018
and September 30, 2017, respectively, and were included in other assets.
(2) As of September 30, 2018 and 2017, all debt was included in long-term debt.
Senior Unsecured Notes
In May 2016, we issued $500 million in aggregate principal amount of 6.0% senior, unsecured long-
term debt at par value, due in 2024. We used the net proceeds from the sale of the notes to repay a
portion of our outstanding revolving loan under our current credit facility. Interest is payable semi-
annually on November 15 and May 15. The debt indenture 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, 2018.
On and after May 15, 2019, we may redeem the senior 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% of the
aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the
senior notes in 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, 2018, the total estimated fair value of the Notes was approximately $521.2
million, which is based on quoted prices for the notes on that date.
Credit Agreement
We maintain a multi-currency credit facility with a syndicate of sixteen banks for which JPMorgan
Chase Bank, N.A. acts as Administrative Agent. We use the credit facility for general corporate purposes,
including acquisitions of businesses, share repurchases and working capital requirements. As of
September 30, 2018, the fair value of our credit facility approximates its book value.
In September 2018, we amended and restated the credit facility to increase the revolving loan
commitment from $600 million to $700 million and amend other provisions, including replacing the fixed
charge coverage ratio with an interest coverage ratio. The revolving loan commitment does 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. The credit facility matures on September 13, 2023, when all
remaining amounts outstanding will be due and payable in full.
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, $110.0 million 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% of
F-28
the voting equity interests of certain of PTC’s domestic subsidiaries and 65% of its material first-tier foreign
subsidiaries are pledged as collateral for the obligations under the credit facility.
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, 2018, the
annual rate for borrowing outstanding was 3.8%. Interest rates on borrowings outstanding under the credit
facility range from 1.25% to 1.75% above an adjusted LIBO rate for Euro currency borrowings or would
range from 0.25% to 0.75% above the defined base rate (the greater of the Prime Rate, the NYFRB rate
plus 0.5%, or an adjusted LIBO rate plus 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% to 0.30% per annum, based upon PTC’s total leverage ratio.
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: 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 $100 million for any
purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility,
PTC and its subsidiaries must maintain the following financial ratios:
• 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, 2018, our total leverage ratio was 2.36 to 1.00, our senior secured leverage ratio
was 0.58 to 1.00 and our interest coverage ratio was 6.18 to 1.00 and we were in compliance with all
financial and operating covenants of the credit facility.
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.
We incurred $2.9 million in financing costs in connection with the September 2018 credit facility
amendment and restatement. These origination costs are recorded as deferred debt issuance costs and
are included in other 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.
In 2018, 2017 and 2016, we paid $39.8 million, $38.9 million and $13.3 million, respectively, of interest
on our debt. The average interest rate on borrowings outstanding during 2018, 2017 and 2016 was
approximately 5.2%, 4.9% and 3.0%, respectively.
I. Commitments and Contingencies
Leasing Arrangements
We 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 $36.9 million, $35.8 million and $37.2 million in 2018, 2017 and 2016, respectively.
At September 30, 2018, our future minimum lease payments under noncancellable operating leases are
as follows:
F-29
Year ending September 30,
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
38,690
33,753
33,109
28,248
18,336
200,543
352,679
Amounts above include future minimum lease payments for our corporate headquarters facility located
in Needham, Massachusetts. The lease for our headquarters facility was renewed in the first quarter of
2011 for an additional 10 years (through November 2022) with a ten-year renewal option through
November 2032. Under the terms of the lease, we are paying approximately $7.4 million in annual base
rent plus operating expenses. Utilities related to this lease are excluded from the above table due to
variability year to year. These costs were approximately $1.6 million in 2018. The amended lease provides
for $12.8 million in landlord funding for leasehold improvements which we completed in 2014. We
capitalized these leasehold improvements and will amortize them to expense over the shorter of the lease
term or their expected useful life. The $12.8 million of funding by the landlord is not included in the table
above and reduces rent expense over the lease term.
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 expect to move our headquarters from Needham to
Boston. The term of the lease is expected to run from January 1, 2019 through June 30, 2037, subject to
adjustment based on the initial occupancy date. 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, subject to adjustment based on the lease commencement date, is
included in the operating lease obligations above. In addition to the base rent, PTC shall 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 capitalize leasehold improvements as the assets are
placed in service and amortize 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, 2018 and 2017, we had letters of credit and bank guarantees outstanding of
$15.5 million (of which $1.1 million was collateralized) and $4.3 million (of which $1.2 million was
collateralized), respectively, primarily related to our corporate headquarters lease.
Legal and Regulatory Matters
Korean Tax Audit
In July 2016, we received an assessment from the tax authorities in Korea related to an ongoing tax
audit of approximately $12 million. See Note G. Income Taxes for additional information.
Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of business.
We do not believe that resolving the legal proceedings and claims that we are currently subject to 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.
Accruals
With 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 amount of the loss can be reasonably estimated. For
F-30
legal proceedings and claims for which the likelihood that a liability has been incurred is more than
remote but less than probable, we estimate the range of possible outcomes. As of September 30, 2018,
we estimate approximately $0.7 million to $5.0 million in legal proceedings and claims, of which we had
accrued $0.9 million. As of September 30, 2017, we had a legal proceedings and claims accrual of $0.3
million.
Accounts Receivable
Accounts receivable as of September 30, 2017 included an amount invoiced under a multi-year
contract for which the period of performance, and related revenue recognized, spanned a number of
years (with no revenue recognized since the first quarter of 2017). The invoiced amount was disputed by
the customer. A settlement reached in September 2018 included partial payment of the receivable and
new software purchases. The net revenue write-down recorded in the fourth quarter was $9.3 million,
comprised of $14.5 million professional services revenue write-down, partially offset by new license
revenue of $5.2 million.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Pursuant
to such agreements with our business partners or customers, we 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 as claims relating to property damage or personal injury resulting
from the performance of services by us or our subcontractors. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is unlimited.
Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been
minimal and we accordingly believe the estimated fair value of liabilities under these agreements is
immaterial.
We warrant that our software products will perform in all material respects in accordance with our
standard published specifications in effect at the time of delivery of the licensed products for a specified
period of time. Additionally, we generally warrant that our consulting services will be performed
consistent with generally accepted industry standards. 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.
J. 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. 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.
Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock for
the October 1, 2017 through September 30, 2020 period.
We intend to 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.
In 2018, we repurchased 9.4 million shares. The repurchases were made under two accelerated
repurchase (ASR) agreements. We completed the $100 million ASR repurchase in the third quarter of
2018. We entered into a $1,000 million ASR in July 2018. Shares valued at $800 million in the aggregate
were delivered to us upon entry into the ASR. The remaining $200 million represents the amount held
back by the bank counterparty pending final settlement of the ASR, which is expected to occur in the
second or third quarter of 2019. Upon settlement of the ASR, the total shares repurchased by us will equal
F-31
$1,000 million divided by the average daily volume weighted-average price of our common stock during
the term of the ASR program less a fixed per share discount. We used the $1 billion in proceeds from the
Rockwell Automation investment in PTC and $100 million of cash from operations to make the
repurchases.
In 2017, we repurchased 0.9 million shares at cost of $51.0 million. In 2016, we did not repurchase any
shares due to our transition to a subscription business model and the near-term impact on free cash flow
and EBITDA.
K. Equity Incentive Plan
Our 2000 Equity Incentive Plan (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 as the principal equity incentive
awards, 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 unit represents the contingent right to receive one share of our common
stock.
The fair value of restricted stock units granted in 2018, 2017 and 2016 was based on the fair market
value of our stock on the date of grant. The weighted average fair value per share of restricted stock
units granted in 2018, 2017 and 2016 was $76.17, $51.27 and $37.25, respectively. In 2018 and 2017, the
weighted average fair value per share of restricted stock was increased by $4.35 and $2.27, respectively,
by the additional shares earned for the 2016 TSR grant upon measurement on the vest date in 2017.
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:
Year ended September 30,
2018
2017
2016
(in thousands)
Cost of license subscription revenue
$
1,801
$
1,379
$
Cost of support revenue
Cost of professional services revenue
Sales and marketing
Research and development
General and administrative
2,645
7,079
24,893
13,488
33,033
5,116
6,116
15,373
13,968
34,756
Total stock-based compensation expense
$
82,939
$
76,708
$
805
4,593
5,393
14,659
10,174
30,372
65,996
Stock-based compensation expense in 2018, 2017 and 2016 includes $4.3 million, $3.2 million, and
$0.4 million respectively, related to our employee stock purchase plan (ESPP). The stock-based
compensation expense in 2016 included $10 million of expense related to modifications of certain
performance-based RSUs previously granted under our long-term incentive programs. The
Compensation Committee of our Board of Directors amended these equity awards due to the impact of
changes in our business model and strategy and foreign currency on our financial results.
As of September 30, 2018, total unrecognized compensation cost related to unvested restricted
stock units expected to vest was approximately $144.5 million and the weighted average remaining
recognition period for unvested awards was 28 months.
As of September 30, 2018, 2.3 million shares of common stock were available for grant under the
2000 Plan and 3.3 million shares of common stock were reserved for issuance upon the exercise of stock
options and vesting of restricted stock units granted and outstanding.
Our ESPP, initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of
their base salary, up to a maximum of $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% of the lower of the fair market value of our common stock on the first and
F-32
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.
Weighted
Average
Grant Date
Fair Value
Aggregate
Intrinsic Value as
of September 30,
2018
Shares
Restricted stock unit activity for the year ended September 30, 2018
(in thousands except grant date fair value data)
Balance of nonvested outstanding restricted stock units October 1, 2017
Granted (1)
Vested
Forfeited or not earned
3,487
2,190
$
$
(1,829) $
(564) $
45.57
76.17
43.91
51.32
Balance of nonvested outstanding restricted stock units September 30, 2018
3,284
$
65.93
$
348,638
(1) Restricted stock granted includes approximately 184,000 shares from prior period TSR awards that
were earned upon achievement of the performance criteria and vested in November 2018.
Restricted stock unit grants
Year ended September 30, 2018
Restricted Stock Units
Performance-
based RSUs (1)
Service-based
RSUs (2)
(Number of Units in thousands)
961
1,045
(1) Substantially all the performance-based RSUs were granted to our executive officers. Approximately
189,000 shares are eligible to vest based upon annual performance measures, measured over a
three-year period. RSUs not earned for a period may be earned in the third period. An additional
250,000 shares are eligible to vest based upon a 2018 performance measure. To the extent earned,
those performance-based RSUs will vest in three substantially equal installments on November 15,
2018, November 15, 2019 and November 15, 2020, or the date the Compensation Committee
determines the extent to which the applicable performance criteria have been achieved for each
performance period. An additional 500,000 shares are eligible to vest based upon annual
performance measures, measured over a three-year period in fiscal years 2021, 2022 and 2023. RSUs
not earned for a period may be earned in the third period.
(2) The service-based RSUs were granted to employees, our executive officers and our directors. All
service-based RSUs will vest in three substantially equal annual installments on or about the
anniversary of the date of grant.
Until July 2005, we generally granted stock options. For those options, the option exercise price was
typically the fair market value at the date of grant, and they generally vested over four years and expired
ten years from the date of grant. There were no options outstanding and exercisable at September 30,
2018, 2017 and 2016.
Year ended September 30,
2018
2017
2016
Value of stock option and stock-based award activity
(in thousands)
Total intrinsic value of stock options exercised
Total fair value of restricted stock unit awards vested
$
$
— $
— $
88
127,525
$
78,573
$
63,655
In 2018, shares issued upon vesting of restricted stock units were net of 0.7 million shares retained by
us to cover employee tax withholdings of $45.4 million. In 2017, shares issued upon vesting of restricted
stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $26.7
million. In 2016, shares issued upon vesting of restricted stock and restricted stock units were net of 0.6
million shares retained by us to cover employee tax withholdings of $20.9 million.
L. Employee Benefit Plan
We offer a savings plan to eligible U.S. employees. The plan is intended to qualify under
Section 401(k) of the Internal Revenue Code. Participating employees may defer a portion of their pre-tax
F-33
compensation, as defined, but not more than statutory limits. We contribute 50% of the amount
contributed by the employee, up to a maximum of 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. We made
matching contributions of $5.8 million, $5.6 million, and $5.4 million in 2018, 2017 and 2016, respectively.
M. 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 one to five years 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.
The following table presents the actuarial assumptions used in accounting for the pension plans:
Weighted average assumptions used to determine benefit obligations at September 30
measurement date:
Discount rate
Rate of increase in future compensation
Weighted average assumptions used to determine net periodic pension cost for fiscal
years ended September 30:
Discount rate
Rate of increase in future compensation
Rate of return on plan assets
2018
2017
2016
1.9%
3.0%
1.8%
2.8%
5.4%
1.8%
2.8%
1.3%
2.8%
5.4%
1.3%
2.8%
2.2%
3.0%
5.7%
In selecting the expected long-term rate of return on assets, we considered the current investment
portfolio and the investment return goals in the plans’ investment policy statements. We, with input from
the plans’ professional investment managers and actuaries, also considered the average rate of earnings
expected on the funds invested or to be invested to provide plan benefits. This process included
determining expected returns for the various asset classes that comprise the plans’ target asset
allocation. This basis for selecting the long-term asset return assumptions is consistent with the prior year.
Using generally accepted diversification techniques, the plans’ assets, in aggregate and at the individual
portfolio level, are invested so that the total portfolio risk exposure and risk-adjusted returns best meet the
plans’ long-term liabilities to employees. Plan asset allocations are reviewed periodically and rebalanced
to achieve target allocation among the asset categories when necessary.
As of September 30, 2018, 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, 2018
in the table above, will be used to determine our 2019 net periodic pension cost, which we expect to be
approximately $1.2 million.
The actuarially computed components of net periodic pension cost recognized in our Consolidated
Statements of Operations for each year are shown below:
Year ended September 30,
2018
2017
2016
(in thousands)
Interest cost of projected benefit obligation
$
1,260
$
815
$
Service cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial loss
Settlement loss
Net periodic pension cost
1,535
(4,180)
(5)
2,293
9
1,696
(3,327)
(5)
3,385
—
$
912
$
2,564
$
F-34
1,374
1,599
(3,305)
(5)
2,292
—
1,955
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:
Year ended September 30,
2018
2017
(in thousands)
Change in benefit obligation:
Projected benefit obligation—beginning of year
$
87,168
$
Service cost
Interest cost
Actuarial loss (gain)
Foreign exchange impact
Participant contributions
Benefits paid
Settlements
Projected benefit obligation—end of year
Change in plan assets and funded status:
Plan assets at fair value—beginning of year
Actual return on plan assets
Employer contributions
Participant contributions
Foreign exchange impact
Settlements
Benefits paid
Plan assets at fair value—end of year
Projected benefit obligation—end of year
Underfunded status
Accumulated benefit obligation—end of year
Amounts recognized in the balance sheet:
Non-current liability
Current liability
Amounts in accumulated other comprehensive loss:
Unrecognized actuarial loss
$
$
$
$
$
$
$
$
$
1,535
1,260
2,157
(1,669)
212
(1,637)
(1,162)
87,864
70,494
1,025
2,459
212
(1,250)
(1,162)
(1,637)
70,141
87,864
(17,723) $
85,103
$
(17,502) $
(221) $
92,695
1,696
815
(8,496)
2,379
183
(2,104)
—
87,168
61,935
6,261
2,036
183
2,183
—
(2,104)
70,494
87,168
(16,674)
84,298
(16,674)
—
27,027
$
24,738
We expect to recognize approximately $2.4 million of the unrecognized actuarial loss as of
September 30, 2018 as a component of net periodic pension cost in 2019.
The following table shows change in accumulated other comprehensive loss:
Accumulated other comprehensive loss- beginning of year
Recognized during year - net actuarial (losses)
Occurring during year - settlement loss
Occurring during year - net actuarial losses (gains)
Foreign exchange impact
Accumulated other comprehensive loss- end of year
Year ended September 30,
2018
2017
(in thousands)
24,738
$
(2,288)
(9)
5,312
(726)
27,027
$
38,667
(3,380)
—
(11,430)
881
24,738
$
$
F-35
The following table shows the percentage of total plan assets for each major category of plan
assets:
Asset category:
Equity securities
Fixed income securities
Commodities
Insurance company funds
Cash
September 30,
2018
2017
35%
46%
1%
12%
6%
100%
23%
57%
6%
12%
2%
100%
We periodically review the pension plans’ investments in the various asset classes. The current asset
allocation target is 60% equity securities and 40% fixed income securities for the CoCreate plan in
Germany, and 100% fixed income securities for the other international plans. 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 2018, 2017 and 2016 our actual return on plan assets was $1.0 million, $6.3 million and $1.7 million,
respectively.
Based on actuarial valuations and additional voluntary contributions, we contributed $2.5 million,
$2.0 million, and $2.0 million in 2018, 2017 and 2016, respectively, to the plans.
As of September 30, 2018, benefit payments expected to be paid over the next ten years are
outlined in the following table:
Year ending September 30,
2019
2020
2021
2022
2023
2024 to 2028
Fair Value of Plan Assets
Future Benefit Payments
(in thousands)
$
2,721
2,989
3,265
3,871
3,873
23,493
The International 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.
F-36
Plan assets:
Fixed income securities:
Government
European corporate investment grade
European large capitalization stocks
Commodities
Insurance company funds (1)
Cash
Plan assets:
Fixed income securities:
Government
European corporate investment grade
European large capitalization stocks
Commodities
Insurance company funds (1)
Cash
September 30, 2018
Level 1
Level 2
Level 3
Total
(in thousands)
$
29,754
$
— $
— $
2,499
24,502
724
—
4,249
—
—
—
8,413
—
—
—
—
—
—
29,754
2,499
24,502
724
8,413
4,249
$
61,728
$
8,413
$
— $
70,141
September 30, 2017
Level 1
Level 2
Level 3
Total
(in thousands)
$
29,445
$
— $
— $
10,675
16,164
3,966
—
1,530
—
—
—
8,714
—
—
—
—
—
—
29,445
10,675
16,164
3,966
8,714
1,530
$
61,780
$
8,714
$
— $
70,494
(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.
N. 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 contracts is the institutional market in
an over-the-counter environment with a relatively high level of price transparency. The market
participants are usually large financial institutions. Our foreign currency 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.
The fair value of our contingent consideration arrangements is determined based on our evaluation
as to the probability and amount of any earn-out that will be achieved based on expected future
performances by the acquired entities. These arrangements are classified within Level 3 of the fair value
hierarchy.
F-37
Our significant financial assets and liabilities measured at fair value on a recurring basis as of
September 30, 2018 and 2017 were as follows:
Financial assets:
Cash equivalents (1)
Marketable securities:
Certificates of deposit
Corporate notes/bonds
U.S. government agency securities
Forward contracts
Financial liabilities:
Contingent consideration related to acquisitions
Forward contracts
Financial assets:
Cash equivalents (1)
Marketable securities:
Certificates of deposit
Corporate notes/bonds
U.S. government agency securities
Forward contracts
Financial liabilities:
Contingent consideration related acquisitions
Forward contracts
(1) Money market funds and time deposits.
September 30, 2018
Level 1
Level 2
Level 3
Total
(in thousands)
$
93,058
$
— $
— $
93,058
—
54,737
—
—
219
—
995
2,889
—
—
—
—
219
54,737
995
2,889
147,795
$
4,103
$
— $
151,898
— $
—
— $
— $
1,575
$
3,419
—
3,419
$
1,575
$
1,575
3,419
4,994
$
$
$
September 30, 2017
Level 1
Level 2
Level 3
Total
(in thousands)
$
49,845
$
— $
— $
49,845
—
47,673
—
—
240
—
2,402
1,163
—
—
—
—
240
47,673
2,402
1,163
97,518
$
3,805
$
— $
101,323
— $
—
— $
— $
8,400
$
4,347
—
8,400
4,347
4,347
$
8,400
$
12,747
$
$
$
Since 2015, we have had two major acquisitions resulting in contingent consideration: ColdLight and
Kepware. Changes in the fair value of Level 3 contingent consideration liability associated with these
acquisitions were as follows:
Balance at October 1, 2016
Change in fair value of contingent consideration
Payment of contingent consideration
Balance at October 1, 2017
Contingent consideration at acquisition
Payment of contingent consideration
Balance at September 30, 2018
Contingent Consideration
(in thousands)
ColdLight
Kepware
Other
Total
2,500
$
17,070
$
— $
—
(2,500)
930
(9,600)
—
—
— $
8,400
$
— $
—
—
—
(8,400)
2,100
(525)
— $
— $
1,575
$
19,570
930
(12,100)
8,400
2,100
(8,925)
1,575
$
$
$
F-38
As of September 30, 2018, all contingent consideration liabilities are included in accrued expenses
and other current liabilities. Contingent consideration is valued using a discounted cash flow method
and a probability weighted estimate of achievement of the targets. Payments made against the original
fair value ($8.3 million, $11.0 million and $10.6 million, in 2018, 2017 and 2016, respectively) were included
in financing activities in the Consolidated Statement of Cash Flows. Payments related to changes in fair
value after the respective acquisition dates are recorded in operating activities.
In connection with 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 defined in the Stock
Purchase Agreement) within 24 months from April 1, 2016. The estimated undiscounted range of
outcomes for the contingent consideration was $16.9 million to $18.0 million at the acquisition date. As of
September 30, 2018, we had made $18.0 million in payments and had no liability remaining.
O. Marketable Securities
The amortized cost and fair value of marketable securities as of September 30, 2018 and 2017
were as follows:
Certificates of deposit
Corporate notes/bonds
U.S. government agency securities
Certificates of deposit
Corporate notes/bonds
U.S. government agency securities
Amortized cost
September 30, 2018
Gross
unrealized
gains
Gross
unrealized
losses
(in thousands)
Fair value
$
$
220
$
— $
(1) $
55,140
1,004
—
—
(403)
(9)
56,364
$
— $
(413) $
219
54,737
995
55,951
Amortized cost
September 30, 2017
Gross
unrealized
gains
Gross
unrealized
losses
(in thousands)
Fair value
$
$
240
$
— $
— $
47,811
2,407
50,458
$
2
—
2
(140)
(5)
$
(145) $
240
47,673
2,402
50,315
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, 2018 and 2017.
Certificates of deposit
Corporate notes/bonds
US government agency securities
Less than twelve months
September 30, 2018
Greater than twelve
months
Total
Fair Value
Gross
unrealized
loss
Fair Value
Gross
unrealized
loss
Fair Value
Gross
unrealized
loss
(in thousands)
$
219
$
(1) $
— $
— $
219
$
24,067
—
(70)
—
30,670
995
(333)
(9)
54,737
995
(1)
(403)
(9)
$
24,286
$
(71) $
31,665
$
(342) $
55,951
$
(413)
F-39
Certificates of deposit
Corporate notes/bonds
US government agency securities
Less than twelve months
September 30, 2017
Greater than twelve
months
Total
Fair Value
Gross
unrealized
loss
Fair Value
Gross
unrealized
loss
Fair Value
Gross
unrealized
loss
(in thousands)
$
240
$
— $
— $
— $
240
$
15,254
—
(43)
—
28,885
2,402
(97)
(5)
44,139
2,402
—
(140)
(5)
$
15,494
$
(43) $
31,287
$
(102) $
46,781
$
(145)
The following table presents our available-for-sale marketable securities by contractual maturity
date, as of September 30, 2018 and 2017.
Due in one year or less
Due after one year through three years
P. Derivative Financial Instruments
September 30, 2018
September 30, 2017
Amortized cost
Fair value
Amortized cost
Fair value
(in thousands)
(in thousands)
$
$
25,792
$
25,670
$
18,274
$
30,572
30,281
32,184
56,364
$
55,951
$
50,458
$
18,244
32,071
50,315
As of September 30, 2018 and 2017, we had outstanding forward contracts for derivatives not
designated as hedging instruments with notional amounts equivalent to the following:
Currency Hedged
Canadian / U.S. Dollar
Euro / U.S. Dollar
British Pound / U.S. Dollar
Israeli Sheqel / U.S. Dollar
Japanese Yen / Euro
Japanese Yen / U.S. Dollar
Swiss Franc / U.S. Dollar
Swiss Franc / Euro
Swedish Krona / U.S. Dollar
Chinese Yuan offshore / Euro
Singapore Dollar / U.S. Dollar
Chinese Renminbi / U.S. Dollar
All other
Total
September 30,
2018
2017
(in thousands)
$
7,334
$
297,730
7,074
9,778
—
37,456
11,944
—
18,207
—
1,314
9,010
6,109
12,809
244,000
907
8,820
17,694
3,198
605
7,157
4,627
10,423
1,186
—
7,093
$
405,956
$
318,519
F-40
The following table shows the effect of our non-designated hedges in the Consolidated Statements
of Operations for the year ended September 30, 2018 and 2017:
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,
2018
2017
2016
(in thousands)
Forward Contracts
Other income (expense), net
$
(9,720) $
870
$
(883)
As of September 30, 2018 and 2017, we had outstanding forward contracts designated as cash flow
hedges with notional amounts equivalent to the following:
Currency Hedged
Euro / U.S. Dollar
Japanese Yen / U.S. Dollar
SEK / U.S. Dollar
Total
September 30,
2018
2017
(in thousands)
8,495
$
2,193
1,708
64,831
22,675
14,091
12,396
$
101,597
$
$
The following table shows the effect of our derivative instruments designated as cash flow hedges in
the Consolidated Statements of Operations for the twelve months ended September 30, 2018 and 2017
(in thousands):
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
Location of
Gain or
(Loss)
Recognize
d-
Ineffective
Portion
Gain or (Loss)
Reclassified from OCI
into Income-Effective
Portion
Year ended September 30,
Gain or (Loss)
Recognized-Ineffective
Portion
2018
2017
2018
2017
2018
2017
Forward
Contracts
$
1,652 $
(866)
Software
Revenue
$
(552) $
(524)
Other
Income
(Expense)
$
21 $
(49)
As of September 30, 2018, we estimated that approximately all values reported in accumulated
other comprehensive income will be reclassified to income within the next twelve months.
In the event the underlying forecast transaction does not occur, or it becomes probable that it will
not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified
to “Other income (expense), net” on the Consolidated Statements of Operations. For the year ended
September 30, 2018, there were no such gains or losses.
F-41
The following table shows our derivative instruments measured at gross fair value as reflected in the
Consolidated Balance Sheets:
Derivative assets (a):
Forward Contracts
Derivative liabilities (b):
Forward Contracts
September 30,
Fair Value of Derivatives
Designated As Hedging Instruments
Fair Value of Derivatives Not
Designated As Hedging Instruments
2018
2017
2018
2017
(in thousands)
(in thousands)
$
$
440
$
540
$
2,449
$
623
— $
2,352
$
3,419
$
1,995
(a) As of September 30, 2018, $2,889 thousand current derivative assets are recorded in other current assets, in the Consolidated
Balance Sheets. As of September 30, 2017, $1,128 thousand current derivative assets are recorded in other current assets, and
$35 thousand long-term derivative assets are recorded in other assets in the Consolidated Balance Sheets.
(b) As of September 30, 2018, $3,419 thousand current derivative liabilities are recorded in accrued expenses and other current
liabilities in the Consolidated Balance Sheets. As of September 30, 2017, $4,329 thousand current derivative liabilities are
recorded in accrued expenses and other current liabilities, and $18 thousand long-term derivative liabilities are recorded in
other liabilities in the Consolidated Balance Sheets.
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements which 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, 2018:
Gross Amounts Offset in the
Consolidated Balance Sheets
Gross Amounts Not Offset in
the Consolidated Balance
Sheets
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amounts
of Assets
Presented in
the
Consolidated
Balance
Sheets
Gross
Amount of
Recognized
Assets
September 30, 2018
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Forward Contracts
$
2,889
$
— $
2,889
$
(2,889) $
— $
—
(in thousands)
The following table sets forth the offsetting of derivative liabilities as of September 30, 2018:
Gross Amounts Offset in the
Consolidated Balance
Sheets
Gross Amounts Not Offset in
the Consolidated Balance
Sheets
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amounts
of Liabilities
Presented in
the
Consolidated
Balance
Sheets
Gross
Amount of
Recognized
Liabilities
September 30, 2018
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Forward Contracts
$
3,419
$
— $
3,419
$
(2,889) $
— $
530
(in thousands)
Net gains and losses on foreign currency exposures, including realized and unrealized gains and
losses on forward contracts, included in foreign currency net losses, were net losses of $7.0 million, $5.7
million and $1.9 million for 2018, 2017 and 2016, respectively. Net realized and unrealized gains and losses
on forward contracts included in foreign currency net losses were a net loss of $7.5 million in 2018, a net
gain of $1.8 million in 2017, and a net gain of $0.5 million in 2016.
F-42
Q. Segment Information
Effective with the beginning of fiscal 2018, we changed our segments, see Note A. Description of
Business and Basis of Presentation for additional information. We operate within a single industry 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 two 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 & 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 asset information by reportable segment; therefore, it is not reported.
Software Products
Revenue
Operating Costs (1)
Profit
Professional Services
Revenue
Operating Costs (2)
Profit
Total segment revenue
Total segment costs
Total segment profit
Year ended September 30,
2018
2017
2016
(in thousands)
$
1,088,487
$
987,316
$
387,817
700,670
153,337
136,816
16,521
367,224
620,092
176,723
145,091
31,632
943,596
344,594
599,002
196,937
165,325
31,612
1,241,824
1,164,039
1,140,533
524,633
717,191
512,315
651,724
509,919
630,614
Unallocated operating expenses:
Sales and marketing expenses
General and administrative expenses
Restructuring and headquarters relocation charges, net
Intangibles amortization
Stock-based compensation
Other unallocated operating expenses (3)
Total operating income
Interest expense
Interest income and other expense, net
389,631
108,095
3,764
58,056
82,939
1,469
73,237
(41,673)
(2,908)
357,573
108,439
7,942
58,729
76,708
1,435
40,898
(42,400)
96
Income (loss) before income taxes
$
28,656
$
(1,406) $
352,806
108,548
76,273
57,802
65,996
6,203
(37,014)
(29,882)
(296)
(67,192)
(1) Operating costs for the Software Products segment includes all cost of software revenue and research
and development costs, excluding stock-based compensation and intangible amortization. Operating
costs for the Software Products segment includes depreciation of $5.1 million, $5.0 million and $4.7 million
in 2018, 2017 and 2016, respectively.
F-43
(2) Operating costs for the Professional Services segment includes all cost of professional services
revenue, excluding stock-based compensation, intangible amortization, and fair value adjustments for
deferred services costs. The Professional Services segment includes depreciation of $1.6 million, $1.8
million and $2.0 million in 2018, 2017 and 2016, respectively.
(3) Other unallocated operating expenses include acquisition-related and other transactional costs,
certain legal accrual expenses, pension plan termination-related costs and fair value adjustments for
deferred services costs. Unallocated departments include depreciation of $22.7 million, $21.2 million and
$22.1 million in 2018, 2017 and 2016, respectively.
We report revenue by the following four product areas:
• CAD: Creo® and Mathcad®.
• PLM: PLM solutions (primarily Windchill®), Integrity™ and Atego®.
•
IoT: ThingWorx®, Vuforia® and Kepware®.
• Other, including service parts management.
CAD
PLM
IoT
Other
Total revenue
Year ended September 30,
2018
2017
2016
(in thousands)
499,772
$
474,608
$
483,327
139,278
119,447
454,299
103,359
131,773
462,307
456,285
80,297
141,644
1,241,824
$
1,164,039
$
1,140,533
$
$
Revenue and long-lived tangible assets for the geographic regions in which we operate is presented
below.
Revenue:
Americas (1)
Europe (2)
Asia-Pacific
Total revenue
Long-lived tangible assets:
Americas (3)
Europe
Asia-Pacific
Total long-lived tangible assets
Year ended September 30,
2018
2017
2016
(in thousands)
511,237
$
500,879
$
485,851
244,736
435,183
227,977
487,594
424,268
228,671
1,241,824
$
1,164,039
$
1,140,533
September 30,
2018
2017
2016
(in thousands)
67,704
$
47,055
$
5,303
7,606
6,284
10,261
80,613
$
63,600
$
48,281
6,915
11,917
67,113
$
$
$
$
(1)
(2)
Includes revenue in the United States totaling $487.3 million, $475.5 million and $463.1 million for 2018,
2017 and 2016, respectively.
Includes revenue in Germany totaling $193.3 million, $164.7 million and $167.2 million for 2018, 2017
and 2016, respectively.
(3) Substantially all of the Americas long-lived tangible assets are located in the United States.
F-44
Our international revenue is presented based on the location of our customer. 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 Asia-Pacific regions.
Intercompany sales and transfers between geographic areas are accounted for at prices that are
designed to be representative of unaffiliated party transactions.
R. Subsequent Events
Restructuring
In October 2018, we announced a restructuring charge of approximately $18 million, which consists
principally of termination benefits, substantially all of which we expect will be paid in fiscal 2019. With the
growth opportunity in front of us in the Industrial Internet of Things and Augmented Reality, other strategic
initiatives we’ve undertaken, and our continued commitment to operating margin improvement, we are
realigning our workforce to shift investment to support these strategic, high growth opportunities. As this is
a realignment of resources rather than a cost-savings initiative, we don’t expect this realignment will result
in significant cost savings.
Restricted Stock Unit Grants
In October and November 2018, we granted restricted stock units (RSUs) valued at approximately
$73.5 million to employees, including $31.9 million target value of performance-based RSUs, of which
$31.7 million was granted to our executives, and $41.6 million of time-based RSUs granted to employees
and executives.
Substantially all of the executive performance-based RSUs are eligible to vest based upon annual
performance measures. To the extent earned, these units will vest in three substantially equal installments
on the later of November 15, 2019, 2020 and 2021, or the date the Compensation Committee determines
the extent to which the applicable performance criteria have been achieved for each performance
period. RSUs not earned for a period may be earned in the third period. The performance-based RSUs
allow for upside based on 2019, 2020 and 2021 performance measures, and provide the opportunity to
earn up to one times the number of performance-based RSUs (up to a maximum of 146,000 shares) if
certain performance conditions are met.
The time-based RSUs will vest in three substantially equal annual installments on November 15, 2019,
2020 and 2021. The time-based RSUs granted to our executives allow for upside based on a 2019
performance measure. Executives have the opportunity to earn up to one times or, for our CEO, two
times the number of time-based RSUs granted (up to a maximum of 197,000 shares) if the upside
performance measure is achieved. Any upside RSUs earned will vest in three substantially equal
installments at the same times as the base RSUs.
Borrowings
In November 2018, we borrowed $80 million under our credit facility to fund working capital
requirements, including 2018 year end incentive-based compensation accruals.
F-45
SELECTED CONSOLIDATED FINANCIAL DATA
You 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 Statements of Operations data for the years ended September 30, 2018, 2017, and
2016 and the Consolidated Balance Sheets data as of September 30, 2018 and 2017 are derived from our
audited consolidated financial statements appearing elsewhere in this Annual Report. The Consolidated
Statements of Operations data for the years ended September 30, 2015 and 2014 and the Consolidated
Balance Sheet data as of September 30, 2016, 2015 and 2014 are derived from our audited consolidated
financial statements that are not included in this Annual Report. The historical results are not necessarily
indicative of results in any future period.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (1)
(in thousands, except per share data)
Revenue
Gross margin
Operating income (loss) (2)
Net income (loss) (2) (3)
Earnings (loss) per share—Basic (2) (3)
Earnings (loss) per share—Diluted (2) (3)
Total assets
Working capital
Long-term liabilities
Stockholders’ equity
2018
2017
2016
2015
2014
$
1,241,824
$
1,164,039
$
1,140,533
$
1,255,242
$
1,356,967
915,630
73,237
51,987
0.45
0.44
835,020
40,898
6,239
0.05
0.05
814,868
(37,014)
(54,465)
(0.48)
(0.48)
920,508
41,616
47,557
0.41
0.41
983,284
196,576
160,194
1.36
1.34
2,329,022
2,360,384
2,345,729
2,209,913
2,199,954
(101,495)
(12,353)
(11,930)
719,154
874,589
796,039
885,436
848,544
842,666
87,419
732,482
860,171
105,500
719,398
853,889
(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 (loss) and net income (loss) 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. Operating income and net income in 2014 includes pre-tax restructuring charges of
$28.4 million.
In 2015, net income includes an $18.7 million tax benefit related to settlement of our U.S pension plan.
Net income in 2014 includes tax benefits totaling $18.1 million related to the reversal of a portion of
the valuation allowance in the U.S. related to the impact on deferred taxes in accounting for
acquisitions and accounting for the U.S. pension plan.
(3)
A-1
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
September 30,
2018
June 30, 2018
March 31, 2018
December 30,
2017
$
312,521
$
314,777
$
307,833
$
234,472
11,697
13,191
233,221
21,703
16,997
224,252
22,366
7,922
$
$
0.11
0.11
$
$
0.15
0.14
$
$
0.07
0.07
$
$
306,644
223,686
17,472
13,877
0.12
0.12
September 30,
2017
July 1, 2017
April 1,
2017
December 31,
2016
$
306,379
$
291,293
$
280,040
$
223,574
17,569
17,435
209,025
11,256
(951)
198,210
7,513
(1,104)
286,327
204,212
4,561
(9,141)
$
$
0.15
0.15
$
$
(0.01) $
(0.01) $
(0.01) $
(0.01) $
(0.08)
(0.08)
Revenue
Gross margin
Operating income
Net income
Earnings per share:
Basic
Diluted
Revenue
Gross margin
Operating income
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
A-2
Directors
Shareholders and Stock Listing
Robert Schechter
Chairman of the Board
Chairman and Chief Executive Officer (Retired), NMS
Communications Corporation, a software company
Janice Chaffin
Group President, Consumer Business Unit (Retired), Symantec
Corporation, an enterprise software company
Phillip Fernandez
Venture Partner (Retired), Shasta Ventures, a venture capital
firm
Donald Grierson
Chief Executive Officer (Retired), ABB Vetco International, an
oil services business
James Heppelmann
President and Chief Executive Officer, PTC
Klaus Hoehn
Senior Advisor, Innovation and Technology to the Office of the
Chairman, Deere & Company, a manufacturing company
Paul Lacy
President (Retired), Kronos Incorporated, an enterprise
software company
Corinna Lathan
Chief Executive Officer, Co-Founder and Chair of the Board of
AnthroTronix, Inc., a biomedical engineering research and
development company
Blake Moret
President and Chief Executive Officer and Chairman of the
Board of Rockwell Automation, Inc., a company focused on
industrial automation and information
Corporate Officers
James Heppelmann
President and Chief Executive Officer
Andrew Miller
Executive Vice President, Chief Financial Officer
Barry Cohen
Executive Vice President, Chief Strategy Officer
Matthew Cohen
Executive Vice President, Field Operations
Kathleen Mitford
Executive Vice President, Products
Aaron von Staats
Executive Vice President, General Counsel and Secretary
Our common stock is traded on the Nasdaq Global Select
Market under the symbol PTC. On September 30, 2018, our
common stock was held by 1,138 stockholders of record.
Dividends
We have not paid dividends on our common stock and have
historically retained earnings for use in our business. We review
our policy with respect to the payment of dividends from time
to time. However, there can be no assurance that we will pay
any dividends in the future.
Investor Information
You may obtain a copy of any of the exhibits to our Annual
Report on Form 10-K free of charge. These documents are
available on our website at www.ptc.com or by contacting
PTC Investor Relations.
Requests for information about PTC should be directed to:
Investor Relations
PTC
121 Seaport Boulevard
Boston, MA 02210
Telephone: 781.370.5000
Email: ir@ptc.com
Annual Meeting
The annual meeting of stockholders will be held at the time
and location stated below.
Wednesday, March 6, 2019
8:00 a.m., local time
PTC Headquarters
121 Seaport Boulevard
Boston, Massachusetts 02210
Internet Access
www.ptc.com
General Outside Counsel
Locke Lord LLP, Boston, Massachusetts
Independent Accountants
PricewaterhouseCoopers LLP, Boston, Massachusetts
Transfer Agent and Registrar
American Stock Transfer & Trust Company, New York, NY
© 2019 PTC Inc. All rights reserved. PTC, the PTC logo and all PTC product names and logos are trademarks or registered trademarks
of PTC Inc. or its subsidiaries in the United States and in other countries. All other companies and products referenced herein are
trademarks or registered trademarks of their respective holders.
PTC Worldwide Headquarters
121 Seaport Boulevard
Boston, MA 02210
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