Ptc Inc 10-Q for FY2021 Q1
Ptc Inc. (PTC)
About this 10-Q
Ptc Inc filed this 10-Q on February 4, 2021, covering the quarter ended December 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $429.05M
- up 20.5% from $356.11M a year earlier
- Net income
- $23.52M
- down 33.7% from net income of $35.46M a year earlier
- Diluted EPS
- $0.20
- down 35.5% from $0.31 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from_ to_
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
There were
PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended December 31, 2020
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Item 1. |
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Consolidated Balance Sheets as of December 31, 2020 and September 30, 2020 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 6. |
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PART I—FINANCIAL INFORMATION
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ITEM 1. |
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
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December 31, 2020 |
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September 30, 2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term marketable securities |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Acquired intangible assets, net |
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Long-term marketable securities |
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Deferred tax assets |
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Operating right-of-use lease assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Accrued compensation and benefits |
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Accrued income taxes |
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Deferred revenue |
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Short-term lease obligations |
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Total current liabilities |
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Long-term debt |
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Deferred tax liabilities |
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Deferred revenue |
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Long-term lease obligations |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 15) |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ 2020, respectively |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
1
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three months ended |
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December 31, 2020 |
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December 28, 2019 |
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Revenue: |
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License |
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$ |
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$ |
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Support and cloud services |
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Total software revenue |
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Professional services |
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Total revenue |
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Cost of revenue: |
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Cost of license revenue |
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Cost of support and cloud services revenue |
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Total cost of software revenue |
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Cost of professional services revenue |
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Total cost of revenue |
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Gross margin |
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Operating expenses: |
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Sales and marketing |
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Research and development |
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General and administrative |
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Amortization of acquired intangible assets |
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Restructuring and other charges, net |
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Total operating expenses |
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Operating income |
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Interest expense |
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Other income (expense), net |
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Income before income taxes |
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Provision (benefit) for income taxes |
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Net income |
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$ |
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$ |
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Earnings per share—Basic |
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$ |
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$ |
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Earnings per share—Diluted |
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$ |
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$ |
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Weighted-average shares outstanding—Basic |
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Weighted-average shares outstanding—Diluted |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
2
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
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Three months ended |
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December 31, 2020 |
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December 28, 2019 |
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Net income |
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$ |
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$ |
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Other comprehensive income, net of tax: |
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Hedge loss arising during the period, net of tax benefit of $ |
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Foreign currency translation adjustment, net of tax of $ |
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Unrealized loss on marketable securities, net of tax of $ |
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( |
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Amortization of net actuarial pension loss included in net income, net of tax of $ |
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Change in unamortized pension loss during the period related to changes in foreign currency |
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( |
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Other comprehensive income |
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Comprehensive income |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three months ended |
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December 31, 2020 |
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December 28, 2019 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of right-of-use lease assets |
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Stock-based compensation |
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Other non-cash items, net |
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Changes in operating assets and liabilities, excluding the effects of acquisitions: |
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Accounts receivable |
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Accounts payable and accrued expenses |
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( |
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Accrued compensation and benefits |
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( |
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Deferred revenue |
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( |
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( |
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Accrued income taxes |
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( |
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Other current assets and prepaid expenses |
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( |
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Operating lease liabilities |
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( |
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( |
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Other noncurrent assets and liabilities |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Additions to property and equipment |
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( |
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Purchases of short- and long-term marketable securities |
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Proceeds from sales of short- and long-term marketable securities |
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Proceeds from maturities of short- and long-term marketable securities |
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Acquisitions of businesses, net of cash acquired |
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( |
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Purchases of investments |
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Purchase of intangible assets |
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( |
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Settlement of net investment hedges |
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( |
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Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Borrowings under credit facility |
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Repayments of borrowings under credit facility |
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Debt issuance costs |
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Payments of withholding taxes in connection with stock-based awards |
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( |
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( |
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Payments on principal for financing leases |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash |
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Net change in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash, beginning of period |
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Cash, cash equivalents, and restricted cash, end of period |
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$ |
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$ |
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Supplemental disclosure of non-cash financing activities: |
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Withholding taxes in connection with stock-based awards, accrued |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
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Three months ended December 31, 2020 |
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Common Stock |
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Accumulated |
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Shares |
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Amount |
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Additional Paid-In Capital |
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Accumulated Deficit |
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Other Comprehensive Loss |
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Total Stockholders’ Equity |
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Balance as of September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Common stock issued for employee stock-based awards |
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( |
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— |
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— |
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— |
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Shares surrendered by employees to pay taxes related to stock-based awards |
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( |
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( |
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( |
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— |
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— |
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( |
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Compensation expense from stock-based awards |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Unrealized loss on net investment hedges, net of tax |
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— |
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— |
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— |
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— |
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( |
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( |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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Unrealized loss on available-for-sale securities, net of tax |
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— |
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— |
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— |
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— |
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( |
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( |
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Change in pension benefits, net of tax |
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— |
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— |
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— |
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— |
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( |
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( |
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Balance as of December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Three months ended December 28, 2019 |
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Common Stock |
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Accumulated |
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Shares |
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Amount |
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Additional Paid-In Capital |
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Accumulated Deficit |
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Other Comprehensive Loss |
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Total Stockholders’ Equity |
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Balance as of September 30, 2019 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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ASU 2016-02 (ASC 842) adoption |
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— |
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— |
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— |
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( |
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— |
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( |
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Common stock issued for employee stock-based awards |
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( |
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— |
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— |
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— |
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Shares surrendered by employees to pay taxes related to stock-based awards |
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( |
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( |
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( |
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— |
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— |
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( |
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Compensation expense from stock-based awards |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Unrealized loss on net investment hedges, 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 December 28, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
PTC Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, 2020 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.
Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. In the first quarter of 2021, we changed our fiscal calendar from thirteen-week quarters ending on a Saturday to three-month quarters ending on the last calendar day of the third month. There was no change to our fiscal year-end. We do not expect that this change will materially impact comparability of our financial results for fiscal years 2021 and 2020. Because our fiscal year-end did not change, we were not required to file a transition report. The first quarter of 2021 ended on December 31, 2020 and the first quarter of 2020 ended on December 28, 2019. The results of operations for the three months ended December 31, 2020 are not necessarily indicative of the results expected for the remainder of the fiscal year.
Risks and Uncertainties - COVID-19 Pandemic
In December 2019, the virus that causes COVID-19 surfaced. The virus has spread worldwide, including the United States, and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic has significantly impacted global economic activity and has created macroeconomic uncertainty.
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of December 31, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While our assessment did not result in a material impact to our consolidated financial statements as of and for the quarter ended December 31, 2020, our future assessment could result in material impacts to our consolidated financial statements in future reporting periods.
6
Recently Adopted Accounting Pronouncements
Intangibles—Goodwill and Other—Internal-Use Software
In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted the new standard prospectively effective October 1, 2020. As a result of the adoption, we are required to capitalize certain costs related to the implementation of cloud computing arrangements. Capitalized costs related to cloud computing arrangements for the three months ended December 31, 2020, which are included in other current assets on the Consolidated Balance Sheets, were not material.
Financial Instruments—Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326), which, along with subsequent amendments, replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when recording credit loss estimates. We adopted the new standard effective October 1, 2020, with no impact on our consolidated financial statements.
Pending Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. ASU 2020-04 is effective for all entities upon issuance through December 31, 2022. We are still evaluating the impact, but do not expect the standard to have a material impact on our consolidated financial statements.
Income Taxes
In December 2019, the FASB issued Accounting Standards Update ASU 2019-12, Income Taxes (Topic 740) on Simplifying the Accounting for Income Taxes. The decisions reflected in ASU 2019-12 update specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The new standard will be effective for us in the first quarter of 2022, though early adoption of the amendments is permitted. We are currently evaluating the impact the standard will have on our consolidated financial statements, but at this time we do not expect it to be material.
2. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
|
(in thousands) |
|
December 31, 2020 |
|
|
September 30, 2020 |
|
||
|
Contract asset |
|
$ |
|
|
|
$ |
|
|
|
Deferred revenue |
|
$ |
|
|
|
$ |
|
|
As of December 31, 2020, $
7
During the three months ended December 31, 2020, we recognized $
Our multi-year, non-cancellable on-premises subscription contracts provide customers with an annual right to exchange software within the subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we use the most likely amount method to determine the amount of variable consideration. In both circumstances, the variable consideration included in the transaction price is constrained to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of December 31, 2020 and September 30, 2020, the total refund liability was $
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Effective October 1, 2020, we adopted ASC 326, Financial Instruments—Credit Losses, which replaces the incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $
Costs to Obtain or Fulfill a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs (primarily commissions) are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of December 31, 2020 and September 30, 2020, deferred costs of $
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of December 31, 2020, the amounts include additional performance obligations of $
8
Remaining performance obligations do not include the cancellable value for subscriptions which contain this clause.
Disaggregation of Revenue
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Recurring revenue |
|
$ |
|
|
|
$ |
|
|
|
Perpetual license |
|
|
|
|
|
|
|
|
|
Professional services |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
For further disaggregation of revenue by geographic region and product group see Note 11. Segment and Geographic Information.
3. Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits), headquarters relocation charges, and impairment and accretion expense charges related to the lease assets of exited facilities. Refer to Note 14. Leases for additional information about exited facilities.
For the three months ended December 31, 2020, restructuring and other charges, net totaled $
For the three months ended December 28, 2019, restructuring and other charges, net totaled $
Restructuring Charges
During the first quarter of 2020, we initiated a restructuring program as part of a realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition. The restructuring plan resulted in charges of $
The following table summarizes restructuring accrual activity for the three months ended December 31, 2020:
|
(in thousands) |
|
Employee severance and related benefits |
|
|
Facility closures and related costs |
|
|
Total |
|
|||
|
October 1, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Charges to operations, net |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Cash disbursements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Foreign exchange impact |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual, December 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
9
The following table summarizes restructuring accrual activity for the three months ended December 28, 2019:
|
(in thousands) |
|
Employee severance and related benefits |
|
|
Facility closures and related costs |
|
|
Total |
|
|||
|
October 1, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
ASC 842 adoption |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Charges to operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Foreign exchange impact |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Accrual, December 28, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
Of the accrual for facility closures and related costs, as of December 31, 2020, $
4. Stock-based Compensation
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as our principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive
For performance-based awards, we recognize stock-based compensation based on expected achievement of performance criteria. We measure the cost of employee services received in exchange for RSU awards based on the fair value of the RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. We account for forfeitures as they occur, rather than estimate expected forfeitures.
Our employee stock purchase plan (ESPP) allows eligible employees to contribute up to
10
The following table shows restricted stock unit activity for the three months ended December 31, 2020:
|
(in thousands, except grant date fair value data) |
|
Number of RSUs |
|
|
Weighted-Average Grant Date Fair Value Per RSU |
|
||
|
Balance of outstanding restricted stock units, October 1, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted(1) |
|
|
|
|
|
$ |
|
|
|
Vested |
|
|
( |
) |
|
$ |
|
|
|
Forfeited or not earned |
|
|
( |
) |
|
$ |
|
|
|
Balance of outstanding restricted stock units, December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
(1) |
Restricted stock granted includes |
|
(in thousands) |
|
Restricted Stock Units |
|
|||||||||
|
Grant Period |
|
Performance- based RSUs(1) |
|
|
Service-based RSUs(2) |
|
|
Total Shareholder Return RSUs(3) |
|
|||
|
First three months of 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The performance-based RSUs were granted to our executives and are eligible to vest based upon annual increasing performance measures over a period. To the extent earned, those performance-based RSUs will vest in |
|
(2) |
The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in |
|
(3) |
The Total Shareholder Return RSUs (TSR RSUs) were granted to our executives pursuant to the terms described below. |
The number of TSR RSUs that vest over the period will be determined based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2021, 2022 and 2023, respectively. The RSUs earned for each period will vest on November 15 following each measurement period, up to a maximum of
The weighted-average fair value of the TSR RSUs was $
The significant assumptions used in the Monte Carlo simulation model were as follows:
|
Average volatility of peer group |
|
|
|
% |
|
Risk free interest rate |
|
|
|
% |
|
Dividend yield |
|
|
|
% |
11
Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Cost of license revenue |
|
$ |
|
|
|
$ |
|
|
|
Cost of support and cloud services revenue |
|
|
|
|
|
|
|
|
|
Cost of professional services revenue |
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
|
|
|
$ |
|
|
Stock-based compensation expense includes $
5. Earnings per Share (EPS) and Common Stock
EPS
Basic EPS is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted-average number of shares outstanding plus the dilutive effect, if any, of outstanding RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense as additional proceeds.
The following table presents the calculation for both basic and diluted EPS:
|
(in thousands, except per share data) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Weighted-average shares outstanding—Basic |
|
|
|
|
|
|
|
|
|
Dilutive effect of restricted stock units |
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding—Diluted |
|
|
|
|
|
|
|
|
|
Earnings per share—Basic |
|
$ |
|
|
|
$ |
|
|
|
Earnings per share—Diluted |
|
$ |
|
|
|
$ |
|
|
There were
Common Stock Repurchases
Our Articles of Organization authorize us to issue up to
6. Acquisitions
Acquisition-related costs in the first quarter of 2021 totaled $
Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees and severance). In addition,
12
subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges.
Our results of operations include the results of acquired businesses beginning on their respective acquisition date. Our results of operations for the reported periods, if presented on a pro forma basis, would not differ materially from our reported results.
Onshape
On November 1, 2019, we completed our acquisition of Onshape Inc. pursuant to the Agreement and Plan of Merger dated as of October 23, 2019 by and among Onshape Inc., OPAL Acquisition Corporation and the Stockholder Representative named therein, the material terms of which are described in the Form 8-K filed by PTC on October 23, 2019 and which is filed as Exhibit 1.1 to that Form 8-K. PTC paid approximately $
The acquisition of Onshape has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $
7. Goodwill and Intangible Assets
We have
As of December 31, 2020, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $
We completed our annual goodwill impairment review as of June 27, 2020 based on a quantitative assessment. To conduct these tests of goodwill, the fair value of the reporting unit is compared to its
13
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 estimated 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 and operating plans, including consideration of the impact of the COVID-19 pandemic on our future results; and industry data. The estimated fair value of each reporting unit exceeded its carrying value as of June 27, 2020. Through December 31, 2020, there were no events or changes in circumstances that indicated that the carrying values of goodwill or acquired intangible assets may not be recoverable.
Goodwill and acquired intangible assets consisted of the following:
|
(in thousands) |
|
December 31, 2020 |
|
|
September 30, 2020 |
|
||||||||||||||||||
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
||||||
|
Goodwill (not amortized) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
Intangible assets with finite lives (amortized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased software |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Capitalized software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Total goodwill and acquired intangible assets |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Goodwill
Changes in goodwill presented by reportable segments were as follows:
|
(in thousands) |
|
Software Products |
|
|
Professional Services |
|
|
Total |
|
|||
|
Balance, October 1, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives is classified in our Consolidated Statements of Operations as follows:
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Amortization of acquired intangible assets |
|
$ |
|
|
|
$ |
|
|
|
Cost of license revenue |
|
|
|
|
|
|
|
|
|
Total amortization expense |
|
$ |
|
|
|
$ |
|
|
8. 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. GAAP prescribes 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. There are three levels of inputs that may be used to measure fair value:
14
|
|
• |
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.
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.
The principal market in which we execute our foreign currency derivatives is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency derivatives’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and September 30, 2020 were as follows:
|
(in thousands) |
|
December 31, 2020 |
|
|||||||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(in thousands) |
|
September 30, 2020 |
|
|||||||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes/bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Non-Marketable Equity and Level 3 Debt Investments
We account for non-marketable equity investments at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. 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. Changes in fair value of non-marketable equity investments are recorded in other income (expense), net on the Consolidated Statements of Operations. The carrying value of our non-marketable equity investments is recorded in other assets on the Consolidated Balance Sheets and totaled $
15
In the first quarter of 2021, we invested $
|
Balance, October 1, 2020 |
|
$ |
|
|
|
Investment |
|
|
|
|
|
Balance, December 31, 2020 |
|
$ |
|
|
9. Marketable Securities
We did
|
(in thousands) |
|
September 30, 2020 |
|
|||||||||||||
|
|
|
Amortized cost |
|
|
Gross unrealized gains |
|
|
Gross unrealized losses |
|
|
Fair value |
|
||||
|
Corporate notes/bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The following table summarizes the fair value and gross unrealized losses aggregated by category and the length of time that individual securities had been in a continuous unrealized loss position as of September 30, 2020:
|
(in thousands) |
|
September 30, 2020 |
|
|||||||||||||||||||||
|
|
|
Less than twelve months |
|
|
Greater than twelve months |
|
|
Total |
|
|||||||||||||||
|
|
|
Fair Value |
|
|
Gross unrealized loss |
|
|
Fair Value |
|
|
Gross unrealized loss |
|
|
Fair Value |
|
|
Gross unrealized loss |
|
||||||
|
Corporate notes/bonds |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
The following table presents our marketable securities by contractual maturity date as of September 30, 2020:
|
(in thousands) |
|
September 30, 2020 |
|
|||||
|
|
|
Amortized cost |
|
|
Fair value |
|
||
|
Due in one year or less |
|
$ |
|
|
|
$ |
|
|
|
Due after one year through three years |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
16
10. Derivative Financial Instruments
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, Israel, India and Sweden. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. Dollar value of anticipated transactions and balances denominated in foreign currency resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts and options, to manage the exposures to foreign currency exchange risk in order to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
|
(in thousands) |
|
Fair Value of Derivatives Designated As Hedging Instruments |
|
|
Fair Value of Derivatives Not Designated As Hedging Instruments |
|
||||||||||
|
|
|
December 31, 2020 |
|
|
September 30, 2020 |
|
|
December 31, 2020 |
|
|
September 30, 2020 |
|
||||
|
Derivative assets(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Options |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Derivative liabilities(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
As of December 31, 2020 and September 30, 2020, current derivative assets of $ |
|
(2) |
As of December 31, 2020 and September 30, 2020, current derivative liabilities of $ |
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
We hedge our forecasted U.S. Dollar cash flows with foreign exchange options to reduce the risk that they would be adversely affected by changes in Euro exchange rates. These contracts have maturities of up to approximately
17
As of December 31, 2020 and September 30, 2020, we had outstanding forward contracts and options with notional amounts equivalent to the following:
|
Currency Hedged (in thousands) |
|
December 31, 2020 |
|
|
September 30, 2020 |
|
||
|
Canadian / U.S. Dollar |
|
$ |
|
|
|
$ |
|
|
|
Euro / U.S. Dollar(1) |
|
|
|
|
|
|
|
|
|
British Pound / U.S. Dollar |
|
|
|
|
|
|
|
|
|
Israeli Shekel / U.S. Dollar |
|
|
|
|
|
|
|
|
|
Japanese Yen / U.S. Dollar |
|
|
|
|
|
|
|
|
|
Swiss Franc / U.S. Dollar |
|
|
|
|
|
|
|
|
|
Swedish Krona / U.S. Dollar |
|
|
|
|
|
|
|
|
|
Chinese Renminbi / U.S. Dollar |
|
|
|
|
|
|
|
|
|
Taiwanese Dollar / U.S. Dollar |
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
(1) |
As of December 31, 2020, $ |
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three months ended December 31, 2020 and December 28, 2019:
|
(in thousands) |
|
|
|
Three months ended |
|
|||||
|
|
|
Location of Loss |
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Net realized and unrealized loss, excluding the underlying foreign currency exposure being hedged |
|
Other income (expense), net |
|
$ |
( |
) |
|
$ |
( |
) |
In the three months ended December 31, 2020, foreign currency losses, net were $
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive loss on the Consolidated Balance Sheets. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge foreign exchange forward contracts is approximately
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.
As of December 31, 2020 and September 30, 2020, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
|
Currency Hedged (in thousands) |
|
December 31, 2020 |
|
|
September 30, 2020 |
|
||
|
Euro / U.S. Dollar |
|
$ |
|
|
|
$ |
|
|
18
The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three months ended December 31, 2020 and December 28, 2019:
|
(in thousands) |
|
|
|
Three months ended |
|
|||||
|
|
|
Location of Gain (Loss) |
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Gain (loss) recognized in OCI |
|
OCI |
|
$ |
|
|
|
$ |
( |
) |
|
Gain (loss) reclassified from OCI |
|
OCI |
|
|
|
|
|
|
( |
) |
|
Gain recognized, excluded portion |
|
Other income (expense), net |
|
|
|
|
|
|
|
|
As of December 31, 2020, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements for our forward contracts that 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 December 31, 2020:
|
(in thousands) |
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
|
|
||||||||||
|
As of December 31, 2020 |
|
Gross Amount of Recognized Assets |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of Assets Presented in the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Received |
|
|
Net Amount |
|
||||||
|
Forward Contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
The following table sets forth the offsetting of derivative liabilities as of December 31, 2020:
|
(in thousands) |
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
|
|
||||||||||
|
As of December 31, 2020 |
|
Gross Amount of Recognized Liabilities |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Pledged |
|
|
Net Amount |
|
||||||
|
Forward Contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
11. Segment and Geographic 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
19
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.
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Software Products |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
Operating costs(1) |
|
|
|
|
|
|
|
|
|
Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services |
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
Operating costs(2) |
|
|
|
|
|
|
|
|
|
Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue |
|
|
|
|
|
|
|
|
|
Total segment costs |
|
|
|
|
|
|
|
|
|
Total segment profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing expenses |
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
|
|
|
|
|
|
|
Restructuring and other charges, net |
|
|
|
|
|
|
|
|
|
Intangibles amortization |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
Other unallocated operating expenses(3) |
|
|
|
|
|
|
|
|
|
Total operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
Other income (expense), net |
|
|
( |
) |
|
|
|
|
|
Income before income taxes |
|
$ |
|
|
|
$ |
|
|
|
(1) |
Operating costs for the Software Products segment include all costs of software revenue and research and development costs, excluding stock-based compensation and intangible amortization. |
|
(2) |
Operating costs for the Professional Services segment include all costs of professional services revenue, excluding stock-based compensation. |
|
(3) |
Other unallocated operating expenses include acquisition-related and other transactional costs. |
Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Americas |
|
$ |
|
|
|
$ |
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
Asia Pacific |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
12. Income Taxes
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Income before income taxes |
|
$ |
|
|
|
$ |
|
|
|
Provision (benefit) for income taxes |
|
$ |
|
|
|
$ |
( |
) |
|
Effective income tax rate |
|
|
|
% |
|
|
( |
)% |
In the first quarter of 2021 and 2020, our effective tax rate differed from the statutory federal income tax rate of
20
Our first quarter of 2021 results include a charge of $
In the first quarter of 2020, we reduced our previously established U.S. valuation allowance by $
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. However, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of any valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. We will continue to reassess our valuation allowance requirements each financial reporting period.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service 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, limitations on net operating losses and tax credits.
As of December 31, 2020 and September 30, 2020, we had unrecognized tax benefits of $
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 $
21
13. Debt
At December 31, 2020 and September 30, 2020, we had the following long-term debt obligations:
|
(in thousands) |
|
December 31, 2020 |
|
|
September 30, 2020 |
|
||
|
4.000% Senior notes due 2028 |
|
$ |
|
|
|
$ |
|
|
|
3.625% Senior notes due 2025 |
|
|
|
|
|
|
|
|
|
Credit facility revolver(1) |
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs for the senior notes(2) |
|
|
( |
) |
|
|
( |
) |
|
Total debt, net of issuance costs |
|
$ |
|
|
|
$ |
|
|
|
(1) |
Unamortized debt issuance costs related to the credit facility were $ |
|
(2) |
Unamortized debt issuance costs are included in long-term debt on the Consolidated Balance Sheets. |
Senior Notes
In February 2020, we issued $
As of December 31, 2020, the total estimated fair value of the 2028 and 2025 notes was approximately $
We were in compliance with all the covenants for all of our senior notes as of December 31, 2020.
Terms of the 2028 and 2025 Notes
Interest on the 2028 and 2025 notes is payable semi-annually on February 15 and August 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions.
We may, on one or more occasions, redeem the 2025 and 2028 notes in whole or 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 notes at a purchase price equal to
Credit Agreement
In February 2020, we entered into a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, for a new secured multi-currency bank credit facility with a syndicate of banks. The new credit facility replaced our prior credit facility. As with the prior credit facility, we expect to use the new credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of December 31, 2020, the fair value of our credit facility approximates its book value.
The credit facility consists of a $
22
PTC Inc. and certain eligible foreign subsidiaries are eligible to borrow under the credit facility. The obligations under the credit facility are required to 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-Q, 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-Q, there were
Loans under the credit facility bear interest at variable rates which reset every 30 to
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness, incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $
|
|
• |
Total leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, not to exceed |
|
|
• |
Senior secured leverage ratio, defined as senior consolidated total indebtedness (which excludes unsecured indebtedness) to the consolidated trailing four quarters EBITDA, not to exceed |
|
|
• |
Interest coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA to consolidated trailing four quarters of cash basis interest expense, of not less than |
As of December 31, 2020, our total leverage ratio was
Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
In the first quarter of 2021 and 2020, we paid $
23
14. Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease obligations on our Consolidated Balance Sheets. Our operating leases are primarily for office space, cars, servers, and office equipment. We made an election not to separate lease components from non-lease components for office space, servers and office equipment. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other liabilities on our Consolidated Balance Sheets.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term as that of the lease payments at commencement date. The right-of-use assets include any lease payments made and exclude lease incentives received. Operating lease expense is recognized on a straight-line basis over the lease term.
Our operating leases expire at various dates through 2037. Our lease terms may include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain lease agreements contain variable payments, which are expensed as incurred and not included in the lease assets and liabilities. These variable payments include insurance, taxes, consumer price index payments, and payments for maintenance and utilities.
Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts (the Boston lease). The Boston lease is for approximately
The components of lease cost reflected in the Consolidated Statement of Operations for the three months ended December 31, 2020 and December 28, 2019 were as follows:
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
Short-term lease cost |
|
|
|
|
|
|
|
|
|
Variable lease cost |
|
|
|
|
|
|
|
|
|
Sublease income |
|
|
( |
) |
|
|
( |
) |
|
Total lease cost |
|
$ |
|
|
|
$ |
|
|
Supplemental cash flow and right-of-use assets information for the three months ended December 31, 2020 and December 28, 2019 was as follows:
|
(in thousands) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
|
|
|
$ |
|
|
|
Financing cash flows from financing leases |
|
$ |
|
|
|
$ |
|
|
|
Right-of-use assets obtained in exchange for new lease obligations: |
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
|
|
|
$ |
|
|
|
Financing leases |
|
$ |
|
|
|
$ |
|
|
24
Supplemental balance sheet information related to the leases as of December 31, 2020 was as follows:
|
|
As of December 31, 2020 |
|
|
|
Weighted-average remaining lease term - operating leases |
|
|
|
|
Weighted-average remaining lease term - financing leases |
|
|
|
|
Weighted-average discount rate - operating leases |
|
|
% |
|
Weighted-average discount rate - financing leases |
|
|
% |
Maturities of lease liabilities as of December 31, 2020 are as follows:
|
(in thousands) |
|
Operating Leases |
|
|
|
Remainder of 2021 |
|
$ |
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total future lease payments |
|
$ |
|
|
|
Less: imputed interest |
|
|
( |
) |
|
Total |
|
$ |
|
|
Exited (Restructured) Facilities
As of December 31, 2020, we have net liabilities of $
In determining the amount of right-of-use assets for restructured facilities, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. Updates to these estimates may result in revisions to the value of right-of-use assets recorded. The amounts recorded are based on the net present value of estimated sublease income. As of December 31, 2020, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $
In the first quarter of 2021 and 2020, we made payments of $
15. Commitments and Contingencies
Legal and Regulatory Matters
Korean Tax Audit
We continue to appeal an assessment from the tax authorities in South Korea. In the first quarter of 2021, we recorded a charge of $
Legal Proceedings
On
25
We are subject to various other 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 reporting period could be adversely affected.
Accruals
In addition to the matters listed above, we are subject to legal claims against us in the ordinary course of business. With respect to such 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 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 December 31, 2020, we estimate that the range of possible outcomes in legal proceedings and claims is immaterial.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of our business. Under 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, claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors and data breaches. The maximum potential amount of future payments we could be required to make under indemnification agreements for intellectual property and damage and injury claims is unlimited; in most cases the maximum potential amount for indemnification for data breaches is capped in those contracts. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we 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.
16. Subsequent Events
Acquisition
On January 15, 2021, we acquired Arena Solutions, creators of a Software as a Service (SaaS) product lifecycle management (PLM) solution, for approximately $
Borrowings under Credit Facility
In January 2021, we borrowed $
26
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Business Overview
PTC is a global software and services company that delivers solutions to power our industrial customers' digital transformations, enabling them to better design, manufacture, operate, and service their products. Our Internet of Things (IoT) and Augmented Reality (AR) solutions enable companies to connect factories and plants, smart products, and enterprise systems to transform their businesses. These products, along with Onshape, are considered our Growth Products. The primary products in our Core Products portfolio are innovative Computer-Aided Design (CAD) and Product Lifecycle Management (PLM) solutions that enable manufacturers to create, innovate, and service products. Our Focused Solutions Group (FSG) is a family of software products that target specific vertical industries where we can deliver unique domain expertise and a competitive advantage with Application Lifecycle Management (ALM) products, Service Lifecycle Management (SLM) products, and other niche tailored solutions. Together, these technologies power the digital thread across industrial enterprises.
Forward-Looking Statements
Statements in this document that are not historic facts, including statements about our future financial and growth expectations and targets, debt repayment and potential stock repurchases, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the macroeconomic and/or global manufacturing climates may not improve when or as we expect, or may deteriorate, due to, among other factors, the COVID-19 pandemic, which could cause customers to delay or reduce purchases of new software, reduce the number of subscriptions they carry, or delay payments to us, all of which would adversely affect ARR and our financial results, including cash flow; our businesses, including our SaaS businesses, may not expand and/or generate the revenue or ARR we expect if customers are slower to adopt our technologies than we expect or if they adopt competing technologies; we may be unable to generate sufficient operating cash flow to repay our outstanding debt when or as we expect or to return 50% of free cash flow to shareholders, and other uses of cash or our credit facility limits or other matters could preclude such repayment and/or repurchases; foreign exchange rates may differ materially from those we expect; orders associated with minimum purchase commitments under our Strategic Alliance Agreement with Rockwell Automation may not result in subscription contracts sold through to end-user customers, which could cause the ARR associated with those orders to churn in the future; our strategic initiatives and investments may not generate the revenue or ARR we expect; we may be unable to expand our partner ecosystem as we expect and our partners may not generate the revenue we expect. In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses and profits, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.
Operating and Non-GAAP Financial Measures
Our discussion of results includes discussion of our ARR (Annual Run Rate) operating measure, non-GAAP financial measures, and disclosure of our results on a constant currency basis. ARR and our non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating Measure and Results of Operations - Non-GAAP Financial Measures, respectively. The methodology used to calculate constant currency disclosures is described in Results of Operations - Impact of Foreign Currency Exchange on Results of Operations. You should read those sections to understand our operating measure, non-GAAP financial measures, and constant currency disclosures.
Executive Overview
ARR of $1.34 billion represents 16% growth (12% on a constant currency basis) compared to Q1’20 driven by continued momentum in our Core business and solid performance in our Growth business. First quarter revenue was up 20% year over year, driven by 26% recurring revenue growth. Our Q1’21 operating margin increased compared to the year-ago period, primarily due to higher revenue and continued operating expense discipline. Our Q1’21 EPS was down primarily due to a higher tax rate resulting from reserves related to a South Korean tax exposure, primarily related to foreign withholding taxes (see Note 12. Income Taxes to the Condensed Consolidated Financial Statements on this Form 10-Q).
27
We generated a Q1 record of $114 million of cash from operations in Q1'21 compared to $8 million in Q1'20, primarily reflecting higher collections and lower interest payments. During Q1’21, we also liquidated all our investments in marketable securities, resulting in proceeds of $56 million. We ended Q1’21 with $399 million of cash and cash equivalents and $1.0 billion of debt outstanding, which was comprised of senior notes with a weighted average cost of debt of 3.8%.
In January 2021, we acquired Arena Solutions, Inc., creators of a leading Software as a Service (SaaS) product lifecycle management (PLM) solution, for approximately $715 million, net of cash acquired. We financed the acquisition with available cash on hand and $600 million of borrowings under our existing credit facility.
Future Expectations
Our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions, which has been adversely impacted by the COVID-19 pandemic as customers delay purchases due to the macroeconomic uncertainty and the inability to implement many of our solutions due to the on-site work generally required to do so. In addition, existing customers may renew fewer license subscriptions as their own operations are affected by the ongoing pandemic. Additionally, under the subscription license model, particularly sales of products in our growth business, customers may place smaller initial orders than under a perpetual license model. Sales of our products may have long lead times as they often follow a lengthy product selection and evaluation process and, for existing customers, are influenced by contract duration and expiration cycles. Accordingly, the amount of revenue 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. This may cause volatility in our results.
Despite the challenges associated with the COVID-19 pandemic, we currently anticipate ARR, revenue, and operating income growth in FY’21. We expect churn to improve compared to FY’20 but remain slightly higher than it was in FY’19.
Results of Operations
The following table shows the financial measures that we consider the most significant indicators of our business performance. In addition to providing operating income, operating margin, diluted earnings per share and cash from operations as calculated under GAAP, we provide non-GAAP operating income, non-GAAP operating margin, non-GAAP diluted earnings per share, and free cash flow for the reported periods. We also provide a view of our actual results on a constant currency basis. These non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.
|
(Dollar amounts in millions, except per share data) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Actual |
|
|
Constant Currency(1) |
|
||||
|
Recurring revenue |
|
$ |
385.0 |
|
|
$ |
305.4 |
|
|
|
26 |
% |
|
|
23 |
% |
|
Perpetual license |
|
|
8.5 |
|
|
|
9.0 |
|
|
|
(6 |
)% |
|
|
(8 |
)% |
|
Professional services |
|
|
35.6 |
|
|
|
41.7 |
|
|
|
(15 |
)% |
|
|
(18 |
)% |
|
Total revenue |
|
|
429.1 |
|
|
|
356.1 |
|
|
|
20 |
% |
|
|
17 |
% |
|
Total cost of revenue |
|
|
86.8 |
|
|
|
87.4 |
|
|
|
(1 |
)% |
|
|
(3 |
)% |
|
Gross margin |
|
|
342.2 |
|
|
|
268.7 |
|
|
|
27 |
% |
|
|
23 |
% |
|
Operating expenses |
|
|
251.9 |
|
|
|
238.3 |
|
|
|
6 |
% |
|
|
4 |
% |
|
Total costs and expenses |
|
|
338.7 |
|
|
|
325.7 |
|
|
|
4 |
% |
|
|
3 |
% |
|
Operating income |
|
$ |
90.3 |
|
|
$ |
30.4 |
|
|
|
197 |
% |
|
|
151 |
% |
|
Non-GAAP operating income(1) |
|
$ |
153.4 |
|
|
$ |
93.1 |
|
|
|
65 |
% |
|
|
54 |
% |
|
Operating margin |
|
|
21.1 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
Non-GAAP operating margin(1) |
|
|
35.8 |
% |
|
|
26.1 |
% |
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.20 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
Non-GAAP diluted earnings per share(1)(2) |
|
$ |
0.97 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
Cash flow from operations(3) |
|
$ |
113.8 |
|
|
$ |
7.5 |
|
|
|
|
|
|
|
|
|
|
Free cash flow(4) |
|
$ |
110.9 |
|
|
$ |
2.8 |
|
|
|
|
|
|
|
|
|
|
(1) |
See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP measures and Impact of Foreign Currency Exchange on Results of Operations below for a description of how we calculate our results on a constant currency basis. |
28
|
(2) |
We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the FY’21 and FY’20 non-GAAP tax provisions are calculated assuming there is no valuation allowance. In Q1'20, our GAAP results included a benefit of $21.0 million related to the release of a valuation allowance related to the Onshape acquisition. As the non-GAAP tax provision is calculated assuming that there is no valuation allowance, this benefit has been excluded. 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. Additionally, our Q1'21 non-GAAP results exclude tax expense of $34.6 million related to a non-U.S. tax exposure, primarily related to foreign withholding taxes. |
|
(3) |
Cash flow from operations for Q1'21 includes $7.3 million of restructuring payments and $2.9 million of acquisition-related payments. Cash flow from operations for Q1'20 includes $3.3 million of restructuring payments and $6.4 million of acquisition-related payments. |
|
(4) |
Free cash flow is cash from operations net of capital expenditures of $2.9 million and $4.7 million in Q1’21 and Q1’20, respectively. |
Impact of Foreign Currency Exchange on Results of Operations
Approximately 60% of our revenue and 40% of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported results. Our constant currency disclosures are calculated by multiplying the results in local currency for the quarterly and year-to-date periods for FY’21 and FY’20 by the exchange rates in effect on September 30, 2020. The results of operations in the table above and revenue by line of business, product group, and geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.
Revenue
Our revenue results quarter to quarter are impacted by contract terms, including the duration and start dates of our subscription contracts, due to our up-front recognition of subscription license revenue. We are expanding our SaaS offerings and are releasing additional cloud functionality into our products. As a result, our revenue will be impacted over time as a higher portion of it will be recognized ratably.
Revenue by Line of Business
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Actual |
|
|
Constant Currency |
|
||||
|
License |
|
$ |
177.2 |
|
|
$ |
123.4 |
|
|
|
44 |
% |
|
|
39 |
% |
|
Support and cloud services |
|
|
216.2 |
|
|
|
191.0 |
|
|
|
13 |
% |
|
|
10 |
% |
|
Software revenue |
|
|
393.4 |
|
|
|
314.4 |
|
|
|
25 |
% |
|
|
22 |
% |
|
Professional services |
|
|
35.6 |
|
|
|
41.7 |
|
|
|
(15 |
)% |
|
|
(18 |
)% |
|
Total revenue |
|
$ |
429.1 |
|
|
$ |
356.1 |
|
|
|
20 |
% |
|
|
17 |
% |
Software revenue in Q1’21 increased over Q1’20 due to subscription revenue growth, offset by a decline in perpetual support revenue due to conversions of support contracts to subscriptions. In Q1’21, subscription license revenue grew 47% (43% constant currency) compared to Q1’20, primarily due to selling contracts with longer durations and more large deals. Subscription support and cloud services grew 37% (34% constant currency) while perpetual support decreased 14% (16% constant currency) compared to Q1’20, primarily due to conversions from perpetual support to subscription.
Professional services engagements typically result from sales of new licenses; revenue is recognized over the term of the engagement. Our expectation is that professional services revenue will trend flat-to-down over time due to our strategy to expand margins by migrating more services engagements to our partners and delivering products that require less consulting and training services, and in the near term will trend down due to the effects of the COVID-19 pandemic.
Professional services revenue declined in the quarter due to challenges with project scoping and implementation activities and performance due to social distancing measures and facility closures implemented to address the COVID-19 pandemic. Additionally, professional services revenue was impacted by a prior-year extension to complete work on a large fixed price contract, which has led to lower revenue in Q1’21 compared to Q1’20 on that contract.
29
Software Revenue by Product Group
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Actual |
|
|
Constant Currency |
|
||||
|
Core (CAD and PLM) |
|
$ |
289.5 |
|
|
$ |
226.2 |
|
|
|
28 |
% |
|
|
24 |
% |
|
Growth (IoT, AR, Onshape) |
|
|
57.7 |
|
|
|
43.2 |
|
|
|
34 |
% |
|
|
31 |
% |
|
FSG (Focused Solutions Group) |
|
|
46.2 |
|
|
|
45.0 |
|
|
|
3 |
% |
|
|
0 |
% |
|
Software revenue |
|
$ |
393.4 |
|
|
$ |
314.4 |
|
|
|
25 |
% |
|
|
22 |
% |
Core Product software revenue growth in Q1’21 compared to the year-ago period was driven by subscription revenue growth of 47% (42% constant currency), offset by a decline in perpetual support revenue due to conversions of support contracts to subscriptions. ARR increased 17% (12% constant currency) for Q1’21 compared to Q1’20, reflecting mid-teens ARR growth in PLM and high single-digit growth in CAD as customers pursue their digital transformation initiatives.
Growth Product software revenue increased in Q1’21 due to subscription revenue growth of 47% (44% constant currency) compared to Q1’20. Growth Product ARR increased 29% (26% constant currency) for Q1’21 compared to Q1’20, reflecting particularly strong growth in AR due to customer expansions and new purchases as customers purchased our Vuforia Studio and Vuforia Chalk solutions to more effectively train their employees and provide remote assistance to their customers.
FSG Product software revenue growth in Q1’21 reflects subscription revenue growth of 14% (11% constant currency) compared to Q1’20, offset by a decline in perpetual support revenue due to conversions of support contracts to subscriptions. ARR was flat year over year, with 2% growth (0% constant currency), due to challenges faced by commercial airlines and retail companies in the COVID-19 pandemic.
Software Revenue by Geographic Region
A significant portion of our software revenue is generated outside the U.S. In the first three months of FY'21, approximately 50% of software revenue was generated in the Americas, 35% in Europe, and 15% in Asia Pacific. In FY'20, approximately 40% of software revenue was generated in the Americas, 35% in Europe, and 20% in Asia Pacific.
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Actual |
|
|
Constant Currency |
|
||||
|
Americas |
|
$ |
191.0 |
|
|
$ |
141.8 |
|
|
|
35 |
% |
|
|
35 |
% |
|
Europe |
|
|
144.8 |
|
|
|
115.7 |
|
|
|
25 |
% |
|
|
18 |
% |
|
Asia Pacific |
|
|
57.6 |
|
|
|
56.9 |
|
|
|
1 |
% |
|
|
(2 |
)% |
|
Software revenue |
|
$ |
393.4 |
|
|
$ |
314.4 |
|
|
|
25 |
% |
|
|
22 |
% |
Americas software revenue growth in Q1’21 was driven by subscription revenue growth of 57% (actual and constant currency) compared to Q1’20, partially offset by a decline in perpetual support revenue, resulting in recurring revenue growth of 37% (actual and constant currency) in Q1’21 compared to Q1’20. Americas constant currency ARR growth of 13% was the second quarter in a row of double-digit growth, driven by broad-based demand across our Core and Growth segments, partially offset by weakness in FSG.
Europe software revenue growth in Q1’21 was driven by growth in subscription revenue of 41% (33% constant currency) compared to Q1’20, partially offset by a decline in perpetual support revenue, resulting in recurring revenue growth of 25% (18% constant currency) in Q1’21 compared to Q1’20. Europe constant currency ARR growth of 8% reflects some large Core Product competitive wins and customer expansions in the Automotive and Aerospace & Defense verticals.
30
Asia Pacific software revenue growth was flat in Q1’21 compared to Q1’20, primarily due to subscription revenue growth of 6% (2% constant currency) being offset by a decline in perpetual support revenue of 8% (11% constant currency). Asia Pacific had a strong performance with constant currency ARR growth of 16%, reflecting the earlier re-opening of those economies, and much improved churn rates due to increasing acceptance of our subscription licensing model.
Gross Margin
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Percent Change |
|
|||
|
License gross margin |
|
$ |
163.9 |
|
|
$ |
110.3 |
|
|
|
49 |
% |
|
License gross margin percentage |
|
|
93 |
% |
|
|
89 |
% |
|
|
|
|
|
Support and cloud services gross margin |
|
$ |
177.9 |
|
|
$ |
152.0 |
|
|
|
17 |
% |
|
Support and cloud services gross margin percentage |
|
|
82 |
% |
|
|
80 |
% |
|
|
|
|
|
Professional services gross margin |
|
$ |
0.4 |
|
|
$ |
6.4 |
|
|
|
(94 |
)% |
|
Professional services gross margin percentage |
|
|
1 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
|
$ |
342.2 |
|
|
$ |
268.7 |
|
|
|
27 |
% |
|
Total gross margin percentage |
|
|
80 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP gross margin(1) |
|
$ |
352.9 |
|
|
$ |
278.5 |
|
|
|
27 |
% |
|
Non-GAAP gross margin percentage(1) |
|
|
82 |
% |
|
|
78 |
% |
|
|
|
|
|
(1) |
Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below. |
License gross margin increased in Q1’21 compared to Q1’20 due to a $53.7 million increase in license revenue while cost of license revenue remained flat.
Support and cloud services gross margin increased in Q1’21 compared to Q1’20 due to increases in subscription support and cloud revenue, offset by a decrease in perpetual support revenue. There was a modest decrease in cost of support and cloud services revenue in Q1’21 compared to Q1’20.
Professional services gross margin decreased in Q1’21 compared to Q1’20 primarily due to a decrease in revenue due to the impact of the COVID-19 pandemic, while cost of professional services revenue remained flat. Cost of professional services revenue was impacted by a decrease of $1.7 million in travel costs and $1.9 million in outside services costs, which were offset by a $3.5 million increase in compensation compared to the year-ago period. Additionally, professional services gross margin was impacted by a prior-year extension to complete work on a large fixed price contract, which has led to a reduced margin on that contract.
Operating Expenses
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Percent Change |
|
|||
|
Sales and marketing |
|
$ |
124.7 |
|
|
$ |
107.6 |
|
|
|
16 |
% |
|
% of total revenue |
|
|
29 |
% |
|
|
30 |
% |
|
|
|
|
|
Research and development |
|
$ |
70.8 |
|
|
$ |
65.3 |
|
|
|
8 |
% |
|
% of total revenue |
|
|
17 |
% |
|
|
18 |
% |
|
|
|
|
|
General and administrative |
|
$ |
49.5 |
|
|
$ |
44.6 |
|
|
|
11 |
% |
|
% of total revenue |
|
|
12 |
% |
|
|
13 |
% |
|
|
|
|
|
Amortization of acquired intangible assets |
|
$ |
6.6 |
|
|
$ |
6.8 |
|
|
|
(2 |
)% |
|
% of total revenue |
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
Restructuring and other charges, net |
|
$ |
0.2 |
|
|
$ |
14.0 |
|
|
|
(98 |
)% |
|
% of total revenue |
|
|
0 |
% |
|
|
4 |
% |
|
|
|
|
|
Total operating expenses |
|
$ |
251.9 |
|
|
$ |
238.3 |
|
|
|
6 |
% |
Headcount increased 2% between Q1’20 and Q1’21.
31
Operating expenses in Q1'21 compared to operating expenses in Q1'20 increased primarily due to the following:
|
|
• |
a $34.6 million increase in compensation expense (including benefit costs), primarily driven by an $16.8 million (67%) increase in stock-based compensation expense, an $11.3 million (12%) increase in salaries and a $4.1 million (32%) increase in commission expense. Of the $34.6 million increase in compensation expense, $20.4 million related to sales and marketing, $9.9 million related to general and administrative costs, and $4.3 million related to research and development costs; and |
|
|
• |
$3.0 million of expenses related to our investment in our digital transformation; |
partially offset by:
|
|
• |
a $13.9 million decrease in restructuring costs. The Q1’20 restructuring charges primarily related to an employee restructuring plan to shift resources to support our SaaS initiatives; |
|
|
• |
a $5.6 million decrease in travel costs driven by the COVID-19 pandemic; and |
|
|
• |
a $3.2 million decrease in acquisition-related transaction costs (included in general and administrative). |
Stock-based compensation was higher for Q1’21 compared to Q1’20 primarily due to modifications in FY’20 of performance-based awards and the resulting higher estimated attainment, in addition to higher expense for time-based awards due to more equity being awarded in FY’20.
Interest Expense
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Percent Change |
|
|||
|
Interest expense |
|
$ |
(11.5 |
) |
|
$ |
(12.1 |
) |
|
|
(5 |
)% |
Interest expense includes interest under our credit facility and senior notes. We had $1.0 billion of total debt at December 31, 2020, compared to $1.1 billion at December 28, 2019. The average interest rate on borrowings outstanding was 3.8% during Q1’21, compared to 4.9% during Q1’20.
Other Income (Expense)
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Percent Change |
|
|||
|
Interest income |
|
$ |
0.6 |
|
|
$ |
0.9 |
|
|
|
(39 |
)% |
|
Other expense, net |
|
|
(2.0 |
) |
|
|
(0.2 |
) |
|
|
727 |
% |
|
Other income (expense), net |
|
$ |
(1.4 |
) |
|
$ |
0.7 |
|
|
|
(301 |
)% |
The $1.8 million increase in other expense, net for Q1’21 compared to Q1’20 is driven by FX losses in the quarter.
Income Taxes
|
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
|
Percent Change |
|
|||
|
Income before income taxes |
|
$ |
77.4 |
|
|
$ |
19.0 |
|
|
|
307 |
% |
|
Provision (benefit) for income taxes |
|
$ |
53.9 |
|
|
$ |
(16.4 |
) |
|
|
(428 |
)% |
|
Effective income tax rate |
|
|
70 |
% |
|
|
(86 |
)% |
|
|
|
|
32
In Q1’21 and Q1’20, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate and the excess tax benefit related to stock-based compensation. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In FY’21 and FY’20, the foreign rate differential predominantly relates to these Irish earnings. In addition, the effective tax rate was impacted by the matters described below.
In Q1’21, our results include a charge of $35.3 million related to the effects of an unrecognized tax benefit in a non-U.S. jurisdiction. See Note 12. Income Taxes to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information about this charge.
In Q1’20, we reduced our previously established U.S. valuation allowance by $21.0 million as the result of the Onshape acquisition.
Operating Measure
ARR
ARR (Annual Run Rate) represents the annual value of our portfolio of active renewable customer contracts as of the end of the reporting period, including subscription software, cloud, and support contracts. ARR includes orders placed under our Strategic Alliance Agreement with Rockwell Automation and includes orders placed to satisfy contractual quarterly minimum commitments.
We believe ARR is a valuable operating metric to measure the health of a subscription business because it captures expected subscription and support cash generation from new customers, existing customer renewals and expansions, and includes the impact of churn, which reflects gross churn, offset by the impact of any pricing increases.
Because this measure represents the annual value of renewable customer contracts as of the end of a reporting period, ARR does not represent revenue for any particular period or remaining revenue that will be recognized in future periods.
Non-GAAP Financial Measures
Our non-GAAP financial measures and the reasons we use them and the reasons we exclude the items identified below are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2020.
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
|
|
• |
free cash flow—cash flow from operations |
|
|
• |
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 or loss per share—GAAP diluted earnings or loss per share |
Free cash flow is cash flow from operations net of capital expenditures, which are expenditures for property and equipment and consist primarily of facility improvements, office equipment, computer equipment, and software. We believe that free cash flow, in conjunction with cash from operations, is a useful measure of liquidity since capital expenditures are a necessary component of ongoing operations.
33
The non-GAAP financial measures other than free cash flow exclude, as applicable, stock-based compensation expense; amortization of acquired intangible assets; acquisition-related and other transactional charges included in general and administrative expenses; restructuring and other charges, net; non-operating charges; and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. In FY’20, we incurred an early redemption interest penalty and wrote off debt issuance costs, both of which were related to the settlement of the 6.000% Senior Notes due 2024 and which are also excluded from our non-GAAP financial measures as they were non-ordinary course in nature and not included in management’s review of our results. In Q1’21, we incurred tax expense related to a reserve for a South Korean tax exposure established in the quarter which is excluded from our non-GAAP financial measures as it is related to prior periods and not included in management’s view of Q1’21 results for comparative purposes.
The items excluded from these non-GAAP financial measures 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.
The items excluded from the non-GAAP financial measures often have a material impact on our financial results, certain of those items are recurring, and other such items often recur. Accordingly, the non-GAAP financial measures included in this Quarterly Report on Form 10-Q 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.
|
(in millions, except per share amounts) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
GAAP gross margin |
|
$ |
342.2 |
|
|
$ |
268.7 |
|
|
Stock-based compensation |
|
|
4.4 |
|
|
|
3.0 |
|
|
Amortization of acquired intangible assets included in cost of revenue |
|
|
6.3 |
|
|
|
6.8 |
|
|
Non-GAAP gross margin |
|
$ |
352.9 |
|
|
$ |
278.5 |
|
|
GAAP operating income |
|
$ |
90.3 |
|
|
$ |
30.4 |
|
|
Stock-based compensation |
|
|
46.1 |
|
|
|
27.9 |
|
|
Amortization of acquired intangible assets |
|
|
12.8 |
|
|
|
13.6 |
|
|
Acquisition-related and other transactional charges included in general and administrative expenses |
|
|
3.9 |
|
|
|
7.1 |
|
|
Restructuring and other charges, net |
|
|
0.2 |
|
|
|
14.0 |
|
|
Non-GAAP operating income |
|
$ |
153.4 |
|
|
$ |
93.1 |
|
|
GAAP net income |
|
$ |
23.5 |
|
|
$ |
35.5 |
|
|
Stock-based compensation |
|
|
46.1 |
|
|
|
27.9 |
|
|
Amortization of acquired intangible assets |
|
|
12.8 |
|
|
|
13.6 |
|
|
Acquisition-related and other transactional charges included in general and administrative expenses |
|
|
3.9 |
|
|
|
7.1 |
|
|
Restructuring and other charges, net |
|
|
0.2 |
|
|
|
14.0 |
|
|
Income tax adjustments(1) |
|
|
27.2 |
|
|
|
(32.0 |
) |
|
Non-GAAP net income |
|
$ |
113.7 |
|
|
$ |
66.2 |
|
|
GAAP diluted earnings per share |
|
$ |
0.20 |
|
|
$ |
0.31 |
|
|
Stock-based compensation |
|
|
0.39 |
|
|
|
0.24 |
|
|
Amortization of acquired intangible assets |
|
|
0.11 |
|
|
|
0.12 |
|
|
Acquisition-related and other transactional charges included in general and administrative expenses |
|
|
0.03 |
|
|
|
0.06 |
|
|
Restructuring and other charges, net |
|
|
— |
|
|
|
0.12 |
|
|
Income tax adjustments(1) |
|
|
0.23 |
|
|
|
(0.28 |
) |
|
Non-GAAP diluted earnings per share |
|
$ |
0.97 |
|
|
$ |
0.57 |
|
|
(1) |
We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the FY’21 and FY’20 non-GAAP tax provisions are being calculated assuming there is no valuation allowance. In Q1'20, our GAAP results included a benefit of $21.0 million related to the release of a valuation allowance related to the Onshape acquisition. As the non-GAAP tax provision is calculated assuming that there is no valuation allowance, this benefit has been excluded. 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. Additionally, our Q1'21 non-GAAP results exclude tax expense of $34.6 million related to a South Korean tax exposure, primarily related to foreign withholding taxes. |
34
Operating margin impact of non-GAAP adjustments:
|
|
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
GAAP operating margin |
|
|
21.1 |
% |
|
|
8.5 |
% |
|
Stock-based compensation |
|
|
10.7 |
% |
|
|
7.8 |
% |
|
Amortization of acquired intangible assets |
|
|
3.0 |
% |
|
|
3.8 |
% |
|
Acquisition-related and other transactional charges included in general and administrative expenses |
|
|
0.9 |
% |
|
|
2.0 |
% |
|
Restructuring and other charges, net |
|
|
0.1 |
% |
|
|
3.9 |
% |
|
Non-GAAP operating margin |
|
|
35.8 |
% |
|
|
26.1 |
% |
Critical Accounting Policies and Estimates
The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2020 Annual Report on Form 10-K.
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 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for all recently issued accounting pronouncements.
Liquidity and Capital Resources
|
(in millions) |
|
December 31, 2020 |
|
|
September 30, 2020 |
|
||
|
Cash and cash equivalents |
|
$ |
398.7 |
|
|
$ |
275.5 |
|
|
Restricted cash |
|
|
0.5 |
|
|
|
0.5 |
|
|
Short- and long-term marketable securities |
|
|
— |
|
|
|
59.1 |
|
|
Total |
|
$ |
399.2 |
|
|
$ |
335.1 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Cash provided by operating activities |
|
$ |
113.8 |
|
|
$ |
7.5 |
|
|
Cash provided by (used in) investing activities |
|
$ |
46.7 |
|
|
$ |
(473.4 |
) |
|
Cash provided by (used in) financing activities |
|
$ |
(42.8 |
) |
|
$ |
431.1 |
|
Cash, Cash Equivalents and Restricted Cash
We invest our cash with highly rated financial institutions. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. In December 2020, we sold all of our investments in marketable securities. At December 31, 2020, cash and cash equivalents totaled $399 million, compared to $275 million at September 30, 2020.
35
A significant portion of our cash is generated and held outside the U.S. As of December 31, 2020, we had cash and cash equivalents of $128 million in the U.S., $132 million in Europe, $108 million in Asia Pacific (including India) and $31 million in other non-U.S. countries. We have substantial cash requirements in the U.S., but we believe that the combination of our existing U.S. cash and cash equivalents, our ability to repatriate cash to the U.S. more cost effectively with the recent U.S. tax law changes, 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.
Cash Provided by Operating Activities
Cash provided by operating activities was $114 million in Q1’21, compared to $8 million in Q1’20. Cash from operations for Q1’21 includes $7.3 million of restructuring payments and $2.9 million of acquisition-related payments compared to $3.3 million of restructuring payments and $6.4 million of acquisition-related payments in the prior year period. The increase in cash from operations in Q1’21 compared to Q1’20 was primarily driven by increased collections and lower interest payments.
Cash Provided by (Used in) Investing Activities
|
(in millions) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Additions to property and equipment |
|
$ |
(2.9 |
) |
|
$ |
(4.7 |
) |
|
Proceeds from (purchases of) short- and long-term marketable securities, net |
|
|
58.5 |
|
|
|
(0.1 |
) |
|
Acquisitions of businesses, net of cash acquired |
|
|
— |
|
|
|
(467.7 |
) |
|
Settlement of net investment hedges |
|
|
(7.4 |
) |
|
|
(0.9 |
) |
|
Other |
|
|
(1.5 |
) |
|
|
— |
|
|
Net cash provided by (used in) investing activities |
|
$ |
46.7 |
|
|
$ |
(473.4 |
) |
Cash provided by investing activities in Q1’21 reflects proceeds from the sale of marketable securities of $56 million. Cash used in investing activities in Q1’20 reflects $469 million used to acquire Onshape.
Cash Provided by (Used in) Financing Activities
|
(in millions) |
|
Three months ended |
|
|||||
|
|
|
December 31, 2020 |
|
|
December 28, 2019 |
|
||
|
Borrowings (payments) on debt, net |
|
$ |
(18.0 |
) |
|
$ |
455.0 |
|
|
Payments of withholding taxes in connection with stock-based awards |
|
|
(24.5 |
) |
|
|
(22.9 |
) |
|
Other |
|
|
(0.3 |
) |
|
|
0.1 |
|
|
Net cash provided by (used in) financing activities |
|
$ |
(42.8 |
) |
|
$ |
431.1 |
|
Net cash outflows related to financing activities in Q1’21 include the repayment of $18 million of borrowings under our credit facility, compared to net borrowings in Q1’20 of $455 million under the credit facility for the Onshape acquisition.
Outstanding Debt
|
(in millions) |
|
December 31, 2020 |
|
|
|
4.000% Senior notes due 2028 |
|
$ |
500.0 |
|
|
3.625% Senior notes due 2025 |
|
|
500.0 |
|
|
Credit facility revolver |
|
|
— |
|
|
Total debt |
|
$ |
1,000.0 |
|
|
Unamortized debt issuance costs for the senior notes |
|
|
(12.1 |
) |
|
Total debt, net of issuance costs |
|
$ |
987.9 |
|
|
|
|
|
|
|
|
Undrawn under credit facility revolver |
|
$ |
1,000.0 |
|
|
Undrawn under credit facility revolver available for borrowing |
|
$ |
983.5 |
|
36
As of December 31, 2020, we were in compliance with all financial and operating covenants of the credit facility and the note indentures. Any failure to comply with such covenants under the credit facility would prevent us from being able to borrow additional funds under the credit facility, and, as with any failure to comply with such covenants under the note indentures, could constitute a default that could cause all amounts outstanding to become due and payable immediately.
Our credit facility and our senior notes described in Note 13. Debt to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Future Expectations
We believe that existing cash and cash equivalents, together with cash generated from operations and amounts available under our credit facility, will be sufficient to meet our working capital and capital expenditure requirements (which capital expenditures we expect to be approximately $25 million in FY’21) through at least the next twelve months and to meet our known long-term capital requirements.
In January 2021, we acquired Arena Solutions for approximately $715 million, net of cash acquired. In connection with the acquisition, we borrowed $600 million under our existing credit facility. We plan to use available cash from operations to pay down borrowings under the credit facility. When our leverage ratio (Debt/EBITDA) is below 3x, we plan to reevaluate share repurchases.
Our expected uses and sources of cash could change, payments due to us may be delayed due to the COVID-19 pandemic, our cash position could be reduced, and we could incur additional debt obligations if we decide to retire debt, engage in strategic transactions or repurchase shares, any of which could be commenced, suspended or completed at any time. Any such repurchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any debt retirement or issuance, share repurchases, or strategic transactions may be material.
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no significant changes in our market risk exposure as described in Item 7A. Quantitative and Qualitative Disclosures about Market Risk of our 2020 Annual Report on Form 10-K.
|
ITEM 4. |
CONTROLS AND PROCEDURES |
Evaluation of Effectiveness 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.
We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2020.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the period ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
37
PART II—OTHER INFORMATION
|
ITEM 1. |
LEGAL PROCEEDINGS |
Information on legal proceedings can be found in Note 15. Commitments and Contingencies of Notes to Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.
|
ITEM 1A. |
RISK FACTORS |
In addition to other information set forth in this report, you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our 2020 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
|
ITEM 6. |
EXHIBITS |
|
2 |
|
|
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
31.1 |
|
Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). |
|
|
|
|
|
31.2 |
|
Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). |
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32* |
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Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350. |
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101 |
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The following materials from PTC Inc.'s Quarterly Report on Form 10-Q for the quarter ended December 31, 2020 ("Q1 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of December 31, 2020 and September 30, 2020; (ii) Condensed Consolidated Statements of Operations for the three months ended December 31, 2020 and December 28, 2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2020 and December 28, 2019; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2020 and December 28, 2019; (v) Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2020 and December 28, 2019; and (vi) Notes to Condensed Consolidated Financial Statements. |
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104 |
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The cover page of the Q1 Form 10-Q formatted in Inline XBRL (included in Exhibit 101). |
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Indicates that the exhibit is being furnished, not filed, with this report. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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PTC Inc. |
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By: |
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/S/ KRISTIAN TALVITIE |
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Kristian Talvitie Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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Date: February 4, 2021
39
CERTIFICATION
I, James Heppelmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PTC Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: |
February 4, 2021 |
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/S/ JAMES HEPPELMANN |
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James Heppelmann |
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President and Chief Executive Officer |
CERTIFICATION
I, Kristian Talvitie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PTC Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: |
February 4, 2021 |
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/S/ KRISTIAN TALVITIE |
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Kristian Talvitie |
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Executive Vice President and Chief Financial Officer |
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of PTC Inc. (the “Company”) certifies that, to his knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date: |
February 4, 2021 |
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/S/ JAMES HEPPELMANN |
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James Heppelmann President and Chief Executive Officer |
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Date: |
February 4, 2021 |
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/S/ KRISTIAN TALVITIE |
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Kristian Talvitie |
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Executive Vice President and Chief Financial Officer |