Ptc Inc 10-Q for FY2020 Q2
Ptc Inc. (PTC)
10-Q
2020-05-06
For: 2020-03-28
View Original
Added on
April 10, 2026
About this 10-Q
Ptc Inc filed this 10-Q on May 6, 2020, covering the quarter ended March 28, 2020 (FY2020 Q2).
Headline figures
Quarter ended March 28, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $359.6M
- up 23.8% from $290.45M a year earlier
- Net income
- $7.16M
- compared with a net loss of $43.51M a year earlier
- Diluted EPS
- $0.06
- compared with -$0.37 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 28, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from_ to_
Commission File Number: 0-18059
____________________________________________________
(Exact name of registrant as specified in its charter)
____________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
(Address of principal executive offices, including zip code)
(781 ) 370-5000
(Registrant’s telephone number, including area code)
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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:
☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ||||||
Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
There were 115,695,431 shares of our common stock outstanding on May 4, 2020.
PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended March 28, 2020
Page Number | ||
Part I—FINANCIAL INFORMATION | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Part II—OTHER INFORMATION | ||
Item 1A. | ||
Item 6. | ||
PART I—FINANCIAL INFORMATION
ITEM 1. | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
March 28, 2020 | September 30, 2019 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Short-term marketable securities | |||||||
Accounts receivable, net of allowance for doubtful accounts of $831 and $744 at March 28, 2020 and September 30, 2019, respectively | |||||||
Prepaid expenses | |||||||
Other current assets | |||||||
Total current assets | |||||||
Property and equipment, net | |||||||
Goodwill | |||||||
Acquired intangible assets, net | |||||||
Long-term marketable securities | |||||||
Deferred tax assets | |||||||
Operating right-of-use lease assets | |||||||
Other assets | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | $ | |||||
Accrued expenses and other current liabilities | |||||||
Accrued compensation and benefits | |||||||
Accrued income taxes | |||||||
Current portion of long-term debt | |||||||
Deferred revenue | |||||||
Short-term lease obligations | |||||||
Total current liabilities | |||||||
Long-term debt | |||||||
Deferred tax liabilities | |||||||
Deferred revenue | |||||||
Long-term lease obligations | |||||||
Other liabilities | |||||||
Total liabilities | |||||||
Commitments and contingencies (Note 15) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued | |||||||
Common stock, $0.01 par value; 500,000 shares authorized; 115,695 and 114,899 shares issued and outstanding at March 28, 2020 and September 30, 2019, respectively | |||||||
Additional paid-in capital | |||||||
Accumulated deficit | ( | ) | ( | ) | |||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total stockholders’ equity | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
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)
Three months ended | Six months ended | ||||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
Revenue: | |||||||||||||||
License | $ | $ | $ | $ | |||||||||||
Support and cloud services | |||||||||||||||
Total software revenue | |||||||||||||||
Professional services | |||||||||||||||
Total revenue | |||||||||||||||
Cost of revenue: | |||||||||||||||
Cost of license revenue | |||||||||||||||
Cost of support and cloud services revenue | |||||||||||||||
Total cost of software revenue | |||||||||||||||
Cost of professional services revenue | |||||||||||||||
Total cost of revenue | |||||||||||||||
Gross margin | |||||||||||||||
Operating expenses: | |||||||||||||||
Sales and marketing | |||||||||||||||
Research and development | |||||||||||||||
General and administrative | |||||||||||||||
Amortization of acquired intangible assets | |||||||||||||||
Restructuring and other charges, net | |||||||||||||||
Total operating expenses | |||||||||||||||
Operating income (loss) | ( | ) | |||||||||||||
Interest and debt premium expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other income (expense), net | ( | ) | ( | ) | |||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | |||||||||||
Provision (benefit) for income taxes | ( | ) | |||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Earnings (loss) per share—Basic | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Earnings (loss) per share—Diluted | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Weighted-average shares outstanding—Basic | |||||||||||||||
Weighted-average shares outstanding—Diluted | |||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three months ended | Six months ended | ||||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Hedge gain (loss) arising during the period, net of tax of $0.2 million in the second quarter of 2020 and 2019, respectively, and $0.9 million and $0.2 million in the first six months of 2020 and 2019, respectively | ( | ) | |||||||||||||
Net hedge (gain) loss reclassified into earnings, net of tax of $0.0 million in the second quarter of 2020 and 2019, respectively, and $0.0 million and $0.1 million in the first six months of 2020 and 2019, respectively | ( | ) | |||||||||||||
Realized and unrealized gain (loss) on hedging instruments | ( | ) | |||||||||||||
Foreign currency translation adjustment, net of tax of $0 for each period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period | ( | ) | ( | ) | |||||||||||
Amortization of net actuarial pension gain included in net income, net of tax of $0.3 million and $0.2 million in the second quarter of 2020 and 2019, respectively, and $0.6 million and $0.3 million in the first six months of 2020 and 2019, respectively | |||||||||||||||
Change in unamortized pension gain (loss) during the period related to changes in foreign currency | ( | ) | |||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended | |||||||
March 28, 2020 | March 30, 2019 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | $ | ( | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | |||||||
Stock-based compensation | |||||||
Other non-cash items, net | ( | ) | |||||
Loss on disposal of fixed assets | |||||||
Changes in operating assets and liabilities, excluding the effects of acquisitions: | |||||||
Accounts receivable | |||||||
Accounts payable and accrued expenses | |||||||
Accrued compensation and benefits | ( | ) | ( | ) | |||
Deferred revenue | |||||||
Accrued income taxes | ( | ) | ( | ) | |||
Other current assets and prepaid expenses | |||||||
Other noncurrent assets and liabilities | ( | ) | |||||
Net cash provided by operating activities | |||||||
Cash flows from investing activities: | |||||||
Additions to property and equipment | ( | ) | ( | ) | |||
Purchases of short- and long-term marketable securities | ( | ) | ( | ) | |||
Proceeds from maturities of short- and long-term marketable securities | |||||||
Acquisitions of businesses, net of cash acquired | ( | ) | ( | ) | |||
Purchases of investments | ( | ) | |||||
Settlement of net investment hedges | |||||||
Net cash used in investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance of Senior Notes | |||||||
Borrowings under credit facility | |||||||
Repayments of borrowings under credit facility | ( | ) | ( | ) | |||
Repurchases of common stock | ( | ) | |||||
Proceeds from issuance of common stock | |||||||
Payments for debt issuance costs | ( | ) | |||||
Contingent consideration | ( | ) | |||||
Payments of withholding taxes in connection with stock-based awards | ( | ) | ( | ) | |||
Net cash provided by (used in) financing activities | ( | ) | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | |||||
Net change in cash, cash equivalents, and restricted cash | |||||||
Cash, cash equivalents, and restricted cash, beginning of period | |||||||
Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
Three months ended March 28, 2020 | ||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance as of December 28, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Common stock issued for employee stock-based awards | ( | ) | — | — | ||||||||||||||||||
Shares surrendered by employees to pay taxes related to stock-based awards | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||
Common stock issued for employee stock purchase plan | — | — | ||||||||||||||||||||
Compensation expense from stock-based awards | — | — | — | — | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||||||
Unrealized gain 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 March 28, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Six months ended March 28, 2020 | ||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance as of September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
ASU 2016-02 (ASC 842) adoption | — | — | — | ( | ) | — | ( | ) | ||||||||||||||
Common stock issued for employee stock-based awards | ( | ) | — | — | ||||||||||||||||||
Shares surrendered by employees to pay taxes related to stock-based awards | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||
Common stock issued for employee stock purchase plan | — | — | ||||||||||||||||||||
Compensation expense from stock-based awards | — | — | — | — | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||||||
Unrealized loss on net investment hedges, net of tax | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Foreign currency translation adjustment | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Unrealized loss on marketable securities, net of tax | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Change in pension benefits, net of tax | — | — | — | — | ||||||||||||||||||
Balance as of March 28, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
5
Three months ended March 30, 2019 | ||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance as of December 29, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Common stock issued for employee stock-based awards | — | — | ||||||||||||||||||||
Shares surrendered by employees to pay taxes related to stock-based awards | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||
Common stock issued for employee stock purchase plan | — | — | ||||||||||||||||||||
Compensation expense from stock-based awards | — | — | — | — | ||||||||||||||||||
Net income (loss) | — | — | — | ( | ) | — | ( | ) | ||||||||||||||
Repurchases of common stock | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||
Unrealized gain on net investment hedges, net of tax | — | — | — | — | ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Unrealized gain on available-for-sale securities, net of tax | — | — | — | — | ||||||||||||||||||
Change in pension benefits, net of tax | — | — | — | — | ||||||||||||||||||
Balance as of March 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Six months ended March 30, 2019 | ||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance as of September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
ASU 2016-16 adoption | — | — | — | — | ||||||||||||||||||
ASC 606 adoption | — | — | — | — | ||||||||||||||||||
Common stock issued for employee stock-based awards | ( | ) | — | — | ||||||||||||||||||
Shares surrendered by employees to pay taxes related to stock-based awards | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||
Common stock issued | — | — | ( | ) | — | — | ( | ) | ||||||||||||||
Common stock issued for employee stock purchase plan | — | — | ||||||||||||||||||||
Compensation expense from stock-based awards | — | — | — | — | ||||||||||||||||||
Net income (loss) | — | — | — | ( | ) | — | ( | ) | ||||||||||||||
Repurchases of common stock | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||
Unrealized loss on cash flow hedges, net of tax | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Unrealized gain on net investment hedges, net of tax | — | — | — | — | ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Unrealized gain on marketable securities, net of tax | — | — | — | — | ||||||||||||||||||
Change in pension benefits, net of tax | — | — | — | — | ||||||||||||||||||
Balance as of March 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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, 2019. 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, 2019 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. Our fiscal quarters end on a Saturday following a thirteen-week calendar and may result in different quarter end dates year to year. The second quarter of 2020 ended on March 28, 2020 and the second quarter of 2019 ended on March 30, 2019. The results of operations for the six months ended March 28, 2020 are not necessarily indicative of the results expected for the remainder of the fiscal year.
We adjusted the $3.0 million hedge gain in the Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 30, 2019 that was incorrectly reflected as a loss.
Risks and Uncertainties - COVID-19 Pandemic
In December 2019, a novel strain of coronavirus, now referred to as COVID-19, surfaced. The virus has spread to over 100 countries, 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 future 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 COVID-19 as of March 28, 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 there was not a material impact to our consolidated financial statements as of and for the quarter ended March 28, 2020, resulting from our assessments, our future assessment of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases (Topic 842) (ASC 842), which replaced the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and to disclose important information about leasing arrangements. We adopted ASC 842 effective October 1, 2019 (the effective date). ASC 842 requires a modified retrospective transition method that could either be applied at the earliest comparative period in the financial statements or in the period of adoption. We elected to use the period of adoption (October 1, 2019) transition method and therefore did not recast prior periods.
6
Since we adopted the new standard using the period of adoption transition method, we are not required to present 2020 comparative disclosures under ASC 842. However, we are required to present the required annual disclosures under the previous U.S. GAAP lease accounting standard (ASC 840).
We elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases. In addition, we elected an accounting policy to not recognize leases with an initial term of one year or less on the balance sheet.
Upon the adoption of this standard on October 1, 2019, we recognized an operating lease liability of $224.0 million, representing the present value of the minimum lease payments remaining as of the adoption date, and a right-of-use asset in the amount of $167.9 million. The right-of-use asset reflects adjustments for derecognition of deferred leasing incentives. We also recorded a $1.6 million decrease to retained earnings as a result of the change in scheduling of reversal of temporary tax differences due to the adoption of ASC 842.
Pending Accounting Pronouncements
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. The new standard will be effective for us in the first quarter of 2021. Entities can choose to adopt the new guidance prospectively or retrospectively. We plan to adopt this standard using the prospective adoption approach. We are currently evaluating the effects of this pronouncement on our consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of 2021. We do not expect this ASU to have a material impact on our consolidated financial statements.
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, along with subsequent amendments, which replace 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. The new standard will be effective for us in the first quarter of 2021. 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 significant.
2. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
(in thousands) | March 28, 2020 | September 30, 2019 | |||||
Contract asset | $ | $ | |||||
Deferred revenue | $ | $ | |||||
As of March 28, 2020, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $10.2 million of the September 30, 2019 contract asset balance was transferred to receivables during the six months ended March 28, 2020 as a result of the right to payment becoming unconditional. The majority of the contract asset balance relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $8.8 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the six months ended March 28, 2020.
7
During the six months ended March 28, 2020, we recognized $283.4 million of revenue that was included in deferred revenue as of September 30, 2019 and there were additional deferrals of $301.3 million during the six months ended March 28, 2020, primarily related to new billings. In addition, deferred revenue increased by an immaterial amount as a result of the acquisition of Onshape. The balance of total short- and long-term receivables as of September 30, 2019 was $412.5 million, compared to total short- and long-term receivables as of March 28, 2020 of $431.0 million.
Our multi-year, non-cancellable on-premise 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 March 28, 2020 and September 30, 2019, the total refund liability was $30.2 million and $22.9 million, respectively, primarily associated with the annual right to exchange on-premise subscription software.
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 March 28, 2020 and September 30, 2019, deferred costs of $29.7 million and $27.7 million, respectively, were included in other current assets and $65.7 million and $64.8 million, respectively, were included in other assets (non-current).
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of March 28, 2020, the amounts include additional performance obligations of $417.2 million recorded in deferred revenue and $608.8 million that are not yet recorded in the consolidated balance sheets. We expect to recognize approximately 90 % of the total $1,026.0 million over the next 24 months, with the remaining amount thereafter. Certain of our multi-year subscription contracts with start dates on or after October 1, 2018 contain a limited annual cancellation right. For such cancellable subscription contracts, we consider each annual period a discrete contract. Early in the fourth quarter of 2019, we discontinued offering the cancellation right for substantially all new contracts. Remaining performance obligations do not include the cancellable value for subscriptions which contain this clause.
Disaggregation of Revenue
(in thousands) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
Total 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 second quarter and first six months ended March 28, 2020, restructuring charges and other charges, net totaled $18.2 million and $32.3 million, respectively, of which $13.2 million and $27.0 million is attributable to restructuring charges, respectively, and $4.7 million and $5.0 million is related to impairment and accretion expense related to exited lease facilities, respectively. The restructuring and other charges for the second quarter and first six months of 2020 also includes $0.3 million of accelerated depreciation related to the planned exit of a facility.
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For the second quarter and first six months ended March 30, 2019, restructuring and other charges totaled $27.0 million and $45.5 million, respectively, of which $26.4 million and $43.0 million is attributable to restructuring charges, respectively, and $0.6 million and $2.5 million is related to headquarters relocation charges, respectively.
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. During the six months ended March 28, 2020, we incurred $31.5 million in connection with this restructuring plan for termination benefits associated with approximately 255 employees.
During the first quarter of 2019, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic opportunities. As this was a realignment of resources rather than a cost-savings initiative, it did not result in significant cost savings. The restructuring plan was completed in the first quarter of 2019 and resulted in restructuring charges of $16.3 million for termination benefits associated with approximately 240 employees, substantially all of which has been paid. In the second quarter of 2020, we recorded $0.1 million of credits related to this restructuring plan.
During the second quarter of 2019, we relocated our worldwide headquarters to the Boston Seaport District. We incurred a restructuring charge for the former headquarters lease, which will not expire until November 2022. During the first six months ended March 28, 2020, we reversed $4.4 million of accrued variable operating facility restructuring charges associated with the exit of a portion of our former headquarters lease.
The following table summarizes restructuring accrual activity for the six months ended March 28, 2020:
(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 | ( | ) | ( | ) | ( | ) | |||||
Other non-cash | ( | ) | ( | ) | |||||||
Foreign exchange impact | ( | ) | |||||||||
Accrual, March 28, 2020 | $ | $ | $ | ||||||||
The following table summarizes restructuring accrual activity for the six months ended March 30, 2019:
(in thousands) | Employee severance and related benefits | Facility closures and related costs | Total | ||||||||
October 1, 2018 | $ | $ | $ | ||||||||
Charges to operations, net | |||||||||||
Cash disbursements | ( | ) | ( | ) | ( | ) | |||||
Foreign exchange impact | ( | ) | ( | ) | |||||||
Other non-cash charges | |||||||||||
Accrual, March 30, 2019 | $ | $ | $ | ||||||||
The accrual for employee severance and related benefits is included in accrued compensation and benefits in the Consolidated Balance Sheets.
Upon adoption of ASC 842, $16.5 million of accrued expenses and other current liabilities, representing the present value of lease commitments net of estimated sublease income, were reclassified
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to lease assets and obligations: $7.6 million to lease assets, $9.2 million to short-term lease obligations and $14.9 million to long-term lease obligations.
As of March 28, 2020, the remaining restructuring facility accrual of $7.2 million relates to variable non-lease costs not subject to ASC 842, of which, $2.6 million is included in accrued expenses and other current liabilities and $4.6 million is included in other liabilities in the Consolidated Balance Sheets.
Of the accrual for facility closures and related costs, as of March 30, 2019, $12.4 million is included in accrued expenses and other current liabilities and $18.9 million is included in other liabilities in the Consolidated Balance Sheets.
Other - Headquarters Relocation Charges
Headquarters relocation charges represent other expenses associated with exiting our prior Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District. In the first six months of 2019, we recorded $1.9 million of accelerated depreciation expense related to shortening the estimated useful lives of leasehold improvements related to the Needham location. In January 2019, we made rental payments for both our new and previous headquarters. Headquarters relocation charges for the second quarter of 2019 include $0.6 million of rental expense for the Needham facility that overlapped with rental expense for the new Seaport headquarters.
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 the 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 one share of our common stock.
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 % of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85 % of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the
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Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.
Restricted stock unit activity for the six months ended March 28, 2020 | Number of RSUs (in thousands) | Weighted- Average Grant Date Fair Value Per RSU | ||||
Balance of outstanding restricted stock units October 1, 2019 | $ | |||||
Granted | $ | |||||
Vested | ( | ) | $ | |||
Forfeited or not earned | ( | ) | $ | |||
Balance of outstanding restricted stock units March 28, 2020 | $ | |||||
(in thousands) | Restricted Stock Units | ||||
Grant Period | Performance-based RSUs (1) | Service-based RSUs (2) | Total Shareholder Return RSUs (3) | ||
First six months of 2020 | |||||
_________________
(1) | The performance-based RSUs were granted to our executives and are eligible to vest based upon annual increasing performance measures over a three-year period. RSUs not earned in either of the first two measurement periods may be earned in the third 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 three-year 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, 2020, 2021 and 2022, respectively. The RSUs earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of TSR RSUs eligible to be earned for the period (up to a maximum aggregate of 195 thousand RSUs). No vesting will occur in a period unless an annual threshold requirement is achieved. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the TSR RSUs will vest for the measurement period. TSR RSUs not earned in either of the first two measurement periods are eligible to be earned in the third measurement period.
The weighted-average fair value of the TSR RSUs was $106.69 per target RSU on the grant date. The fair value of the TSR RSUs was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.
The significant assumptions used in the Monte Carlo simulation model were as follows:
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Average volatility of peer group | % | |
Risk free interest rate | % | |
Dividend yield | % | |
Compensation expense recorded for our stock-based awards was classified in our Consolidated Statements of Operations as follows:
(in thousands) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 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 | $ | $ | $ | $ | |||||||||||
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.
Three months ended | Six months ended | ||||||||||||||
Calculation of Basic and Diluted EPS (in thousands, except per share data) | March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | |||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Weighted-average shares outstanding—Basic | |||||||||||||||
Dilutive effect of restricted stock units | |||||||||||||||
Weighted-average shares outstanding—Diluted | |||||||||||||||
Earnings (loss) per share—Basic | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Earnings (loss) per share—Diluted | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
There were 331,464 and 90,555 anti-dilutive shares for the three and the six months ended March 28, 2020. For the three and six months ended March 30, 2019 the diluted net loss per share is the same as the basic net loss per share as the effects of all our potential common stock equivalents are antidilutive because we reported a loss for the periods.
Common Stock Repurchases
Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock in the period October 1, 2017 through September 30, 2020. We did not repurchase any shares in the second quarter and first six months of 2020. We repurchased $65.0 million of our common stock in the second quarter and first six months of 2019. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.
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6. Acquisitions
Acquisition-related costs in the second quarter and first six months of 2020 totaled $0.3 million and $7.4 million, respectively compared to $0.4 million and $0.8 million, respectively in the second quarter and first six months of 2019. 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, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.
Our results of operations include the results of acquired businesses beginning on their respective acquisition date. 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 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 $469 million, net of cash acquired, for Onshape, which amount we borrowed under our existing credit facility. Onshape is not expected to be material to our 2020 results.
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 $364.9 million of goodwill, $56.8 million of customer relationships, $47.3 million of purchased software, $3.6 million of trademarks and $4.1 million of other net liabilities. The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 10 years, 16 years, and 15 years, respectively, based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by accelerating CAD and PLM growth, especially in the low-end of the market and participating in future growth in the CAD and PLM SaaS market.
Frustum
On November 19, 2018, we acquired Frustum Inc. for $69.5 million (net of cash acquired of $0.7 million). We financed the acquisition with borrowings under our credit facility. Frustum is engaged in next-generation computer-aided design, including generative design, an approach that leverages artificial intelligence to generate design options. At the time of the acquisition, Frustum had approximately 12 employees and historical annualized revenues were not material.
The acquisition of Frustum was accounted for as a business combination. Assets acquired and liabilities assumed were 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 $53.7 million of goodwill, $17.9 million of purchased software and $2.1 million of other net liabilities. The acquired technology is being amortized over a useful life of 15 years based on the expected benefit pattern of the assets. The acquired goodwill was allocated to our software products segment and will not be deductible for income tax purposes. The resulting amount of goodwill reflects the expected value that will be created by integrating Frustum generative design technology into our CAD solutions.
7. Goodwill and Intangible Assets
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We have two operating and reportable segments: (1) Software Products and (2) Professional Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments.
As of March 28, 2020, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,809.1 million and attributable to our Professional Services segment was $45.2 million. As of September 30, 2019, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $1,362.4 million and attributable to our Professional Services segment was $45.7 million. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
We completed our annual goodwill impairment review as of June 29, 2019 based on a qualitative assessment. Our qualitative assessment included company specific (financial performance and long-range plans), industry, and macroeconomic factors, and consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair values of our reporting units exceed their carrying values and no further impairment testing is required.
Goodwill and acquired intangible assets consisted of the following:
(in thousands) | March 28, 2020 | September 30, 2019 | |||||||||||||||||||||
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 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, 2019 | $ | $ | $ | ||||||||
Onshape acquisition | |||||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | |||||||
Balance, March 28, 2020 | $ | $ | $ | ||||||||
The aggregate amortization expense for intangible assets with finite lives was classified in our Consolidated Statements of Operations as follows:
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(in thousands) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 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. Three levels of inputs that may be used to measure fair value:
• | Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; |
• | Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or |
• | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
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Our significant financial assets and liabilities measured at fair value on a recurring basis as of March 28, 2020 and September 30, 2019 were as follows:
(in thousands) | March 28, 2020 | ||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Financial assets: | |||||||||||||||
Cash equivalents | $ | $ | — | $ | — | $ | |||||||||
Marketable securities: | |||||||||||||||
Commercial paper | — | — | |||||||||||||
Corporate notes/bonds | — | — | |||||||||||||
Forward contracts | — | — | |||||||||||||
$ | $ | $ | — | $ | |||||||||||
Financial liabilities: | |||||||||||||||
Forward contracts | — | — | |||||||||||||
$ | — | $ | $ | — | $ | ||||||||||
(in thousands) | September 30, 2019 | ||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Financial assets: | |||||||||||||||
Cash equivalents | $ | $ | — | $ | — | $ | |||||||||
Marketable securities: | |||||||||||||||
Commercial paper | — | — | |||||||||||||
Corporate notes/bonds | — | — | |||||||||||||
Forward contracts | — | — | |||||||||||||
$ | $ | $ | — | $ | |||||||||||
Financial liabilities: | |||||||||||||||
Forward contracts | — | — | |||||||||||||
$ | — | $ | $ | — | $ | ||||||||||
Non-Marketable Equity 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 $9.4 million as of both March 28, 2020 and September 30, 2019.
9. Marketable Securities
The amortized cost and fair value of marketable securities as of March 28, 2020 and September 30, 2019 were as follows:
(in thousands) | March 28, 2020 | ||||||||||||||
Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Commercial paper | $ | $ | $ | $ | |||||||||||
Corporate notes/bonds | ( | ) | |||||||||||||
$ | $ | $ | ( | ) | $ | ||||||||||
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(in thousands) | September 30, 2019 | ||||||||||||||
Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Commercial paper | $ | $ | $ | $ | |||||||||||
Corporate notes/bonds | ( | ) | |||||||||||||
$ | $ | $ | ( | ) | $ | ||||||||||
Our investment portfolio consists of certificates of deposit, commercial paper, corporate notes/bonds and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings.
We review our investments to identify and evaluate investments that have an indication of possible impairment. We concluded that, at March 28, 2020, the unrealized losses were temporary.
The following tables summarize the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of March 28, 2020 and September 30, 2019.
(in thousands) | March 28, 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 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | |||||||||||||
(in thousands) | September 30, 2019 | ||||||||||||||||||||||
Less than twelve months | Greater than twelve months | Total | |||||||||||||||||||||
Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | Fair Value | Gross unrealized loss | ||||||||||||||||||
Corporate notes/bonds | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||
The following table presents our marketable securities by contractual maturity date as of March 28, 2020 and September 30, 2019.
(in thousands) | March 28, 2020 | September 30, 2019 | |||||||||||||
Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||
Due in one year or less | $ | $ | $ | $ | |||||||||||
Due after one year through three years | |||||||||||||||
$ | $ | $ | $ | ||||||||||||
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 Canada. 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, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.
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 seven months . Generally, we
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do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other income (expense), net.
As of March 28, 2020 and September 30, 2019, we had outstanding forward contracts with notional amounts equivalent to the following:
Currency Hedged (in thousands) | March 28, 2020 | September 30, 2019 | |||||
Canadian / U.S. Dollar | $ | $ | |||||
Euro / U.S. Dollar | |||||||
British Pound / U.S. Dollar | |||||||
Israeli Sheqel / U.S. Dollar | |||||||
Japanese Yen / U.S. Dollar | |||||||
Swiss Franc / U.S. Dollar | |||||||
Danish Kroner/ U.S. Dollar | |||||||
Swedish Kronor / U.S. Dollar | |||||||
Singapore Dollar / U.S. Dollar | |||||||
Chinese Renminbi / U.S. Dollar | |||||||
Russian Ruble / U.S. Dollar | |||||||
All other | |||||||
Total | $ | $ | |||||
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the six months ended March 28, 2020 and March 30, 2019:
Derivatives Not Designated as Hedging Instruments (in thousands) | Location of Gain or (Loss) Recognized in Income | Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged) | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | |||||||||||||||
Forward Contracts | Other income (expense), net | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
In the first three and six months ended March 28, 2020 foreign currency losses, net were $2.5 million and $2.6 million, respectively. In the first three and six months ended March 30, 2019 foreign currency losses, net were $0.2 million and $0.4 million, respectively.
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 Sheet. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheet and the maximum duration of foreign exchange forward contracts is approximately three months .
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to
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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 March 28, 2020 and September 30, 2019, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
Currency Hedged (in thousands) | March 28, 2020 | September 30, 2019 | |||||
Euro / U.S. Dollar | $ | $ | |||||
Total | $ | $ | |||||
Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI | Location of Gain or (Loss) Reclassified from OCI | Gain or (Loss) Reclassified from OCI | Location of Gain or (Loss) Excluded from Effectiveness Testing | Gain or (Loss) Recognized-Excluded Portion | |||||||||||||||||||||
Three months ended | Three months ended | Three months ended | ||||||||||||||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | |||||||||||||||||||||
Forward Contracts | $ | ( | ) | $ | Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | Other income (expense), net | $ | $ | ||||||||||||
Six months ended | Six months ended | Six months ended | ||||||||||||||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | |||||||||||||||||||||
Forward Contracts | $ | ( | ) | $ | Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | Other income (expense), net | $ | $ | ||||||||||||
As of March 28, 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 .
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 | |||||||||||||
March 28, 2020 | September 30, 2019 | March 28, 2020 | September 30, 2019 | ||||||||||||
Derivative assets (1): | |||||||||||||||
Forward Contracts | $ | $ | $ | $ | |||||||||||
Derivative liabilities (2): | |||||||||||||||
Forward Contracts | $ | $ | $ | $ | |||||||||||
(1) | As of March 28, 2020 and September 30, 2019, current derivative assets of $ |
(2) | As of March 28, 2020 and September 30, 2019, current derivative liabilities of $ |
Offsetting Derivative Assets and Liabilities
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We have entered into master netting arrangements 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 March 28, 2020:
(in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||
As of March 28, 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 March 28, 2020:
(in thousands) | Gross Amounts Offset in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||
As of March 28, 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 two operating and reportable segments: (1) Software Products, which includes license, subscription and related support revenue (including updates and technical support) for all our products; and (2) Professional Services, which includes consulting, implementation and training services. We do not allocate sales and marketing or general and administrative expense to our operating segments as these activities are managed on a consolidated basis. Additionally, segment profit does not include stock-based compensation, amortization of intangible assets, restructuring charges and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.
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(in thousands) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 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 (income) (3) | |||||||||||||||
Total operating income (loss) | ( | ) | |||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other income (expense), net | ( | ) | ( | ) | |||||||||||
Income (loss) 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 cost of professional services revenue, excluding stock-based compensation and fair value adjustments for deferred services costs.
(3) Other unallocated operating expenses include acquisition-related and other transactional costs and fair value adjustments for deferred services 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 | Six months ended | |||||||||||||
Revenue | March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | |||||||||||
Americas | $ | $ | $ | $ | |||||||||||
Europe | |||||||||||||||
Asia-Pacific | |||||||||||||||
Total revenue | $ | $ | $ | $ | |||||||||||
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12. Income Taxes
In the second quarter and first six months of 2020, our effective tax rate was 55 % on pre-tax income of $15.8 million and (22 )% on a pre-tax income of $34.8 million, respectively, compared to (30 )% on pre-tax loss of $(33.4 ) million and (73 )% on a pre-tax loss of $(13.0 ) million in the second quarter and first six months of 2019, respectively. In the first six months of 2020 and 2019, 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, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. Additionally, in the first six months of 2020 and 2019, we reduced the valuation allowance by $21.2 million and $1.8 million as the result of the Onshape and Frustum acquisitions, respectively. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2020 and 2019, the foreign rate differential predominantly relates to these Irish earnings.
On March 27, 2020, the U.S. Federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES ACT”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak, which among other things contains numerous income tax provisions. While we continue to evaluate the impact of the CARES Act, we do not currently believe it will have a material impact on our consolidated financial statements or related disclosures.
We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess our valuation allowance requirements each financial reporting period.
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. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates.
As of March 28, 2020 and September 30, 2019, we had unrecognized tax benefits of $13.2 million and $11.5 million, respectively. If all our unrecognized tax benefits as of March 28, 2020 were to become recognizable in the future, we would record a benefit to the income tax provision of $13.2 million, which would be partially offset by an increase in the U.S. valuation allowance of $6.3 million.
Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $0.5 million as audits close and statutes of limitations expire.
In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in South Korea. The assessment relates to various tax issues, primarily foreign withholding taxes. We have appealed and intend to vigorously defend our positions. We believe that upon completion of a multi-level appeal process it is more likely than not that our positions will be sustained. Accordingly, we have not recorded a tax reserve for this matter. We paid this assessment in the first quarter of 2017 and have recorded the amount in other assets, pending resolution of the appeal process. If the South Korean tax authorities were to prevail then, in addition to the $12 million already assessed, the potential additional exposure through 2019 would be approximately $13 million. We are continuing to work with our advisors during the court process and still believe our position is sustainable.
In April 2020 we became aware of a potential new interpretation of a withholding tax law in a non-U.S. jurisdiction and its application to certain transactions that was not previously reasonably knowable by us. We are evaluating this new information and the effect, if any, on our tax positions. The amount of any potential impact, if any, on our financial statements is not yet estimable at this time.
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13. Debt
At March 28, 2020 and September 30, 2019, we had the following debt obligations:
(in thousands) | March 28, 2020 | September 30, 2019 | |||||
4.000% Senior notes due 2028(1) | $ | $ | |||||
3.625% Senior notes due 2025(1) | |||||||
6.000% Senior notes due 2024(2) | |||||||
Credit facility revolver(3) | |||||||
Total debt | |||||||
Unamortized debt issuance costs for the Senior notes(4) | ( | ) | ( | ) | |||
Total debt, net of issuance costs | $ | $ | |||||
(1) | The 2028 and 2025 notes issued in February 2020 were classified as long-term debt as of March 28, 2020 on the Consolidated Balance Sheet. |
(2) | The 2024 notes issued in May 2016 were classified as short-term debt as of March 28, 2020 and as long-term debt as of September 30, 2019 on the Consolidated Balance Sheets. |
(3) | The amount outstanding under the credit facility revolver was classified as long-term debt as of March 28, 2020 and September 30, 2019 on the Consolidated Balance Sheets. Unamortized debt issuance costs related to the credit facility were $ |
(4) | Unamortized debt issuance costs related to the 2024 notes were $ |
Senior Notes
In February 2020, we issued $500 million in aggregate principal amount of 4.0 % senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625 % senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes). In the second quarter of 2020, we used $460 million of the net proceeds from the sale of the notes to repay a portion of the outstanding revolving loan under our credit facility. In the third quarter of 2020, we will use the remaining net proceeds from the sale of the notes to redeem the $500 million aggregate principal amount of our outstanding 6.0 % senior notes due in 2024 (the 2024 notes). The redemption price for the 2024 notes is 103 % of the aggregate principal amount of the notes, plus accrued and unpaid interest to, but excluding, May 15, 2020.
As of March 28, 2020, we recognized in interest expense $15.0 million for fees to be paid upon early redemption of the 2024 notes.
As of March 28, 2020, the total estimated fair value of the 2028, 2025 and 2024 senior notes was approximately $468.8 million, $471.0 million and $502.5 million, respectively, based on quoted prices for the notes on that date.
We were in compliance with all the covenants for all of our senior notes as of March 28, 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 101 % of the aggregate principal amount of the notes, plus accrued and unpaid interest. Our ability to repurchase the notes upon such event may be limited by law, by the indenture associated with the notes, by our then-available financial resources or by the terms of other agreements to which we may be party at such time. If we fail to repurchase the
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notes as required by the indenture, it would constitute an event of default under the indenture which, in turn, may also constitute an event of default under other obligations.
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 credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of March 28, 2020, the fair value of our credit facility approximates its book value.
The credit facility consists of a $1 billion revolving credit facility, which may be increased by up to an additional $500 million in the aggregate if the existing or additional lenders are willing to make such increased commitments. The maturity date of the credit facility is February 13, 2025, when all remaining amounts outstanding will be due and payable. The revolving loan commitment does not require amortization of principal and may be repaid in whole or in part prior to the scheduled maturity date at our option without penalty or premium.
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 no borrowings by eligible foreign subsidiaries. In addition, substantially all existing and after-acquired personal property of PTC Inc. and certain of its material domestic subsidiaries that become parties to the subsidiary guaranty, if any, is or will be, in the case of such subsidiary guarantors, subject to first priority perfected liens in favor of the lenders under the credit facility. 100 % of the voting equity interests of certain of PTC Inc.’s domestic subsidiaries and 65 % of its material first-tier foreign subsidiaries are pledged as collateral for the obligations under the credit facility.
Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of March 28, 2020, the annual rate for borrowings outstanding was 2.6 %. Interest rates on borrowings outstanding under the credit facility range from 1.25 % to 1.75 % above an adjusted LIBO rate (or an agreed successor rate) for Euro currency borrowings or range from 0.25 % to 0.75 % above the defined base rate (the greater of the Prime Rate, the NYFRB rate plus 0.5 %, or an adjusted LIBO rate plus 1 %) for base rate borrowings, in each case based upon PTC’s total leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective LIBO rates (or agreed successor rates) for those currencies, based on PTC’s total leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175 % to 0.30 % per annum based upon PTC’s total leverage ratio.
The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur 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 $100 million for any purpose and an additional $200 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:
• | 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 March 28, 2020, our total leverage ratio was 3.36 to 1.00, our senior secured leverage ratio was 0.47 to 1.00 and our interest coverage ratio was 7.86 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility.
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Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.
We incurred $2.0 million in financing costs in connection with the February 2020 credit facility and $1.0 million in connection with a November 2019 amendment to our prior credit facility. These origination costs are recorded as deferred debt issuance costs and are included in other assets. Financing costs are expensed over the remaining term of the obligations.
In the second quarter and first six months of 2020 we paid $6.8 million and $23.7 million, respectively, of interest on our debt. In the second quarter and first six months of 2019 we paid $3.8 million and $20.4 million of interest, respectively, on our debt. The average interest rate on borrowings outstanding in the second quarter and first six months of 2020 was approximately 4.6 % and 4.8 %, respectively. The average interest rate on borrowings outstanding in the second quarter and first six months of 2019 was approximately 5.3 % and 5.4 %, respectively.
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 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 of the lease payments at commencement date. The right-of-use assets include any lease payments made and exclude lease incentives received. Lease expense for lease payments 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 options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain office space leases require us to pay for taxes, insurance, maintenance and other operating expenses in addition to rent.
Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts (the Boston lease). The Boston lease is for approximately 250,000 square feet and runs from January 1, 2019 through June 30, 2037. Base rent for the first year of the lease is $11.0 million and will increase by $1 per square foot per year thereafter ($0.3 million per year) with base rent first becoming payable on July 1, 2020. In addition to the base rent, we are required to pay our pro rata portions of building operating costs and real estate taxes (together, “Additional Rent”). Additional Rent is estimated to be approximately $7.1 million for the first year we begin paying rent. The lease provides for $25 million in landlord funding for leasehold improvements ($100 per square foot). The leasehold improvement funding provision was fully utilized by us and was reflected as a derecognition adjustment to the right-of-use asset.
The components of lease cost reflected in the Consolidated Statement of Operations for the second quarter and first six months ended March 28, 2020 were as follows:
(in thousands) | Three months ended | Six months ended | |||||
March 28, 2020 | March 28, 2020 | ||||||
Operating lease cost | $ | $ | |||||
Short-term lease cost | |||||||
Variable lease cost | |||||||
Sublease income | ( | ) | ( | ) | |||
Total lease cost | $ | $ | |||||
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Supplemental cash flow and right-of use assets information for the three and six months ended March 28, 2020 was as follows:
(dollar amounts in thousands) | Three months ended | Six months ended | |||||
March 28, 2020 | March 28, 2020 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | |||||||
Operating cash flows from operating leases | $ | $ | |||||
Right-of-use assets obtained in exchange for new operating lease liabilities(1) | $ | ( | ) | $ | |||
Right-of-use assets obtained in exchange for new financing lease liabilities | $ | $ | |||||
(1) | For the three months ending March 28, 2020, right-of-use assets obtained in exchange for new operating lease liabilities is a net reduction to the right-of-use assets due to lease incentives being earned for right-of-use asset obtained in the first quarter of 2020. |
Supplemental balance sheet information related to the leases as of March 28, 2020 was as follows:
As of | ||
March 28, 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 March 28, 2020 are as follows:
(in thousands) | Operating Leases | ||
Remainder of 2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total future lease payments | $ | ||
Less: imputed interest | ( | ) | |
Total | $ | ||
As of March 28, 2020, we have operating leases that have not yet commenced. These leases will commence in 2020 with lease terms between 3 years to 5 years and approximate future lease payments of $2.2 million.
Under the prior lease standard (ASC 840), as of September 30, 2019, future minimum lease payments under non-cancellable operating leases are as follows (in thousands):
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total minimum lease payments | $ | ||
Exited (Restructured) Facilities
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As of March 28, 2020, we have net liabilities of $17.1 million related to excess facilities (compared to $16.5 million at September 30, 2019), representing $4.5 million of right-of-use assets and $21.6 million of lease obligations, of which $13.3 million is classified as short term and $8.3 million is classified as long term.
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 March 28, 2020, the right-of-use assets for exited facilities reflects discounted committed sublease income of approximately $3.3 million and uncommitted sublease income of approximately $1.2 million. As a result of changes in our sublease income assumptions and an incremental obligation to exit a portion of our former headquarters facility early, in the three months ended March 28, 2020, we recorded a facility impairment charge of $4.0 million. In addition, in the second quarter of 2020, we exited the former Onshape headquarters lease and recorded a related $0.7 million impairment charge.
15. Commitments and Contingencies
Legal and Regulatory Matters
Korean Tax Audit
In July 2016, we received an assessment of approximately $12 million from the tax authorities in South Korea related to an ongoing tax audit. See Note 12. Income Taxes for additional information.
Legal Proceedings
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
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For 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 March 28, 2020, we estimate approximately $0.8 million to $3.0 million in legal proceedings and claims, of which we had accrued $0.8 million.
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
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product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
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, helping 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.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not historic facts, including statements about our future financial and growth expectations and targets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the COVID-19 pandemic's impact on the global macroeconomic environment and our business could be more severe and prolonged than we expect; the macroeconomic and/or global manufacturing climates may deteriorate further due to, among other factors, the geopolitical environment, including the focus on technology transactions with non-U.S. entities and potential expanded prohibitions, and ongoing trade tensions and tariffs; customers may continue to delay or reduce purchases of new software, to reduce the number of subscriptions they carry, or delay payments to us due to the COVID-19 pandemic, all of which would adversely affect ARR and our financial results, including cash flow; our businesses, including our Internet of Things (IoT), Augmented Reality and Onshape businesses, may not expand and/or generate the revenue we expect if customers are slower to adopt those technologies than we expect or adopt competing technologies; bookings 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; our strategic initiatives and investments may not generate the revenue we expect; we may be unable to expand our partner ecosystem as we expect and our partners may not generate the revenue we expect; 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 under our long-term capital plan, and other uses of cash or our credit facility limits or other matters could preclude such repayments or share repurchases. 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 1 A. Risk Factors of this report.
Operating and Non-GAAP Financial Measures
Our discussion of results includes discussion of our ARR operating measure and non-GAAP financial measures. 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. You should read those sections to understand our operating and non-GAAP financial measures.
Executive Overview
Our Q2’20 financial results were solid, reflecting the strength of our recurring revenue model. We delivered 10% ARR growth (11% on a constant currency basis), 24% revenue growth (25% on a constant currency basis), and 117% EPS growth (173% non-GAAP EPS growth) over Q2’19. We experienced some pressure on new bookings in the final weeks of the quarter related to the COVID-19 pandemic resulting in new license bookings being down mid-teens over Q2’19. The impact on new bookings was late in the quarter and varied across our product portfolio and geographies as companies were affected by and
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responded to the COVID-19 pandemic in regions around the world at different times. However, renewals were essentially unaffected by the crisis in Q2’20.
We generated $88 million of cash from operations in Q2'20 compared to $141 million in Q2'19, primarily reflecting lower accounts receivable collections in the second quarter of 2020 than in the second quarter of 2019 due to the last time perpetual license sales in the first quarter of 2019 in Asia Pacific as well as higher restructuring payments during the quarter. In Q2'20, we issued $500 million in aggregate principal amount of 4.0% Senior Notes due in 2028 and $500 million in aggregate principal amount of 3.625% Senior Notes due in 2025. We used $460 million of the net proceeds from the sale of the notes to repay a portion of the outstanding revolving loan under our credit facility. As of March 28, 2020, the balance outstanding under our credit facility was $148 million and total debt outstanding was $1,648 million, $500 million of which will be repaid when we redeem our 6% Senior Notes due 2024 in May 2020.
Future Expectations; COVID-19 Impact
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. The amount of revenue attributable to large transactions, and the number of such transactions, may also vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Such transactions may have long lead times as they often follow a lengthy product selection and evaluation process and, for existing customers, are influenced by contract expiration cycles. This may cause volatility in our results.
We currently anticipate new bookings will be down approximately 30% year over year for the second half of 2020 due to the COVID-19 pandemic as described above. We also anticipate that our churn rate may deteriorate to approximately 8% for the year rather than a modest improvement over the fiscal 2019 churn rate as previously expected as customers may not renew their subscriptions or support contracts in full due to the COVID-19 pandemic if they reduce their workforces and users or due to macroeconomic and liquidity uncertainty. We expect to continue to control costs with operating expense growth of roughly 2% for the full year compared to our previous projection of 9% expense growth year over year, primarily due to the restructuring actions in the first half of 2020, savings on certain expenses due to the COVID-19 pandemic (such as converting our annual LiveWorx event to a virtual event and curtailing other travel), as well as lower anticipated variable compensation and increased cost discipline related to employee hiring. Despite the challenges associated with COVID-19, we are anticipating FY'20 ARR growth of approximately 11%, revenue growth of approximately 12%, and a 30-basis point increase (90-basis points on non-GAAP basis) in operating margin over 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, and non-GAAP diluted earnings per share for the reported periods. 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.
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(Dollar amounts in millions, except per share data) | Three months ended | ||||||||||||
Percent Change | |||||||||||||
March 28, 2020 | March 30, 2019 | Actual | Constant Currency | ||||||||||
Total recurring revenue | $ | 315.9 | $ | 239.2 | 32 | % | 34 | % | |||||
Perpetual license | 8.2 | 10.3 | (21 | )% | (19 | )% | |||||||
Professional services | 35.5 | 40.9 | (13 | )% | (11 | )% | |||||||
Total revenue | 359.6 | 290.5 | 24 | % | 25 | % | |||||||
Total cost of revenue | 83.0 | 79.9 | 4 | % | 5 | % | |||||||
Gross margin | 276.6 | 210.5 | 31 | % | 33 | % | |||||||
Operating expenses | 226.6 | 233.4 | (3 | )% | (3 | )% | |||||||
Total costs and expenses | 309.6 | 313.3 | (1 | )% | (1 | )% | |||||||
Operating income (loss) | 50.0 | (22.9 | ) | (319 | )% | (288 | )% | ||||||
Non-GAAP operating income (1) | $ | 103.2 | $ | 44.4 | 133 | % | 146 | % | |||||
Operating margin | 13.9 | % | (7.9 | )% | |||||||||
Non-GAAP operating margin (1) | 28.7 | % | 15.3 | % | |||||||||
Diluted earnings (loss) per share | $ | 0.06 | $ | (0.37 | ) | ||||||||
Non-GAAP diluted earnings per share (1) (2) | $ | 0.59 | $ | 0.22 | |||||||||
Cash flow from operations (3) | $ | 87.8 | $ | 141.1 | |||||||||
(Dollar amounts in millions, except per share data) | Six months ended | ||||||||||||
Percent Change | |||||||||||||
March 28, 2020 | March 30, 2019 | Actual | Constant Currency | ||||||||||
Total recurring revenue | $ | 621.2 | $ | 490.6 | 27 | % | 28 | % | |||||
Perpetual license | 17.2 | 52.1 | (67 | )% | (67 | )% | |||||||
Professional services | 77.3 | 82.4 | (6 | )% | (4 | )% | |||||||
Total revenue | 715.7 | 625.1 | 14 | % | 16 | % | |||||||
Total cost of revenue | 170.4 | 157.3 | 8 | % | 10 | % | |||||||
Gross margin | 545.3 | 467.9 | 17 | % | 18 | % | |||||||
Operating expenses | 464.8 | 460.7 | 1 | % | 1 | % | |||||||
Total costs and expenses | 635.3 | 618.0 | 3 | % | 3 | % | |||||||
Operating income | 80.5 | 7.2 | 1,021 | % | 19,432 | % | |||||||
Non-GAAP operating income (1) | $ | 196.3 | $ | 135.6 | 45 | % | 51 | % | |||||
Operating margin | 11.2 | % | 1.1 | % | |||||||||
Non-GAAP operating margin (1) | 27.4 | % | 21.7 | % | |||||||||
Diluted earnings (loss) per share | $ | 0.37 | $ | (0.19 | ) | ||||||||
Non-GAAP diluted earnings per share (1) (2) | $ | 1.16 | $ | 0.78 | |||||||||
Cash flow from operations (3) | $ | 95.3 | $ | 162.3 | |||||||||
(1) | See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP financial measures. |
(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 2020 and 2019 non-GAAP tax provisions are calculated assuming there is no valuation allowance. Income tax adjustments reflect the tax effects of non-GAAP adjustments, which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above. |
(3) | Cash flow from operations for the second quarter and first six months of 2020 includes $18.0 million and $21.3 million of restructuring payments, respectively, and $2.1 million and $8.6 million of acquisition-related payments, respectively. Cash flow from operations for the second quarter and first six months of 2019 includes $9.6 million and $17.9 million of restructuring payments, 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, Sheqel, and Rupee relative to the U.S. Dollar, affects our reported results. Starting in the first quarter of 2020, our constant currency disclosures are calculated by multiplying the results in local currency for the second quarter and first six months of 2020 and 2019 by the exchange rates in effect on September 30, 2019, excluding the effect of any hedging. The results of operations in
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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 duration and start dates of our subscription contracts. This is particularly true during the COVID-19 crisis as customers are generally electing one-year contracts given the current macroeconomic uncertainty. This may cause volatility in our results.
Our revenue results are shown by line of business, by product group and by geographic region and are discussed below.
Revenue by Line of Business
(Dollar amounts in millions) | Three months ended | Six months ended | |||||||||||||||||||||||||
Percent Change | Percent Change | ||||||||||||||||||||||||||
March 28, 2020 | March 30, 2019 | Actual | Constant Currency | March 28, 2020 | March 30, 2019 | Actual | Constant Currency | ||||||||||||||||||||
Software revenue | $ | 324.1 | $ | 249.5 | 30 | % | 31 | % | $ | 638.4 | $ | 542.8 | 18 | % | 19 | % | |||||||||||
Professional services | 35.5 | 40.9 | (13 | )% | (11 | )% | 77.3 | 82.4 | (6 | )% | (4 | )% | |||||||||||||||
Total revenue | $ | 359.6 | $ | 290.5 | 24 | % | 25 | % | $ | 715.7 | $ | 625.1 | 14 | % | 16 | % | |||||||||||
Software
Software revenue consists of subscription, support, and perpetual license revenue. Our subscription revenue includes an immaterial amount of Software as a Service (SaaS) and cloud services. Software revenue increased due to subscription revenue growth during the quarter and year-to-date periods, offset by declines in perpetual support revenue due to conversions of support contracts to subscriptions. For the second quarter and first six months of 2020 compared to the year ago periods, subscription license revenue increased 132% and 103%, respectively, in part due to the fact that we no longer provide an annual cancellation right in new multi-year contracts.
Professional Services
Professional services engagements typically result from sales of new licenses; revenue is recognized over the term of the engagement. Professional services revenue declined in part due to an extension to complete work on a fixed price professional services contract. 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. Professional services revenue may be further negatively impacted due to challenges with project scoping and implementation activities and performance while social distancing measures are in place due to COVID-19.
Revenue by Product Group
Software Revenue by Product Group | |||||||||||||||||||||||||||
(Dollar amounts in millions) | Three months ended | Six months ended | |||||||||||||||||||||||||
Percent Change | Percent Change | ||||||||||||||||||||||||||
March 28, 2020 | March 30, 2019 | Actual | Constant Currency | March 28, 2020 | March 30, 2019 | Actual | Constant Currency | ||||||||||||||||||||
Core (CAD and PLM) | $ | 234.4 | $ | 172.5 | 36 | % | 38 | % | $ | 460.5 | $ | 386.1 | 19 | % | 21 | % | |||||||||||
Growth (IoT, AR, Onshape) | 43.2 | 35.4 | 22 | % | 23 | % | 86.4 | 67.3 | 28 | % | 29 | % | |||||||||||||||
FSG (Focused Solutions Group) | 46.5 | 41.5 | 12 | % | 13 | % | 91.5 | 89.4 | 2 | % | 3 | % | |||||||||||||||
Software revenue | $ | 324.1 | $ | 249.5 | 30 | % | 31 | % | $ | 638.4 | $ | 542.8 | 18 | % | 19 | % | |||||||||||
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Total Revenue by Product Group (1) | |||||||||||||||||||||||||||
(Dollar amounts in millions) | Three months ended | Six months ended | |||||||||||||||||||||||||
Percent Change | Percent Change | ||||||||||||||||||||||||||
March 28, 2020 | March 30, 2019 | Actual | Constant Currency | March 28, 2020 | March 30, 2019 | Actual | Constant Currency | ||||||||||||||||||||
Core (CAD and PLM) | $ | 252.8 | $ | 198.5 | 27 | % | 29 | % | $ | 504.6 | $ | 438.7 | 15 | % | 17 | % | |||||||||||
Growth (IoT, AR, Onshape) | 53.3 | 41.3 | 29 | % | 31 | % | 106.0 | 79.1 | 34 | % | 35 | % | |||||||||||||||
FSG (Focused Solutions Group) | 53.5 | 50.7 | 6 | % | 7 | % | 105.1 | 107.3 | (2 | )% | (1 | )% | |||||||||||||||
Total revenue | $ | 359.6 | $ | 290.5 | 24 | % | 25 | % | $ | 715.7 | $ | 625.1 | 14 | % | 16 | % | |||||||||||
(1) | In the second quarter of 2020, we identified an immaterial misclassification of professional services revenue between the reported product groups from the first quarter of 2019 through the first quarter of 2020. Total professional services revenue was unaffected. Total revenue by product group in the table reflects the appropriate classifications for the periods presented. |
Core Product revenue growth was driven by growth in subscription revenue, offset by an expected decline in perpetual license revenue due to the end of sales of perpetual licenses at the end of the first quarter of 2019. In the second quarter and first six months of 2020, total recurring revenue for Core Products grew 36% (38% on a constant currency basis) and 30% (32% on a constant currency basis), respectively, compared to the second quarter and first six months of 2019. In the second quarter and first six months of 2020, Core Product professional services revenue declined 29% (27% on a constant currency basis) and 16% (14% on a constant currency basis), respectively, compared to the year ago periods due in part to an extension to complete work on a fixed price professional services contract in the second quarter of 2020.
Growth Product revenue growth in the second quarter and first six months of 2020 was driven by subscription revenue growth of 38% (39% constant currency) and 45% (46% constant currency), respectively, compared to the second quarter and first six months of 2019, offset by a decline in support revenue due to conversions of support contracts to subscription.
FSG Product revenue growth in the second quarter of 2020 reflects growth of subscription revenue of 41% (42% constant currency) compared to the second quarter of 2019, offset by an expected decline in perpetual license revenue due to the end of sales of perpetual licenses at the end of the first quarter of 2019. The revenue decrease for the first six months of 2020 as compared to the first six months of 2019 is a result of the decline in perpetual license revenue, offset by growth of subscription revenue of 24% (25% constant currency).
Software Revenue by Geographic Region
A significant portion of our total revenue is generated outside the U.S. In 2019 and in the first six months of 2020, approximately 40% of total revenue was generated in the Americas, 40% in Europe, and 20% in Asia Pacific.
(Dollar amounts in millions) | Three months ended | Six months ended | |||||||||||||||||||||||||
Percent Change | Percent Change | ||||||||||||||||||||||||||
March 28, 2020 | March 30, 2019 | Actual | Constant Currency | March 28, 2020 | March 30, 2019 | Actual | Constant Currency | ||||||||||||||||||||
Americas | $ | 138.7 | $ | 108.0 | 28 | % | 29 | % | $ | 280.5 | $ | 237.5 | 18 | % | 18 | % | |||||||||||
Europe | 132.2 | 97.3 | 36 | % | 39 | % | 247.9 | 186.7 | 33 | % | 37 | % | |||||||||||||||
Asia Pacific | 53.2 | 44.3 | 20 | % | 22 | % | 110.0 | 118.6 | (7 | )% | (7 | )% | |||||||||||||||
Total software revenue | $ | 324.1 | $ | 249.5 | 30 | % | 31 | % | $ | 638.4 | $ | 542.8 | 18 | % | 19 | % | |||||||||||
Americas software revenue growth in the second quarter and first six months of 2020 was driven by growth in subscription revenue of 57% and 37%, respectively, compared to the second quarter and first six months of 2019, partially offset by a decline in support revenue, resulting in recurring revenue growth of 31% and 19%, respectively, in the second quarter and first six months of 2020 compared to the year ago periods.
Europe software revenue growth in the second quarter and first six months of 2020 was driven by growth in subscription revenue of 85% (90% constant currency) and 88% (95% constant currency), respectively, compared to the second quarter and first six months of 2019, partially offset by a decline in support revenue, resulting in recurring revenue growth of 37% and 35%, respectively, in the second quarter and first six months of 2020 compared to the year ago periods.
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Asia Pacific software revenue growth in the second quarter of 2020 was driven by growth in subscription revenue of 79% (81% constant currency) compared to the second quarter of 2019, partially offset by a decline in support revenue, resulting in recurring revenue growth of 23% in the second quarter of 2020 compared to year ago period. In the first six months of 2020, compared to the first six months of 2019, revenue declined due to a strong first quarter of 2019, which benefited from the last-time purchases of perpetual licenses in that quarter associated with the discontinuation of perpetual license sales as of January 1, 2019.
Gross Margin
(Dollar amounts in millions) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
Gross margin: | |||||||||||||||
License gross margin | $ | 113.7 | $ | 49.0 | $ | 224.0 | $ | 141.8 | |||||||
License gross margin percentage | 89 | % | 79 | % | 89 | % | 85 | % | |||||||
Support and cloud services gross margin | $ | 162.2 | $ | 154.8 | $ | 314.2 | 311.5 | ||||||||
Support and cloud services gross margin percentage | 83 | % | 82 | % | 81 | % | 83 | % | |||||||
Professional services | 0.6 | 6.8 | 7.1 | 14.6 | |||||||||||
Professional services gross margin percentage | 2 | % | 17 | % | 9 | % | 18 | % | |||||||
Total gross margin | $ | 276.6 | $ | 210.5 | $ | 545.3 | $ | 467.9 | |||||||
Total gross margin percentage | 77 | % | 72 | % | 76 | % | 75 | % | |||||||
Non-GAAP gross margin (1) | $ | 286.5 | $ | 220.6 | $ | 565.0 | $ | 488.0 | |||||||
Non-GAAP gross margin percentage | 80 | % | 76 | % | 79 | % | 78 | % | |||||||
(1) Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.
License gross margin increased for the second quarter and first six months of 2020 compared to the second quarter and first six months of 2019 as revenue increased primarily due to an increase in subscription license revenue. Revenue growth in 2020 was offset by a related increase in royalty expenses.
Support and cloud services gross margin increased for the second quarter of 2020 compared to the second quarter of 2019 due to higher subscription support revenue, offset by increases in costs associated with our cloud services business due to increased demand for those services. Support and cloud services gross margin decreased for the first six months of 2020 compared to the first six months of 2019 due to increases in costs associated with our cloud services business due to increased demand for those services, royalty expenses, and compensation costs, offset by an increase in subscription support revenue.
Professional services gross margin decreased for the second quarter and first six months of 2020 compared to the second quarter and first six months of 2019 due in part to a decrease in revenue due in part to an extension to complete work on a fixed price professional services contract in the second quarter of 2020, along with higher compensation costs.
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Operating Expenses
(Dollar amounts in millions) | Three months ended | Six months ended | |||||||||||||||||||
March 28, 2020 | March 30, 2019 | Percent Change | March 28, 2020 | March 30, 2019 | Percent Change | ||||||||||||||||
Sales and marketing | $ | 107.4 | $ | 103.7 | 4 | % | $ | 215.0 | $ | 207.9 | 3 | % | |||||||||
% of Total Revenue | 30 | % | 36 | % | 30 | % | 33 | % | |||||||||||||
Research and development | 60.0 | 61.4 | (2 | )% | 125.3 | 122.2 | 3 | % | |||||||||||||
% of Total Revenue | 17 | % | 21 | % | 18 | % | 20 | % | |||||||||||||
General and administrative | 33.6 | 35.4 | (5 | )% | 78.2 | 73.2 | 7 | % | |||||||||||||
% of Total Revenue | 9 | % | 12 | % | 11 | % | 12 | % | |||||||||||||
Amortization of acquired intangible assets | 7.3 | 5.9 | 23 | % | 14.1 | 11.9 | 19 | % | |||||||||||||
% of Total Revenue | 2 | % | 2 | % | 2 | % | 2 | % | |||||||||||||
Restructuring and other charges, net | 18.2 | 27.0 | (32 | )% | 32.3 | 45.5 | (29 | )% | |||||||||||||
% of Total Revenue | 5 | % | 9 | % | 5 | % | 7 | % | |||||||||||||
Total operating expenses | $ | 226.6 | $ | 233.4 | (3 | )% | $ | 464.8 | $ | 460.7 | 1 | % | |||||||||
Headcount increased 3% between March 30, 2019 and March 28, 2020.
As we entered fiscal 2020, we announced a restructuring plan to shift resources into our SaaS initiatives. As we executed our restructuring strategy during the first six months of 2020, we reduced costs more than originally planned, which will result in greater than expected cost savings over the remainder of the year. We expect to prudently hire to expand our workforce as necessary, which we expect will return some of those costs to our run-rate in fiscal 2021. Variable compensation costs were lower for the second quarter and first six months of 2020 compared to the year ago periods and are expected to be lower for the remainder of the year due to lower expected achievement under our performance-based compensation plans due to the effect of COVID-19 on our business.
Operating expenses in the second quarter of 2020 compared to operating expenses in the second quarter of 2019 decreased primarily due to the following:
• | a decrease in total research and development costs primarily related to a $1.1 million decrease in compensation, benefit costs and travel expenses, |
• | a decrease in total general and administrative costs driven by a $3.8 million decrease in compensation (primarily lower stock compensation), benefit costs and travel expenses, which was partially offset by a $1.3 million increase in outside services costs, and |
• | lower restructuring charges. We incurred $18.2 million of restructuring and other charges during the quarter, primarily related to an employee restructuring program, compared to $27.0 million incurred in the second quarter of 2019 largely associated with exiting our Needham headquarters facility. |
partially offset by:
• | an increase in total sales and marketing costs primarily related to a $4.6 million increase in compensation (including benefit costs and travel expenses) due to higher salaries related to higher headcount and higher commissions due to amortization of capitalized commissions under ASC 606, and |
• | an increase of $1.4 million in intangible amortization primarily related to the acquisition of Onshape. |
Operating expenses in the first six months of 2020 compared to operating expenses in the first six months of 2019 increased primarily due to the following:
• | an increase in total sales and marketing costs primarily related to a $7.6 million increase in compensation (including benefit costs and travel expenses) due to higher salaries related to higher headcount and higher commissions due to amortization of capitalized commissions under ASC 606, |
• | an increase in research and development costs primarily related to a $2.1 million increase in compensation, benefit costs and travel expenses due to higher salaries and stock-based compensation, |
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• | an increase in general and administrative expenses primarily driven by $7.4 million in acquisition-related charges recorded in the first six months of 2020 associated with the acquisition of Onshape compared to $0.8 million in the prior year period, and |
• | an increase of $2.2 million in intangible amortization related to the acquisition of Onshape, |
partially offset by:
• | lower restructuring charges. We incurred $27.0 million of restructuring charges in the first six months of 2020, primarily related to an employee restructuring program, compared to $43.0 million incurred in the first six months of 2019 largely associating with exiting our Needham headquarters facility. |
Interest Expense
(in millions) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
Interest expense | $ | (32.6 | ) | $ | (11.4 | ) | $ | (44.7 | ) | $ | (21.7 | ) | |||
Interest expense includes interest under our credit facility and senior notes. We had $1,648 million of total debt at March 28, 2020, compared to $743 million at March 30, 2019, which increased interest expense in the period. Additionally, we recognized $15 million of expense in the second quarter of 2020 related to penalties for the planned third quarter early redemption of the 6.000% Senior Notes due in 2024.
Other Income (Expense)
(in millions) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
Interest income | $ | 1.6 | $ | 1.0 | $ | 2.5 | $ | 1.9 | |||||||
Other expense, net | (3.2 | ) | (0.1 | ) | (3.4 | ) | (0.5 | ) | |||||||
Other income (expense), net | $ | (1.6 | ) | $ | 0.8 | $ | (0.9 | ) | $ | 1.5 | |||||
Income Taxes
(Dollar amounts in millions) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
Income (loss) before income taxes | $ | 15.8 | $ | (33.4 | ) | $ | 34.8 | $ | (13.0 | ) | |||||
Provision (benefit) from income taxes | $ | 8.6 | $ | 10.1 | (7.8 | ) | 9.5 | ||||||||
Effective income tax rate | 55 | % | (30 | )% | (22 | )% | (73 | )% | |||||||
In the first six months of 2020 and 2019, 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, the excess tax benefit related to stock-based compensation and the indirect effects of the adoption of ASC 606. Additionally, in the first six months of 2020 and 2019, we reduced the U.S. valuation allowance by $21.2 million and $1.8 million as the result of the Onshape and Frustum acquisitions, respectively. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2020 and 2019, the foreign rate differential predominantly relates to these Irish earnings.
On March 27, 2020, the U.S. Federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES ACT”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak, which among other things contains numerous income tax provisions. While we continue to evaluate the impact of the CARES Act, we do not currently believe it will have a material impact on our consolidated financial statements or related disclosures.
Operating Measures
ARR
ARR represents the annualized value of our portfolio of recurring customer arrangements as of the end of the reporting period, including subscription software, cloud, and support contracts.
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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 customers, existing customer expansions, and includes the impact of net total churn, which reflects gross churn, offset by the impact of any pricing increases.
Because this measure represents the annualized value of recurring 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, 2019.
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
• | non-GAAP revenue—GAAP revenue |
• | non-GAAP gross margin—GAAP gross margin |
• | non-GAAP operating income—GAAP operating income |
• | non-GAAP operating margin—GAAP operating margin |
• | non-GAAP net income—GAAP net income |
• | non-GAAP diluted earnings or loss per share—GAAP diluted earnings or loss per share |
The non-GAAP financial measures exclude, as applicable, fair value adjustments related to acquired deferred revenue and deferred costs, 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, and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. In the second quarter of 2020, we also incurred an interest penalty for the early redemption of the 6.000% Senior Notes due 2024, which is also excluded from our non-GAAP financial measures as it is a significant non-ordinary course charge.
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 and 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.
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(in millions, except per share amounts) | Three months ended | Six months ended | |||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||
GAAP revenue | $ | 359.6 | $ | 290.5 | $ | 715.7 | $ | 625.1 | |||||||
Fair value of acquired deferred revenue | — | 0.2 | — | 0.5 | |||||||||||
Non-GAAP revenue | $ | 359.6 | $ | 290.7 | $ | 715.7 | $ | 625.6 | |||||||
GAAP gross margin | $ | 276.6 | $ | 210.5 | $ | 545.3 | $ | 467.9 | |||||||
Fair value of acquired deferred revenue | — | 0.2 | — | 0.5 | |||||||||||
Fair value of acquired deferred costs | — | (0.1 | ) | — | (0.2 | ) | |||||||||
Stock-based compensation | 3.0 | 3.1 | 6.0 | 6.2 | |||||||||||
Amortization of acquired intangible assets included in cost of revenue | 6.9 | 6.8 | 13.7 | 13.6 | |||||||||||
Non-GAAP gross margin | $ | 286.5 | $ | 220.6 | $ | 565.0 | $ | 488.0 | |||||||
GAAP operating income (loss) | $ | 50.0 | $ | (22.9 | ) | $ | 80.5 | $ | 7.2 | ||||||
Fair value of acquired deferred revenue | — | 0.2 | — | 0.5 | |||||||||||
Fair value of acquired deferred costs | — | (0.1 | ) | — | (0.2 | ) | |||||||||
Stock-based compensation | 20.5 | 27.0 | 48.4 | 56.4 | |||||||||||
Amortization of acquired intangible assets included in cost of revenue | 6.9 | 6.8 | 13.7 | 13.6 | |||||||||||
Amortization of acquired intangible assets | 7.3 | 5.9 | 14.0 | 11.9 | |||||||||||
Acquisition-related and other transactional charges included in general and administrative expenses | 0.3 | 0.4 | 7.4 | 0.8 | |||||||||||
Restructuring and other charges, net | 18.2 | 27.0 | 32.3 | 45.5 | |||||||||||
Non-GAAP operating income | $ | 103.2 | $ | 44.4 | $ | 196.3 | $ | 135.6 | |||||||
GAAP net income (loss) | $ | 7.2 | $ | (43.5 | ) | $ | 42.6 | $ | (22.5 | ) | |||||
Fair value of acquired deferred revenue | — | 0.2 | — | 0.5 | |||||||||||
Fair value of acquired deferred costs | — | (0.1 | ) | — | (0.2 | ) | |||||||||
Stock-based compensation | 20.5 | 27.0 | 48.4 | 56.4 | |||||||||||
Amortization of acquired intangible assets included in cost of revenue | 6.9 | 6.8 | 13.7 | 13.6 | |||||||||||
Amortization of acquired intangible assets | 7.3 | 5.9 | 14.0 | 11.9 | |||||||||||
Acquisition-related and other transactional charges included in general and administrative expenses | 0.3 | 0.4 | 7.4 | 0.8 | |||||||||||
Restructuring and other charges, net | 18.2 | 27.0 | 32.3 | 45.5 | |||||||||||
Debt early redemption premium | 15.0 | — | 15.0 | — | |||||||||||
Income tax adjustments (1) | (6.9 | ) | 2.1 | (38.8 | ) | (12.7 | ) | ||||||||
Non-GAAP net income | $ | 68.5 | $ | 25.8 | $ | 134.6 | $ | 93.1 | |||||||
GAAP diluted earnings (loss) per share | $ | 0.06 | $ | (0.37 | ) | $ | 0.37 | $ | (0.19 | ) | |||||
Stock-based compensation | 0.18 | 0.23 | 0.42 | 0.47 | |||||||||||
Amortization of acquired intangible assets | 0.12 | 0.11 | 0.24 | 0.21 | |||||||||||
Acquisition-related and other transactional charges included in general and administrative expenses | — | — | 0.06 | 0.01 | |||||||||||
Restructuring and other charges, net | 0.16 | 0.22 | 0.28 | 0.38 | |||||||||||
Debt early redemption premium | 0.13 | — | 0.13 | — | |||||||||||
Income tax adjustments (1) | (0.06 | ) | 0.02 | (0.34 | ) | (0.11 | ) | ||||||||
Non-GAAP diluted earnings per share | $ | 0.59 | $ | 0.22 | $ | 1.16 | $ | 0.78 | |||||||
(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 2020 and 2019 non-GAAP tax provisions are calculated assuming there is no valuation allowance. Income tax adjustments reflect the tax effects of non-GAAP adjustments, which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above. |
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Operating margin impact of non-GAAP adjustments:
Three months ended | Six months ended | ||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||
GAAP operating margin | 13.9 | % | (7.9 | )% | 11.2 | % | 1.1 | % | |||
Fair value of acquired deferred revenue | — | % | 0.1 | % | — | % | 0.1 | % | |||
Stock-based compensation | 5.7 | % | 9.3 | % | 6.8 | % | 9.0 | % | |||
Amortization of acquired intangible assets | 3.9 | % | 4.4 | % | 3.9 | % | 4.1 | % | |||
Acquisition-related and other transactional charges included in general and administrative expenses | 0.1 | % | 0.1 | % | 1.2 | % | 0.1 | % | |||
Restructuring and other charges, net | 5.1 | % | 9.3 | % | 4.5 | % | 7.3 | % | |||
Non-GAAP operating margin | 28.7 | % | 15.3 | % | 27.4 | % | 21.7 | % | |||
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 2019 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 for all recently issued accounting pronouncements, which is incorporated herein by reference.
Liquidity and Capital Resources
(in thousands) | March 28, 2020 | March 30, 2019 | |||||
Cash and cash equivalents (1) | $ | 826,776 | $ | 294,299 | |||
Restricted cash | 902 | 1,133 | |||||
Short- and long-term marketable securities | 56,941 | 56,415 | |||||
Total | $ | 884,619 | $ | 351,847 | |||
(in thousands) | Six months ended | ||||||
March 28, 2020 | March 30, 2019 | ||||||
Cash provided by operating activities | $ | 95,329 | $ | 162,344 | |||
Cash used by investing activities | (476,743 | ) | (128,340 | ) | |||
Cash provided (used) by financing activities | 944,143 | (1,902 | ) | ||||
(1) | The March 28, 2020 cash balance includes $530 million to be used for the redemption of our 6.000% Senior Notes due 2024 in May 2020. |
Cash, cash equivalents and restricted cash
We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. In addition, we hold investments in marketable securities totaling approximately $57 million with an average maturity of 11 months. At March 28, 2020, cash and cash equivalents totaled $827 million, compared to $270 million at September 30, 2019.
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A significant portion of our cash is generated and held outside the U.S. As of March 28, 2020, we had cash and cash equivalents of $574 million in the U.S., $132 million in Europe, $93 million in Asia Pacific (including India), and $28 million in other non-U.S. countries. All the marketable securities are held in Europe. We have substantial cash requirements in the United States, but we believe that the combination of our existing U.S. cash and cash equivalents after use of $530 million to redeem the aggregate principal amount of 6.000% Senior Notes due 2024 on May 15, 2020 (such redemption to include $500 million in principal plus $30 million, which includes interest and an early redemption premium), marketable securities, 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 $95 million in the first six months of 2020, compared to $162 million in the first six months of 2019. Cash from operations for the first six months of 2020 includes $21 million of restructuring payments and $9 million of acquisition-related payments compared to $18 million of restructuring payments in the prior year period. The decrease in cash from operations in the first six months of 2020 compared to the same period in 2019 was due in part to lower accounts receivable collections particularly in Asia Pacific in the second quarter of 2020 compared to the second quarter of 2019 due to the last-time perpetual license sales in the first quarter of 2019 in that region. In addition, in the first six months of 2019, we received tenant reimbursements related to our new Seaport headquarters.
Cash used in investing activities
Cash used in investing activities reflects $469 million used for the Onshape acquisition in the first six months of 2020, compared to $70 million used for the Frustum acquisition in the first six months of 2019. Capital expenditures were approximately $41 million higher for the first six months of 2019 compared to the first six months of 2020, due to construction expenses for our new worldwide headquarters in the Boston Seaport District in 2019.
Cash used in financing activities
The net borrowings in the first six months of 2020 primarily reflect $1 billion in new notes issued in February 2020, compared to net borrowings of $95 million under our revolving credit facility in the first six months of 2019 for working capital requirements and the Frustum acquisition.
Outstanding Debt
As of March 28, 2020, we had:
(in millions) | March 28, 2020 | ||
4.000% Senior notes due 2028 | $ | 500.0 | |
3.625% Senior notes due 2025 | 500.0 | ||
6.000% Senior notes due 2024 | 500.0 | ||
Credit facility revolver | 148.1 | ||
Total debt | 1,648.1 | ||
Unamortized debt issuance costs for the Senior notes | (17.4 | ) | |
Total debt, net of issuance costs | $ | 1,630.7 | |
Undrawn under credit facility revolver | $ | 835.7 | |
Undrawn under credit facility revolver available for borrowing | $ | 393.1 | |
As of March 28, 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 due 2024, 2025, and 2028 are described in Note 13. to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Future Expectations
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Although we are anticipating $60 million less cash provided from operations for FY20 compared to FY'19, primarily due to the disruptive impact of COVID-19 on new bookings, we believe that existing cash and cash equivalents, together with cash generated from operations and amounts available under the credit facility, will be sufficient to meet our working capital and capital expenditure requirements (which capital expenditures we expect to be approximately $22 million in 2020) through at least the next twelve months and to meet our known long-term capital requirements. We have suspended our share repurchase program for FY20.
Our expected uses of cash could change, customers may delay payments to us 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, to 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. We also evaluate possible strategic transactions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible strategic transactions. The amounts involved in any debt retirement, 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 2019 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 March 28, 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 March 28, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report and below, you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our 2019 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.
The extent to which the novel coronavirus COVID-19 may impact our business is uncertain and it could materially adversely affect our financial condition and results of operations.
The COVID-19 pandemic has significantly impacted global economic activity and has created future macroeconomic uncertainty. Public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, temporary closures of businesses, and the adoption of remote working, have significantly changed the way we and our customers work. The effects and duration of this disruption are uncertain.
While PTC has been able to transition to remote working without significant disruption to our day-to-day operations, prolonged disruption and/or a slow recovery could negatively impact the businesses of our customers and, therefore, our business and financial condition.
For example, demand for our solutions has declined and could further decline due to challenges associated with conducting in person sales meetings and project scoping and implementation activities while social distancing measures are in place, which has deterred or prevented, and could further deter or prevent, customers from proceeding with new software purchases and deployments. Likewise, temporary plant closures, layoffs and furloughs at our customers and the challenges they face forecasting business needs in this time of global economic uncertainty have caused, and could continue to cause, our customers to delay or reduce new license purchases.
In addition, longer term plant closures and layoffs among our customer base could cause existing subscription customers to renew fewer existing licenses when their subscriptions come up for renewal and could cause existing support customers to discontinue support at the time of renewal. Although we have not experienced a significant increase in churn so far in FY20, we anticipate the possibility of an increase in churn to 8% for FY20. If actual churn exceeds these levels, our ARR and financial results and condition could be negatively impacted.
Reductions in new license sales and/or renewals and in professional services delivered could reduce our ARR growth or cause our ARR to decline, and would reduce our professional services revenue, all of which would adversely affect our revenue, earnings and cash flow.
The economic uncertainty caused by the COVID-19 pandemic has also caused our customers to focus on their liquidity. This focus on liquidity, or our customers’ lack of liquidity, could adversely affect our cash flows if we make concessions in the amount or timing of payments due from customers or if our customers do not pay when or as expected. Moreover, some of our resellers may face liquidity challenges, which could adversely affect our cash flows if they do not pay us when or as expected.
If our business declines due to the above, we could be required to reduce our expenses, which could result in material restructuring charges and/or reduce or delay investments in our business, including hiring. Reductions in our workforce and/or investments in our business could hamper our ability to recover and compete successfully, which could adversely affect our business and results of operations.
Finally, while we expect to have sufficient liquidity with cash on hand, cash generated from operations and amounts available under our credit facility to meet our working capital and capital expenditure requirements through at least the next twelve months and our known long-term capital requirements, declines in cash flows could adversely affect our liquidity and we may be unable to draw on our credit facility as we expect due to covenants under the credit facility. If our liquidity is significantly impaired, it would significantly adversely affect our business due to our inability to pay our suppliers and our employees. Further, a significant liquidity impairment could cause us to be unable to make the required periodic interest payments due on our outstanding Senior Notes due 2028 and 2025, which would constitute an event of default under the applicable notes, and cause the aggregate principal amount of those notes on which we defaulted to become due and payable.
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We face significant competition, which may reduce our profitability and limit or reduce our market share.
The markets for our products and solutions are rapidly changing and characterized by intense competition, disruptive technology developments, evolving distribution models and increasingly lower barriers to entry. If we are unable to provide products and solutions that address customers’ needs as well as our competitors’ products and solutions do, or to align our pricing, licensing and delivery models with customer preferences, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share.
For example, the COVID-19 pandemic has caused companies worldwide to close their offices and their employees to have to work remotely from their homes, which has focused companies on the need for solutions that empower and support remote work by employees. We believe customers and potential customers will increasingly seek software solutions that support remote work by employees. Although many of our solutions support remote work, others are less efficient at doing so. We have embarked on an effort to make our solutions available on a SaaS platform, however, this will require significant effort and investment and we cannot be sure that we will be able to make our solutions available as SaaS solutions as quickly as we expect. If we are unable to compete successfully with competitors offering SaaS solutions, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share, which would adversely affect our business and financial results.
In addition, competitive pressures could cause us to reduce our prices, which could reduce our revenue and margins.
Finally, our current and potential competitors range from large and well-established companies to emerging start-ups. Some of our competitors and potential competitors have greater name recognition in the markets we serve and greater financial, technical, sales and marketing, and other resources, which could limit our ability to gain customer recognition and confidence in our products and solutions and successfully sell our products and solutions, which could adversely affect our ability to grow our business.
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ITEM 6. EXHIBITS
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
10.1* | ||
10.2 | ||
10.3 | ||
31.1 | ||
31.2 | ||
32** | ||
101 | The following materials from PTC Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 28, 2020 ("Q2 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 28, 2020 and September 30, 2019; (ii) Condensed Consolidated Statements of Operations for the three and six months ended March 28, 2020 and March 30, 2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 28, 2020 and March 30, 2019; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended March 28, 2020 and March 30, 2019; (v) Consolidated Statements of Stockholders’ Equity for the three and six months ended March 28, 2020 and March 30, 2019; and (vi) Notes to Condensed Consolidated Financial Statements. | |
104 | The cover page of the Q1 Form 10-Q formatted in Inline XBRL (included in Exhibit 101). | |
_________________
* Indicates a management contract or arrangement in which an executive officer of PTC participates.
** | 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.
PTC Inc. | ||
By: | /S/ KRISTIAN TALVITIE | |
Kristian Talvitie Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||
Date: May 6, 2020
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EXECUTIVE AGREEMENT This Executive Agreement (“Agreement”) dated as of [Date] is by and between PTC Inc., a Massachusetts corporation (the “Company”), and [Executive] (the “Executive”). WHEREAS, the Executive is the Executive Vice President, [Title]; and WHEREAS, the Company wishes to make the following arrangements with the Executive concerning certain payments and benefits to be provided to the Executive if the Executive’s employment with the Company is terminated without Cause or if certain other events specified herein occur; NOW, THEREFORE, the Company and the Executive hereby agree as follows: 1. Definitions. For the purposes of this Agreement: (a) “Board” means the Company’s board of directors. (b) “Code” means the U.S. Internal Revenue Code of 1986, as amended. (c) “Cause” means (i) the Executive’s willful and continued failure to substantially perform the Executive’s duties to the Company (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), provided that the Company has delivered a written demand for performance to the Executive specifically identifying the manner in which the Company believes that the Executive has not substantially performed the Executive’s duties and the Executive does not cure such failure within thirty (30) days after such demand; (ii) willful conduct by the Executive which is demonstrably and materially injurious to the Company; (iii) the Executive’s conviction of, or pleading of guilty or nolo contendere to, a felony; (iv) the Executive’s entry in the Executive’s personal capacity into a consent decree relating to the business of the Company with any government body; or (v) the Executive’s willful violation of any material provision of the Executive’s Non- Disclosure, Non-Competition and Invention Agreement with the Company; provided that, if such violation can be cured, the Executive has not, within thirty (30) days after written demand by the Company, cured such violation. For purposes of this definition, no act or failure to act on the Executive’s part shall be deemed “willful” unless done or omitted to be done by the Executive not in good faith and without reasonable belief that the Executive’s action or omission was in the best interests of the Company. (d) “Change in Control” means the occurrence of any of the following events: (i) any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock in the Company) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities (other than as a result of acquisitions of such securities from the Company);
(ii) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this Agreement, considered to be a member of the Incumbent Board; (iii) the consummation of a merger, share exchange or consolidation of the Company or any subsidiary of the Company with any other entity (each a “Business Combination”), other than (A) a Business Combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) beneficial ownership, directly or indirectly, of a majority of the combined voting power of the Company or the surviving entity (including any person that, as a result of such transaction, owns all or substantially all of the Company’s assets either directly or through one or more subsidiaries) outstanding immediately after such Business Combination or (B) a merger, share exchange or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as defined above) is or becomes the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (iv) the stockholders of the Company approve (A) a plan of complete liquidation of the Company; or (B) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets but excluding a sale or spin-off of a product line, business unit or line of business of the Company if the remaining business is significant as determined by the Company’s board of directors in its sole discretion. (e) “Change in Control Termination” means any of the following terminations of the Executive’s employment: (i) termination of the Executive’s employment by the Company during the period from the date of a Change in Control through the second anniversary thereof, other than for Cause or as a result of the Executive’s Disability; (ii) resignation by the Executive for Good Reason during the period from the date of a Change in Control through the second anniversary thereof; or (iii) termination of the Executive’s employment by the Company within one hundred eighty (180) days prior to a Change in Control, other than for Cause or as a result of the Executive’s Disability, if it is reasonably demonstrated by the Executive that such termination of employment (A) was at the request of a third party that has taken steps reasonably calculated to effect the Change in Control or (B) was otherwise related to or in anticipation of the Change in Control. A Change in Control Termination under this Section 1(e)(iii) shall be deemed to have occurred when the Change in Control occurs. (f) “Disability” means such physical or mental incapacity as to make the Executive unable to perform the essential functions of the Executive’s employment duties for a period of at least sixty (60) consecutive days with or without reasonable accommodation. If any question shall arise as to whether during any period the Executive is so disabled as to be unable to perform the essential functions of the Executive’s employment duties with or without reasonable accommodation, the Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom the Executive or the Executive’s guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Company’s determination of such issue shall be binding on the Executive. (g) “Equity Award” means any stock option, stock appreciation right, restricted stock unit, restricted stock or other equity award issued under any Stock Plan, but excludes any Target Annual Incentive Bonus that may be payable in the form of equity. 2
(h) “Good Reason” means the occurrence, without the Executive’s consent and without Cause, of any of the following events after or in connection with a Change in Control (provided that the Executive shall have given the Company written notice describing such event within ninety (90) days of its initial existence and the matter shall not have been fully remedied by the Company within thirty (30) days after receipt of such notice): (i) any reduction of the Executive’s annual base salary or target bonus as in effect at the date of the Change in Control; provided that any such reduction (not exceeding fifteen percent (15%) of either (A) such base salary or (B) the sum of such base salary and such target bonus) that is consistent with similar actions taken with respect to the base salaries and/or target bonuses of the other senior executives of the Company shall not constitute Good Reason; (ii) any material reduction in the aggregate benefits for which the Executive is eligible under the Company’s benefit plans, including medical, dental, vision, basic life insurance, retirement, paid time off, long- term disability and short-term disability plans; provided that any such reduction or other action that is consistent with similar actions taken with respect to comparable benefits of the Company employees generally shall not constitute Good Reason; (iii) a material diminution in the substantive responsibilities or the scope of the Executive’s position, taking into consideration, without limitation, the dollar amount of the budget and the number of employees for which the Executive has responsibility (and a reduction of more than ten percent (10%) in such dollar amount or such number from that which was applicable at the date of the Change in Control shall be deemed a “material diminution” unless it is comparable to similar reductions then applicable to the Company’s executive officers generally); (iv) any breach by the Company of its material obligations under this Agreement; (v) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or (vi) any requirement that the Executive relocate to a primary work site that would increase the Executive’s one-way commute distance by more than fifty (50) miles from the Executive’s then principal residence. (i) “Stock Plan” means any stock option or equity compensation plan of the Company in effect at any time, including without limitation the 2000 Equity Incentive Plan. (j) “Target Annual Incentive Bonus” means an Annual Incentive Bonus (stated as a cash amount even if it may be payable in the form of equity) payable under a Corporate Incentive Plan of the Company for achievement of performance measure(s) at the Target Level. “Corporate Incentive Plan” means any incentive program of the Company in effect at the respective time to the extent it provides for compensation upon achievement of one or more performance measures with a performance period of one year or less and service-based vesting with a vesting term of less than fifteen (15) months (“Annual Incentive Bonus”). “Target Level” means the level at which 100% of a Target Annual Incentive Bonus becomes payable. Any upside bonus or other amounts that may be earned for achievement of performance measures beyond the Target Level under the Corporate Incentive Plan and any discretionary or other bonus are not considered part of the Target Annual Incentive Bonus. “Bonus Equity” means any Equity Award granted to the Executive under the Corporate Incentive Plan that may be earned upon achievement of one or more performance measures. 2. Termination of Employment without Cause. If the Company terminates the Executive’s employment without Cause, other than a termination constituting a Change in Control Termination or a termination due to the Executive’s Disability, the Executive shall be entitled to the following: 3
(a) a lump sum payment in an amount equal to one times the highest annual base salary in effect with respect to the Executive during the six-month period immediately preceding the termination date, payable within forty-five (45) days after the termination date; (b) a lump sum payment in an amount equal to one times the Target Annual Incentive Bonus, if any, for which the Executive is eligible for the fiscal year in which the termination date occurs, payable within forty-five (45) days after the termination date; and (c) continued participation in the Company’s medical, dental, vision and basic life insurance benefit plans (the “Benefit Plans”), subject to the terms and conditions of the respective plans and applicable law, for a period of one year following the termination date; provided that, to the extent that any of the Benefit Plans does not permit such continuation of the Executive’s participation following the Executive’s termination or any such plan is terminated, the Company shall pay the Executive an amount which is sufficient for the Executive to purchase equivalent benefits, such amount to be paid quarterly in advance; provided further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance benefits under a plan provided by another employer, the Executive’s entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of the Executive’s eligibility under such plan. 3. Change in Control. (a) Equity Awards. Effective upon a Change in Control that occurs during the Executive’s employment, and except as provided in any Equity Award documentation that explicitly or implicitly excludes such Equity Award from the effects of this Section 3, the following shall occur: (i) any performance measure(s) applicable to any outstanding Equity Award held by the Executive shall be deemed to have been met at the Target Level (which deemed performance will not affect any service-based vesting schedule for such Equity Award); and (ii) each outstanding Equity Award held by the Executive shall be deemed amended automatically to provide that, notwithstanding any provision of any Stock Plan, such Equity Award may not be terminated or forfeited without the Executive’s written consent (provided that this shall not prevent termination of (A) any unvested portion thereof that is terminated or forfeited upon termination of the Executive’s employment as provided in the respective Stock Plan or in any agreement or certificate executed in connection with such Equity Award, (B) a stock option the termination of which is covered by Section 8(i) of the Company’s 2000 Equity Incentive Plan, or (C) an Equity Award upon payment of a cash payment with a Fair Market Value (as defined in the applicable Stock Plan) equal to the amount that would have been received upon the exercise or payment of the Equity Award had the Equity Award been exercised or paid upon the Change in Control). The foregoing notwithstanding, this Section 3(a) shall not apply to any Bonus Equity held by the Executive, which shall be treated as provided in Section 3(b)(ii). (b) Annual Incentive Bonus. Effective upon (x) a Change in Control that occurs during the Executive’s employment or (y) a Change in Control Termination under Section 1(e)(iii): (i) the Executive shall be entitled to payment of a pro-rata portion of the Target Annual Incentive Bonus, if any, for which the Executive is eligible for the fiscal year in which the Change in Control occurs, based on the percentage of the performance period completed through the date of the Change in Control, for the purposes of which any performance measure(s) applicable to such Target Annual Incentive Bonus shall be deemed to have been met at the Target Level, which payment shall be made in one lump sum within forty-five (45) days of the date of the Change in Control; provided, however, that this Section 3(b)(i) shall not apply if the Executive holds Bonus Equity for the applicable fiscal year performance period and Section 3(b)(ii) shall apply instead; or (ii) a pro-rata portion of any Bonus Equity held by the Executive, having performance measures applicable to the fiscal year, or any portion thereof, in which the Change in Control occurs, that could be earned at the Target Level, based on the percentage of the applicable fiscal year or applicable portion completed through the date of the Change in Control, shall thereupon be vested and subject to no further restrictions, 4
exercisable or distributable, as the case may be, and the portion not so vested shall thereupon automatically be cancelled and forfeited to the Company. (c) Change in Control Termination Benefits. (i) Equity Awards. Effective upon a Change in Control Termination, the following shall occur: (A) all outstanding Equity Awards held by the Executive (other than any Bonus Equity) shall immediately become vested and exercisable or distributable in full; and (B) all restrictions applicable to restricted stock issued under any Stock Plan and held by the Executive (other than any Bonus Equity) shall immediately lapse. (ii) Make-Up Payment. Effective upon a Change in Control Termination under Section 1(e)(iii), the Company shall pay the Executive in a lump sum the amount equal to the sum of: (x) the excess, if any, of (A) the product of (1) the number of additional shares of the Company’s Common Stock that were subject to Equity Awards that would have become vested and exercisable and/or as to which the restrictions would have lapsed, in each case solely as a result of Section 3(c)(i), and for which the Executive would have been entitled to receive consideration in the Change in Control (on the same basis as other holders of Common Stock), had the Executive remained employed on the date of the Change in Control and was deemed to have exercised all the stock options that would then have become exercisable under Section 3(c)(i)(A) times (2) the amount per share of the Company’s Common Stock (if any) received by the Company’s stockholders generally pursuant to the Change in Control (the “Shareholder Price”) over (B) the aggregate exercise price of all such additional stock options that the Executive would then have become able to exercise upon the Change in Control as a result of Section 3(c)(i)(A) (whereupon all such Equity Awards shall terminate and shall no longer be exercisable); and (y) the excess, if any, of (A) the product of (1) the number of shares of the Company’s Common Stock that the Executive (a) held on the date of termination of the Executive’s employment or acquired upon exercise of stock options held on such date and (b) sold before the consummation of the Change in Control (the “Pre-Sold Shares”) times (2) the Shareholder Price over (B) the aggregate amount received by the Executive in the sale(s) of the Pre-Sold Shares. The Company shall pay this lump sum payment within forty-five (45) days following the Executive’s termination date. (iii) Salary, Annual Incentive Bonus and Benefits. Effective upon a Change in Control Termination, the Executive shall be entitled to the following: (A) a lump sum payment in an amount equal to one times the Executive’s base salary plus the Executive’s Target Annual Incentive Bonus, such base salary to be the highest annual base salary in effect with respect to the Executive during the six-month period immediately preceding the Executive’s termination and such Target Annual Incentive Bonus to be the highest Target Annual Incentive Bonus in effect with respect to the Executive for (1) the fiscal year in which the Change in Control occurs, (2) the fiscal year following the year in which the Change in Control occurs, or (3) the fiscal year in which the Change in Control Termination occurs, whichever is highest, payable within forty-five (45) days after the termination date; and (B) continued participation in the Benefit Plans, subject to the terms and conditions of the respective plans and applicable law, for a period of one year following the termination date; provided that, to the extent that any of the Benefit Plans does not permit such continuation of the Executive’s participation following the Executive’s termination or any such plan is terminated, the Company shall pay the Executive an amount which is 5
sufficient for the Executive to purchase equivalent benefits, such amount to be paid quarterly in advance; provided, further, however, that to the extent the Executive becomes eligible to receive medical, dental, vision and/or basic life insurance benefits under a plan provided by another employer, the Executive’s entitlement to participate in the corresponding Benefit Plans or to receive such corresponding alternate payments shall cease as of the date the Executive is eligible to participate in such other plan, and the Executive shall promptly notify the Company of the Executive’s eligibility under such plan. (iv) No Duplication. Payments and benefits under this Section 3(c) shall be in lieu and without duplication of any amounts or benefits under Section 2, and the Executive shall be entitled to any such payments and benefits for no more than one year even if both such sections apply. If, in the event of a Change in Control Termination under Section 1(e)(iii), the Executive becomes entitled to payments under this Section 3(c) after the Executive has begun to receive payments under Section 2, the Executive shall be entitled to a make-up payment to ensure that the Executive receives the higher amount payable hereunder, with such make-up payment being made within forty-five (45) days following the Change in Control Termination. (d) Deemed Amendment of Equity Awards. The Company and the Executive hereby agree that the agreements evidencing any (i) Equity Awards to the Executive are hereby and will be deemed amended to give effect to the provisions of Sections 3 and 4 of this Agreement, and (ii) Bonus Equity are hereby and will be deemed amended to give effect to the provisions of Section 3(b)(ii) of this Agreement. 4. Death or Disability. Effective upon a termination of the Executive’s employment due to Executive’s death or by the Company due to the Executive’s Disability, except as provided in any Equity Award documentation that explicitly or implicitly excludes such Equity Award from the effects of this section, all performance measures applicable to any Equity Awards held by the Executive shall be deemed to have been met at the Target Level and all Equity Awards held by the Executive shall immediately become vested, unrestricted and exercisable or distributable at the Target Level; provided that this Section 4 shall not apply to any Bonus Equity. 5. Certain Payments to Specified Employees. Notwithstanding anything to the contrary in this Agreement, if the Executive is a “specified employee” within the meaning of Code Section 409A(a)(2)(B)(i) at the time of the Executive’s separation from service with the Company (in connection with a Change in Control Termination or otherwise), no payment or benefit payable or provided to the Executive pursuant to this Agreement that constitutes an item of deferred compensation under Code Section 409A and becomes payable by reason of the Executive’s termination of employment with the Company will be paid or provided to the Executive prior to the earlier of (i) the expiration of the six (6) month period following the date of the Executive’s “separation from service” (as such term is defined by Code Section 409A and the regulations promulgated thereunder), or (ii) the date of the Executive’s death, but only to the extent such delayed commencement is otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). The payments and benefits to which the Executive would otherwise be entitled during the first six (6) months following the Executive’s separation from service shall be accumulated and paid or provided, as applicable, in a lump sum, on the date that is six (6) months and one day following the Executive’s separation from service (or if such date does not fall on a business day of the Company, the next following business day) and any remaining payments or benefits will be paid in accordance with the normal payment dates specified for them herein. 6. Taxes. (a) Withholding. All payments to be made to the Executive under this Agreement will be subject to any required withholding of federal, state and local income and employment taxes. In addition, the Company may withhold from any payments hereunder any amounts attributable to withholding taxes applicable to the vesting of or lapse of restrictions on restricted stock or restricted stock units held by the Executive or the exercise of any nonqualified stock options held by the Executive, including, in its discretion withholding from any shares deliverable to the Executive such number of shares as the Company determines is necessary to satisfy such tax obligations, valued at their fair market value (determined pursuant to the respective Company equity compensation plan) as of the date of such vesting or lapse of restrictions. 6
(b) Limitations on Payments. (i) If it is determined that any payment, benefit or distribution provided for in this Agreement or otherwise (for the purposes of this Section 6(b), each, a “Payment” and collectively, the “Payments”) from the Company to or for the benefit of the Executive (x) constitutes a “parachute payment” within the meaning of Section 280G of the Code and (y) but for this subsection (b), would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), such Payments shall be either: (A) delivered in full, or (B) delivered to such lesser extent that would result in no portion of the Payments being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Executive on an after-tax basis, of the greatest amount of Payments, notwithstanding that all or some portion of the Payments may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 6(b)(i) shall be made in writing in good faith by an independent accounting firm selected by the Company, whose determinations shall be binding upon the Company and the Executive (the “Accountants”), in good faith consultation with the Executive. (ii) In the event a reduction in the Payments is required hereunder, the Company shall promptly give the Executive notice to that effect and the Executive may then determine, in the Executive’s sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as, after such election, none of the Payments are subject to the Excise Tax), and shall advise the Company in writing of the Executive’s election within ten (10) days of the Executive’s receipt of the Company’s notice. If no such election is made by the Executive within such period, the Company may determine which and how much of the Payments shall be eliminated or reduced (as long as, after such determination, none of the Payments are subject to the Excise Tax) and shall notify the Executive promptly of such determination. (iii) For purposes of making the determinations and calculations required by this Section 6(b), the Accountants: (A) shall take into account the value of any reasonable compensation for services to be rendered by the Executive before or after the Change in Control within the meaning of Section 280G(b)(2) of the Code and the regulations thereunder, including without limitation, the Executive’s agreeing to refrain from performing services pursuant to a covenant not to compete or similar covenant, whether set forth in this Agreement or otherwise (a “Noncompete Covenant”), and the Company shall cooperate in good faith in connection with any such valuations and reasonable compensation positions. Without limiting the generality of the foregoing, for purposes of this provision, the Company agrees to allocate as consideration for any Noncompete Covenant the maximum amount of compensation and benefits payable under this Agreement reasonably allocable thereto so as to avoid, to the extent possible, subjecting any Payments to tax under Section 4999 of the Code; and (B) may make reasonable assumptions and approximations concerning the application of taxes and may rely on reasonable good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 6(b). The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6(b). (iv) If the Payments are reduced to avoid the Excise Tax pursuant to Section 6(b)(i) hereof and notwithstanding such reduction, the IRS determines that the Executive is liable for the Excise Tax as a result of the receipt of Payments from the Company, then the Executive shall be obligated to pay to the Company (the 7
“Repayment Obligation”) an amount of money equal to the “Repayment Amount.” The Repayment Amount shall be the smallest such amount, if any, as shall be required to be paid to the Company so that the Executive’s net proceeds with respect to the Payments (after taking into account the payment of the Excise Tax imposed on such benefits) shall be maximized. Notwithstanding the foregoing, the Repayment Amount shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax in accordance with the principles of Section 6(b)(i). If the Excise Tax is not eliminated through the performance of the Repayment Obligation, the Executive shall pay the Excise Tax. The Repayment Obligation shall be discharged within 30 days of either (A) the Executive’s entering into a binding agreement with the IRS as to the amount of Excise Tax liability, or (B) a final determination by the IRS or a court decision requiring the Executive to pay the Excise Tax from which no appeal is available or is timely taken. 7. Term. Unless the Executive’s employment is earlier terminated, this Agreement shall continue in effect until 11:59 p.m. on September 30, 2020 and shall automatically renew thereafter on an annual basis for additional twelve- month terms unless either party provides written notice to the other party of non-renewal at least ninety (90) days prior to the expiration of the then current term. If a Change in Control occurs while this Agreement is in effect, the term of this Agreement shall automatically be extended to the second anniversary of the Change in Control. Upon the termination of this Agreement, the respective rights and obligations of the parties shall survive to the extent necessary to carry out the intentions of the parties as embodied herein. 8. Successors and Assigns. (a) This Agreement is personal to the Executive and is not assignable by the Executive, other than by will or the laws of descent and distribution, without the prior written consent of the Company. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor or acquirer (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to or acquirer of its business and/or assets that assumes and agrees to perform this Agreement. 9. No Duty to Mitigate. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as contemplated by Sections 2(b) and 3(c)(iii)(B)hereof, any benefits payable to the Executive hereunder shall not be subject to reduction for any compensation received from other employment. 10. Conditions to Payment of Severance. Notwithstanding any other provision of this Agreement, the Executive’s entitlement to receive any of the payments and other benefits contemplated by Sections 2, 3 or 4 (with respect to Disability) hereof shall be contingent upon: (a) execution by the Executive within forty-five (45) days of the termination of a general release in substantially the form of Appendix A hereto (such applicable form depending on my age at the time of termination, the “Release”), which has not subsequently been revoked, and the Executive hereby acknowledges and agrees that the Company’s entering into this Agreement and agreement to make such payments are and shall be good and sufficient consideration for such Release; and 8
(b) the Executive’s continued compliance with the material terms of this Agreement, as applicable, and those of the Executive’s Non-Disclosure, Non-Competition and Invention Agreement with the Company. 11. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except any such laws that would render such choice of law ineffective. (b) Compliance with Section 409A. This Agreement is intended, to the extent applicable, to constitute good faith compliance with the requirements of Section 409A of the Code. The Company and the Executive agree that they shall cooperate in good faith to amend any provision hereof to the extent required to maintain compliance with the provisions of Section 409A of the Code as they may be modified hereafter (including by subsequent regulations or other guidance of the Internal Revenue Service). (c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Partial Invalidity. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated in any way. (e) Entire Agreement; Effect of Current Agreement. This Agreement constitutes the entire understanding and agreement between the parties hereto regarding the compensation and benefits payable to the Executive in the respective circumstances described herein, superseding all prior understandings and agreements, whether oral or written. (f) Expenses. The Company agrees to pay as incurred and within twenty (20) days after submission of supporting documentation, to the full extent permitted by law, all legal fees and expenses the Executive may reasonably incur as a result of any contest by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement) with respect to which the Executive is successful on the merits, plus, in each case, interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. The Company’s payment of any eligible expenses must be made no later than December 31 of the year after the year in which the expense was incurred. (g) Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand delivery, by a reputable overnight courier service, or by registered or certified mail, return receipt requested, postage prepaid. Notice to the Executive shall be addressed to the Executive at the Executive’s last address contained in the records of the Company, and notice to the Company shall be addressed to: PTC Inc. 121 Seaport Boulevard Boston, MA 02210 Attention: General Counsel Notice shall be addressed to such other address as either party shall have furnished to the other in writing in accordance herewith. Any notice or communication shall be deemed to be delivered upon the date of hand delivery, one day following delivery to an overnight courier service, or three days following mailing by registered or certified mail. 9
EXECUTED as of the date first written above. PTC INC. [EXECUTIVE NAME] By: [Name] [Title] 10
140 Kendrick Street Needham, Massachusetts FIFTH AMENDMENT TO LEASE (the “FIFTH AMENDMENT”) Execution Date: April 10, 2020 LANDLORD: BP 140 KENDRICK STREET PROPERTY LLC, a Delaware limited liability company (successor in interest to Original Landlord, as defined below) TENANT: PTC Inc., a Massachusetts corporation (successor in interest by merger to Original Tenant, as defined below) LEASE: Indenture of Lease dated as of December 14, 1999, between Boston Properties Limited Partnership (“Original Landlord”) and Parametric Technology Corporation (“Original Tenant”)(the “Original Lease”), as amended by letter agreement dated April 25, 2000, as assigned to BP 140 Kendrick Street LLC by Assignment of Lease dated April 25, 2000, as amended by First Amendment to Lease dated September 14, 2000, as assigned to BP 140 Kendrick Street Property LLC (“Landlord”) by Second Assignment of Lease dated June 11, 2001, as affected by letter agreement dated September 21, 2001, as amended by Second Amendment to Lease dated November 30, 2001, as affected by letter agreement dated as of June 25, 2008, as amended by Third Amendment to Lease dated October 27, 2010 (the “Third Amendment”), as amended by letter agreement dated April 13, 2012, as amended by Fourth Amendment to Lease dated July 20, 2012, and as further affected by Acknowledgment of Merger and Change of Name dated February 19, 2013 and letter agreement dated June 23, 2014, Consent to Sublease dated September 3, 2019 respecting Sublease to C&W Facility Services, Inc., and Consent to Sublease dated October 11, 2019 respecting Sublease to Chiasma, Inc. (collectively, the “Lease”). -1-
ORIGINAL LEASE EXECUTION DATE: December 14, 1999 PROPERTY: The land in Needham, Massachusetts located on Kendrick Street, as more particularly described on Exhibit A-1 and shown on Exhibit A-2, each attached to the Original Lease, together with all improvements constructed thereon, including, without limitation, three buildings, known as “Building A”, “Building B” and “Building C” (collectively, the “Buildings”), the Garage, and surface parking areas. SURRENDERED PREMISES: Areas containing approximately 122,797 rentable square feet, in the aggregate, including the entirety of the interior of Building B (“Fifth Amendment Surrendered Tenanted Premises”), and elsewhere in Buildings A and B (“Fifth Amendment Surrendered Common Spaces”), all as shown on Exhibit A attached hereto and incorporated herein. REMAINING PREMISES: Approximately 197,858 rentable square feet, consisting of 89,758 rentable square feet in Building A, and 108,100 rentable square feet in Building C, all as shown on Exhibit A attached hereto and incorporated herein. LEASE EXPIRATION DATE: November 30, 2022 WHEREAS, Tenant desires to surrender to Landlord the Surrendered Premises, subject to and in accordance with the terms and provisions contained herein; WHEREAS, Landlord is willing to accept such surrender upon the terms and conditions hereinafter set forth and the parties desire to amend the above-referenced Lease as more fully set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree that the above-referenced Lease is hereby further amended as follows: -2-
1. TERMINATION OF LEASE IN RESPECT OF SURRENDERED PREMISES A. The Term of the Lease with respect to the Surrendered Premises shall terminate as of 11:59 p.m. on May 31, 2020 (the “Effective Reduction Date”). B. On or before the Effective Reduction Date, Tenant shall vacate and surrender the Surrendered Premises to Landlord in the condition in which the Surrendered Premises are in as of the Execution Date of this Fifth Amendment, reasonable wear and tear, and damage by fire or other casualty and condemnation, excepted, free and clear of all tenants or other occupants and broom-clean, with all unaffixed furniture and personal property, and with respect to Tenant’s security system for the Surrendered Premises, shall turn off all security panels and card readers in Building B and shall coordinate with Landlord to switch the security system from Tenant’s control over to Landlord’s control. Except as hereinafter provided with respect to the Removed Signage (as defined below), Tenant shall have no obligation to remove any alterations or leasehold improvements (including, without limitation, cabling or attached furniture) which exist in the Surrendered Premises as of the Execution Date of this Fifth Amendment. Notwithstanding the foregoing, Tenant shall remove all of Tenant’s signage which exists on the Property and/or in or on any of the Buildings, including any signage installed to identify Tenant’s Reserved Parking, as such signage is more particularly described and indicated on Exhibit B attached hereto (the “Removed Signage”), all of which Removed Signage shall be removed in the manner and as required under the Lease and the respective letter agreements under which Tenant was granted the rights thereto, including, without limitation, any restoration obligation described therein (the “Signage Removal Requirement”). Tenant shall complete the Signage Removal Requirement on or before September 1, 2020. C. As of the Effective Reduction Date: (1) The term “Premises”, as defined in the Lease, shall be deemed to mean the Remaining Premises(the parties hereby agreeing that, from and after the Effective Reduction Date, the Remaining Premises shall constitute the “Premises”); and (2) The remainder of the Property (other than (x) the Premises and (y) the Fifth Amendment Surrendered Tenanted Premises and (z) the “Surrendered Tenanted Premises” as defined in the Third Amendment to Lease), shall be considered to be Common Areas, and the “Common Areas” will include, in addition to the Fifth Amendment Surrendered Common Spaces, all “Common Areas” as defined in the Third Amendment to Lease. 2. REVISED ANNUAL FIXED RENT Effective as of the Effective Reduction Date, the Annual Fixed Rent payable by Tenant to Landlord, notwithstanding anything contained in the Lease to the contrary, shall be payable in the following amounts: -3-
Time Period Monthly Fixed Annual Fixed Rent Rent June 1, 2020 – May 31, 2021 $710,575.08 $8,526,901.00 June 1, 2021 – Lease Expiration Date $379,227.83 $4,550,734.00* *based on $23.00 per RSF 3. LANDLORD’S ACCESS TO PREMISES Landlord reserves the right, exercisable by itself or its nominee, at any time and from time to time and without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor or otherwise affecting Tenant's obligations under this Lease (all except as expressly set forth in this Fifth Amendment), to make such changes, alterations, additions, improvements, repairs or replacements in or to that portion of the Premises consisting of level 2 of Building A (or such portion of level 2 as Landlord may elect) in order to facilitate marketing Building A to future tenants (“Landlord's Marketing Space Work”). Tenant acknowledges that Landlord’s Marketing Space Work, if any, will be performed in the Premises during the Term and Tenant hereby grants to Landlord such reasonable access to the Premises as is necessary for Landlord to complete Landlord’s Marketing Space Work and that, notwithstanding the performance of such work by Landlord, there shall be no diminution or abatement of Annual Fixed Rent or Additional Rent or other compensation due from Landlord to Tenant hereunder, nor shall the Lease be affected or any of the Tenant’s obligations hereunder reduced, and Landlord shall have no responsibility or liability for any inconvenience or disruption to Tenant’s business (all except as expressly provided in this Fifth Amendment). Landlord shall give Tenant at least 30 days advance notice of its commencement of the Landlord’s Marketing Space Work, including a reasonable description of the project and project schedule therefor and, thereafter, Landlord shall provide updates of material changes to the project schedule, as applicable, and in performing such work shall keep Tenant reasonably informed of anticipated utility shutdowns that would impact the Premises or other closures of Common Areas that would have a material adverse effect on Tenant’s access to or use of the Premises. Prior to commencement of Landlord’s Marketing Space Work on-site, Landlord shall provide a certificate of liability insurance from Landlord’s contractors performing such work which shall include Tenant as an additional insured (on a primary and non-contributory basis). Once commenced on-site, Landlord shall proceed with the Landlord’s Marketing Space Work diligently to completion, subject to delays for fire, casualty and other force majeure events beyond Landlord’s control and any delays caused by Tenant. 4. COMMON AREAS The following shall replace Sections 4A through 4C of the Third Amendment. A. Rights to Use Common Areas. Tenant shall have, as appurtenant to the Premises, the non-exclusive right to use the Common Areas in common with others entitled thereto, subject to: (i) rules and regulations promulgated by Landlord pursuant to Section 20 of the Third Amendment, and (ii) Landlord's rights under Sections 4B and 4C hereof. -4-
B. Landlord's Reservations. Landlord reserves the right from time to time, upon reasonable prior notice to Tenant (except no prior notice shall be required in an emergency), without unreasonable interference with Tenant's access to or use and enjoyment of the Property and Premises, and without violation of an express term or provision contained in this Fifth Amendment: (i) to install, use, maintain, repair, replace and relocate for service to the Premises and other parts of the Property, or either, pipes, ducts, conduits, wires and appurtenant fixtures, wherever located in the Premises or Property, and (ii) to alter or relocate such common facilities described in the foregoing clause (i), provided that substitutions are substantially equivalent or better. In addition, Landlord reserves for itself (and any tenant or occupant to whom Landlord may elect to grant rights, in its sole discretion), all rights to install any signage on or in any Building, Common Area and anywhere on the Property, and any and all rights of Tenant granted under the Lease or otherwise, to install, erect, modify and/or maintain signage anywhere on the Property are hereby eliminated. Installations, replacements and relocations referred to in this Section 4.B. shall be located so far as practicable in the central core area of the Building, above ceiling surfaces, below floor surfaces or within perimeter walls of the Premises. In exercising its rights hereunder, Landlord shall use reasonable efforts to minimize interference with Tenant's access to and use of the Premises for the conduct of business. C. Landlord's Right to Change Common Areas. Notwithstanding the foregoing, Landlord reserves the right, exercisable by itself or its nominee acting by and through a qualified professional project manager, at any time and from time to time with reasonable prior notice (as described below) to Tenant and without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor or otherwise affecting Tenant's obligations under this Lease (all except as expressly set forth in this Fifth Amendment), to make such changes, alterations, additions, improvements, repairs or replacements in or to the Common Areas (including, without limitation, the Fifth Amendment Surrendered Common Spaces and the Parking Facility) and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators, escalators, and stairways thereof, as it may deem necessary or desirable, and to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Buildings and the Property (collectively, “Common Area Work”). Landlord shall give Tenant reasonable advance notice of its commencement of any Common Area Work which could reasonably be expected to have a material adverse effect on use of or access to the Premises, including a reasonable description of the project and project schedule therefor and, thereafter, Landlord shall provide updates of material changes to the project schedule, as applicable, and in performing such work shall keep Tenant reasonably informed of anticipated utility shutdowns that would impact use of or access to the Premises or other closures of Common Areas that would have a material adverse effect on Tenant’s access to or use of the Premises. Once commenced, Landlord shall proceed with the Common Area Work diligently to completion, subject to delays for fire, casualty and other force majeure events beyond Landlord’s control and any delays caused by Tenant. Nothing contained in this Section 4.C. shall be deemed to relieve Tenant of any duty, obligation or liability of Tenant imposed on Tenant by the Lease or by reason of Legal Requirements with respect to making any repair, replacement or improvement or complying with any law, order or requirement of any governmental or other authority, unless and to the extent that any such violation thereof is caused by the performance of Common Area Work. Neither this Lease nor any use by Tenant shall give -5-
Tenant any right or easement for the use of any door in Building B or any passage or any concourse connecting with any building or to any public convenience, and the use of such doors, passages and concourses and of such conveniences may be regulated or discontinued at any time and from time to time by Landlord without notice to Tenant and without affecting the obligation of Tenant hereunder or incurring any liability to Tenant therefor. Tenant acknowledges that any such work may be performed in areas adjacent to the Premises and that, notwithstanding the performance of such work by Landlord, there shall be no diminution or abatement of Annual Fixed Rent or Additional Rent or other compensation due from Landlord to Tenant hereunder, nor shall the Lease be affected or any of the Tenant’s obligations hereunder reduced, and Landlord shall have no responsibility or liability for any inconvenience or disruption to Tenant’s business. Sections 19 and 22 of the Third Amendment (and all references in the Lease to the Cafeteria and the Fitness Center) are hereby deleted and Landlord shall have no further obligation with respect thereto, provided, however, that (i) the parties acknowledge and agree that the costs of the maintenance, repairs and replacements (subject to amortization of any capital expenditures), and the operation thereof, of any fitness center, café, cafeteria, conference center, or other common amenity now or hereafter provided at the Property are components of Operating Expenses, and (ii) so long as existing subleases to one or more of the existing subtenants remain in effect, (x) Landlord shall not eliminate the Fitness Center unless there is a replacement made therefor of substantially similar or better quality (and Landlord agrees that the existing Fitness Center shall remain in operation pending completion of the replacement therefor) and (y) the parties agree that the Cafeteria is currently not in operation pending Landlord’s replacement to be made therefor of substantially similar or better quality. The Property shall continue to be operated in a manner consistent with other Class A office buildings owned by Boston Properties, Inc. or its affiliates, in the Route 128 Central market, or, at such time as Boston Properties, Inc. and its affiliates no longer owns any Class A office buildings in the Route 128 Central market, then the Property shall be operated in a manner consistent with other Class A office buildings in the Route 128 Central market which were previously owned by Boston Properties, Inc. or its affiliates. 5. OPERATING EXPENSES. As of the Effective Reduction Date, Section 6D of the Third Amendment is amended to reflect that “Tenant’s Proportionate Share” shall be defined as the ratio of the rentable area of the Remaining Premises (i.e., 197,858 rentable square feet) to the Rentable Floor of the Buildings (i.e., 380,987 rentable square feet), or 51.93%. Areas of the Remaining Premises in which Landlord’s Marketing Space Work is being performed shall not be included in the calculation of Tenant’s Proportionate Share for the purpose of determining Operating Expenses attributable to janitorial services. 6. ELECTRICITY. As of the Effective Reduction Date, Exhibit F to the Third Amendment is amended to substitute “the tenant of Building B” for “Tenant” in the 4th line of Section 4.b, provided, however, that all electricity usage associated with the performance of Landlord’s Marketing Space Work shall be paid by Landlord. -6-
7. PARKING. As of the Effective Reduction Date, Section 14B of the Third Amendment is deleted. 8. INAPPLICABLE LEASE PROVISIONS Sections 3, 5, and Exhibits B, B-1, D and E in the Third Amendment shall have no applicability with respect to this Fifth Amendment. 9. DELETED LEASE PROVISIONS Section 15 of the Third Amendment is hereby deleted. 10. BROKERS Tenant represents and warrants and represents that Tenant has not dealt with any broker in connection with the consummation of this Fifth Amendment other than Cresa (whose fees and expenses in connection herewith shall be paid by Tenant); and in the event any claim is made against the Landlord relative to dealings by Tenant with brokers, Tenant shall defend the claim against Landlord with counsel of Tenant’s selection first approved by Landlord (which approval will not be unreasonably withheld) and save harmless and indemnify Landlord on account of loss, cost or damage which may arise by reason of such claim. Landlord warrants and represents that Landlord has not dealt with any broker in connection with the consummation of this Fifth Amendment other than Cresa; and in the event any claim is made against the Tenant relative to dealings by Landlord with brokers other than Cresa, Landlord shall defend the claim against Tenant with counsel of Landlord’s selection first approved by Tenant (which approval will not be unreasonably withheld) and save harmless and indemnify Tenant on account of loss, cost or damage which may arise by reason of such claim. 11. TERMINATION PAYMENT Tenant acknowledges and agrees that it has entered into this Fifth Amendment to induce Landlord to reduce the size of the Premises and that the terms and conditions contained in this Fifth Amendment are material inducements to Landlord agreeing to such reduction as of the Effective Reduction Date. This Fifth Amendment and the terms thereof shall become effective only upon the terms and conditions herein set forth, and not otherwise. In consideration for Landlord’s agreement to enter into this Fifth Amendment, Tenant shall pay Landlord Three Million Six Hundred Eighty Three Thousand Nine Hundred Ten and 00/100 Dollars ($3,683,910.00) (the “Termination Payment”) split into two equal payments of One Million Eight Hundred Forty One Thousand Nine Hundred Fifty Five and 00/100 Dollars ($1,841,955.00). The first of the Termination Payments shall be payable concurrent with Tenant’s execution and delivery of this Fifth Amendment and the remaining half shall be due on November 1, 2020. -7-
12. CONDITION PRECEDENT This Fifth Amendment shall become binding upon the execution and delivery hereof by both Landlord and Tenant, subject to Landlord’s rights in this section. Notwithstanding the foregoing, only upon the receipt by Landlord of a fully executed third party lease of the Surrendered Premises on such terms and conditions as are acceptable to Landlord in its sole discretion, which shall be considered a condition precedent to the effectiveness hereof, shall the Effective Reduction Date occur. 13. MARKETING OF PREMISES Landlord and Tenant each acknowledge and agree that Landlord is marketing the Premises for lease to third parties. In the event Landlord secures an acceptable third party for occupancy of all or a portion of the Premises during the remaining portion of the Term on terms and provisions satisfactory to Landlord, then this Lease shall be amended by appropriate instrument to provide that (i) the premises subject thereto shall no longer be included in the Premises, (ii) the Fixed Rent and Tenant’s Proportionate Share under this Lease shall be appropriately adjusted, and (iii) such other amendments as the parties determine are reasonably necessary. Tenant shall not be obligated to pay any termination or other fee to Landlord in connection with any such amendment relating to one floor or less. 14. MISCELLANEOUS Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Lease except to the extent inconsistent with the provisions of this Fifth Amendment. All other terms and conditions of the Lease, as hereby amended, are ratified, confirmed and approved in all respects, and the Lease, as amended hereby, shall remain in full force and effect, as so amended. [signature page follows] -8-
EXECUTED UNDER SEAL in two or more counterparts each of which shall be deemed to be an original. WITNESS: LANDLORD: _________________________________ BP 140 KENDRICK STREET PROPERTY LLC, a Delaware limited liability company BY: BOSTON PROPERTIES LIMITED PARTNERSHIP, a Delaware limited partnership, its managing member BY: BOSTON PROPERTIES, INC., a Delaware Corporation, its general partner By: /s/Patrick Mulvihill Name: Patrick Mulvihill Title: SVP Leasing WITNESS: TENANT: _________________________________ PTC INC., A Massachusetts corporation By: /s/Kristian Talvitie Name: Kristian Talvitie Title: CFO Hereunto Duly Authorized
EXHIBIT A PLANS OF BUILDINGS [see attached]
EXHIBIT B REMOVED SIGNAGE
EXHIBIT 31.1
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.
Date: | May 6, 2020 | /S/ JAMES HEPPELMANN | |||
James Heppelmann | |||||
President and Chief Executive Officer | |||||
EXHIBIT 31.2
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.
Date: | May 6, 2020 | /S/ Kristian Talvitie | |||
Kristian Talvitie | |||||
Executive Vice President and Chief Financial Officer | |||||
EXHIBIT 32
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 March 28, 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.
Date: | May 6, 2020 | /S/ JAMES HEPPELMANN | |||
James Heppelmann President and Chief Executive Officer | |||||
Date: | May 6, 2020 | /S/ Kristian Talvitie | |||
Kristian Talvitie | |||||
Executive Vice President and Chief Financial Officer | |||||